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State Capacity and Long-Run Economic Performance

Dincecco, Mark and Katz, Gabriel (2012): State Capacity and Long-Run Economic Performance.

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Abstract

We present new evidence about the long-run relationship between state capacity and economic performance in Europe, the birthplace of modern economic growth. Our database is novel and spans 11 countries and 4 centuries from the Old Regime to World War I. We argue that national governments undertook two political transformations over this period: fiscal centralization and limited government. We find a significant direct relationship between fiscal centralization and economic growth. Furthermore, we find that an increase in the state's capacity to extract greater tax revenues was one mechanism through which both fiscal centralization and, to some extent, limited government played significant economic roles. We believe that our analysis is among the first to show systematic evidence that state capacity is an important determinant of long-run economic growth.

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