Chapter 5: State Spaces

All happy families resemble each other; every unhappy family is unhappy in its own way.

- Leo Tolstoy, 1873-77.

Leo Tolstoy. Credit: F. W. Taylor, Public domain via Wikimedia Commons

The previous chapter expanded our core state-capacity model from Chapter 3 to include investments in violence.

We used this model to explore the theoretical determinants of repression and civil war, and demonstrated that the predictions are consistent with the within-country variation in violence over time.

Prior to the empirical detour in the last half of Chapter 4, we observed that political violence and state-capacity investments had several common determinants. Specifically, the investments in the state and the investments in violence appeared to be substitutes; among the common determinants, every variable that increased investments in violence decreased investments in state capacity.

The theoretical analysis in Chapter 4 was incomplete, however, in that we treated the levels of legal and fiscal capacity as given. We now complete the analysis by making them endogenous. Thus, we derive the optimal investments in state capacity by a period-1 incumbent, when political (in)stability is endogenous - rather than exogenous, as in Chapter 2 and 3 - and given by the equilibrium investments in violence.

This exercise results in a new pair of Euler equations for legal and fiscal capacity, through which state capacity, income and political violence are jointly determined. Moreover, we take a further step towards endogenizing income by reintroducing private capital formation into the analysis. This suggests a natural negative link between conflict risk and investment (and thereby income).

Once these remaining tasks have been resolved, we can put the pieces together to obtain a more complete picture of development clusters. As we shall see, our comprehensive core model helps us further in isolating possible explanations for the observed correlations between income, institutions, and violence.

In particular, we can combine our findings in Chapters 2 and 3 of a typology with common-interest, redistributive and weak states, with our findings in Chapter 4 of a typology with peaceful, repressive and civilwar states. This gives us a general state space in the form of a matrix. A country's precise location in this matrix at a given time depends on the parameter values that describe its polity and economy.