Labor coercion, fiscal modernization, and state capacity: Evidence from colonial Indonesia

What explains the emergence of centralized fiscal institutions and information-intensive monetary taxation? This is the first study to estimate the effect of state capacity expansion on labor coercion as taxation, a practice known as corvée labor. To do so, I construct a new database covering eighteen Indonesian residencies over thirty-two years (1874–1905) during the period of Dutch colonial rule. I document the wide use of corvée labor and find that national-level policy centralized state finances by gradually replacing corvée with a head tax. At the same time, a residency-level panel data analysis shows that local state capacity expansion, primarily indigenous officials working as agents for the state, slowed the movement away from corvée. These estimates are supported by an IV strategy that uses effective distance to the capital as an instrument for local state capacity. The relationship between state capacity expansion and fiscal modernization therefore depends on what part of the state is expanding and whether interests across types of taxation differ within the state bureaucracy. Opposing interests of different state actors can be key in understanding fiscal modernization and public labor coercion.