Skip to main content Accessibility help

How do political institutions affect fiscal capacity? Explaining taxation in developing economies


A central aspect of institutional development in developing economies is building tax systems capable of raising revenues from broad tax bases, i.e. fiscal capacity. While it is recognised that fiscal capacity is pivotal for state building and economic development, it is less clear what its origins are and what explains its cross-country differences. We focus on political institutions, seen as stronger systems of checks and balances on the executive. Exploiting a recent database on public sector performance in developing economies and an IV strategy, we estimate their long-run impact, distinguishing between the accountability and transparency of fiscal institutions (impartiality) and their effectiveness in extracting revenues. We find that stronger constraints on the executive foster the impartiality of tax systems. However, there is no robust evidence that they also improve its effectiveness. Our findings also suggest that the overall impact on both total tax revenues and income tax is economically relevant.

Corresponding author
Hide All
Acemoglu, D. (2005), ‘Constitutions, Politics, and Economics: A Review Essay on Persson and Tabellini's The Economic Effects of Constitutions’, Journal of Economic Literature, 43: 1025–48.
Acemoglu, D., Johnson, S., and Robinson, J. A. (2001), ‘The Colonial Origins of Comparative Development: An Empirical Investigation’, American Economic Review, 91 (5): 1369–401.
Acemoglu, D. and Robinson, J. A. (2009), Economic Origins of Dictatorship and Democracy, Cambridge: Cambridge University Press.
Acemoglu, D., Johnson, S., Robinson, J. and Thaicharoen, Y. (2003), ‘Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth’, Journal of Monetary Economics, 50 (1): 49123.
Albouy, D. Y. (2012), ‘The Colonial Origins of Comparative Development: An Empirical Investigation: Comment’, American Economic Review, 102 (6): 3059–76.
Andrews, M. (2011), ‘Which Organizational Attributes Are Amenable to External Reform? An Empirical Study of African Public Financial Management’, International Public Management Journal, 14 (2): 131–56.
Bates, R. H. and Lien Da-Hsiang, D. (1985), ‘A Note on Taxation, Development, and Representative Government’, Politics & Society, 14 (1): 5370.
Baum, C. F., Schaffer, M. E. and Stillman, S. (2007), ‘Enhanced Routines for Instrumental Variables/Generalized Method of Moments Estimation and Testing’, Stata Journal, 7 (4): 465506.
Besley, T., and Persson, T. (2014), ‘Why Do Developing Countries Tax So Little?Journal of Economic Perspectives, 28 (4): 99120.
Besley, T. and Persson, T. (2011). Pillars of Prosperity: The Political Economics of Development Clusters, Princeton, NJ: Princeton University Press.
Besley, T. and Persson, T. (2009). ‘The Origins of State Capacity: Property Rights, Taxation, and Politics’, American Economic Review, 99 (4): 1218–44.
Besley, T. and Persson, T. (2013), ‘Taxation and Development’, in Auerbach, A., Chetty, R., Feldstein, M. and Saez, E. (eds) Handbook of Public Economics, Amsterdam: Elsevier.
Bockstette, V., Chanda, A. and Putterman, L. (2002), ‘States and Markets: The Advantage of an Early Start’, Journal of Economic Growth, 7 (4): 347–69.
Brautigam, D., Fjeldstad, O. H., and Moore, M. (2008), Taxation and State-Building in Developing Countries: Capacity and Consent, Cambridge: Cambridge University Press.
Cameron, A. C. and Trivedi, P. K. (2005), Microeconometrics: Methods and Applications, Cambridge: Cambridge University Press.
Centeno, M. A., Kohli, A., and Yashar, D. J. (2017), ‘Unpacking states in the developing world: capacity, performance, and politics’, in Centeno, M. A., Kohli, A. and Yashar, D. J. (eds) States in the Developing World, Cambridge: Cambridge University Press.
Charron, N., Dahlström, C. and Lapuente, V. (2012), ‘No Law without a State’, Journal of Comparative Economics, 40 (2): 176–93.
Cheibub, J. A. (1998), ‘Political Regimes and the Extractive Capacity of Government Taxation in Democracies and Dictatorships’, World Politics, 50 (3): 349–76.
D'Arcy, M. (2012), ‘Taxation, Democracy and State-Building: how does sequencing matter?Quality of Government Working Paper Series 2012:4, University of Gothenburg.
Dincecco, M. (2017) State Capacity and Economic Development: Present and Past, Cambridge: Cambridge University Press.
Dincecco, M. and Katz, G. (2016), ‘State Capacity and Long-run Economic Performance’, Economic Journal, 126 (590): 189218.
Doerrenberg, P. and Peichl, A. (2013), ‘Progressive Taxation and Tax Morale’, Public Choice, 155 (3–4): 293316.
Fukuyama, F. (2004). ‘The Imperative of State-Building’, Journal of Democracy, 15 (2): 1731.
Fuller, W. A. (1977), ‘Some Properties of a Modification of the Limited Information Estimator’, Econometrica 45 (4): 939–54.
Grabowski, R. (2008), ‘Modes of Long-run Development: Latin America and East Asia’, Journal of Institutional Economics, 4 (1): 2550.
Hahn, J., Hausman, J., and Kuersteiner, G. (2004), ‘Estimation with Weak Instruments: Accuracy of Higher-order Bias and MSE Approximations’, Econometrics Journal, 7: 272306.
Hanson, J. K. and Sigman, R. (September 2013). ‘Leviathan's Latent Dimensions: Measuring State Capacity for Comparative Political Research’. APSA 2011 Annual Meeting Paper. Available at SSRN:, retrieved on 5 March 2018.
Herbst, J. I. (2000), States and Power in Africa: Comparative Lessons in Authority and Control, Princeton, NJ: Princeton University Press.
ICTD – International Centre for Tax and Development (2015), Government Revenue Dataset 2015, available at, retrieved on 1 October 2015.
Isham, J., Woolcock, M., Pritchett, L., and Busby, G. (2005), ‘The Varieties of Resource Experience: Natural Resource Export Structures and the Political Economy of Economic Growth’, World Bank Economic Review, 19 (2): 141–74.
Kohli, A. (2009), ‘States and Economic Development’, Brazilian Journal of Political Economy, 32 (4): 212–27.
Johnson, N. D. and Koyama, M. (2017), ‘States and Economic Growth: Capacity and Constraints’, Explorations in Economic History, 64: 120.
Levi, M. (1988), Of Rule and Revenue, Berkeley: University of California Press.
Lieberman, E. S. (2002), ‘Taxation Data as Indicators of State–Society Relations: Possibilities and Pitfalls in Cross-National Research’, Studies in Comparative International Development, 36 (4): 89115.
Luttmer, E. F. P. and Singhal, M. (2014), ‘Tax Morale’, Journal of Economic Perspectives, 28 (4): 149–68.
Marshall, M. G., Jaggers, K., and Gurr, T. R. (2011), Polity IV Project: Dataset Users’ Manual, Polity IV Project. Vienna, VA: Center for Systemic Peace.
Martin, I. W. and Prasad, M. (2014), ‘Taxes and Fiscal Sociology’, Annual Review of Sociology, 40 (4): 331–45.
Moore, M. (2007), ‘How Does Taxation Affect the Quality of Governance?’ IDS Working Paper 280, Brighton: Institute of Development Studies.
North, D. C. and Weingast, B. R. (1989), ‘Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England’, Explorations in Economic History, 44 (4): 803–32.
Olson, M. (1993), ‘Dictatorship, Democracy and Development’, American Political Science Review, 87 (3): 567–76.
Osafo-Kwaako, P. and Robinson, J. A. (2013), ‘Political Centralization in pre-colonial Africa’, Journal of Comparative Economics, 41 (1): 621.
PEFA (2006), Public Expenditure and Financial accountability (PEFA) Performance Measurement Framework, available at, retrieved on 5 March 2018.
Prichard, W. (2010), ‘Taxation and State Building: Towards a Governance Focused Tax Reform Agenda’, IDS Working Paper 341, Brighton: Institute of Development Studies, available at, retrieved on 5 March 2018.
Ricciuti, R., Savoia, A. and Sen, K. (2018). ‘What Determines Administrative Capacity In Developing Countries?’ WIDER Working Paper 2018/13. Helsinki: UNUWIDER.
Savoia, A. and Sen, K. (2015), ‘Measurement, Evolution, Determinants and Consequences of State Capacity: A Review of Recent Research’, Journal of Economic Surveys, 29 (3): 441–58.
Schumpeter, J. A. (1917/18), ‘The Crisis of the Tax State’, International Economic Papers, 4 (5): 538.
Shleifer, A. and Vishny, R. W. (1993), ‘Corruption’, Quarterly Journal of Economics, 108 (3): 599617.
Soifer, H. and Vom Hau, M. (2008). ‘Unpacking the Strength of the State: The Utility of State Infrastructural Power’, Studies in Comparative International Development, 43 (3/4): 219–30.
Staiger, D. and Stock, J. H. (1997), ‘Instrumental Variable Regression with Weak Instruments’, Econometrica, 65 (3): 557–86.
Tilly, C. (1990). Coercion, Capital, and European States, AD 990–1990, Oxford: Blackwell.
Timmons, J. F. (2010), ‘Taxation and Representation in Recent History’, Journal of Politics, 72 (1): 191208.
World Bank (2013), World development Indicators, Washington D.C. Available at, retrieved on 5 March 2018.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Institutional Economics
  • ISSN: 1744-1374
  • EISSN: 1744-1382
  • URL: /core/journals/journal-of-institutional-economics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *


Altmetric attention score

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed