by Magnus Neubert (IAMO Halle and Martin-Luther-Universität Halle-Wittenberg)
This blog is based on a paper presented at the 2022 Economic History Society Annual Conference in the New Researcher Session: NRIB (Fiscal Capacity).
Why are some countries poor and others are rich? And what role did the state play in this divergent economic development across Europe and the world? Although quite old, these questions are not easy to answer, because the quality of the state has multiple aspects like taxation, bureaucracy, law and order, and military power. Many of them can foster economic growth, but also hamper it. The right mix seems to be decisive. Furthermore, historical data are rare and often only available for certain polities, making it difficult to disentangle the impact of natural endowments, cultural traditions, and state institutions.
The Kingdom of Yugoslavia is a perfect case for studying the economic impact of diverging state institutions because it was founded after the First World War and was divided for several centuries before by the Habsburg empire in the north and the Ottoman empire in the south. Both empires developed very different levels of state capacity over the eighteenth and nineteenth centuries. Inspired by the enlightenment, the Habsburg empire built up an efficient and centralized bureaucracy that enabled the government to raise more taxes and ensure secure private property rights due to a cadastre system. Moreover, increasing tax revenues allowed the government to invest in railway construction and mass education. On the other hand, the Ottoman empire failed to follow the Habsburg trajectory in all of these aspects of state capacity, and it fell behind.
As a result, the economic development of former Habsburg and Ottoman regions in Yugoslavia diverged. By using labour force data from the 1931 census and additional sources, I can decompose the gross national product of Yugoslavia to 346 districts and map the regional distribution of economic activity; see Figure 1.
Figure 1. GDP per capita in Yugoslavia, 1931
The map illustrates the disparities between the former Habsburg regions in the north and the long-standing Ottoman regions in the south, divided by the old imperial border depicted as a black solid line. While industrialization already began, especially in Slovenia and the Vojvodina, the long-standing Ottoman regions remained economically backward.
These regional disparities were caused by the diverging levels of state capacity in the Habsburg and Ottoman empires due to several reasons. First, more civil servants were working in the former Habsburg regions, since they were natives which returned from Austro-Hungarian universities to their home towns and kept the Habsburg bureaucracy running even after the dissolution of the empire. Better legal institutions like land registers encouraged peasants and entrepreneurs to invest in productivity-enhancing technologies. The lack of these institutions in long-standing Ottoman regions led to quarrels over land ownership, and such uncertainty often discouraged long-term investments. Second, most of the Yugoslavs in the former Habsburg regions were literate, enabling them to adapt faster to new production technologies, while the poor schooling system in many former Ottoman regions hampered technology diffusion. Last but not least, the Habsburg government invested heavily in railway construction and left a dense railway network, while the network in the long-standing Ottoman regions was sparse and consisted of narrow-gauge tracks beyond the trunk lines. Although railways reduce transport costs and open up new markets, I cannot find any impact of railways on economic development in Yugoslavia. It seems to be likely that foreign firms were more competitive and, thus, were favoured by railway access at the cost of domestic firms.
Regional income disparities across Yugoslavia were the legacy of the age of empires. Diverging levels of state capacity caused the differences in economic development which persist until today. The former Habsburg territories of Slovenia and Croatia are still economically more successful and have already joined the EU. And the Vojvodina, as well as the Belgrade region, are the economic power house of present-day Serbia. Hence, the state is a key factor in the process of economic development, but yields visible results only in the long run.
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