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The Cartel System of States: An Economic Theory of International Politics

International borders represent one of the most consequential and universal features of the international state system, a system whose reach is so wide that in modern times, we have come to take it for granted. But this system did not always exist, and the world did not necessarily have to be this way.  

Imagine, for a moment, a counter-factual world in which the residents of border towns could decide for themselves if they wanted to pay a portion of their taxes to the Canadian government to “buy in” to Canadian healthcare while paying another portion of their taxes to the U.S. government to enjoy access to American public services, such as the ability to enjoy in-state tuition in a state’s public colleges. We could even ask this question of cities, towns and communities that are not border communities. Why can’t public services be bought piecemeal, on an a-la-carte basis, with governments competing with one another to provide higher quality services at the lowest cost, in a sort-of marketplace for governance and public goods?  What impact would this competition have on citizen-welfare? Presumably, this competition would be good for citizens since governments would be compelled to provide more and better services at lower costs, or else be driven out of the market. Why, after the advent of democracy, haven’t citizens demanded such a competitive market system in the provision of governance?

The questions that we are concerned with in this book are: What is the territorial state system? How does it maintain itself?  And, perhaps most importantly, why does it exist? These are questions that have been asked and answered before. But the answer that we will give in this book is novel, and provides a new lens by which we can understand this basic feature of modern political life. 

Our argument is that the territorial state system represents an economic cartel. It is an implicit agreement among rulers to divide what we refer to as the “market for governance” in ways that reduce competition and deter entry, at the expense of their citizens. It exists because rulers are forward-looking and self-interested revenue maximizers, always seeking to find ways to maximize their power over their subjects, who use their monopoly power through the mechanisms of oligopolistic cooperation to extract more revenue from citizens. We set out a neoclassical theory of the state, where rulers provide “governance” (a package of services starting from protection, to dispute resolution, to modern public goods and infrastructure) to citizens. Since they are the only providers of coercion, rulers can force citizens to pay the price they choose for a set of services that they choose, constrained only by the (often high) cost of individual exit. 

A key argument of this book is that the market for governance has the potential to be competitive. Individuals facing tax demands that they consider too high relative to the benefits they receive may instead join another polity. Individuals placed between two polities can play them against each other, demanding more services or less taxation in return for their allegiance. The tax rates paid by individuals are thus regulated by the availability of alternative rulers, and the costs that those rulers face in providing services. Individuals in a competitive governance market will thus pay a price for services determined very close to the costs of the competing states in providing those services, with the more efficient polities overing the most competitive prices. Individuals in noncompetitive markets, however, still pay a monopoly price, often well above the cost of providing services. %In colonial India, for instance, the British raj was the only convincing provider of governance and thus had broad discretion in setting tax rates.

The costs of provision for each polity varies spatially. Each polity possesses a zone, often (though not always) the zone around the capital, where its ability to extract resources and apply coercive force is very high. The farther away from this zone the state attempts to expand, the longer communications become, the farther armies have to travel, and the more unfamiliar local society becomes to officials. All of these raise the costs of providing governance. Note that the increase of cost with distance is not necessarily linear.

As we move from the center of one state, we may be moving towards the center of gravity of another. This will have an effect on taxes, since it gives local elites an outside option. By threatening, even if only implicitly, to switch their allegiance to a rival polity, border lords can extract concessions, usually in the form of lower net taxes, increased services, or increased local autonomy. Put in economic terms, the appearance of cooperation in the governance market is accompanied by lower prices and higher levels of services.

The desire to eliminate these unstable, unprofitable border zones has been the main factor in the creation and stability of the state system. The state system, at its basis, is a product of cooperation by rulers against their citizens, where polities divide the potential market among themselves, and agree to not provided governance outside of these boundaries. Since each “state” is now a local monopolist in the provision of governance, individuals must pay them the monopoly price, leading to tax burdens being equalized across core and peripheral areas. 

This state system, thus constituted, resembles a cartel. In the same way that Archer Daniels Midland and its Japanese and Korean competitors distributed among themselves the global market in lysine in the 1990s, or Osram, General Electric, Associated Electrical Industries, and Philips divided global market in lightbulbs in the 1920s, contemporary states divide among themselves the right to tax the world. By limiting competition, the members of the cartel can charge citizens in border areas much higher prices than they would be able to otherwise. However, unlike most modern cartels the state system is, due to the anarchic nature of the international order, untroubled by the legal restrictions on cartels that exist in most countries. Like most modern cartels, the state system is haunted by the specter of cheating: That one player will attempt to steal the market share of the others, either by force or by attracting border elites. 

The territorial division that is characteristic of the contemporary state system is a means for reducing this type of cheating. Violations of the norm of non-competition are easier to police when they are unambiguous and visible. The mutually agreed, demarcated territorial border serves as an unambiguous way of dividing political authority, and of the territory of one taxing monopoly from one another. While a Medieval “border violation” might be difficult to separate from the legitimate exercise of political authority, today any state that governs outside of its internationally recognized borders is clearly violating the norms of the state system. 

Within these borders, a single political unit is legally supreme—or, to use the commonly used expression, “sovereign.” It recognizes other political units as sovereign within their own borders, and receives their recognition in return: In both theory and in practice, it is this mutual recognition, symbolized by the exchange of ambassadors that sets “states” apart from other political units. Note that this does not mean that states are able to govern with equal efficiency. In fact, some states, such as those in contemporary Africa may be so institutionally underdeveloped that they are unable to provide much in the way of state services, or extract much in way of taxes. While these efficiency problems might doom these states in a perfectly competitive system, the state system guarantees them a share of the market, much as economic cartels can guarantee the survival of inefficient producers. 

Cooperation between states can be made self-enforcing with the help of strategies that punish deviating rulers for violations of the cooperative norm. While a state might gain revenues by collecting taxes from its neighbors’ subjects, this would lead eventually to a loss of revenue as it reduced taxes in the face of competition for the allegiance of its own border subjects. However, it may still be in states’ interests to alter the border in their favor. To reduce such attempts, the state system has developed a complicated system of norms that discourage the unilateral initiation of conflict, and unilateral annexation of territory. In Africa, for instance, colonial boundaries, however artificial, are widely considered to be inviolable.

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From Hierarchy to Ethnicity: The Politics of Caste in 20th Century India

Caste identities have played a role in the politics and political culture of South Asia for centuries, but the politics of caste has undergone two changes in the past century that have fundamentally altered Indian politics. The first of these is the expansion of the number of political actors making caste-based claims. Caste today is of central importance in understanding how Indians vote, and the distributional strategies of politicians are also focused around caste. Even more interesting than the general rise in ethnic or caste consciousness was its uneven distribution across groups, with many individuals disdaining narrow caste appeals in favor of the broader rhetoric of empire, religion or nation. Even seven decades after independence, the caste identities mobilized during this period remain central to political behavior in India, with elections featuring political parties relying on mobilizing caste “vote banks.” Prominent examples include Mayawati’s Chamars in Uttar Pradesh, Laloo Prasad Yadav’s Yadavs in Bihar, and Hardik Patel’s Patels in Gujarat. Similar types of identity politics (both violent and non-violent) are found in many poor countries

However, caste politics has also changed quantitatively since the colonial period. Scholars today think of ethnic groups as “conceptually autonomous” categories, there were (both in South Asia and elsewhere) many cases of groups that relied on external legitimation and emphasized their similarities to high-status groups over their own distinctive characteristics—where upwardly mobile members of poor groups sought to assimilate the values and behaviors of rich ones rather than challenge them. Such “ranked” identities were common in many parts of the world before the Industrial Revolution. In India, where ranking was highly salient during the colonial era, the gradual evolution of a very different “ethnified” view of identity was one of the key events of the 20th century, creating an additive, voting block identity politics that resembles in certain respects ethnic politics in other parts of the world.

This book will describe the causes of the upsurge in caste activism that has occurred in India over the past century, and the strategic choices made by caste activists from upwardly mobile poor groups as to what role caste should play in their political careers. This resolves itself naturally into two questions. Firstly, why do some identities become the focus for elite activism?. Secondly, why do some activists participate in maintaining existing ranked identity systems by rejecting opportunities to create a conceptually independent identity of their own? Finally, it will show how the differential and occasionally ranked nature of identity mobilization in modern India has influenced its society and politics.

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Development in Multiple Dimensions: Social Power and Regional Policy in India

One of the most serious obstacles to economic growth and human development in poor countries is that their governments often refuse to provide basic public services such as education, health care, roads and electricity. Many observers have suggested that such failures are a consequence of the social inequalities prevalent in many poor countries, which create powerful elites who manipulate state institutions for their own benefit. However, such a conclusion ignores a crucial aspect of the societies of most poor countries: that social inequalities are not single, but multiple, and that a single region may have several competing elites, with sharply different policy preferences and sources of political power.

This book will explore the complicated, chaotic, distributional politics that result from multiple patterns of reinforcing, and non-reinforcing, social inequality. It will show why some elite groups are excluded from political power, while others wield disproportionate influence. On the outcome side, it rejects simplistic notions of “high” or “low” performing states, and the related idea that development policy has no programatic component. On the contrary, there are important compositional differences in the types of public services governments supply, with some favoring infrastructure over social services and others taking the opposite approach.

This theory, and the empirics that test it, are drawn from India and the Indian political experience. It examines one of the great problems of South Asian studies: Why the states of India, despite virtually identical formal institutions, differ so dramatically both in the levels and in the types of services provided by their governments? They show that different states have pursued very different paths to the ideal of development, and that these paths are closely associated with the local distribution of social power.

The book makes two contributions to the study of the political economy of development in India. The first of these is a reconceptualization of variation in government performance. This book argues that public goods distribution in India varies in two dimensions, corresponding to social and infrastructure goods, and, ultimately, economic and human development. Some states, like Gujarat, produced excellent roads and power plants but poor schools and hospitals, while other states, like West Bengal, have social services that are much better than their infrastructure. Such a distinction allows a richer conversation about what politics in poor countries looks like, adding a greater awareness of policy disagreements to a literature focused on unidimensional “performance.”

The second contribution is a theory of the cause of these differences, based on the importance of multiple sources of social inequality. Indian states are dominated by powerful social groups, which are overrepresented in the political system and able to exercise disproportionate influence on policy. The power of these social groups comes a variety of sources, most importantly land (and the clientelistic ties that come with it), urban education, and simple group numbers (in democratic settings). The distribution of these sources of power relative to one another determines the political influence of each group, and in turn the types of resource transfers that politicians will find attractive. Areas dominated by large landed groups, such as Gujarat, Maharashtra, and Punjab, will favor the provision of infrastructure goods, while areas dominated by large educated groups, such as West Bengal and Kerala, will favor the provision of infrastructure goods. Areas dominated by small, educated landed groups, such as Bihar and Uttar Pradesh, will provide few of either kinds of public goods, while areas dominated by groups combining all three sources of power, such as Himachal Pradesh, will provide both types of goods.

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