The War of the Pacific and Chilean public revenues: Reallocation of the tax burden and institutional change

Abstract

A substantial body of literature has considered warfare a fundamental driver of fiscal capacity. We argue that the nature of the tax base available to governments can either foster or constrain the ability and incentives of central elites to impose their legitimacy once the war is over. We illustrate this dynamic by analysing the evolution of public revenues in Chile before, during, and after the War of the Pacific (1879–83). The seizure of natural resource-rich areas enabled the Chilean state to raise public revenues and expand its size. This process was driven by a significant increase in natural resource revenues, accompanied by the reduction or decentralization of other revenue sources - outcomes shaped by deliberate policy choices. Over time, the limitations of this arrangement became increasingly evident, paving the way for the introduction of new domestic taxes and investments in fiscal capacity from the early twentieth century onward. While these shifts are crucial for understanding the long-term development of Chilean state capacity, they proved insufficient to address the short-term macroeconomic vulnerabilities stemming from the state's dependence on natural resource taxation.