Fiscal legibility and state development: Theory and evidence from colonial Mexico

The forthcoming article “Fiscal legibility and state development: Theory and evidence from colonial Mexico” by Francisco Garfias and Emily A. Sellars is summarized by the author(s) below.

What enables political centralization and state development? In this article, we focus on the role of fiscal legibility: the ability of central authorities to independently observe, measure, and assess local populations, wealth, and activities for taxation and control.

Our theory highlights an interdependence between fiscal legibility and the consolidation of authority under a central ruler. In areas with low fiscal legibility, central rulers often resort to indirect rule, ceding autonomy to local elites to govern on behalf of the center. Though sometimes advantageous for central authorities, indirect rule requires giving up revenue and control to powerful elites. As fiscal legibility improves, central authorities can better monitor local intermediaries, making political centralization—the replacement of autonomous intermediaries with direct agents of the state—more attractive.

Under more centralized arrangements, rulers have an incentive to invest in improving legibility through efforts like conducting censuses or establishing tax offices to better monitor agents in the periphery, efforts that have little immediate benefit under indirect forms of rule. Because of this interdependence between centralization and fiscal legibility, a sudden increase in state informational capacity can lead to longer-term divergence in state development.

To assess these ideas empirically, we examine the consequences of a sudden improvement in fiscal legibility in colonial Mexico: the discovery of the patio process to refine silver in the 1550s. This new technology relied on mercury to extract silver in a known ratio. The Spanish Crown was able to exploit its monopoly over the distribution of this key input to track fluctuations in local silver production, drastically improving the center’s ability to monitor economic conditions in silver-producing areas.

Using a differences-in-differences empirical strategy, we show that this sudden increase in fiscal legibility led to an acceleration in political centralization. Mining areas affected by the legibility shock experienced a faster transition from the administration of territory via encomiendas, a form of indirect rule, to corregimientos, a more direct form of rule through which intermediaries directly collected taxes and were hired and fired by the center. We then examine the longer-term implications of this legibility shock. We show that affected areas received greater state investment in informational capacity through the placement of post offices, further altering the trajectory of state development.

Our theory highlights the important connection between endogenous and exogenous sources of fiscal legibility, with important implications for longer-term divergence in state development. Where states lack information about the periphery, central authorities have little incentive to either centralize power or to invest to improve fiscal legibility. A single shock that raises fiscal legibility encourages both centralization and additional investment in informational capacity with far-reaching consequences for state development. The features of our empirical context allow us to provide quasi-experimental evidence on the connection between fiscal legibility and political centralization, a relationship that is typically endogenous and self-reinforcing.

About the Author(s): Francisco Garfias is an Associate Professor in the School of Global Policy and Strategy at the University of California, San Diego and Emily A. Sellars is an Assistant Professor in the Department of Political Science at Yale University. Their research “Fiscal legibility and state development: Theory and evidence from colonial Mexico” is now available in Early View and will appear in a forthcoming issue of the American Journal of Political Science.