Quarterly Journal of Political Science > Vol 10 > Issue 2

From Mercantilism to Free Trade: A History of Fiscal Capacity Building

Didac Queralt, Carlos III University, Carlos III-Juan March Institute of Social Sciences — Getafe, Spain, dqueralt@march.es
Suggested Citation
Didac Queralt (2015), "From Mercantilism to Free Trade: A History of Fiscal Capacity Building", Quarterly Journal of Political Science: Vol. 10: No. 2, pp 221-273. http://dx.doi.org/10.1561/100.00014065

Publication Date: 24 Jun 2015
© 2015 D. Queralt
Comparative political economy,  Bureaucracy,  International political economy,  Political history,  Public economics


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In this article:
1. The Short Run: Set Up 
2. The Long Run: Set Up 
3. Vested Interests 
4. Empirical Implications 
5. Discussion 


This paper presents a theory explaining how trade policy is contingent on the development of fiscal capacity. The paper investigates the conditions under which mercantilism is adopted as a substitute for taxation when fiscal capacity is weak, when mercantilist revenue is reinvested in developing fiscal capacity, and when economies endogenously abandon mercantilist practices and embrace free trade. If mercantilism is pursued when the stock of fiscal capacity is too low, the economy eventually falls into a protectionist trap, characterized by low income and low taxes. If mercantilism is adopted when the initial stock is large enough, then mercantilist revenue is invested in the expansion of the fiscal bureaucracy of the state. Eventually, the economy moves from the mercantilist-equilibrium to the free tradeequilibrium, where both income and taxes are high. The empirical implications of the model are examined against historical European data from 1820 to 1950.