Pawned States: State Building in the Era of International Finance

Foreign lending weakens emerging nations by providing easy access to external finance at early stages of state building, leading to chronic fiscal instability and weakened state capacity. This reliance on external capital distorts local leaders' incentives to expand tax capacity, articulate power-sharing institutions, and strengthen bureaucratic apparatus, leading to fragile fiscal institutions and autocratic politics.

Format: Paperback / softback
Length: 368 pages
Publication date: 09 August 2022
Publisher: Princeton University Press

In the 19th century, many developing countries sought sovereign loans from European credit houses to balance their books and withstand significant fiscal shocks like wars. This reliance on external public finance opened up endless opportunities for emerging nations to overcome growth barriers, but it also allowed rulers to bypass crucial stages in institution-building and political development.

Pawned States, by Didac Queralt, explores how easy access to foreign lending in the early stages of state building has led to chronic fiscal instability and weakened state capacity in the developing world. The book documents the rise of cheap overseas credit between 1816 and 1913, showing how countries in the global periphery obtained these loans by agreeing to "extreme conditionality," which gave international investors control over local revenue sources in cases of default. Foreclosure further eroded a country's tax base, causing lasting fiscal disequilibrium. Queralt combines quantitative analysis of tax performance between 1816 and 2005 with qualitative historical analysis in Latin America, Asia, Africa, and the Middle East, illustrating how overreliance on external capital by local leaders distorts their incentives to expand tax capacity, articulate power-sharing institutions, and strengthen bureaucratic apparatus.

Pawned States offers a panoramic view of how early and easy access to external finance pushes developing nations into trajectories characterized by fragile fiscal institutions and autocratic politics. The book sheds valuable light on the consequences of relying too heavily on external finance and highlights the need for developing countries to prioritize institution-building and political development to achieve sustainable growth and stability.

Weight: 600g
Dimension: 157 x 234 x 24 (mm)
ISBN-13: 9780691231525