Many scholars believe that intense warfare propelled state formation in early modern Europe because rulers built tax institutions to pay for wars. Scholars likewise cite milder geopolitical pressures to explain the lackluster state building in the developing world. The authors analyze episodes of ferocious warfare in and beyond Europe and find that despite similar fiscal strains, not all governments built strong tax institutions to service wartime debt. When net creditors in a country's credit market were part of the ruling political coalition, they pressed governments to diversify taxes and strengthen fiscal institutions to ensure debt service. But when net debtors held political sway, governments were indifferent to debt servicing and fiscal invigoration. Coalitional politics can help to explain why mounting debt-service obligations led to fiscal institution building in some cases, but not others. The analysis highlights how the private economic interests of ruling coalition members can affect state building.
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