The Blessings of Extractive Institutions : Colonial Revenue Raising and Modern-Day Institutional Quality in British Colonies

The influence of government revenue, primarily taxation, on institutional quality has increasingly been identified as a key issue for state building. This study juxtaposes the hypothesis, as presented by Acemoglu, Johnson and Robinson (2001), that colonies where European settlers focused primarily on revenue extraction developed poor institutions, with the claim from the fiscal sociology literature that increased revenue raising improves institutional quality over time. Using colonial fiscal records from a sample of twenty-nine British colonies, results from cross-country regression analyses show that higher colonial revenue extraction during the early twentieth century, measured as income-adjusted revenue level, can be linked to higher institutional quality today. This effect is substantial and robust to several specifications of both colonial revenue and modern-day institutional quality. The results support the notion that the current institutional success of former colonies can be traced back to the extent of historical revenue extraction