Research Highlights Article
December 5, 2024
The process of state building and long-run growth
How did administrative reforms initiated during the French Revolution shape economic development over time?
Source: Jacques-Louis David, Public domain
State capacity, which involves a government’s ability to carry out its core responsibilities and achieve policy goals, is widely recognized as crucial for economic growth, but economists still have much to learn about the dynamic process through which it is built and when it starts to pay dividends for citizens. Deep questions about how long state building might take and the order in which institutions should be built remain only partially answered.
In a paper in the American Economic Review, authors Cédric Chambru, Emeric Henry, and Benjamin Marx show how state-building efforts that initially appear costly can yield substantial economic benefits, but only after decades of institutional development. The researchers drew their conclusions from revolutionary France, when the government completely reorganized the country's administrative structure.
Before the Revolution, France had a complex, overlapping system of nearly 800 local jurisdictions inherited from Roman and medieval times, which meant that a single parish might need to deal with multiple jurisdictions for different services—taxes in one city, courts in another.
In 1790, France’s first Constituent Assembly created a constitutional committee to redesign the country’s administrative map. The assembly divided the nation into 83 departments, each needing a new capital city. In some "artificial" departments—those not based on historical boundaries—there were a number of equally suitable candidate cities. Unable to decide between them, and under intense lobbying efforts from local elites, the revolutionary government sometimes rotated administrative functions between cities or held local elections to choose capitals.
Those revolutionaries who fought for their city to become a capital strongly believed that obtaining this status would yield substantial economic benefits, but ironically they did not live to see these benefits. Instead, in the short run they might have seen their city exposed to greater taxation and conscription.
Benjamin Marx
This system quickly proved unworkable, and a government decree in September 1791 fixed the capitals in their then-current locations, creating an ideal natural experiment. By comparing cities that became capitals to very similar candidate cities that did not, the researchers were able to estimate the impact of being an administrative center over nearly two centuries of economic development.
The results reveal a clear pattern in how state capacity develops over time.
In the first few decades after the reform, new capitals saw an increase in what the researchers call "coercive capacity." Compared to candidate cities, capital cities made greater investments in the capacity to collect taxes (via the adoption of land cadastres), hired more police, built more tribunals, and recruited more men into the military.
This initial phase was a crucial step toward receiving more public goods like schools, hospitals, and railways, along with increases in measures of productivity and innovation, such as patent registrations, but these economic benefits took time to materialize. For instance, when France conducted its first industrial census in 1840, there was no clear difference between capitals and candidate cities in terms of industrial development. But by 1914, the populations of capitals were about 40 percent larger than those of similar non-capital cities on average, with substantially more public and private employment, an advantage that persisted into the 21st century.
"Those revolutionaries who fought for their city to become a capital strongly believed that obtaining this status would yield substantial economic benefits," Marx told the AEA in an interview, "but ironically they did not live to see these benefits. Instead, in the short run they might have seen their city exposed to greater taxation and conscription."
These findings may hold important implications for developing countries today. When states build up administrative capacity, they might first need to invest in their ability to collect revenue and to enforce law and order, which may initially be unpopular. This might present a dilemma for fragile states if the corresponding improvements in public goods provision only materialize in the longer run.
Becoming a capital
The chart below shows the dynamic effects of the administrative reform over the nineteenth century. The panels show the regression coefficients for whether or not a municipality established a land registry (panel A); the cumulative number of construction and renovation projects of prisons and tribunals (panel B); whether or not a municipality had a railway station (panel C); the number of banks operating in the municipality (panel D); the number of patents registered by residents of the municipality (panel E); and the logarithm of the population (panel F).
“Many low-income countries lack the strong bureaucracies required to solve the complex multi-tasking problems that arise at early stages of the state-building process,” Marx said.
In the short run, policies that build up the state’s ability to extract resources from citizens run the risk of undermining growth and generating discontent. This can, in turn, derail the state-building process before the state becomes capable of delivering the public goods demanded by citizens.
The solution to this conundrum might lie in better incorporation of citizens’ preferences early in the state-building process. According to Marx, if states focus on building responsive bureaucracies that effectively interact with citizens and manage to deliver even simple, tangible public goods and services that the citizens value, such as garbage collection services, this might help consolidate political support during the long and complex process of building state capacity.
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“The Dynamic Consequences of State Building: Evidence from the French Revolution” appears in the November 2024 issue of the American Economic Review.