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From Mercantilism to Free Trade: A History of Fiscal Capacity Building

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  • Queralt, Didac

Abstract

This paper presents a theory explaining how trade policy is contingent on the development of fiscal capacity. The paper investigates the conditions under which mercantilism is adopted as a substitute for taxation when fiscal capacity is weak, when mercantilist revenue is reinvested in developing fiscal capacity, and when economies endogenously abandon mercantilist practices and embrace free trade. If mercantilism is pursued when the stock of fiscal capacity is too low, the economy eventually falls into a protectionist trap, characterized by low income and low taxes. If mercantilism is adopted when the initial stock is large enough, then mercantilist revenue is invested in the expansion of the fiscal bureaucracy of the state. Eventually, the economy moves from the mercantilist-equilibrium to the free tradeequilibrium, where both income and taxes are high. The empirical implications of the model are examined against historical European data from 1820 to 1950.

Suggested Citation

  • Queralt, Didac, 2015. "From Mercantilism to Free Trade: A History of Fiscal Capacity Building," Quarterly Journal of Political Science, now publishers, vol. 10(2), pages 221-273, June.
  • Handle: RePEc:now:jlqjps:100.00014065
    DOI: 10.1561/100.00014065
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    Cited by:

    1. repec:hal:spmain:info:hdl:2441/6flqrv4et09btppk9s58qgp979 is not listed on IDEAS
    2. Pablo Beramendi & Melissa Rogers, 2021. "Disparate geography and the origins of tax capacity," The Review of International Organizations, Springer, vol. 16(1), pages 213-237, January.
    3. Hannah Simpson, 2023. "Access to justice in revenue-seeking legal institutions," Journal of Theoretical Politics, , vol. 35(2), pages 75-99, April.
    4. Cagé, Julia & Gadenne, Lucie, 2018. "Tax revenues and the fiscal cost of trade liberalization, 1792–2006," Explorations in Economic History, Elsevier, vol. 70(C), pages 1-24.
    5. Cagé, Julia & Gadenne, Lucie, 2018. "Tax revenues and the fiscal cost of trade liberalization, 1792–2006," Explorations in Economic History, Elsevier, vol. 70(C), pages 1-24.
    6. Ryan H. Murphy, 2023. "State capacity, economic freedom, and classical liberalism," Constitutional Political Economy, Springer, vol. 34(2), pages 165-187, June.

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