State fiscal capacity and state failure

Abstract

This paper develops a predatory theory approach to understanding state failure. Predatory theory expects that state revenue extraction is central to the ability of states to engage in any other activities. States that are able to maximize their revenue extraction subject to well-known constraints are therefore likely to avoid state failure. On the other hand, when state failure occurs, it should reduce state revenue extraction. These hypotheses receive mixed support in several two-stage least-squares time-series analyses that control for the endogenous relationship between state fiscal capacity and state failure. While state failure reduces state fiscal capacity, state fiscal capacity does not deter state failure onset or incidence. In the sub-Saharan African subsample, state fiscal capacity does reduce the incidence of state failure despite a reciprocal negative effect.