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The Princeton Economic History of the Western World #108
Pawned States: State Building in the Era of International Finance
How foreign lending weakens emerging nations
In the nineteenth century, many developing countries turned to the credit houses of Europe for sovereign loans to balance their books and weather major fiscal shocks such as war. This reliance on external public finance offered emerging nations endless opportunities to overcome barriers to growth, but it also enabled rulers to bypass critical stages in institution building and political development. Pawned States reveals how easy access to foreign lending at early stages of state building has led to chronic fiscal instability and weakened state capacity in the developing world.
Drawing on a wealth of original data to document the rise of cheap overseas credit between 1816 and 1913, Didac Queralt shows how countries in the global periphery obtained these loans by agreeing to “extreme conditionality,” which empowered international investors to take control of local revenue sources in cases of default, and how foreclosure eroded a country’s tax base and caused lasting fiscal disequilibrium. Queralt goes on to combine quantitative analysis of tax performance between 1816 and 2005 with qualitative historical analysis in Latin America, Asia, Africa, and the Middle East, illustrating how overreliance on external capital by local leaders distorts their incentives to expand tax capacity, articulate power-sharing institutions, and strengthen bureaucratic apparatus.
Panoramic in scope, Pawned States sheds needed light on how early and easy access to external finance pushes developing nations into trajectories characterized by fragile fiscal institutions and autocratic politics.
In the nineteenth century, many developing countries turned to the credit houses of Europe for sovereign loans to balance their books and weather major fiscal shocks such as war. This reliance on external public finance offered emerging nations endless opportunities to overcome barriers to growth, but it also enabled rulers to bypass critical stages in institution building and political development. Pawned States reveals how easy access to foreign lending at early stages of state building has led to chronic fiscal instability and weakened state capacity in the developing world.
Drawing on a wealth of original data to document the rise of cheap overseas credit between 1816 and 1913, Didac Queralt shows how countries in the global periphery obtained these loans by agreeing to “extreme conditionality,” which empowered international investors to take control of local revenue sources in cases of default, and how foreclosure eroded a country’s tax base and caused lasting fiscal disequilibrium. Queralt goes on to combine quantitative analysis of tax performance between 1816 and 2005 with qualitative historical analysis in Latin America, Asia, Africa, and the Middle East, illustrating how overreliance on external capital by local leaders distorts their incentives to expand tax capacity, articulate power-sharing institutions, and strengthen bureaucratic apparatus.
Panoramic in scope, Pawned States sheds needed light on how early and easy access to external finance pushes developing nations into trajectories characterized by fragile fiscal institutions and autocratic politics.
368 pages, Paperback
Published August 9, 2022
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April 21, 2023Super fascinating thesis about how easy lending conditions for countries in Europe’s periphery led them to rely on foreign finance to the exclusion of domestic taxation. As a result, they defaulted and sold their asserts odd to the financiers, and they didn’t develop their state institutions. A gold standard case in which social and political history benefit from economic methodologies. However, the book itself is primarily made up of those little econ models that drive me up the wall.
January 13, 2026
A very interesting book that follows the lines of Acemoglu et. al. in the role that inclusive vs extractive institutions play in societal development. The premise is that by the mid-19th century, and accelerating as the 20th century approached, surplus credit in London, and to a lesser extent Paris and Berlin, was a significant extractive institution. Following Tilly's line of war and state-building, Queralt demonstrates how most of this debt was incurred to fund wars, yet failed to yield strong economic growth.
Governments can pay for wars by raising taxes or debt, or a mix of both. Governments that raise taxes must concede power-sharing to the financiers, contributing to the decentralization of power. Governments that raise funds from domestic capital markets are likewise constrained by suddenly important financiers who are anxious to make their profits. Queralt argues that this was the case for Western Europe and why Western Europe fits Thilly's thesis so well. However, as Western Europe developed, those countries became capital-rich when compared to the rest of the world. It therefore became very cheap for bad governments to borrow from foreign private lenders.
But wouldn't bad governments earn a reputation for not repaying debt? Yes, they did, but this led to the development of formal contractual clauses that surrender certain profit streams - like mining or customs duty profits - to a consortium of creditors. These clauses were enough to flatten the premium between safe borrowers and bad governments. Because cheap foreign capital gave these governments an alternative form of war-finance, they did not have to concede to domestic power-sharing arrangements.
There's also the alternative path of bureaucratization, which Queralt also discusses. Looking for money to pay for a war, governments often increased the efficiency of their tax collection through bureaucracy. An example of this is Qing China and, I would argue, the Roman Empire.
Governments can pay for wars by raising taxes or debt, or a mix of both. Governments that raise taxes must concede power-sharing to the financiers, contributing to the decentralization of power. Governments that raise funds from domestic capital markets are likewise constrained by suddenly important financiers who are anxious to make their profits. Queralt argues that this was the case for Western Europe and why Western Europe fits Thilly's thesis so well. However, as Western Europe developed, those countries became capital-rich when compared to the rest of the world. It therefore became very cheap for bad governments to borrow from foreign private lenders.
But wouldn't bad governments earn a reputation for not repaying debt? Yes, they did, but this led to the development of formal contractual clauses that surrender certain profit streams - like mining or customs duty profits - to a consortium of creditors. These clauses were enough to flatten the premium between safe borrowers and bad governments. Because cheap foreign capital gave these governments an alternative form of war-finance, they did not have to concede to domestic power-sharing arrangements.
There's also the alternative path of bureaucratization, which Queralt also discusses. Looking for money to pay for a war, governments often increased the efficiency of their tax collection through bureaucracy. An example of this is Qing China and, I would argue, the Roman Empire.
September 11, 2022
Here’s another brick in the wall of evidence that borrowing money from foreigners is harmful to the health and wellbeing of states. Harms have been especially severe in non-Western places where bankers, donors, arms dealers and merchants of ‘development’ have over nearly two centuries pushed their goods and services, selling them as sure-fire means to achieve prosperity, democracy, viable public services, and military triumph. But as shown in decades of critical scholarship, and even the eating of some humble pie among high priests of development finance, these claims are grossly misleading if not wholly bogus.
This book focuses on the impacts of finance on state capacity, narrowly interpreted as capacities to tax citizens (and perhaps also exporters, importers and investors) – a tax effort further interpreted as a sign of accountable governance. In the ‘Bond Era’ 1860-1913, some states managed to create those domestic tax capacities, thereby preserving their sovereignty. They did so by avoiding European private creditors’ ‘lending frenzy’. Whereas those states susceptible to easy money from abroad saw their sovereign powers evaporate. Some were caught in debt traps, where foreign creditors’ bailiffs, occasionally backed by gunboats, took over key national sources of revenue – turning those countries into ‘pawned states’. Those crude forms of debt collection largely vanished after the First World War. Instead there came public-private task forces of bailiffs operating under auspices of the League of Nations -- a history discussed powerfully in Jamie Martin’s The Meddlers. Sovereignty, Empire, and the Birth of Global Economic Governance.
After the Second World War, debtor countries have faced not gunboats but coercion by the IMF plus a battery of laws, treaties, commercial courts and debt forums (means of foreign coercion curiously ignored in this book) to ensure that creditors remain exempt from ‘haircuts’, that is, major losses on their loans. These have meant, in country after country, dimished external sovereignty, and virtual disappearance of downward accountability to citizens.
This is an academic book for academicians. Its construction emerges through schematic scaffolds and ceteris paribus circumspections. In some chapters the author deploys multiple regression and other statistical methods, even where the data are scarce and flimsy. The prose in those chapters is abstruse and often barely readable.
The book’s case studies are much clearer and more persuasive. The story of the semi-autarchic Boer Republics’ self-finance is fascinating. The 16th & 17th century Spanish state suffered a secular decline because of its over-reliance on imported silver and gold (politically 'easy money') and consequent neglect of the mobilization of domestic revenues. The lesson: external finance (in this case resource rents) and weak tax effort can damage capacities of rich creditor states too—an angle this book unfortunately does not pursue.
While the indictment of finance in the 19th century is clear, the discussion of international loans and state capacities in the 20th century is more equivocal. It suggests that western institutions of public finance, led by the IMF, have today become interested in something claimed to be ‘capacity building’. If such interest were genuine, and if it meant authentic state-building, a major about-face would be at hand. For over nearly fifty years, those institutions have put the boot into public sectors and democratic politics, as shown in study after study. To name but two: Helen Thompson's Might, Right, Prosperity and Consent: Representative Democracy and the International Economy 1919-2001; and Susan L Woodward's The Ideology of Failed States: Why Intervention Fails.
Despite such equivocation, this book's impressive findings from the 19th century convey a vital lesson for today, namely that foreign borrowing can cripple, if not nullify means by which states should fairly tax their citizens, account to them and build social contracts that work for all.
This book focuses on the impacts of finance on state capacity, narrowly interpreted as capacities to tax citizens (and perhaps also exporters, importers and investors) – a tax effort further interpreted as a sign of accountable governance. In the ‘Bond Era’ 1860-1913, some states managed to create those domestic tax capacities, thereby preserving their sovereignty. They did so by avoiding European private creditors’ ‘lending frenzy’. Whereas those states susceptible to easy money from abroad saw their sovereign powers evaporate. Some were caught in debt traps, where foreign creditors’ bailiffs, occasionally backed by gunboats, took over key national sources of revenue – turning those countries into ‘pawned states’. Those crude forms of debt collection largely vanished after the First World War. Instead there came public-private task forces of bailiffs operating under auspices of the League of Nations -- a history discussed powerfully in Jamie Martin’s The Meddlers. Sovereignty, Empire, and the Birth of Global Economic Governance.
After the Second World War, debtor countries have faced not gunboats but coercion by the IMF plus a battery of laws, treaties, commercial courts and debt forums (means of foreign coercion curiously ignored in this book) to ensure that creditors remain exempt from ‘haircuts’, that is, major losses on their loans. These have meant, in country after country, dimished external sovereignty, and virtual disappearance of downward accountability to citizens.
This is an academic book for academicians. Its construction emerges through schematic scaffolds and ceteris paribus circumspections. In some chapters the author deploys multiple regression and other statistical methods, even where the data are scarce and flimsy. The prose in those chapters is abstruse and often barely readable.
The book’s case studies are much clearer and more persuasive. The story of the semi-autarchic Boer Republics’ self-finance is fascinating. The 16th & 17th century Spanish state suffered a secular decline because of its over-reliance on imported silver and gold (politically 'easy money') and consequent neglect of the mobilization of domestic revenues. The lesson: external finance (in this case resource rents) and weak tax effort can damage capacities of rich creditor states too—an angle this book unfortunately does not pursue.
While the indictment of finance in the 19th century is clear, the discussion of international loans and state capacities in the 20th century is more equivocal. It suggests that western institutions of public finance, led by the IMF, have today become interested in something claimed to be ‘capacity building’. If such interest were genuine, and if it meant authentic state-building, a major about-face would be at hand. For over nearly fifty years, those institutions have put the boot into public sectors and democratic politics, as shown in study after study. To name but two: Helen Thompson's Might, Right, Prosperity and Consent: Representative Democracy and the International Economy 1919-2001; and Susan L Woodward's The Ideology of Failed States: Why Intervention Fails.
Despite such equivocation, this book's impressive findings from the 19th century convey a vital lesson for today, namely that foreign borrowing can cripple, if not nullify means by which states should fairly tax their citizens, account to them and build social contracts that work for all.
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December 26, 2023Displaying 1 - 4 of 4 reviews