The Legacy of War on State Capacity

War is said to make states and states to make war. This prediction assumes that the fiscal effort that states exert to wage a war persists over time. This project tests the effect of war on the long-run fiscal capacity of the state by controlling for how pre-modern wars were funded: via taxes or foreign debt. The first option is argued to exert lasting effects on state capacity, whereas the latter may not, as countries might default once the war is over. Importantly, the way war is waged might be endogenous. To cope with this possibility, I exploit freezes in the international financial markets, which cancels the possibility of borrowing for every state in the world regardless of their (un)observed characteristics. The preliminary analyses suggest that countries that fought inter-state wars while the international financial markets were down have today a higher fiscal capacity, as measured by average tax ratios since 1990. This result is robust to the consideration of potential confounders. Altogether, the paper offers us a better understanding of the mechanisms by which wars exert positive and lasting effects on state building.