World Happiness Report 2023 82 involves uncoordinated violence among multiple parties, which leads to widespread economic disruption and significant destruction of physical and human capital. In this way, a state can enter a vicious cycle with lower income levels reducing the cost of fighting, which further reduces income. Effective and entrenched repression can create a form of political stability, such as the one we see in China, or the Middle-East monarchies. While there is always a risk that incumbents use their arbitrary power to expropriate the returns to investment, it may be feasible for repressive states to pursue long-term economic goals that are credible in the eyes of investors. In this way, repressive regimes can enjoy some economic success at the cost of limited political rights. As corrupt practices that negate economic results may be hard to control, rulers in stable repressive dictatorships who recognize this can have self-serving incentives to control corruption and promote prosperity. State capacities: The Tilly doctrine State capacities can support an effective state by strengthening the ability to identify and deliver efficient policies, or by lowering their cost. For example, to work well an income tax requires investment in infrastructure for monitoring and compliance. The term state capacity was coined by the historical sociologist Charles Tilly to describe the power to tax.9 But it is helpful to think of state capacity in wider domains. Besley and Persson10 suggest three key dimensions of state capacities: fiscal, legal, and collective. They present both cross- sectional and time-series evidence on how state capacities have been built in each of these three dimensions. Fiscal capacity refers to the power to tax. Being able to tax effectively requires having systems for tracking incomes and contributions to social security programs, and promoting compliance with tax laws by firms and individuals. Fiscal capacity is also built by ensuring that tax bases are broad: indeed taxes on income and value added – rather than, say border taxes – finance the bulk of state spending in modern economies. Legal capacity refers to the power to adjudicate and implement laws. Having an effective legal system requires a range of investments in legal institutions, courts, and regulatory bodies. These enable the protection of property rights and enforcement of contracts to encourage trade and investment. Legal capacity can also support economic, political, and civil rights, for example, by making it possible to limit discrimination or enforce minimum-wage laws. Collective capacity refers to the power to deliver a range of public services. This requires organizational structures that enable effective provision of public health and education. Examples include building statistical agencies to plan service provision and developing systems for lifetime interactions between the state and citizens. Investment in intangible capital is hugely important in finding ways of keeping and maintaining records and ensuring delivery of medicines and other supplies. State capacities can be thought of as a form of capital. They often involve public buildings, but they also rely on what is nowadays often referred to as “intangible capital” rather than physical infrastructure. Measuring state capacities is not straightforward and there are no standard, agreed-upon metrics. By way of illustration, we use three crude measures. For fiscal capacity, we use the share of total tax revenues raised by income taxes in 2016. Compared to, say, border taxes, income taxes generally require more extensive bureaucratic infrastructures — e.g., for withholding — to collect taxes or facilitate compliance with tax rules. For legal capacity, we use the 2016 value of the World Bank’s contract enforcement index (from the Doing Business Project).11 For collective capacity, finally, we construct a basic index that takes the average of educational attainment (from Barro and Lee’s dataset12) and life expectancy (from the World Development Indicators).13 These three forms of state capacity are highly correlated across countries and are positively related to income per capita. The patterns in the data are illustrated in a three-dimensional plot (Figure 3.2) in Besley and Persson.14 Although state capacities are related to income, it is not because income causes higher levels of state
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