Taxes, Institutions and Local Governance: Evidence from a Natural Experiment in Colonial Nigeria

Can local colonial institutions continue to affect people’s lives nearly 50 years after decolonization? Can meaningful differences in local institutions persist within a single set of national incentives? The literature on colonial legacies has largely focused on cross country comparisons between former French and British colonies, large-n cross sectional analysis using instrumental variables, or on case studies. I focus on the within-country governance effects of local institutions to avoid the problems of endogeneity, missing variables, and unobserved heterogeneity common in the institutions literature. I show that different colonial tax institutions within Nigeria implemented by the British for reasons exogenous to local conditions led to different present day quality of governance. People living in areas where the colonial tax system required more bureaucratic capacity are much happier with their government, and receive more competent government services, than people living in nearby areas where colonialism did not build bureaucratic capacity. Author’s Note: I would like to thank David Laitin, Adam Przeworski, Shanker Satyanath and David Stasavage for their invaluable advice, as well as all the participants in the NYU predissertation seminar. All errors, of course, remain my own. Do local institutions matter? Can diverse local institutions persist within a single country or will they be driven to convergence? Do decisions about local government structure made by colonial governments a century ago matter today? This paper addresses these issues by looking at local institutions and local public goods provision in Nigeria. Previous work such as Acemoglu et al. (2001) and Sokoloff and Engerman (2000) has presented strong cross-national evidence that colonial legacies are important, and that their importance at least partially passes through institutions. In this paper I use a natural experiment within Nigeria to show that differences in colonial institutions caused different post-independence outcomes in parts of Nigeria which were substantively identical before colonization. The long-run effects of different institutional legacies within Nigeria show us that local institutions are remarkably persistent and have real consequences for people’s lives today. Places where the British built local tax collection bureaucracies a century ago have contemporary local governments which have higher levels of public approval, better delivery of public goods such as vaccinations and lower levels of corruption that those places where the British were less active. This paper advances the state of knowledge on local institutions in three significant ways. First of all, I focus directly on the governance effects of institutions instead of on the economic effects which have previously been the object of more scrutiny. Secondly, in addition to finding differences in satisfaction with local governments, I trace specifically what the higher quality local governments are doing better. Finally, by working rigorously within a single country, I produce results unaffected by the problems of unobserved heterogeneity common in the cross-national study of institutions. The specific institution on which I focus is the de facto institution of local bureaucratic capacity. Local bureaucratic capacity is the ability of local governments to accomplish tasks delegated to them. In a country like Nigeria, where corruption and indifference to the law are commonplace, it is more important to focus on what local governments actually do in practice rather than what they are supposed to do on paper (de jure institutions). Further, the political instability in the country has caused successive military and civilian governments to frequently change the laws and organizational structures under which local governments officially operate but to leave the personnel relatively unchanged. Therefore the ability of local governments to function depends much more heavily on the honesty and competence of the local bureaucrats than on the specifics of the laws