Did External Finance Produce Weaker States?

In the first era of bond finance (roughly 1820-1920), countries often pledged customs revenues and other collateral to back their external debt. Conventional wisdom is divided as to whether these pledges were worth anything. After all, investors couldn't seize the ports on their own, and rich countries were only sometimes willing to do it for them. Didac Queralt (Yale) has done fascinating work on the relationship between external finance and the development of state institutions. Among his surprising findings are that investors did assign value to collateral, suggesting that these pledges were more enforceable than is often assumed. But he also highlights the long-term costs. Access to external capital may have allowed states to defer the development of robust tax systems. In short, ability to tap external finance may have produced weaker and less democratic states. We talk with Didac about his research.

Producer: Leanna Doty