Taxation vs. Expropriation

What’s the difference between a 50% marginal tax rate on income vs. 50% expropriation by a kleptocratic ruler or corrupt officials? Some models might suggest that they are the same, though their “legitimacy” seems to be very different. Despite some grumbling, most citizens of Western democracies (with the notable exception of Tea Party supporters in the United States) are happy with marginal tax rates around 50% or sometimes above, but few businessmen in sub-Saharan Africa or South Asia can be found to sing the praises of similar rates of expropriation or corruption. Why?

The concept of consensually strong states discussed in our last post suggests one possible answer. High tax rates that emerge from the democratic process are viewed more positively — or dare we say “legitimately”? — because citizens consent to them with the expectation that the proceeds will be used for spending that they value. The taxes we observe, according to this perspective, are legitimate while corruption and expropriation isn’t because taxes collected by the consensually strong state will, with some slippage, be used for what the citizens support, and of course, the money that goes into the pockets of a kleptocrat or corrupt officials or a crony elite will not be. 

A Model of the Alternative Perspective

In the last two posts, here and here, we have argued that neither the classic Hobbesian line of the benefits of a Leviathan nor James Scott’s perspective of disadvantaged groups always fleeing the authority of the state are fully satisfactory. Instead, it appears that though the state is often an instrument of repression and extraction in the hands of economic or political elites, there are at times important benefits from state centralization (as we have also argued in Why Nations Fail), and the state can even be a useful instrument for the disadvantaged in their struggles against the local elites.

We are not aware of any comprehensive approach that models or successfully integrates these different ideas. But Daron’s paper from 2005, “Politics and Economics in Weak and Strong States,” takes one baby step in this direction.

The key idea from this paper is that of a “consensually strong state”. It is meant to stand apart from strong states that are useful because they can provide socially useful public goods and from weak states cannot or will not provide such public goods. But strong states are also difficult to control for the citizens, so they will often turn their strength against the citizens, for example, expropriating them.

The observation this paper makes is that if we were trying to interpret the cross-country variation in the political and economic strength of the state, taxes and spending using such a dichotomy between weak and strong states, much of the OECD and certainly Scandinavia would just appear as massive outliers. Here are states that are “politically weak” in that those who control the state and its capacity — politicians and political parties as well as bureaucrats — can be easily replaced and removed from power, but are also “economically strong” as they have a much greater capacity to regulate, tax and keep records about all sorts of economic activities than the states we see in much of the developing world. Moreover, this economic strength is not imposed on the citizens against their will, but largely demanded by the citizens.

So how to interpret this? The interpretation that the paper offers is based on the concept of consensually strong states. Precisely because politicians and political elites are weak, citizens are happy giving them a “long leash” in the economy, consenting to high taxes, regulation and involvement by the state, with the expectation that the politicians in power and the bureaucrats will use this capacity mostly for things that the citizens like. And what if they don’t? This is where the political weakness of the state is key. Because of this weakness, citizens know that they can easily kick out the current crop of politicians, thus making it incentive compatible for them to use the huge resources they control for the benefits of the citizens, for example for public good provision and control of monopoly, rather than for their own or their cronies’ benefits.

Putting it formally, what the paper describes is a subgame perfect equilibrium of a repeated game, in which citizens are willing to allow high taxes because they have the punishment strategy of kicking the incumbent politician out of power if he or she uses the resulting tax revenues for rents or projects that they do not value. Crucially, it is the ability of citizens to easily kick out the politicians that makes this subgame perfect equilibrium possible. If the state were politically too strong (say like an absolutist monarch), such subgame perfect equilibrium arrangement would not be possible.

So according to this model, the problem of the Hobbesian state is not just that it is strong, but that it is a Leviathan emboldened by his own might, rather than empowered by the consent of society at large.

Perhaps a different way of putting this would be to say that the state’s strength has the capacity to be useful for society ­— or at least large parts thereof — because this strength emanates from the consent of civil society rather than as an imposition on that society, by arms or tradition.

The Nature of Stateless Societies

We would also disagree on Scott’s other argument. Though it is true that one can find harmonious stateless societies, the comparative ethnographic evidence also suggests two robust facts. First, historical human societies, including stateless ones and those which lacked a modern state, were far more, not less, violent than modern societies. Hobbes was actually right when he said that the state of nature was nasty, brutish and short. This is evident from contemporary nations, such as those in Somalia or South Sudan, which were built on-top of historically stateless societies. The modern state in Somalia collapsed 20 years ago and has never been re-constructed, and perhaps was never really constructed in the first place and the country has degenerated into continual violence. Though one hopes otherwise, it is quite likely that South Sudan is now headed in the same direction. One should not conclude from this that the stateless society of the Sudan clans or the Nuer and Dinka in the South Sudan was peaceful until the British and Italians turned up and tried to create arbitrary nation states. They were not. In Why Nations Fail we illustrated in Chapter 8 how the stateless societies of historical Somalia were unable to generate order let alone economic development. The same is shown about the Nuer and Dinka in Raymond Kelly’s great book The Nuer Conquest that documents the 200 year conflict which has taken place between these two stateless societies over territory and cattle.

Towards an Alternative Perspective: Against Hobbes

In our last few blog posts on the state, we have argued that Scott’s whole vision of state centralization is deficient. Scott is right that in some cases the state is a great threat to welfare and he has been a vigorous and effective critic of the Hobbesian perspective on the state, so central to much thinking in social science.

Hobbes, the great 17th-century English philosopher, argued that without a state one would have in society a “war of all against all”. The only solution was to create an institution for which Hobbes used the metaphor of a “Leviathan” – the great sea monster described in the Bible’s Book of Job. The cover of Hobbes’s book, Leviathan, featured an etching of the Leviathan with the quotation from Job “There is no power on earth to be compared to him” (Job 41. 24). Point taken. Without a Leviathan in control society would be in trouble and for a functioning society it was necessary for everyone “to submit their Wills, every one to his Will, and their Judgements, to his Judgement” (Hobbes, Chapter 17, p. 227). Without this there would be

no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short. (Leviathan, XIII.9.)

For Hobbes, though the details of states mattered, having one was the main thing. He observed

There is written on the Turrets of the city of Luca in great characters at this day, the word LIBERTAS; yet no man can thence inferred, that a particular man has more Libertie or Immunitie from the service of the Commonwealth there, than in Constantinople. Whether a Commonwealth be Monarchicall, or Popular, the Freedome is still the same (Leviathan, Chapter 21, p. 266)

So freedom was the same in republican Italy as in the despotic Ottoman Empire. Getting a state up and running was the main thing. If anything, Hobbes, having been the tutor to the young exiled Charles II, favored monarchical government. Only a state could remove the clash of interests and notions of justice and eradicate the uncertainly, arbitrariness and domination which a stateless society was prone to.

Scott’s disagreement with this would be twofold. First, as an avowed anarchist, he’d deny that the state of nature was anything like as bad as Hobbes said it was, and he’d certainly be able to cite ethnographic evidence of pre-state societies where life was not “nasty, brutish and short”. Second, he’d never accept that building a state actually solved what problems there might have existed in a stateless society. As we have shown, his arguments in fact are that states typically reduce social welfare and that is why people fly from them and try to escape their power.

To anyone with some knowledge of the great tragedies of the 20^th century, the claim that states formation can reduce human welfare can hardly be a controversial observation. It was the strong states created and controlled by the Bolshevik Party in Russia, the Communist Party in China, the Nazi Party in Germany and the Khmer Rouge in Cambodia that succeeded in wiping out vast numbers of people on a scale of killing never seen before in human history.

At the same time it is also obviously not true that states necessarily do this. The powerful state that England built after the Glorious Revolution of 1688 did not systematically harass or murder its citizens and neither did the central state that was constructed in the United States after the ratification of the Constitution. The obvious point is that it matters how and by who the state is governed. Scott recognizes in Seeing Like a State that the governance of the state, who controls it and in whose interests, is critical in the sense that authoritarianism is necessary to create a really big disaster, but this receives scant attention in The Art of Not Being Governed.

The fact that the governance of the state is critical can be seen from our example taken from David Nugent’s Modernity at the Edge of Empire. Peasants in rural Perú, rather than rejecting the state, actively tried to induce it to intervene to protect them from local elites and to deliver the services and benefits that the Peruvian constitution promised. This example vividly shows how once a state governed by law, even if mostly in the breech, can radically change the calculus of citizens. The same is true of our example from Western Colombia. Afro-Colombians communities were able to use the state to get control over their land and Law 70 of 1993 turned out in the past 20 years to be a key tool to fight against local elites trying to expropriate lands.

Powerful centralized states can therefore be a blessing as well as a curse, it all depends on how they are governed and by whom and under what terms. 

The Benefits of Collective Titles

Hoy estos campesinos están reclamando que las vendieron muy baratas, sí, pero las vendieron, y los empresarios, compraron, barato, sí, pero las compraron — El Alemán

This is a quote from Colombian paramilitary leader “The German,” remarking that “today the peasants are reclaiming the lands which they sold very cheaply, yes, but they sold them, and the businessmen, bought them, cheap, yes, but they bought them” often of course at gun point.

In our last post, we discussed how Afro-Colombian communities managed to get collective title to their lands. We proposed one hypothesis for why they demanded these titles in collective form, namely that it was a response to the incapacity of the Colombian state to deliver anything else.

Let’s discuss another example that may suggest a different motivation. In the north of the Chocó is a region called Urabá that also spills into the department of Antioquia. In this region between 1996 and 1997, 70% of the population of two Afro-Colombian communities Curvaradó and Jiguamiandó was displaced by paramilitaries and the army (see the report). The people were replaced by tropical palm, and by 2005 the palm plantations reached 35,000 hectares. The Inter-Ecclesial Commission of Peace and Justice reported that by 2005, 106 people in the area had been assassinated or were missing, 40,000 people were displaced from their homes; there had been 19 raids and burning of hamlets, and 15 cases of torture.

Interestingly in this case the displaced people used Law 70 as a tool to try to get their land back from the paramilitaries and the land grab (as the report Elusive Justice shows many elites were heavily invested in this as well). They managed to get the land that had been stolen declared to be their communal land and this has helped them get the state to intervene to restore some if not all of it. Thus another hypothesis about the demand for communal land rights is that this form of property rights, which cannot be sold, may be a better tool for defending the communities against expropriation and elite predation.

One of the most depressing parts of this story is that at some point the “left-wing” guerillas of the FARC (Revolutionary Armed Forces of Colombia) appeared to fight against the paramilitaries and elites and immediately kidnapped some of the leaders of the Afro-Colombian communities since they did not want anyone other than themselves organizing the “peasants”. With friends like that who needs enemies?