State Capacity and Economic Development: A Network Approach

We study the direct and spillover effects of local state capacity in Colombia. We model the determination of state capacity as a net-work game between municipalities and the national government. We estimate this model exploiting the municipality network and the roots of local state capacity related to the presence of the colonial state and royal roads. Our estimates indicate that local state capac-ity decisions are strategic complements. Spillover effects are sizable, accounting for about 50 percent of the quantitative impact of an expansion in local state capacity, but network effects driven by equi-librium responses of other municipalities are much larger. (JEL D85, H41, H77, O17, O18) Though we often take for granted the existence of central and local states with the capacity to enforce law and order, regulate economic activity, and provide pub-lic goods, many states in less-developed parts of the world lack this capacity. In Migdal’s (1988, p. 33) words: “In parts of the Third World, the inability of state lead-ers to achieve predominance in large areas of their countries has been striking …” The idea that such state capacity is vital for economic development, though latent in the writings of Hobbes and Weber, began to attract more attention as a consequence of analyses of the “East Asian Miracle. ” A series of books by Johnso