08/11/2023
The Making of a Developing Fiscal State: A New Historical Dataset and a Graphical Network Analysis for Greece, 1833-1939

The Making of a Developing Fiscal State: A New Historical Dataset and a Graphical Network Analysis for Greece, 1833-1939

The paper studies the historical process of fiscal state-building in 19th and early 20th century Greece. A new public finances dataset, compiled from primary sources, is combined with international databases in a graphical network analysis revealing a rich set of dynamic interactions between economic (tax revenue, debt payments and GDP per capita) and institutional variables (army and representation). The emphasis is on two particular results closely related to the fiscal capacity literature: (a) the size of the army had a positive causal effect on tax revenues whereas (b) representation had a negative causal effect on tax revenue.

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The subject of this paper is Greece, a developing agrarian economy that emerged as a sovereign state in 1833. She was the first independent state to break out of the Ottoman Empire, following the first successful revolution in post-Napoleonic Europe, with the support of the first international intervention on a humanitarian pretext. Put together, this series of ‘firsts’ render Greece a pioneer case for national state-building and a blueprint for the international settlements that reshaped the European map of the 19th and early 20th century. Despite her peculiarities, Greece had to face the universal historical challenges associated with national state-building, such as securing domestic order, defending and expanding her borders and accommodating competing groups into the political system. Most importantly for the purposes of this study, she had to extract and allocate the necessary economic resources, i.e. build fiscal capacity, so as to meet those challenges. Therefore, it is straightforward to examine the relevant questions. Did wars and military mobilizations lead to the development of fiscal capacity or, on the contrary, external loans and default served as a better alternative? Did representational institutions justify and facilitate tax collection, or promoted partial arrangements with special interests instead? The purpose of this paper is to describe and interpret this historical process of fiscal state building.

The main empirical findings for Greece can be summarized as follows: Military preparation, as a response to domestic or external security pressures, motivated the Greek state to improve revenue collection. Indeed, the empirical analysis establishes a robust positive causal link from the size of the army to tax revenue, confirming the ‘war made the state’ hypothesis. On the other hand, representation, instead of legitimizing taxation, undermined it. All model specifications identify a negative causal effect from indices of representation to tax revenue, implying that extensions of the franchise and legislative checks were detrimental to fiscal performance.

The paper’s contribution is twofold. First, it introduces a new historical dataset for Greek public finances, carefully compiled from official records from 1833 (the establishment of the modern Greek state) to 1939 (the eve of the Second World War), covering a little more than the first century of the Greek state’s existence. Consistent long-term fiscal data series for developing states are rather rare, due either to the scarcity of official records or to the insufficiency of research efforts. Hence, evidence-based historical studies are usually limited to strong or imperial states. Second, the present study employs a graphical network analysis exploring the historical interactions between fiscal and other economic and institutional variables. Graphical networks have been extensively used in financial economics and can reveal dynamic causal relationships which they visualize in simple and intuitive graphs. More importantly, they can overcome issues such as spurious causality, over-parametrization and identification. To the best of my knowledge, this is the first application of graphical networks in historical economics.

 

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