National Fiscal Redistribution as “International” Development Assistance

The histories of international development and foreign aid often focus on aid between independent nations. Williams’ (2013: 234) history of international development aid only begins from the British Colonial Development Act of 1929. Markovits, Strange and Tingley’s (2019) history of foreign aid focuses on aid between “nations” or empires. Helleiner (2014), for instance, traces the origins of multilateral development finance proposals to China’s Sun Yat-sen in 1919.

There is, however, a major problem with these histories. Their starting points reveal a methodological nationalist approach. The history of states and societies since the modern era, is however more complex. The early modern era is well known for the spate of state consolidations and national formations. It may be argued that intra-national transfers within modernizing nations may represent important forms of regional development assistance that have been left out of the consideration of the history of development assistance.

Medieval Multiplicity and Early Modern Consolidations

Whereas today there are 195 countries, by 1500 there were as many as 500 independent states in Europe alone (Tilly 1992:45–46) and by 1648 the Treaty of Westphalia recognized about 300 sovereign German principalities alone. Whereas today there are 54 African states, in the precolonial era there had been some 10,000 African societies (Meredith, 2014). With so many states characterizing the late Medieval period, Irwin (1993: 92) notes that “Nearly all European states emerged from the medieval period riddled with internal tolls and customs areas that reflected remnants of local power.” Free trade thus emerged first as national free trade.

France, for example, had 1600 internal tolls and tariffs (Irwin, 1993: 92). Jean-Baptiste Colbert, Louis XVI’s Comptroller of Finance, sought to abolish these in order to make France a customs union. William Petty in late 17th century England decried the customs barriers existing between the Three Kingdoms (England, Scotland and Ireland) of Britain’s and its colonies, casting a jealous eye to the more consolidated territory of the French kingdom (Cheney, 2019: 74). England and Scotland achieved commercial union in 1707 after over a century united under a single monarch (Irwin, 1993: 92), thereby creating “the largest free-trade area in Europe” at the time (Emerson, 2008: 13). In Spanish America, colonial rule created “the Western world’s largest customs and monetary union”, before the economic and political fragmentation of the region occurred following the Napoleonic disruption and post-independence political fragmentation (Grafe and Irigoin, 2006: 45).

Political and economic unification often brought benefits of intra-union intergovernmental transfers to the constituent units of the nation. Richer regions tended to provide fiscal aid and transfers to poorer ones.

Colonial Spanish American inter-colonial fiscal redistributions enabled colonies to be self-sufficient for 300 years, as inter-colonial transfers “covered the needs of those regions that either could not or would not raise sufficient revenue to pay for their defence and administrative expenditure” (Grafe and Irigoin, 2006: 43). On the other hand, within the independent Federation of Central America (1823-1842), Honduras was too poor to contribute to the support of the federal government, and Costa Rica found it difficult to fund its state administration (Smith, 1963: 496). It was only the state of Guatemala regularly made funds available to the federal government, which was nowhere enough to fund the national state apparatus or development projects (Smith, 1963: 488).

The Anglo-Scottish 1707 Treaty of Union included a provision for Scotland to be paid the “Equivalent” of £390,085 to compensate for the share of English public debt it would have to take on, for the rise in excise and customs payments once English and Welsh rates were introduced, for the loss sustained by the Company of Scotland which invested in the failed Darien scheme which the English had blocked (Armitage, 1995: 116). This was to be paid both as a lump sum and as payments consequent on expected increases in tax receipts in Scotland through heightened economic activity (Hoppit, 2019: 46-47). This provided some financial incentive to joining the union and making a smoother fiscal transition for Scotland.

The creation of the German customs union (zollverein), which became the largest free trade area of the 19th century (Onishi, 1973), came with a revenue-sharing agreement whereby the net revenues, after the states’ costs for border customs administration were compensated, were split evenly according to population size rather than by receipts. As a result, Prussia made net transfers to other member states (Henderson, 1934: 11). This economic redistribution highly favoured the secondary states because their per capita consumption was considerably smaller than Prussia’s (Mattli, 1999: 123).

When proposals for an Australian federation emerged in the mid-19th century, smaller colonies such as Tasmania, South Australia and Western Australia worried about how to distribute the excess customs duties from the central government to the states (Clark, 1908: 583). With the six colonies forming an Australian federation in 1901, section 96 of the Constitution empowered the federal government to “grant financial assistance to any state” to provide states which might encounter financial difficulty, and thereby destabilize the federation, with a safety net on an ad hoc basis (Kirchner, 2013: 17-19). As a result, “federal payments to states were an important transitional measure by which the former colonies adjusted to the new economic realities of federation” (Kirchner, 2013: 17). The expiration of these transitional provisions was followed by a system of equal per-capita grants from the federal government to the states from 1909 to 1927 (Kirchner, 2013: 19). Subsequently in 1933 Australia introduced a horizontal fiscal equalization (HFE) scheme to distribute more funds to states and territories with lower revenue-raising capacity, oriented towards “full equalization” of fiscal capacity (Kirchner, 2013).

In colonial Africa, it was often the case that the more financially less viable colonies were subsidized by the better off ones. Northern Rhodesia was therefore made to subsidize the development of Southern Rhodesia and to prop up Nyasaland, one of Britain’s poorest colonies, from the former’s gains from copper production (Jerven, 2010: 138). The Northern Protectorate of Nigeria was subsidized by the Southern Protectorate following their amalgamation (Carland, 1980). Such inter-societal financial transfer considerations were one important factor in considering economic and political integration of some neighbouring colonies. For instance, the French in Africa created large colonial federations for “integrating richer coastal territories with vast hinterland areas through fiscal redistribution” (Frankema and van Waijenburg, 2014: 374). Generally, British colonies, which had ex ante been colonized for their greater commercial viability, faced weaker fiscal integration (Frankema and van Waijenburg, 2014: 381). Whereas independent states sought regional federations or national customs unions in order to defend against external forces, combine finances and better undertake joint substantive development policy, colonial powers imposed such amalgamations to suit their own extractive purposes and without such pressure to undertake robust development.

This does not mean there was no resistance by the richer powers within these regions. During the British North African confederation debates of 1865, interlocutors from Upper Canada complained that although it paid the majority of revenues under the Legislative union, it had less control over the system of taxation and expenditure than those from Lower Canada (Heaman, 2016). Confederation was therefore partly proposed as a “tax reform” since it made “local expenses largely, though not exclusively, reliant on local (provincial and/or municipal) taxation. Federal governments would provide a top-up for provincial revenues, but their ability to transfer revenue from one jurisdiction to another would…be severely limited” (Heaman, 2016: 16). Such top-ups were a necessity since only Upper Canada/Ontario “had extensive direct taxation” (Heaman, 2016: 16). In the early years of confederation such subsidies from the central government made up about 50% of all provincial revenues (Magnet, 1974: 474). Similarly, Jamaican critics of a centralized West Indian Federation who “worried that the economic burdens of a federation would fall largely on their island” given that Jamaica was the most populous and more industrialized economy and “the British government would no longer supply grants that constituted a major portion of the budgets in the smaller islands” (Getachew, 2019: 128).

The Lesson

Embedded within the many national unifications around the world since the early modern period has been institutional measures to facilitate some degree of regional redistribution and development cooperation. In other words, such intra-national transfers may have played significant roles in reducing regional inequalities among the economies that became amalgamated. The almost exclusive focus of the history of development assistance on independent North-South fiscal transfers hides this phenomenon. It has thus been relegated to the fields of political science and public finance alone. It would nonetheless be interesting to research how it has contributed to the history of intra-regional convergence.

References

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