Political Transformations and Economic Performance
Today’s advanced economies typically possess a set of political institutions that link powerful centralized tax structures with parliaments that limit executive control over public finances. This paper argues that, by enabling governments to gather large tax revenues and channel funds toward non-military public services with positive economic benefits, states with “balanced” fiscal systems improve economic performance. To make our case, we examine the economic impacts of fundamental political transformations that resolved long-standing problems of weak fiscal authority and strong executive spending control in Europe. Our database is novel and spans 11 countries and 4 centuries. A dynamic simultaneous equation panel model indicates that the performance effects of efficient political regimes are significant, large, and robust.