Journal of Economic Literature 2014, 52(1), 45–123 http://dx.doi.org/10.1257/jel.52.1.45

From Divergence to Convergence: Reevaluating the History Behind China’s Economic Boom†

Loren Brandt, Debin Ma, and Thomas G. Rawski*

China’s long-term economic dynamics pose a formidable challenge to economic historians. The Qing Empire (1644­–1911), the world’s largest national economy before 1800, experienced a tripling of population during the seventeenth and eighteenth centuries with no signs of diminishing per capita income. While the timing remains in dispute, a vast gap emerged between newly rich industrial nations and China’s lagging economy in the wake of the Industrial Revolution. Only with an unprecedented growth spurt beginning in the late 1970s did this great divergence separating China from the global leaders substantially diminish, allowing China to regain its former standing among the world’s largest economies. This essay develops an integrated framework for understanding that entire history, including both the divergence and the recent convergent trend. We explain how deeply embedded political and economic institutions that contributed to a long process of extensive growth before 1800 subsequently prevented China from capturing the benefits associated with the Industrial Revolution. During the twentieth century, the gradual erosion of these historic constraints and of new obstacles erected by socialist planning eventually opened the door to China’s current boom. Our analysis links China’s recent development to important elements of its past, while using recent success to provide fresh perspectives on the critical obstacles undermining earlier modernization efforts, and their eventual removal. (JEL N15, N45, O11, O47, P21, P24, P26)

* Brandt: University of Toronto. Ma: London School Rubie Watson, Jeffrey Williamson, Bin Wong, Tim Wright, of Economics and Shanghai University of Finance and Se Yan, Jan Luiten van Zanden, Madeleine Zelin and par- Economics. Rawski: University of Pittsburgh. We have ticipants in the May 2010 and September 2012 Asian received valuable advice from many colleagues, including Historical Economics Conferences, and the January 2013 Masahiko Aoki, Timothy Brook, James Cassing, Nicolas Third Annual Conference on the Chinese Economy (in Crafts, Wendy Dobson, Ronald A. Edwards, Joshua Fogel, Hong Kong). We would also like to thank Janet Currie and Phil Hoffman, Ralph Huenemann, Wolfgang Keller, Peter four anonymous referees for their very helpful suggestions. Lindert, LIU Pei, LI Bozhong, LONG Denggao, Deirdre Debin Ma acknowledges financial support from Global Price McCloskey, Joel Mokyr, Andrew Nathan, Margaret and Income Project (http://gpih.ucdavis.edu/) funded by Pearson, Dwight Perkins, Kenneth Pomeranz, Evelyn National Science Foundation. The usual disclaimer applies. Rawski, Tirthankar Roy, Roger Sahs, Carole Shiue, Richard † Go to http://dx.doi.org/10.1257/jel.52.1.45 to visit the Smethurst, Paul Smith, Tuan-hwee Sng, Werner Troesken, article page and view author disclosure statement(s).

45 46 Journal of Economic Literature, Vol. LII (March 2014)

1. Introduction1 with substantial­ overseas sales, between 1978 and 1990 without encountering a hina’s enormous boom, now well into its shortage of capable managers and accoun- Cfourth decade, invites inquiry into the tants? How did millions of firms conduct historical antecedents of an unprecedented business, often on a large scale, without surge of productivity and prosperity that has well-developed systems of commercial law lifted hundreds of millions from dire pov- or property rights? erty, pushed the People’s Republic to the While developments that arose from forefront of global manufacturing and trade, China’s planned economy, including the and unleashed sweeping transformations of expansion of human capital and the latent employment, education, urbanization, con- competition inherent in the relatively com- sumption, inequality, ownership, and many plete sets of manufacturing industries cre- other dimensions of economic life in the ated in most of China’s 31 provinces, surely world’s most populous nation. contributed to reform-era growth, this essay Earlier growth spurts in Japan, Taiwan, is written in the conviction that historical and Korea encouraged efforts to probe legacies rooted in the decades and centuries the domestic origins of recent dynamism.2 prior to the establishment of the People’s China’s unexpected rush toward higher Republic in 1949 continue to exert power- incomes invites similar questions. What cir- ful influence upon the evolution of China’s cumstances enabled the hesitant reforms economy. of the late 1970s,3 which restored only a Prior to the industrial revolution, China small fraction of the market arrangements led the world in economic size and in many stifled by socialist policies during the previ- dimensions of technology. Writing before ous three decades, to launch the economy the onset of China’s current boom, ear- on a steep and durable growth path? How lier generations of scholars (Levy 1953, could several hundred million Chinese vil- Feuerwerker 1958) attributed China’s sub- lagers escape from absolute poverty within sequent reversal of fortune to the preva- 10–15 years following the onset of economic lence of nepotism, corruption, and other reform during the late 1970s with, if any- elements of Chinese society that prevented thing, declining external support as former a vibrant response to European expansion collective institutions withered away? How of the sort attained during Japan’s Meiji did the number of so-called “township–vil- era (1868–1912). Subsequent events have lage” enterprises (TVEs) jump from 1.5 mil- overtaken these views; some observers now lion to nearly 20 million, including many promote the opposite approach, attribut- ing Asian prosperity to the “Confucian val- 1 Names of authors working in North America and ues” formerly seen as obstructing economic 4 Europe and publishing in English are presented Western dynamism. style (e.g. Debin Ma). Names of Chinese and Japanese authors based in Asia and writing primarily in Asian lan- guages appear in the East Asian fashion, surname first, with the surname capitalized for clarity (e.g. WU Chengming). 2 For Japan, see Smith (1959, 1988), Ohkawa and 4 See Tu (1996). The economic success of China, Rosovsky (1973), Yamamura (1997), and Hayami, Saito¯, Taiwan, Hong Kong, Singapore, and overseas Chinese and Toby (2004); for Taiwan, see Hsueh, Hsu, and Perkins communities despite continued reliance on personal ties (2001); for Korea, see Cha, Kim, and Perkins (1997). (guanxi) and other cultural practices long seen as incom- 3 Studies of China’s economy during the reform era patible with modernization undercuts this approach. include Riskin (1987), Bramall (2000), Chow (2002), Lin, Retired Singapore leader LEE Kuan Yew and others now Cai, and Li (2006), Naughton (2007), and Brandt and point to “Asian values” as bulwarks of growth, prosperity Rawski (2008). and technological progress. Brandt, Ma, and Rawski: From Divergence to Convergence 47

More recently, James Lee, LI Bozhong, deepen our insight into historical realities Kenneth Pomeranz, R. Bin Wong, and and vice versa. ­others identified as the “California school” Several specific questions will help to unify have reshaped perspectives on the dyna- much of what follows: mism and development of the mid-Qing (1644–1911) economy. Pomeranz, in par- 1. Why was China unable to capitalize ticular, sees little difference in economic on its early economic and technologi- structure or per capita income between the cal ­leadership? Why did China become most commercialized regions of China and a laggard among major global econo- Europe prior to the British industrial revo- mies by the nineteenth century, if not lution. With development in both regions before? constrained by limited land, Pomeranz attri- 2. Once the Industrial Revolution was well butes Britain’s head start in industrialization underway, a succession of countries in to cheap coal and superior access through Europe, Asia, and the Americas fol- its colonies to land-intensive goods, rather lowed England’s lead. Why was China than to any advantage linked to political, slow to take advantage of economic legal, or other institutional factors (2000). opportunities linked to the dissemina- These bold claims have kindled intense con- tion of new technology? troversy, sparked efforts to expand empirical 3. How do we explain the timing and comparisons spanning Europe and Asia, and unique scale of China’s post-1978 catapulted Chinese economic history from breakthrough? a narrow specialty to a central concern of global historical studies.5 The first of these questions is the most The present review6 seeks to illuminate difficult to answer. We are more optimis- the historical antecedents of recent Chinese tic about tackling the second and the third. dynamism, to specify the constraints that hin- We anticipate—and here we disagree with dered the realization of China’s latent poten- the California school—that institutions will tial prior to the start of the recent growth figure prominently in explaining both the spurt, and to track the gradual relaxation of long delay in the onset of rapid growth and these constraints during the course of the the mechanisms underlying China’s recent twentieth century. Our analysis of China’s growth spurt. current boom, as well as the modest advances We begin with a survey of the long-term of the late nineteenth and early twentieth evolution of China’s economy. Since we centuries, helps to clarify the nature and regard institutions as a crucial but neglected impact of earlier constraints. In this way, factor that can contribute to understanding we believe that recent ­developments can both the failures and the triumphs of China’s economy during the past two centuries, we then turn to an analysis of China’s modern 5 The breadth and intensity of the debate on the his- history from the perspective of political torical comparison of economic growth between China economy. Starting with a summary of the and the West is evident from the Economic History Net more robust stylized facts of the imperial forum “Rethinking 18th Century China” http://eh.net/ forums/ChinaSum.html and in a debate between Andre Chinese economy, we lay out a broad ana- Gunder Frank and David Landes at http://www.worldhis- lytic framework for analyzing the political torycenter.org/whc/seminar/pastyears/frank-landes/Frank- economy of China’s premodern system that Landes_01.htm 6 Previous surveys include Feuerwerker (1961, 1992), has links to China’s post-1949 system, both King (1969), and Deng (2000). before and after the onset of the ­economic 48 Journal of Economic Literature, Vol. LII (March 2014)

Map 1. Chinese Territory under Ming (shaded) and Qing reform ­initiatives of the late 1970s. Finally, Republic of China (PRC) approximates that we briefly examine the growth spurt of the Qing, except for the border changes ­following China’s post-1978 reforms with in what are labeled “Xinjiang, Mongolia, an eye to continuities, as well as departures and Manchuria.” Major rivers—the natural from historic patterns. ­arteries of preindustrial commerce—flow from west to east. China’s economic history covers several 2. Long-Term Evolution millennia. Although certain features of the of China’s Economy economic, political, and social system span Map 1 indicates the territories con- much longer periods, our survey highlights trolled by the Ming (1368–1644) and the far major elements during the period since the larger dominions of the Qing (1644–1911) mid-fourteenth century encompassing the emperors.7 The territory of today’s People’s Ming and Qing dynasties and the ensuing

7 Although the map locates Taiwan outside the Qing island between 1683 and 1895, when it passed into the borders, the Qing exercised effective control over the hands of Japan. Brandt, Ma, and Rawski: From Divergence to Convergence 49

Republican period (1912–49), which ended The late Joseph Needham’s massive vol- with the defeat and exile of the Nationalist umes on Science and Civilization in China government led by CHIANG Kai-shek (summarized in Needham and Ronan 1978) (JIANG Jieshi) and the establishment of the document the extraordinary spurt of Tang– People’s Republic of China in 1949. Our Song innovation, including breakthroughs objective is two-fold: to acquaint nonspecial- in gunpowder, the magnetic compass, ist readers with key features of China’s pre- movable type, paper, and shipbuilding— 1800 economy, and to highlight broad areas improvements that commanded world-wide of agreement among specialized researchers admiration: that can serve as building blocks for subse- Printing, gunpowder and the compass: These quent analysis and interpretation. three have changed the face and state of things We preface discussion of fundamental throughout the world; the first in literature, features of the Ming–Qing economy with a the second in warfare, the third in navigation; brief discussion of the earlier Song era (960– whence have followed innumerable changes, 1279), which is essential because specialists in so much that no empire, no sect, no star seems to have exerted greater power and influ- often view Ming–Qing history in light of the ence in human affairs than these mechanical Song era, jumping over the short-lived Yuan discoveries” (Bacon 1960). or Mongol reign (1279–1368). Needham’s works establish China as the 2.1 Song as the Peak? global leader in many fields of scientific and technological endeavor until perhaps the The Song (960–1279) and its Tang (618– fourteenth century. Why this advantage did 907) precursor brought sweeping change not lead to an industrial revolution is known to China’s economy and society. Major new as the “Needham puzzle” (Lin 1995; Deng developments included the formation of 2003). institutions and structures that evolved into Deep institutional change and techno- foundations of what historians see as “tradi- logical progress (which may be linked—see tional” or “premodern” China: consolidation Francesca Bray 1994) had major qualitative of political control in the emperor’s hands; a impact on the Song economy. Some schol- tax system based on registration and assess- ars, notably Jones (1988), go further, depict- ment of privately-held land; a merit-based ing the Southern Song (1127–1289), as an civil service staffed by commoners rather early and remarkable episode of “intensive” than aristocrats; and the use of written growth—meaning increases in urbaniza- examinations to create a pool of candidates tion, marketed agricultural surplus, and the for official appointments, accompanied by level of per capita income—that subsequent a shift to an agricultural regime based on dynasties failed to replicate. Skinner con- small-holder ownership and tenancy, the cludes that “levels of urbanization achieved expansion of markets for commodities and in the most advanced regions were higher factors, the penetration of money in com- in the medieval [i.e. Song] era than in late mercial exchange, and the extensive devel- imperial times” (1977b, p. 28). opment of private commerce.8 Maddison’s estimates or guess-estimates of global economic aggregates, summarized in table 1, reflect this “Song peak” thesis, 8 Modern scholarship in this area begins with the so- called NAITO thesis, named after the pre-war Japanese scholar NAITO​ ¯ ​ Ko ​ ¯ ​nan. Miyakawa (1955) summarizes (2004) cites an array of relevant work by Chinese, Japanese, his thesis. Von Glahn’s review of recent monetary ­studies and western researchers. 50 Journal of Economic Literature, Vol. LII (March 2014)

Table 1 China’s Economy in Global Perspective: Angus Maddison’s Long-Term Estimates

1000 1500 1600 1700 1820 1870 1913 1950 1973 1998 Absolute values Population 59 103 160 138 381 358 437 547 882 1,243 GDP 26.5 61.8 96 82.8 28.6 189.7 241.3 239.9 740 3,873.3 GDP per capita 450 600 600 600 600 530 552 439 839 3,117

Relative values (World 100) = Population 22.0 23.5 28.8 22.9 36.6 28.2 24.4 21.7 22.5 21.0 GDP 22.7 25.0 29.1 22.3 32.9 17.2 8.9 4.5 4.6 11.5 GDP per capita 103.4 106.2 101.2 97.6 90.0 61.1 36.6 20.8 20.4 54.6

Western Europe 100 = GDP per capita 112.5 77.5 67.1 58.6 48.7 26.8 15.9 9.6 7.3 17.4

Note: Population is in millions; GDP in billions of 1990 international dollars; per capita GDP in 1990 international dollars. Source: Angus Maddison (2001, Tables B-10, B18, and B-21).

­indicating a considerable­ rise in China’s to localized improvements clustered in the absolute and relative per capita GDP Lower Yangzi region), contending that avail- between the late tenth century and 1300, able documents do not give a clear picture followed by six centuries of stagnation or of the extent of irrigated rice cultivation, the decline in both indicators. level of crop yields, or the size of the agricul- While the Song peak perspective continues tural surplus (LI Bozhong 2002, chapters 5 to receive scholarly support, most recently and 6; O ​ ¯ ​SAWA Masaaki 1996, especially from QI Xia (1999, 2009) and Liu (2005), the pp. 236–40). quantitative underpinning of key elements 2.2 Major Features of China’s remains controversial. Wagner describes Ming–Qing Economy Hartwell’s widely cited high estimate of Song iron production (1962) as a “guess,” argu- Demography is integral to any narrative ing that, “no reliable calculation is possible of China’s long-term economic evolution. on the basis of presently available sources” There are three crucial dimensions: the (2008, p. 300; 2001, p. 176). While Ho (1956) absolute size of China’s population; its rate and SUD​ O ¯ ​ Yoshiyuki (1962) document the of growth; and the underlying demographic spread of new rice seeds, expanded irriga- regime, typically described in terms of total tion, and other agricultural improvements marital fertility, mortality, and nuptiality. during the Song era, critics question whether Estimates of the size and growth of China’s these innovations cumulated to major agri- population begin with censuses conducted by cultural change in the aggregate (as opposed each dynasty/regime, while ­interpretations Brandt, Ma, and Rawski: From Divergence to Convergence 51 of demographic behavior build on family system (1959, p. 270) and the population genealogies and other micro-level data.9 totals that it generated.11 Coming between Careful empirical study of China’s his- the relatively­ firm totals for 1400 (70 million) torical demography begins with the work of and 1794 (310 million), the invasion from Ho (1959), who examined the institutional China’s northeast (Manchuria) that ousted dimensions of census taking during the Ming the Ming and established Qing rule (circa (1368–1644) and Qing (1644–1911) dynas- 1644) resulted in significant, but unquan- ties. The 1953 population census, the first tifiable population loss that could have conducted by the People’s Republic of China amounted to many millions. (PRC) and probably the most accurate to Problems multiply at the regional level. 12 that point, provides an important milepost Skinner (1987) reconstructed the arbitrary that helps to triangulate earlier estimates. adjustments that provincial officials used Concerns over the reliability of Ming and to update early nineteenth-century popu- Qing census figures arise from their reliance lation reports in Sichuan province, raising on self-reporting, the incentive for misre- concerns about other nineteenth-century porting inherent in the use of population estimates. Skinner’s revisions, (along with (and land) registers to assign tax obligations, earlier work by Perkins 1969), suggest a and the incompleteness of reporting systems, population of no more than 390 million on particularly in regions populated by ethnic the eve of the Taiping Rebellion (1851–64), minorities. A Ming ditty captures some of or at least 40 million lower than the official these sentiments:10 figures. This revision has important implica- tions not only for our view of eighteenth- and Barren soil along the river, the harvest not yet ready ­nineteenth-century population growth, but, New taxes are announced, and yet another in light of losses from the Taiping Rebellion levy, that earlier estimates placed in excess of Every household subdivides, trying to evade 60 million, for the early twentieth century as them— well.13 And officials mistake the whole thing for a growth in population!

Ho emphasizes the comprehensiveness 11 Official records, for example, show impossibly large and broad accuracy of early Ming popula- increases of one-third between 1760 and 1775 and one-half tion registration (circa 1400), but finds the between 1760 and 1790, perhaps because the Qianlong emperor demanded that officials “ascertain the true pop- remaining estimates for the Ming unten- ulation of the empire” after a 1775 regional crop failure able. In his view, it is not until the mid-Qing, exposed the failings of previous tallies (Ho 1959, pp. 47, (circa 1790s), and then only until the Taiping 281). 12 Ge Jianxiong et al., Zhongguo renkoushi [History rebellion (1851–64), that we can place sub- of China’s Population], a multivolume study by historical stantial confidence in the official reporting demographers at Fudan University, offers new estimates that develop aggregate totals from carefully researched regional or county figures. 9 The most important sources of microdemographic 13 Skinner’s downward revision to the 1850 population data are for the Qing imperial family and for Banner settle- figures raises the possibility that estimates of the loss of ments (a legacy of Manchu military organization) residing life may be too high. Independently, Peter Schran argues in present-day Liaoning province. Both groups are domi- for a speedy recovery of population in the aftermath of nated by ethnic minorities whose demographic behavior this shock. He finds the notion of “substantial decline” in might differ from that of the majority Han population. China’s population between 1850 and 1873 to be “quite Liaoning’s abnormally high land/labor ratio could also have implausible” and concludes that, “losses due to the Taiping influenced demographic outcomes. and Nien rebellions had almost been made up” by 1873 10 Lanyang xianzhi [Lanyang county gazetteer, 1545], (1978, pp. 645–46). CAO Shuji (2001), however, argues for with thanks to Timothy Brook. high mortality during the Taiping Rebellion. 52 Journal of Economic Literature, Vol. LII (March 2014)

Despite these uncertainties, there is a than 5 acres.14 Focusing on grain production, core of solid information. Over a period which occupied over 80 percent of total acre- spanning half a millennium, China’s popu- age, Perkins attributes long-term Ming–Qing lation grew from approximately 70 million output growth in roughly equal amounts to in 1400 to roughly 400 million in 1850 and expanded acreage and higher yields, i.e. the 500 million around 1930, implying annual extensive and intensive margins. Between growth averaging 0.4 percent per annum. 1400 and 1913, Perkins estimates that cul- Rates of growth were lower or negative tivated land more than tripled, rising from during periods of succession, rebellion or 370 to 1,360 million mou, while population famine, and higher in interludes of recovery increased more rapidly, more than quintu- and, in all likelihood, during the sixteenth pling from 65–80 million in 1400 to 430 mil- and eighteenth centuries, which qualita- lion in 1913.15 tive accounts identify as periods of stabil- Improved yields, among the world’s high- ity and commercial expansion. Within this est at that time, in turn, arose from grow- framework, we also recognize substantial ing intensification of tillage enabled by an heterogeneity across regions and time peri- increased supply of labor and fertilizer per ods, particularly during episodes of large- unit of land, along with improved seeds and scale migration. Complex interactions implements. This dynamic reflects the views between economic, social, and political of Boserup (1965) in that population growth forces shaped demographic behavior, possi- drives economic expansion by opening the bly, as Skinner’s (1977a, 1977b) work antici- door to increased cultivation of labor-inten- pates, in ways that differed across regions. sive crops and greater use of multiple crop- Despite recent contributions, scholars ping and other labor-using methods. While are unable to reconstruct the household known techniques spread across China’s behavior patterns that drove the trajec- landscape, Perkins finds little evidence of tory of China’s enormous demographic technical change in Ming–Qing agriculture, aggregate. aside from the importation of new food crops Massive population growth with stable (maize, Irish and sweet potatoes). long-run living standards is the defining fea- Subsequent regional studies, many ture of the Ming–Qing economy. Output directed toward the prosperous, highly com- kept pace with population: despite fluctua- mercialized Lower Yangzi area near present- tions and regional variation, we see no down- day Shanghai, enlarge Perkins’ picture of an ward trend in per capita consumption. In economy that responds to gradually rising the absence of widespread technical change, population density by adding new layers of growth, which clustered on the extensive specialization and division of labor that pre- margin, is described as “Smithian” (e.g. by serve living standards in the face of a rising Wong 1997) because of its dependence on man–land ratio. increasing specialization and division of labor. Perkins’s (1969) analysis of agriculture, 14 Farm size was smaller in the south, reflecting the a which dominated the economy and occupied warmer climate, longer growing season, greater availability of water, and higher multiple cropping ratios. Land rental a majority of the labor force, provides the was also more common in the south, with estimates sug- strongest empirical support for this perspec- gesting that tenants cultivated over one-third of farmland tive. The agricultural economy consisted of (Buck 1930, 1937). 15 Perkins (1969, p. 16) notes substantial regional varia- millions of small family farms, with average tion in the expansion of cultivated area and population farm size by the eighteenth century at less (p. 18ff). One hectare is equivalent to 15 mou (p. 16). Brandt, Ma, and Rawski: From Divergence to Convergence 53

2.2.1 Commercialization, Domestic Trade, from the Lower Yangzi northward around Market Integration the Shandong peninsula to Tianjin, “virtually abandoned” under the Ming, was revived The capacity of the Ming­–Qing system during the Qing period and extended north- to ward off diminishing returns rested on ward to connect with commodity flows along progressive intensification of agricultural the Liao River in Manchuria (XU Dixin and rhythms, growing household and regional WU Chengming eds. 2000, p. 166). The specialization, expanded transport systems growth of what became the large middle- and deepening markets for commodities, Yangzi river port of Hankou (now known as as well as the land and labor that produced Wuhan) from “a desolate sandbank” during them. Exploiting uniquely rich documenta- the Ming era to the “hub of a trade network tion available for Jiangnan (referring to the linking Sichuan and Shaanxi [provinces] to southern portion of Jiangsu province, which central and south-eastern China” by 1813 occupies the heart of the Yangzi delta), LI reflects “the development of trade along the Bozhong (2000, 2010) reviews the emer- Yangzi” River during the Qing era (XU and gence and growth of specialized production WU 2000, p. 165; Rowe 1984). in textiles, food processing, apparel, tobacco, Multiple studies trace the Qing deepen- papermaking, printing, toolmaking, construc- ing of domestic commercial networks (e.g. tion, and shipbuilding during 1550–1850. Rawski 1972, Rozman 1974), which influen- Building on the considerable growth of tial work by Skinner (1964) showed to con- markets and commerce recorded under the sist of nested hierarchies of marketplaces Song (960–1279), some of which eroded differentiated according to the periodicity of during the Mongol (Yuan) interregnum market sessions, the scale of activity, and the (1279–1368), the Ming–Qing era witnessed array of products and services transacted that renewed development of trade and grow- extended from the largest cities to remote ing agricultural commercialization. Perkins villages. Increases in the number of towns concludes that, “shipments of agricultural and markets were particularly evident in the products out of rural areas to domestic and densely populated delta regions surrounding foreign markets. . . probably amounted to. . . modern-day Shanghai and Guangzhou (WU under 7–8 percent of farm output” before Chengming 2002, p. 186). the twentieth century (1969, 119). Perkins The analysis of Qing price data for food estimates that 30–40 percent of agricul- grains, which local governments reported tural products were marketed during the upward on a monthly basis, reveals substan- early 20th century (1969, 114). The implied tial price integration, most notably across breakdown between local and long-distance localities linked by low-cost water transport trade, with roughly one-fourth of marketed (Ch’üan and Kraus 1975). Wang concludes farm products entering long-distance trade, that “early eighteenth-century China was, on may approximate circumstances of earlier the whole, comparable with Europe in terms periods. of market integration” (1992, p. 53); Shiue Early Ming renovation of the Grand Canal and Keller (2007) confirm this, and show facilitated the northward shipment of tribute that the Lower Yangzi area achieved greater grain to the capital, providing a new chan- nel for north–south trade.16 The sea route

16 The Grand Canal, initially constructed during the Sui helped to forge the unification of the subsequent Tang and Dynasty (AD 589–616), became a main inland artery that Song empires (CH’ÜAN Han-sheng 1990). 54 Journal of Economic Literature, Vol. LII (March 2014) price integration than continental Europe counterfeit or “clipped” coins). Pawnshops (but not England).17 issued small loans against a variety of collat- eral; ABE Takeo places the number of rural 2.2.2 Finance and Credit pawnshops at 19,000 in the mid-eighteenth Ming–Qing networks of markets and century and 25,000 by the early 1800s, indi- trade drew support from both formalized cating an average of approximately 10 estab- and informal finance. Theformal system lishments for each of China’s counties (Zelin was organized around traditional or “native” 1991, p. 44). banks (qianzhuang) that were largely local Beyond these formal organizations stood in nature, but maintained links beyond a vast array of informal arrangements. their home regions. This system included Shopkeepers, tradesmen, and individuals a nationwide network (the “Shanxi banks,” served as regular sources of personal loans; whose name signified their roots in Shanxi relatives and friends provided funds on a province) that specialized in managing offi- more casual basis. Transactions ostensibly cial funds and arranging long-distance trans- involving the exchange of land or labor often fers (McElderry 1976, Morck and Yang included elements of lending or borrowing 2011). These institutions, whose owners (Brandt and Hosios 1996). Given the irregu- faced unlimited liability, accepted depos- lar timing of farm income, this tapestry of its, issued loans, arranged interregional credit options enabled farmers to monetize (and in some cases, overseas) remittances, land use rights associated with both tenancy and sometimes originated bank notes (typi- and ownership, offering substantial pro- cally restricted to local circulation). These tection against sudden downward mobility financial networks commanded respect following illness, death, or harvest failure. from outsiders: Chinese bankers financed Such arrangements surely enhanced social much of the ­mid-nineteenth-century trade stability. with Europeans; an 1890 Japanese consular While these mechanisms facilitated report lamented the competitive weakness exchange, high interest rates and substantial of Japanese merchants and concluded that, transaction costs limited potential benefits. “The dominance of Chinese merchants is Legal restrictions did not shield Chinese ultimately attributable to. . . their superior households from high borrowing costs.18 financial network” (HAMASHITA Takeshi Myers’s study of two north China provinces, 2008, p 174). Hebei and Shandong, found typical monthly Local “money shops” conducted cur- interest rates of 3 percent in the late eigh- rency exchange (between copper and sil- teenth and early nineteenth century, and ver, between notes and hard currency, and 2–4 percent during the 1930s (1970, p. 243). among local and trade-specific bookkeeping Huang’s review of information from the currencies) as well as currency valuation (i.e. 1930s shows that rural households in north verifying the fineness of uncoined silver or China borrowed at monthly rates between valuing strings of copper cash that included 1.2 and 3 percent, “with most loans made at 2 percent” per month (1985, p. 189). Rural households that owned land could obtain 17 Qing records present grain quantities and silver val- ues in standard units. In reality, currencies, weights, and measures varied substantially across regions and occupa- tions (e.g. King 1965 on currency variation). The absence 18 Successive dynasties enacted (but rarely enforced) of information about the conversion of local market trans- statutory limits on annual interest, which were 36 per- actions into standard units adds an element of uncertainty cent under the Ming and 20 percent during Qing and the to these studies. Republic (Chen, Peng, and Yuan 2010). Brandt, Ma, and Rawski: From Divergence to Convergence 55 credit at substantially lower rates by ceding to over 7 percent, fairly low by the standards “use rights” to land in return for a loan. Once of early modern Europe. This leads scholars the loan was repaid, the use rights were such as Chao (1986) to attribute the overall returned. Land mortgage (diandi) contracts slow growth of cities to a low and declining from northeast China for the 1930s indicate agricultural surplus. implicit annual rates in the neighborhood of Rather than large urban centers, the lower 10 percent. Yangzi region developed a ­distinctive ­pattern Lending rates differed substantially across of urban settlements, forming clusters of regions, reflecting the often highly local market towns along the dense regional net- nature of these markets. Surveys conducted work of rivers, creeks, and man-made canals, during the 1930s showed modal values for with extensive geographic specialization in annual interest costs on unsecured per- the marketing and production of agricul- sonal loans ranged from 20–30 percent in tural and handicraft products (LIU Shijie coastal regions like Guangdong, Fujian, and 1987). The resulting economic geography, Zhejiang to higher figures approaching and with no clear boundaries between urban sometimes exceeding 50 percent in poorer and rural districts or farming and nonagri- and less commercialized provinces like cultural activity, defeats standard measures Henan, Jilin, Suiyuan, and Ningxia (Brandt of urbanization. LI Bozhong argues that and Hosios 2010; Peng et al. 2009). standard classification schemes may under- A compilation tabulating three centuries estimate the degree of urbanization in the of rural interest rates nationwide reveals lower Yangzi region, which he places at 20 no sign of the gradual decline observed in percent during mid-Qing (2000, 414). But Western Europe.19 Myers finds that bor- these estimates, derived from nonstandard rowing costs for rural households remained definitions, lack international comparability. “quite constant over a period of two hundred years” ending in the 1930s (1970, p. 243). 2.2.4 International Exchange Before 1800 Possible explanations for high Chinese rates and limited development of financial insti- Although the bulk of demand and sales tutions and markets comparable to those involved purely domestic transactions, there in early modern Western Europe will be was a small but significant international addressed later. trade. Largely confined to China’s coastal and border regions, and periodically restricted by 2.2.3 Urbanization the state, most of this trade was intra-Asian, This well-developed market network with China shipping manufactures (porce- supported increasingly dense population lain, silk) by sea to Southeast Asia and tea settlements, particularly in prosperous, overland to Central Asia, while importing trade-oriented regions. Authors like Rozman timber, spices, and monetary metals by sea (1974), Skinner (1977a, 1977b), and CAO and horses from Central Asia.20 Shuji (2001, p. 829), who assign the label European explorers arriving in Asian “urban” to settlements exceeding a fixed waters during the early sixteenth century number of residents, derive average rates of encountered well-established networks national urbanization ranging from 3 percent of water-borne trade connecting Chinese merchants and vessels with the rest of Asia

19 See PENG Kaixiang et al. (2009) for China. For Britain, see McCloskey and Nash (1984), and for Western Europe, see Homer and Sylla (2005). 20 Deng provides a detailed account (1997, Chap. 5). 56 Journal of Economic Literature, Vol. LII (March 2014)

(Frank 1998). Trade with Europe rose, silver. Silver imports reflected huge pretrade both directly and through the integration of differences in the gold price of silver between European merchants into Asian trade net- China and the rest of the world (Flynn and works. China’s silk, ceramics, and tea found Giraldez 1994) as well as Chinese growth and new markets in Europe’s expanding cities commercialization described above. China (de Vries 2008; Brook 2010). Chinese sought had limited deposits of precious metals­ and, European luxuries (window glass, clocks), after repeated misadventures with paper metals, and fabrics (Dikötter 2006, p. 28). currency during the early Ming period (von Aside from the effect of silver inflows, Glahn 1996), a decided preference for hard which exerted major influence on China’s money. Von Glahn (2003) estimates that monetary system from the sixteenth century China’s eighteenth-century silver imports onward, the impact of international trade on may have exceeded one billion taels, repre- Chinese prices, incomes, organization, and senting an annual inflow equal to roughly 0.2 production remained small prior to 1800; percent of GDP.23 By 1640, these flows had these commodity flows may have exerted eliminated major crossnational differences greater domestic impact on China’s trade in the gold price of silver; thereafter, “silver partners. Sketchy data suggest 1 percent of continued to gravitate to the Chinese market. GDP as a generous upper bound to China’s . . because there was a huge number of buy- trade ratio (imports plus exports divided by ers at a relatively stable world price” (Flynn GDP).21 Scattered evidence also indicates and Giraldez 1995, p. 433). Significant price that overseas shipments absorbed only mod- differentials persisted, however, with respect est shares of output from the main export to other important agricultural and nonagri- industries.22 cultural commodities. China’s persistent merchandise trade sur- 2.2.5 Households, Human Capital, and plus financed massive imports of New World Private Organizations

21 China’s Maritime Customs trade data begin in the The concept of “homo economicus,” 1850s; the first comprehensive national income estimates invented by thinkers with little knowledge are for 1933 (Liu and Yeh 1965). Together, they suggest of Asia, fits the historical realities of Chinese a trade ratio of 8–10 percent of GDP prior to the 1930s Depression. Backward projection based on these trade village life. Anticipating the Wealth of data and reasonable assumptions for GDP growth puts this Nations by two millennia, Han Fei-tzu (circa ratio at no more than 2 percent in 1870. Since trade surely 280–233 BC) mirrors Smith’s vision of indi- outpaced output growth during the nineteenth century, we propose one percent of GDP as a generous upper bound vidual behavior: for China’s pre-1800 trade ratio. in the case of workmen selling their services 22 Gardella reports calculations by WU Chengming indicating that tea exports amounted to 23 percent of in sowing seeds and tilling farms, the master total output in 1840 (1994, p. 6). Tea exports carried by would . . . give them delicious food and by the East India Company doubled between 1786 and 1830, appropriating cash and cloth make payments while export of Fujian tea to Russia increased by a factor of six between 1798 and 1845 (ibid., 37–39) indicating far smaller eighteenth-century export shares. Evidence for silk 23 Our crude calculations for the late 18th century points in the same direction. In 1880, exports of raw and assume a population of 385 million (Perkins 1969, p. 16); woven silk amounted to 1.17 million piculs, or 55 percent annual per capita grain consumption of 3 shi; an average of total output (Li 1981, p. 100). For the eighteenth cen- grain price of 2 taels per shi; a consumption basket in which tury, scattered figures imply that exports were a tiny frac- grain accounted for 40 percent of total expenditure; and tion of the 1880 total: Li cites sources reporting that Japan 90 percent of GDP going to consumption. Average annual imported 3,000 piculs of Chinese silk “in an exceptionally GDP then becomes (3*385*2)/(0.4*0.9) or 6,417 million good year” and that annual shipments to Mexico, another taels. Average annual silver imports of 10 million taels then major outlet, may have totaled 10,000 piculs (ibid. 64–65). amount to 0.16 percent of annual output. On the tael, see A picul is a measure of weight equivalent to 60.489 kg. note 39 and section 3.4.3. Brandt, Ma, and Rawski: From Divergence to Convergence 57

for their services. Not that they love the hired levels of numeracy in the Chinese ­population workmen, but that . . . by so doing they can of the nineteenth–twentieth centuries than make the workmen till the land deeper and in countries with comparable or even slightly pick the weed more carefully. The hired work- men . . . speedily pick the weed and till the land. higher levels of development (Baten et al. . . . Not that they love their master, but that . . . 2010). Widespread use of bookkeeping and by their so doing the soup will be delicious and accounting by households, businesses, lin- both cash and cloth will be paid to them. Thus, eage trusts, and guilds confirms the high the master’s provisions and the workmen’s level of commercial orientation and numer- services supplement each other as if between them there were the compassion of father acy (Gardella 1992, Yuan and Ma 2010). and son. However. . . they cherish self-seeking Official interactions with the rural popu- motives (Han Fei-tzu, n.d.). lace, including the collection of land taxes and the registration system intended to pro- Studies of North China’s rural economy by mote public security, routinely used written Myers (1970) and Huang (1985), of Fujian materials. A substantial publishing industry and Hunan by Rawski (1972), and of the churned out agricultural manuals as well as Lower Yangzi region by Huang (1990) and LI cheap editions of popular novels (Brokaw Bozhong (1998, 2000, 2010), among others, and Chow 2005). Measures of per capita depict a diligent, ambitious, ­market-oriented book supply show that Western Europe and peasantry that responded aggressively to East Asia were the only regions of the world opportunities for economic gain. Villagers that had mass printing in the early modern were deeply engaged with markets: in the era (van Zanden 2009, chapter 6). more commercialized coastal and riverine Chinese villagers deployed their knowl- districts, many households made daily trips to edge of reading and arithmetic to eco- local markets (Zelin 1991, p. 38). Ambitious nomic ends. There was a brisk market for individuals could enter the world of com- cheap books containing “sample contract[s] merce as brokers or go-betweens with no . . . forms for selling and mortgaging lands, prior accumulation of wealth. In the absence houses, or livestock; tenancy contracts; [and] of official restrictions on personal mobility, loan agreements” (Rawski 1979, p. 114); peddlers and merchants were free to move agricultural handbooks discussed household to promising locations; numerous huiguan, allocation choices in language reminiscent of local organizations of merchants from distant modern price theory texts (Rawski 1972, pp. places, attest to the importance of commer- 54–55). Summarizing work by Myron Cohen cial sojourning (HE Bingdi 1966). and others, Zelin observes that “Even in The practical environment of village life remote [Qing] villages . . . written contracts placed a premium on literacy and numer- were used in the hiring of labor, sale and acy, both of which reached substantial lev- rental of property, distribution of land-use els. Historical links between education and rights, marriage and concubinage, and the social mobility reinforced this tendency, as sale and indenture of human beings” (1994, did popular culture. Rawski (1979) shows p. 40). that strong household demand for education, Another striking feature of Qing rural soci- coupled with low prices for teaching services ety is the capacity of both elites and ordinary and for books, produced levels of literacy in villagers to construct and manage complex Qing China that outstripped much of prein- organizations, and to adapt them to chang- dustrial Europe. Work on age-heaping (the ing circumstances in the pursuit of economic tendency for uneducated people to give their objectives. In addition to kinship groups, ages in round numbers) also suggests higher some of which controlled substantial wealth, 58 Journal of Economic Literature, Vol. LII (March 2014) village-level groups included associations for and without widespread technological crop-watching, defense, and maintenance change surely merits recognition among the of temples and irrigation works, along with economic wonders of the premodern world. “revolving credit associations. . . . [and] asso- While the claims of “Song peak” propo- ciations . . . to build bridges and schools, nents continue to attract controversy, recent endow ferries, and repair roads” (Zelin studies on both Ming (e.g. Brook 1999, 1991, pp. 40–41). Living in a society thickly 2010) and Qing (e.g. XU and WU 2000; LI ­populated with organizations familiarized Bozhong 2000, 2003) view China’s long-term villagers with the processes of designing achievements as resulting from centuries and implementing rules, managing organi- of gradual development that cumulated to zational affairs and assets, and manipulat- substantial gains in crop yields, specializa- ing operations to tilt outcomes in personally tion, commercialization, monetization, trade advantageous directions. volumes and other dimensions of pre-1800 Beyond the village, informal networks economic life. and private organizations facilitated China’s Similar revisionist views apply to long- long history of markets and commerce. term demography. Current texts (Elleman Chinese guilds united people who shared and Paine 2010, pp. 105) echo long-standing lineage or native-place ties, as well as com- assertions about excessive population pres- mon occupations.24 Chen and Myers (1978, sure dating back to Thomas Malthus and 1996) and Zelin (1994) show how mercantile reflected in the research of Huang (1985, associations and customary law encouraged 1990) and Chao (1986). California School stable and reliable commercial practices. authors, by contrast, insist that, “the con- With clear parallels to Greif’s (2006) work ventional contrast of population dynamics on Europe, Rosenthal and Wong emphasize in late imperial China and early modern the contribution of informal arrangements Europe is no longer persuasive” (Lavely and to supporting long-distance commerce: Wong 1998, p. 741). Lee and Wang (1999) when trade partners reside far apart, high argue that China’s unusual combination of costs of transport and communication pre- ­near-universal female marriage and rela- vent official courts from efficiently resolving tively low birth rates reflects the widespread disputes. Under these conditions, informal incidence of female infanticide, primitive arrangements appear “not to palliate failed contraception and abortions, intentional formal institutions but as complements that spacing of births, and adoptions.25 enabled market exchange” (2011, p. 236). These perspectives echo the “industrious revolution,” a label used to describe the tra- 2.2.6 Summary of Pre-1800 jectory of preindustrial Holland, England, Ming–Qing Economic Evolution or even Tokugawa Japan. It downplays That the economy of Ming–Qing China, governed by a tiny cadre of officials wield- 25 This field continues to evolve. Critics question both ing small and declining fiscal resources (dis- the data used by Lee and Wang and their conclusion that cussed below), delivered food, clothing, and Chinese women had lower fertility than in other premod- shelter to an immense and growing popula- ern societies (see the summary in Sommer 2010, pp. 101– 03). Departing from an earlier consensus (Nakamura and tion despite growing demographic ­pressure Miyamoto 1982) that viewed China’s population as subject to Malthusian positive checks in contrast to Tokugawa Japan’s “precocious” demographic transition, SAITO​ ¯ ​ 24 Work on guilds includes Burgess (1966); Morse Osamu (2002) notes the presence of preventive checks and (1932); NEGISHI Tadashi (1951); Rowe (1992); and low birth rates across East Asia, despite contrasting family ­Moll-Murata (2008). and mobility patterns. Brandt, Ma, and Rawski: From Divergence to Convergence 59 structural breaks separating the “preindus- An earlier generation of scholars attributes trial” era from the “Industrial Revolution,” China’s relative economic decline to a gen- highlighting instead the long period of slow eral drop-off in innovative activity under the cumulative change that preceded the indus- Ming and Qing. These researchers offer an trial surge that began in the late eighteenth array of economic and political explanations century. Unlike England or Holland, how- focusing on forces influencing the demand ever, China’s economic development was and supply for new technologies and innova- largely self-contained, the sole (and impor- tion, the key source of intensive growth. tant) exception being the large silver inflows On the demand side, long-standing (but that lubricated domestic commerce, as well now contested, as noted above) Malthusian as public finance. Debate continues, with perspectives link population growth to a the California school claiming that the Qing declining wage–rental ratio, which, in turn, Lower Yangzi region may have attained promoted the adoption of labor-using tech- standards of living comparable to those in nology and labor-absorbing institutions that Northwestern Europe through the end of effectively crowded out labor-saving and the eighteenth century, whereas recent work capital-using technical changes that might by Allen et al. (2011) and Li and van Zanden have promoted higher labor productivity (2012) based on the purchasing power parity and rising incomes. Elvin summarizes this comparison of nineteenth-century incomes perspective: between the Lower Yangzi region and Holland uphold the more traditional finding In late traditional China economic forces that average Chinese per capita income dur- developed in such a way as to make profitable invention more and more difficult. With fall- ing this period remained far below the level ing surplus in agriculture, . . . cheapening labor attained in England and the Netherlands. but increasingly expensive resources and capi- tal, with farming and transport technologies so 2.3 The Great Divergence good that no simple improvements could be made, rational strategy for peasant and mer- chant alike tended in the direction not so much Whether the great divergence between of labor-saving machinery as of economizing west European and Chinese levels of per on resources and fixed capital. Huge but nearly capita income occurred in the fourteenth static markets created no bottlenecks in the or the eighteenth century, the problem of production system that might have prompted creativity. When temporary shortage arose, explaining China’s long economic decline mercantile versatility, based on cheap trans- relative to the industrializing West and then port, was a faster and surer remedy than con- to Japan during the nineteeth and early twen- trivance of machines (1973, pp. 314–15). tieth centuries, and subsequently to a num- ber of dynamic East Asian economies during On the supply side, many authors have the third quarter of the twentieth century, proposed that declining interest in science remains unresolved. Different authors point among China’s educated elites precipitated to a variety of causal mechanisms. a slowdown in technical change. The former Pomeranz’s widely cited study (2000) is sometimes related to a shift in Chinese argues that leading regions in both China and thinking: Elvin detects “a change in the atti- Europe faced binding land constraints, and tudes of philosophers towards nature” which attributes England’s rise to global economic meant that, “Interest in systematic investi- leadership to two specific factors: cheap coal gation was short-circuited” so that “There and access to land-intensive products from were . . . no advances in science to stimu- its colonies and from Eastern Europe. late advances in productive technology” 60 Journal of Economic Literature, Vol. LII (March 2014)

(1973, p. 204). Elman forcefully rejects the to innovation. Such changes, if they occurred, “scholarly consensus about the alleged failed may have arisen from fears about possible history of science in China” (2005, p. 420). dislocation associated with technical and Despite this more favorable assessment, he economic change, a concern that certainly concedes that the transmission of Western figured in periodic official efforts to limit scientific knowledge was hampered by the external trade.26 demise of the Jesuits, by the growing scien- This shifts the focus to China’s political tific prominence of Protestant regions with institutions; specifically, to the capacity of few links to China, and by the reluctance of the political unity that prevailed throughout both Protestants and Catholics to translate most of Ming and Qing to choke off political materials about the solar system or evolution competition. European cities enjoyed con- that seemed to contradict Christian theology siderable autonomy, developing their own (2005, pp. xxxii, xxxiii, 350). charters and civil codes. Intense competition Lin (1995) postulates two sources of inno- between cities and states allowed individu- vation: experience, and science-based exper- als to relocate to favorable environments— imentation. For the former, the probability opportunities that were largely absent within of innovation is directly related to population the unitary Ming–Qing polity (Mokyr 1990, size. The latter, however, requires experi- chap. 9). mentation, which Lin contends developed Historical analysis of the traditional less fully in China than in Europe; following Chinese state and institutions has long others, he attributes this to incentives that reflected simplistic frameworks based on encouraged able youths to pursue Confucian Oriental despotism (Wittfogel 1957) or education in the hope of entering the ruling class struggle (for example WANG Ya’nan bureaucracy. 1981/2005). Recent literature partially cor- The work of others would question the rects these limitations by emphasizing that impact that Lin attributes to China’s system benevolent imperial rule taxed the peasantry of Confucian education. Allen (2009), cit- lightly, protected private property rights, and ing European experience, argues that new permitted the operation of well-established scientific knowledge played only a modest markets in land and labor.27 role in Europe’s advance. Elvin adds that, While the traditional framework of “Chinese technology stopped progressing Oriental despotism may be misleading and well before basic scientific knowledge had overly pessimistic, the state—especially become a serious obstacle” (1973, p. 298). its absolutist features and highly central- Mokyr (2002, 2009), though, insists that ized political and fiscal regime—figures basic science became increasingly important prominently in the formation of property and indeed, indispensable to the second and rights, contract enforcement and incentives, third waves of industrialization. and, therefore, in the economic dynamics Historically, the Chinese state contrib- of imperial China. In particular, the clas- uted to generating and diffusing innova- sic dilemma of government commitment tions, for example in hydraulics, which may posed by North—growth requires a strong have compensated for limited private-sector state to secure property rights, but an overly dynamism. Mokyr (1990) argues for a major post-Song retreat in the Chinese state’s pre- disposition toward, and contribution to, 26 See Elman 2005 for an alternative interpretation. 27 Pomeranz (2000) and Wong (1997) discuss factor developing new technologies. He sees the markets and taxation; Ma (2011b) reviews traditional legal Ming–Qing state as somewhat ­inhospitable institutions. Brandt, Ma, and Rawski: From Divergence to Convergence 61

­powerful state may threaten the security of of these constraints during the course of private ownership—recurs throughout two the twentieth century, and the dynamics of millennia of Chinese dynasties. China’s recent growth spurt. Our approach Recent work by Sng (2010) addresses the follows recent efforts of economists, notably link between geography and fiscal capacity Acemoglu, Johnson, and Robinson (2005) in a world of premodern communication and and Acemoglu and Robinson (2012) to elu- transport. Sng’s work highlights the need for cidate the contribution of institutional struc- a full account of the economic achievements tures and institutional change to long-term and failures of China’s imperial system to economic growth. address the impact of China’s enormous geo- The task is not simply to explain China’s graphic and demographic size on the agency delayed industrialization, but rather to costs inherent in decentralized governance account for a multistage process that includes structures, fiscal capacity, and comple- long periods of limited advance, followed by mentary institutions, most notably, prop- an unprecedented expansion. Our approach erty rights. North and others (North 1994; will rely on the perspectives of political North and Thomas 1973, North, Wallis, and economy and institutional analysis, method- Weingast 2009) see this as crucial to the gen- ologies that, in our view, have much to con- esis of modern economic growth. tribute, and that recent studies of Chinese China’s stunning economic rise begin- economic history have often neglected. ning in the late twentieth century raises new questions. Now that recent events oblige us 3. The Political Economy to recognize the dynamic capabilities inher- of the Traditional Chinese State ent in Chinese social formations and eco- nomic structures, why did realization of this With basic political structures and social vast potential occur only in the past three arrangements displaying substantial conti- decades? In particular, why is there no sign nuity throughout the Qing era, which lasted of accelerated growth during the closing from the mid-seventeenth to the early twen- decades of the Qing era, roughly from 1870– tieth centuries, how can we connect gener- 1910, when China experienced substantial ally stable institutional formations to highly openness to domestic market forces and variable economic outcomes? While recent to international flows of trade and invest- research is not without controversy, there ment, substantial influx of engineering and is no disagreement about overall trends organizational technology, opportunities to in the Qing economy, in which a generally populate fertile new territories in Manchuria prosperous eighteenth century gave way and to repopulate farmland abandoned dur- to a period of growing economic difficulty ing the fiercely contested Taiping rebellion after 1800, during which China was slow to (1854–65), as well as considerable internal grasp new opportunities radiating from the stability under a regime that demonstrated British industrial revolution. Extending the modest interest in reform? Whatever the task to encompass potential links between obstacles to accelerated growth during these Qing institutions and China’s recent growth decades, why did China’s greatest growth explosion broadens the challenge confront- spurt occur more than a century after her ing efforts to develop a cohesive analysis of opening? long-term outcomes. We see institutional analysis as a prom- We begin by postulating the existence of ising avenue for understanding late Qing several key structures. We then follow the obstacles to modern growth, the erosion logic of incentives and constraints to sketch a 62 Journal of Economic Literature, Vol. LII (March 2014) heuristic model of China’s traditional politi- our model: the throne, bureaucracy, gentry, cal economy. The result is a surprisingly and commoners. The results illuminate fun- comprehensive framework that illuminates damental dimensions of political economy the underpinnings of Qing stability and suc- under the Chinese imperial system. cess, pinpoints mounting tensions and con- 3.1 Key Political Institutions straints that gradually reduced the system’s effectiveness, and reveals specific barriers to From the tenth century on, much of what fundamental reform. is now regarded as China was under nearly We focus on interactions among four key continuous unitary rule.29 Map 1 depicts the actors: the imperial household, the bureau- borders of the Ming (1368–1644) and Qing cracy, local elites, and the masses. The (1644–1911) empires. Although Qing military bureaucracy refers to imperially appointed and diplomatic prowess extended their terri- officials; focusing on the 1880s, Chang tory far beyond the boundaries of Ming rule, [ZHANG Zhongli], tabulated 23,000 office- we assume an empire of fixed size. We also holders—2,600 in the imperial court, posit the presence of key institutional fea- 13,000 provincial and local officials, and tures, which we take as given or exogenous: 7,000 military officers (1962, p. 38). The central and unitary imperial rule; a hierar- local elite includes retired imperial appoin- chical, meritocratic system of staffing the tees and graduates of provincial and metro- imperial bureaucracy; and a land-based fis- politan civil service examinations who were cal system. We briefly examine each of these eligible for imperial appointments but held before pursuing their larger implications. no formal posts, as well as holders of lesser The consolidation of political control in degrees and non-degree holders who pos- the hands of the Song emperors represents sessed sufficient land, education, wealth or an important departure from the preceding reputation to merit recognition as part of centuries, during which the power of the the local (or national in the case of promi- throne was checked by a relatively autono- nent salt merchants) elites, along with their mous imperial cabinet and by regional aris- extended families.28 tocrats. By the beginning of Song, absolute While all institutions are in principle power had become vested in the emperor. endogenous, we take as given Song political Moreover, there were no institutional con- institutions that had evolved over the previ- straints on the Emperor other than a vaguely ous millennium and endured until the 1911 defined principle of legitimacy emanating collapse of the Qing regime. After describ- from the so-called “mandate of heaven.” As ing these legacies, we explain how incentives Huang explains in the context of Ming: surrounding these institutions shaped the behavior of the four groups that populate None of the deterrents to unlimited exercise of imperial power—including Confucian moral- ity, reverence for the standards set up by impe- 28 Chang tabulates the ranks of gentry, which, in his rial ancestors, public opinion, or the influence study, includes all holders of both earned and purchased of senior statesmen—had the effect of law. If examination degrees, at 1.09 million before (i.e. about the emperor chose to defy all these and was 1850) and 1.44 million after (i.e. about 1870) the Taiping determined to exercise his absolute power to rebellion (1851–64). Assuming an average of five persons the full, there was no way of checking him per gentry household, he concludes that the gentry popula- (1974, p. 7). tion amounted to approximately 1.3 percent “of the whole population . . . in the first half of the nineteenth century” and to “well over seven million. . . . [or approximately] 1.9 percent of the total population” after the defeat of the 29 Ma (2012) traces the historical phases of unification Taipings (1955, pp. 111–12, 139–41). and fragmentation in Chinese history. Brandt, Ma, and Rawski: From Divergence to Convergence 63

With the elimination of an aristocracy or the connection between learning, wealth, any other autonomous intermediary social or and power that the examination system political group, governing the empire’s vast imprinted in the consciousness of Chinese territories required a bureaucratic structure households (MIYAZAKI 1976, p. 17): that extended beyond the imperial house- hold.30 China’s administrative needs included To enrich your family, no need to buy good border protection, internal security, provision land: of public goods, and the collection of suffi- Books hold a thousand measures of grain. cient tax revenues to finance these activities as For an easy life, no need to build a mansion: In books are found houses of gold. well as the consumption of the imperial court. Going out, be not vexed at absence of followers: From the eighth century, bureaucratic In books, carriages and horses form a crowd. recruitment became increasingly impersonal Marrying, be not vexed by lack of a good and meritocratic. Candidates for official posi- go-between: tions were primarily selected from success- In books there are girls with faces of jade. A boy who wants to become a somebody ful graduates of a standardized progression Devotes himself to the classics, faces the of periodic civil service examinations open to window, and reads. most male commoners. Examinations took place at the county, provincial, and national This examination system offered the pros- levels. Successful candidates received degrees pect of upward mobility, possibly over sev- according to prefectural and provincial quo- eral generations, to commoner households. tas, which meant that imperial officials were Coupled with the “rule of avoidance,” which recruited nationwide, in numbers roughly proscribed officials from serving in their proportional to provincial populations home county, prefecture, or province, and (MIYAZAKI Ichisada 1976; Elman 2000). the frequent rotation of incumbent officials, Examination contents were rooted in this recruiting system endowed the imperial Confucian ideology, which itself reflected state with both talent and legitimacy. the ideal of a hierarchical, patrimonial struc- In principle, the emperor commanded ture with the emperor at the top.31 Successful property rights over all factors of produc- candidates (often called degree holders) tion. Imperial ownership of land and labor commanded immense prestige; they enjoyed is expressed by the traditional notion of lifelong tax exemptions and legal immunity. ‘Wangtu wangmin (王土王民, king’s land, They constituted a nonhereditary elite whose king’s people/all land and all people are welfare was intimately tied to the survival owned by the sovereign)’, which appeared in and success of the imperial regime. A poem The Book of Songs compiled during the age by the Song emperor eloquently sketches of Warring States (403–221 B.C.).32 Despite the emperor’s theoretical ownership, early rulers assigned land to individual house- 30 QIAN Mu (1966) and Ho (1962), pp.17–19 describe holds in return for payment of taxes. The the limited extent of hereditary aristocracy in Ming and Qing. Elliott (2001) focuses on the role of Manchu elites Tang state (618–907) began to relinquish under the Qing. control of land ownership, leading to the 31 This concept of the state is, in many ways, an extension emergence of a system under which private of the Confucian ideal of a patriarchal household. With the elimination of hereditary aristocracy, the transition from owners held de facto ownership of land and feudalism to central rule extended the stand-alone imperial household (家) into the national sovereign (国). The literal translation of the Chinese character for nation-state 32 KISHIMOTO Mio (2011) summarizes imperial (国家) is “state-family” or what Weber (1951) described as ownership and the nature of traditional Chinese property a patrimonial or “familistic” state.” See Ma 2012. rights. 64 Journal of Economic Literature, Vol. LII (March 2014) assumed personal responsibility for paying accompanied by an entourage of yamen run- land taxes, which became the cornerstone ners, went on a tour of inspection . . . a large crowd led by [relatives of the deceased woman] of imperial finances. Thus, de jure imperial . . . stoned the . . . magistrate’s retinue and property rights gave way to de facto rights to drove the magistrate out of town. . . . Similar taxes. In parallel fashion, private labor mar- riots also broke out . . . after the magistrate [of kets gradually replaced systems that had for- another district] personally directed the collec- merly required households to provide labor tion of old tax debts (1984, p. 255). services to the state. China’s fiscal system was centered on the 3.2 Toward a Heuristic Model taxation of privately-owned land. Data for With absolute hereditary power and with- 1753, a year in which, according to Yeh- out formal constraint on its rule, the biggest chien Wang, official fiscal data were “more threats to China’s imperial household came reliable and complete” than at other times, from external invasion or internal insurrec- show land taxes accounting for 73.5 per- tion. Rebellions were an enduring feature cent of officially-recorded revenue, with the of Chinese history. A well-known admoni- balance coming from the salt tax (11.9 per- tion to the Tang emperor to the effect that cent), native customs (i.e. taxes on internal people can support or upend rulers just as and foreign trade, 7.3 percent) and miscel- water can float or overturn a boat provided laneous taxes (7.3 percent).33 For simplicity, a constant reminder of possible insurrec- we assume a fixed stock of taxable land, so tion. Confucians denounced excessive fis- that total fiscal revenue depends on the offi- cal extraction: the Tang scholar-official cial tax rate on a unit of land and the size LIU Zongyuan “castigated taxes as more of the bureaucracy devoted to tax collection. harmful than the venom of a snake” (http:// Government revenue was increasing in both: www.newworldencyclopedia.org/entry/ raising the tax rate generated more revenue, Liu_Zongyuan). as would adding more tax collectors. Fiscal External security required tax revenues to administration also involves expenditures: finance defence spending. In addition, the adding tax officials increases the govern- state needed to support the imperial house- ment’s wage bill and outlays on maintaining hold and finance the costs of running the tax offices. bureaucracy and of supplying public goods. In this setting, the problem facing the Concerns about internal rebellion, however, Emperor is to determine the tax on land meant monitoring the amount and incidence and the size of the bureaucracy to maxi- of taxation to ensure a satisfactory level of mize net fiscal revenue (total tax collec- income and welfare for the populace. tion less administrative costs), subject to Countless examples illustrate the poten- leaving farm households with a satisfactory tial for violent tax resistance. Zelin recounts level of after-tax income. In this quest, the a Qing episode in which a newly appointed Emperor needed to consider indirect agency magistrate, seeking to collect overdue land costs that arise in any hierarchical organiza- taxes in Shanghai county, ordered the arrest tion because of informational asymmetries of defaulters, including a headman initially and imperfect monitoring. Agency costs assigned to pursue tax evaders. The result were especially pertinent in China, where was chaos:

“while a mob attacked the magistrate’s deputy, 33 Wang (1973, pp. 68, 80). The dominant share of land [the wife of the arrested headman commit- tax in total revenues persists throughout the Ming and ted] suicide. Soon afterwards, the magistrate, Qing dynasties. Brandt, Ma, and Rawski: From Divergence to Convergence 65

­imperially-appointed officials were entrusted used their elite status and the dependence to govern far-flung regions linked only by of understaffed local administrations on networks of slow preindustrial transport and their active cooperation as levers to reduce communication.34 or even escape tax obligations, typically with As imperial agents, local officials were the connivance of local officials. expected to treat taxpaying households equi- These circumstances meant that the tably and to provide full and honest accounts intended and actual outcome of efforts to of tax collections. But, like governments collect land taxes differed widely. Some everywhere, China’s bureaucracy often landowners, particularly small-holders with- veered toward the pursuit of self-interest. out the protection of elite patrons, were The problem was further compounded by squeezed by the collectors and ended up limited official fiscal allocations to local gov- making payments that exceeded their statu- ernments, which forced county magistrates tory obligation. Gentry landowners, as well as to impose informal levies unsanctioned by commoners enjoying their patronage, might any imperial decree simply to maintain their persuade or bribe officials to accept frac- offices and perform their duties. Such con- tional payments rather than demanding the ditions made it difficult for both external statutory amount.35 Officials’ need for gentry monitors and the bureaucrats themselves to cooperation made it difficult for magistrates separate what might be called “public-inter- to resist gentry pressures for informal tax est malfeasance” from peculation intended relief. Finally, there was considerable rev- to secure illicit personal gain. Officials enue leakage, as clerks, runners, and officials employed a host of strategems to pillage siphoned public funds into private purses. the public purse: exaggerating the severity Chinese emperors, keenly aware of these of harvest shocks, overstating the extent of difficulties, established institutions aimed tax arrears, colluding with local landholders at limiting the impact of agency costs. to remove land from the tax rolls, or simply Confucian ideology, which prescribed codes diverting public funds for their own benefit. of behavior for all social groups, including The land tax system created sharp con- officials, acted to promote upright behavior flicts between local officials and land-owning even in the absence of effective monitoring. households, including local elites, who often Frequent rotation of officials, as well as the held substantial acreage. Tax collectors often “law of avoidance,” which barred officials bullied ordinary households, for example from serving in their home districts, aimed by manipulating weights and measures to to direct official loyalties toward the throne. extract payments in excess of the legal tax The Censorate, a branch of the central obligation. The prevalence of unofficial tax bureaucracy, dispatched roving observers farming provided ample opportunity for offi- to serve as the emperor’s eyes and ears by cials to appropriate revenues for their private reporting official malfeasance directly to the benefit. Commoners resisted such imposi- throne. tions (and also sought to escape taxation) through violent tax resistance and by ally- ing themselves with local gentry. The gentry 35 Kuhn describes how rural elites “undertook to pay their neighbors’ taxes by proxy and fend off the tax agents’ extortion” in return for fees (2002, pp. 81–82) and docu- 34 Prior to the advent of railways, travel from the capi- ments the Qing government’s inability to suppress this ille- tal to Shenyang required 30 days, to Xi’an or Wuhan 50 gal practice, primarily because of “how little local officials days, to Nanjing nearly 50 days, to Guangzhou 90 days, etc. were willing to do about. . . . elite meddling in the tax sys- (Whitney 1970, p. 47). tem” (ibid., 90–91). 66 Journal of Economic Literature, Vol. LII (March 2014)

These internal checks, which entailed and generates ­organizational diseconomies additional administrative costs, could not of scale (Skinner 1977b, p. 19; Tirole 1986; fully resolve the conflicts inherent in the cen- McAfee and McMillan 1995). tralized hierarchy. The Censorate itself was These agency costs defy precise specifi- plagued with corruption, as is its contem- cation, but represent some combination of porary counterpart.36 Formal bureaucratic informal taxation on individuals and house- posts often evolved from personal appoint- holds, rent extraction by bureaucrats, and ments in which the emperor assigned trusted lawful taxes that went unpaid as a conse- lieutenants to the task of improving the cen- quence of elite manipulation. Formal land ter’s grip on outer layers of administration. taxes impinged primarily on the income Over time, these positions merged into the and welfare of ordinary farm households. formal bureaucratic structure, leading to the Informal taxation, bureaucratic extraction, assignment of fresh cohorts of inner court and elite tax avoidance undermined the personnel to the (now enlarged) tasks of financial position of both the emperor and monitoring and control. This gradual mul- the nonelite populace. Agency costs limited tiplication of bureaucracy, which arose from the Qing system’s potential to increase the internal dynamics unrelated to population level of formal taxation on land.37 growth or territorial expansion, contributed 3.3 What Kind of Political Equilibrium to what some historians have referred to as Emerged? the “externalization” of the inner bureau- cracy (QIAN Mu 1966, p.44; WANG Ya’nan This framework offers surprisingly pow- 1981/2005, pp. 48–49). erful insight into a range of outcomes that Writing in 1896, LIANG Qichao, a cel- describe the political equilibrium of the ebrated intellectual and reformer, noted Chinese imperial regime. In what follows, this self-weakening aspect of the imperial we look at taxation, the size and activities bureaucracy, commenting that, as rulers can- of the state, the nature of property rights in not trust their officials, they set up multiple land, informal taxation and corruption, the layers of bureaucracy to check one another. vested interests of the gentry, and the role of In the end, nothing gets accomplished as no the legal system. We apply the term “equi- one takes responsibility. Moreover, lower librium” because the implied outcomes were level officials become more interested in historically stable, mutually reinforcing and pleasing their superiors than in serving the extremely difficult to alter, short of major people (1896/1984, pp. 27–31). Liang antici- shocks imposed from outside. pates Skinner’s observation that “Chinese 3.3.1 Low Formal Taxation and Small history saw a secular decline in govern- Formal Bureaucracy mental effectiveness from mid-T’ang [i.e. from the mid- to late eighth century] on High agency costs associated with admin- to the end of the imperial era,” as well as istration of the empire and concerns about the findings of modern theorists who show insurrection steered imperial China toward how lengthening a hierarchy by adding new outcomes built upon modest formal taxation,­ supervisory layers increases agency costs

37 While agency costs constrain the ability to collect for- 36 A 2010 news report noted that “a former top anticor- mal tax revenues, higher tax rates should increase agency ruption official . . . was sentenced to death . . . for tak- costs as local elites intensify their efforts to avoid taxation, ing bribes.” See http://news.xinhuanet.com/english2010/ thereby increasing the burden on commoner households china/2010-09/09/c_13486543.htm. and probably raising collection costs as well. Brandt, Ma, and Rawski: From Divergence to Convergence 67

Table 2 Tax Revenues in China, 1085–1776 (in Shi of Rice) Per capita Per capita Total taxes Per capita Index land tax indirect taxes tax burden (1085 100) = Song (1085) 0.26 0.54 72,102,000 0.8 100 Ming (1407) 0.54–0.75 0.02–0.03 47,657,000 0.56–0.79 70–98 Ming (1577) 0.21 0.03 42,185,000 0.24 30 Qing (1685) 0.18 0.04 38,044,444 0.22 28 Qing (1776) 0.09 0.03 36,620,000 0.12 15

Notes: An extensive discussion by Ch’üan and Kraus (175, pp. 79–98) concludes that “the likely weight of an imperial shih (shi) of milled rice in the eighteenth century was about 185 pounds” (p. 98). Source: Data compiled by Guanglin Liu (2005), p. 90.

a small official bureaucracy, and a corre- per capita tax collections fell steadily: by spondingly limited scope of nonmilitary 1850, per capita revenue was less than half activities financed from the public purse. the level for 1700. Nominal revenues rose The rulers’ long time horizons pushed in the sharply in the late nineteenth century, but same direction.38 the increase was modest in real terms. The After rising during the early years as the share of government revenue in total output new Qing dynasty reestablished order, for- during Qing was also low: Yeh-chien Wang mal tax revenue expressed in silver taels finds that late nineteenth-century land taxes remained fairly constant between 1700 and represented 2–4 percent of the produce of 1850, averaging around 36 million silver taels the land in most areas, although they may annually, of which approximately 70 percent have consumed a larger share in the pros- came from taxes on land.39 With stable rev- perous Yangzi delta region. Total govern- enue and substantial population growth, ment revenue from all sources amounted to roughly 2.4 percent of net national prod- 38 In a dynamic setting, we could represent the policy uct in 1908 (Wang 1973, pp. 80, 128, 133), objective as maximizing the discounted present value of suggesting that tax revenues remained well the imperial household’s welfare, implying an important below five percent of total output through- role for the imperial time horizon. The more dynastic the emperor’s view, the longer the time horizon and thus out the Qing period. the lower the discount rate used in these calculations. In Historical compilations summarized in Olson’s (1982) framework based on the analogy of station- table 2 indicate that tax revenues under the ary and roving banditry, extending the ruler’s time horizon would make the throne’s interests more encompassing and Song and Ming dynasties exceeded those in less predatory, thereby contributing to a “virtuous equilib- the Qing period, both in aggregate and in per rium” of low extraction and high mass welfare. capita terms (Liu 2005). While the Song fig- 39 The Qing monetary system included multiple silver taels, which typically represented 35–40 grams of pure sil- ures are subject to considerable uncertainty, ver. The term tael refers to traditional measures of mon- the ordering implied by these data matches etary silver. The kuping tael used in Qing government information on the size of Chinese armies accounts, for example, was a bookkeeping currency con- sisting of 37.5 grams of pure silver. For details, see King during the three dynasties (IWAI Shigeki (1965) and Kann (1975). 2004, p. 33). 68 Journal of Economic Literature, Vol. LII (March 2014)

30,000 – – 25

27,500 –

25,000 – – 20 22,500 – Nominal expenditure (in 10,000 silver taels) Real expenditure (in 10,000 shi of rice) 20,000 – Per capita real expenditure (right side scale)

17,500 – – 15

15,000 –

12,500 – – 10 10,000 – Kilograms of rice

7,500 – – 5 5,000 –

2,500 –

0 |||||||||||||||||||||||||| 0

1652 1662 1682 1725 1766 1791 1812 1838 1839 1840 1841 1842 1843 1844 1845 1846 1847 1848 1849 1884 1893 1903 1908 1911 1850–611861–75

Figure 1. Qing Dynasty Fiscal Expenditure

Sources: See Ma (2011a); fiscal data are from IWAI Shegeki (2004, p. 37) and HAMASHITA Takeshi (2006, p. 73); population from Angus Maddison (2007); grain prices are from Yeh-chien Wang (1992).

Figure 1 displays trends in nominal, real, per capita revenues of the leading European and per capita fiscal expenditure during the states, expressed in grams of silver, were Qing dynasty. Nominal expenditure showed 15–40 times comparable figures for Qing little fluctuation for approximately 200 years China. England’s revenue actually surpassed beginning in the early eighteenth century. the comparable figure for the immensely Population growth and inflation produced larger and more populous Qing Empire! Per an early decline in real and per capita expen- capita revenues, which remained roughly diture, followed by trendless fluctuation constant over long periods under the Qing, during the first half of the nineteenth cen- tended to increase elsewhere. Expressing tury. All three nominal measures rose dur- the tax burden in terms of the number of ing the final half-century of Qing rule, with days an unskilled urban laborer would have per capita expenditure in the early twentieth to work in order to earn the equivalent of the century regaining levels recorded during the average individual tax payment provides an initial period of Qing rule. alternative view of the Qing empire’s modest Comparative data shown in table 3 dem- fiscal capacity. onstrate the Qing dynasty’s limited fiscal Limited revenues and the prospect capacity. During the late eighteenth century, that adding officials could undermine Brandt, Ma, and Rawski: From Divergence to Convergence 69

Table 3 Qing Central Government Annual Revenue in International Comparison

Panel A. Aggregate revenue (tons of silver)

China Ottoman Russia France Spain England Dutch R* 1650–99 940 248 851 243 239 1700–1749 1,304 294 155 932 312 632 310 1750–99 1,229 263 492 1612 618 1,370 350 1800–1849 1,367 6,156 1850–99 2,651 10,941

Panel B. International comparison of per capita tax revenue (grams of silver) China Ottoman Russia France Spain England Dutch R* 1650–99 7.0 11.8 46.0 35.8 45.1 1700–1749 7.2 15.5 6.4 46.6 41.6 93.5 161.1 1750–99 4.2 12.9 21.0 66.4 63.1 158.4 170.7 1800–1849 3.4 303.8 1850–99 7.0 344.1

Panel C: Per capita revenue expressed in days’ wages for unskilled urban workers China Ottoman Russia France Spain England Dutch R* 1650–99 1.7 8.0 7.7 4.2 13.6 1700–1749 2.26 2.6 6.4 6.7 4.6 8.9 24.1 1750–99 1.32 2.0 8.3 11.4 10.0 12.6 22.8 1800–1849 1.23 17.2 1850–99 1.99 19.4

Notes: One Chinese silver tael 37 grams of silver. For per capita revenue in days of urban unskilled wages, figures = for 1650–59 and 1700–09 are used to represent 1650–99 and 1700–49 respectively. The averages of data for 1750–59 and for 1780–89 are used to represent 1750–1799 for all countries except Russia, China and 19th century England. Data are from Karaman and Pamuk (2010), with thanks to Kıvanç Karaman and Sevket Pamuk for sharing their underlying data sets. Nominal wages for Russia are 1 and 2.52 grams of silver for 1700–1725 and 1772–1774 respectively from data supplied by Boris Mironov listed on http://gpih.ucdavis.edu/files/Wages_Moscow_1613-1871.xls. We thank Peter Lindert and Steven Nafziger for the Russian data. Nominal wages for Beijing used to represent China come from Robert C. Allen et al. 2011. *Dutch Republic Source: see Debin Ma 2011a as detailed above.

­administrative effectiveness meant that the official hierarchy, hardly changed after Han size of the bureaucracy lagged far behind (206 BC–220 AD) times. Despite a vastly the growth of population. Indeed, the num- larger population and territory, Qing China ber of counties (xian), units ruled by magis- had only 1,360 counties compared to 1,230 trates who occupied the lowest rung of the under the Song (Skinner 1977b, p. 19). 70 Journal of Economic Literature, Vol. LII (March 2014)

Limitations on the size of the bureaucracy quotas—“a gigantic concession to local gen- help explain why the imperial administra- try and landlords” (Richards 2003, p. 124). tion never penetrated below the county Kangxi’s successor, Yongzheng (r. 1722–35) level. With a near-static administrative struc- sought to incorporate informal taxes and sur- ture, population growth meant that average charges into the formal tax base in an effort county populations during Qing reached a to restrain local corruption and stem the large multiple of comparable Song figures. leakage of resources from the public purse. This increased the administrative burden Here again, top-down imperial reform failed facing local magistrates and magnified their to overcome resistance from below, now dependence on the cooperation of local from local magistrates who valued the dis- gentry, which in turn reinforced the pres- cretion (and opportunities for rent extrac- sures mandating a low-tax regime, as efforts tion) associated with the traditional system. to increase taxes would place local officials Since informal local revenues were essential in direct conflict with the same elites whose to local governance, the information asym- support was essential to managing local metry surrounding these revenues protected affairs and preserving social order. them from extraction by higher-level officials A nineteenth-century example from (Zelin 1984, chap. 7, Ma 2011a). Xinhui, Guangdong illustrates the helpless- Under these circumstances, well-informed ness of local officials in the absence of gentry emperors who understood the dangers of cooperation. When the Qing state imposed excess tax demands on commoners, as well likin (lijin) taxes on domestic trade, the local as the revenue leakage arising from official palm-leaf guild raised no objection. But this peculation and gentry manipulation, might seemingly obscure group blocked subse- reasonably conclude that raising the rate of quent efforts to increase the tax rate: land taxes was not a practical option. Given the limited size of the imperial household When the guild resisted . . . there was nothing the magistrate could do but request a waiver and the throne’s desire for dynastic longev- [exempting the guild from the higher likin ity, imperial ideology evolved toward fixing a rates]. . . . He was unable to survey the palm- revenue target rather than maximum extrac- growing areas to tax them directly, because the tion for normal years (in the absence of har- guild and its supporters refused to cooperate. vest failure or external crisis), an outcome He was unable to muster community support. . . . when he called a meeting of local gentry . . . famously encapsulated in the Kangxi emper- no one came (Mann 1987, p. 130). or’s 1712 proclamation freezing nominal land taxes in perpetuity (Ma 2011a). Similar conditions existed elsewhere. 3.3.2 Limited State Capacity While bearing the emperor’s imprimatur, local magistrates were lone outsiders facing Like all revenue-constrained premodern tightly-knit communities that often included empires, Qing public spending was lim- several hundred thousand residents. The ited to programs that addressed fundamen- inescapable reality of gentry power emerges tal issues of external and internal security. most strikingly from the decision of the Expenditures on the military and border Kangxi emperor (r. 1662–1722), among the defenses protected the largely sedentary strongest Qing rulers, to abandon a pro- agrarian populace. The central government’s posed empire-wide cadastral survey in the outlays on civilian public goods focused on face of elite resistance. The outcome was measures intended to stabilize and increase continued use of obsolete Ming land regis- agricultural productivity—for example ters coupled with a permanent freeze on tax investments in water control and irrigation. Brandt, Ma, and Rawski: From Divergence to Convergence 71

The state operated a network of granaries the focus of the central government as “reg- in an effort to limit price fluctuations and istering and checking the actions of various stave off famine; this program may explain provincial administrations [rather] than . . . why increases in grain prices following assuming a direct initiative in the con- Chinese crop failures were “moderate” (20– duct of affairs” (Mayers and Playfair 1897, 70 percent) in comparison with “the worst pp. 21–22). Kwan finds that the Board of European famines where prices doubled, Revenue, which bore major responsibility tripled, or quadrupled” (Li 2007, 247; also for managing the imperial salt monopoly, see Perdue 1987 and Will and Wong 1991). was “primarily a transmission center of docu- Such programs contributed to mass wel- ments and repository for ledgers . . . [that] fare and thus supported the longevity of the rarely initiated policy” (2001, p. 32). King imperial system. They also relied on local notes that even in the monetary sphere, contributions, highlighting both the need for a central government responsibility, “the magistrates to secure elite cooperation and Board of Revenue could not be the source of the difficulty of reconstructing a complete a coherent monetary policy. It had no power picture of government revenues. Perdue to inspect the quality of provincial coins. . . . (1987) shows how Qing officials worked with It could comment on provincial memorials local gentry to expand irrigation and flood only if they were referred to the Board. . . .” control in Hunan province. Similar arrange- (1969, p. 34). Strauss (1998) aptly summa- ments led to the construction and main- rizes the key goal of the Qing central admin- tenance of major projects that delivered istration as “system maintenance rather than large-scale economic benefits for centuries: maximal efficiency” (p. 14). the Grand Canal, spanning a north–south 3.3.3 De Facto or Informal Private Property route over 1,000 miles in length between Rights Hangzhou and Beijing, completed during the seventh century (Leonard 1996); and This focus on stability and dynastic lon- Dujiangyan, an even older project located in gevity encouraged emperors toward prag- the western province of Sichuan, that clev- matism, rather than absolutism. Late Tang erly combines flood control with irrigation reforms that shifted emperors’ main source (Needham 1971, 288–96). of tax revenue from labor to land prompted To guard against external threats, the the state to relinquish its theoretical control Qing, like previous dynasties, employed a of land tenure and support the emergence mixture of attack, defense, and diplomacy. of the de facto family-based owner–tenant Perdue (1996, 2005) shows how Qing offi- system of private landholding and household cials harnessed mercantile interests to equip cultivation that dominated the economy and supply extended military campaigns in of imperial China for the next millennium. the Empire’s remote western borderlands. Such processes of bottom-up institutional The same logistic capabilities enabled Qing innovation—visible both in Tang and in armies to cross the Himalayas and force the shift from collectives to the household Nepal’s fierce Gurkhas to recognize Manchu responsibility system during the 1970s— overlordship. involved the tacit acquiescence of rulers who China’s large size, limited revenues, long chose to overlook widespread infringements communication lines, and small bureau- of existing rules. cracy influenced the nature, as well as the The emerging private land ownership scale and scope, of official activity. A late rights included residual claimancy; the right ­nineteenth-century commentator described to rent, sell, or mortgage; and the right to 72 Journal of Economic Literature, Vol. LII (March 2014) bequest. Recognition of these rights allowed ­activity (Skinner 1977b, pp. 24–25—note the private owners, rather than the state, to obvious parallel with China’s recent reform capture the benefits associated with rising experience). productivity, land reclamation, and popula- De facto or informal property rights in tion growth. If households became unable to both land and commerce evolved within a farm their plots or chose to shift occupations, unitary hierarchical empire without the rep- the opportunity to sell or rent land use rights resentative institutions, independent cities, allowed them to capture the returns to their or autonomous legal agents that appeared in investment in the land. Western Europe. The Tang reforms encouraged the devel- 3.3.4 Informal Taxation opment of increasingly deep and sophisti- and Rent Extraction cated markets for land in which layers of ownership and user rights could be pur- Land taxes collected from rural commu- chased, sold, rented, mortgaged, and divid- nities were mostly remitted to higher levels ed.40 Ownership of a single plot could be of government. Zelin estimates that county vested in separate parties endowed with magistrates retained approximately one-fifth rights over the surface and subsurface of official land tax collections to meet local respectively—the so-called yitian liangzhu needs (1984, p. 27). Much of the retained (two lords to a field) or yitian sanzhu (three funds went to fulfill imperially-mandated lords to a field) systems: rights that could outlays, for example provisioning military then be sold, leased, or used as collateral. forces and maintaining imperial relay sta- Tenants, as well as owners, could freely tions. What remained was not sufficient to exchange their access rights. The multiplicity operate government offices, pay the mag- and divisibility of rights to land helped ordi- istrate’s salary, and support the required nary villagers to maintain their livelihoods in complement of secretaries, clerks, runners, an inherently risky environment. They also and personal servants.41 This reflects both gave rise to complex arrangements: LONG the state’s limited fiscal resources and the Denggao (2010) reports a single plot of land center’s deliberate effort to limit the growth with over 100 separate owners, some with of local power bases by constraining locally shares as small as 1/608. available fiscal resources. Commerce experienced a similar transfor- To make ends meet, subnational officials mation under the Tang, as earlier systems, relied on informal or extralegal surcharges. “of administered trade became increas- Informal taxation, which was “an established ingly arduous and expensive to enforce . . . practice in the mid-eighteenth century as it a process of trial and error . . . punctuated was necessary for keeping public administra- by the periodic re-imposition of controls . . . tion at work” (Wang 1973, p. 72), blurred [led to] a general withdrawal by government the distinction between legitimate and from the minute regulation of commercial affairs” and a notable expansion of privately established markets and private mercantile 41 Ch’ü indicates that county-level governments employed several hundred (and in some cases, several thousand) clerks, several hundred (and in some cases, over 1,000) “runners” (i.e. messengers, guards, policemen and 40 Land transactions were often recorded in writ- other menial employees), and 10–30 personal aides (1962, ten documents, many of which survive in libraries and pp. 39, 56, 59, 77). Some of these personnel received sal- archives. MURAMATSU Yu ​ ¯ ​ji (1966) and ZHANG Deyi et aries from the magistrate; others received no salary, but al. (2009) provide examples of documents recording land imposed irregular fees on citizens who sought access to transactions. official services. Brandt, Ma, and Rawski: From Divergence to Convergence 73

­corrupt official behavior, and thus compli- for public administration often led to the cated efforts to detect and deter the diver- privatization of public services.43 sion and embezzlement of public funds. The In a world of rising population, static overall weak financial position of local governments and declining per capita revenues restricted increased the dependence of magistrates on the center’s capacity to mobilize resources, local elites, who either to implement new administrative ini- tiatives or to meet national emergencies. played a crucial role here by helping the mag- Although Qing ideology celebrated the bene- istrate with his duties; from the maintenance of water conservancy works to the organization ficial welfare consequences of a “small state,” of local defense corps. . . . the magistrate, as a we cannot determine whether this reflected non-native of the region where he held office, the rulers’ initial belief or represents a ratio- was to a certain extent dependent on the local nalization of unavoidable realities. Limited elite’s advice in carrying out his magisterial revenue and the lack of fiscal provision for duties, as well as on their support in the lead- ership of local people. . . . In “reward” for its local governance obliged emperors to accept “efforts,” the local elite was in turn also in a substantial financial abuse, relying on ideol- position to enjoy certain tax exemptions, and ogy and occasional severe punishments to moreover, to falsify land registers and popula- deter extreme behavior.44 tion reports, or, even, to appropriate tax rev- The ubiquity of irregular taxation explains enue which normally would have passed to the state (Zurndorfer 1989, pg. 3). the apparent contradiction between the low rates reflected in the receipts of the Board Zelin itemizes these informal revenue of Revenue (see tables 2 and 3 above) and sources, which ranged from the levying of the popular image of Ming and Qing as surcharges, manipulation of weights, mea- rapacious regimes. The Kangxi-era gover- sures, and currency conversion in tax collec- nor-general of Shaanxi and Gansu placed tion, falsifying reports, shifting funds across extralegal surcharges at 40–50 percent of the fiscal years, and concealing tax revenue from official tax quota (Zelin 1984, p. 73). Wang commerce and from newly reclaimed land to argues that such imposts were less severe, at extracting contributions and donations from least in 1753, a year for which the historical local farmers and merchants. She chronicles record is particularly rich; Wang concludes an episode in eighteenth-century Jiangsu that “non-statutory­ surcharges amounted to province in which an investigating magis- as much as the statutory ones, which gen- trate discovered widespread embezzlement erally ranged from 10 to 15 percent of the of official funds: “there was not a prefecture, [authorized tax] quota” (1973, p. 69). chou or hsien [county] in the region in which Information about the overall incomes of [secret records providing a true picture of officeholders provides added perspective land ownership and tax payments] . . . were not compiled” (1984, p. 240).42 Provincial officials solicited gifts from their bureau- 43 Ch’ü (1962) offers a vivid portrayal of county clerks extracting bribes with the threat of delaying legal cases cratic subordinates and skimmed funds by submitted, runners demanding “chain-release money” inflating the cost of official purchases (1984, from the families of accused criminals who might other- pp.46–71). Reliance on informal local taxa- wise be chained or tortured, retaining part of the goods recovered from thieves, or sometimes resorting to outright tion and the employment of unofficial staff extortion of wealthy residents. The porters who guarded magistrates’ offices expected tips for accepting documents or warrants. 44 Ho describes the use of selective capital punishment 42 Ho (1967) reports similar practices in early to control Qing officialdom (1962, 293–95). The People’s ­twentieth-century Hebei province. Republic employs similar tactics. 74 Journal of Economic Literature, Vol. LII (March 2014) on the impact of the tax system. While esti- official hierarchy, while remaining subject mates of unrecorded payments are always to imperial discretion. This is exactly what hazardous, the carefully documented work we observe. Under imperial rule, as in the of Chang [ZHANG Zhongli] concludes that PRC, the Chinese system views legal pro- the total incomes (including receipts from cesses as a subsidiary function of the admin- landholding and other nonofficial activi- istrative hierarchy. In China, as in Rome, the ties) accruing to imperial appointees dur- emperor was the source of law. The Tang ing the 1880s may have amounted to twenty dynasty established an elaborate and system- times the official payments associated with atic criminal code that was largely retained their positions and that gentry households, by its successors. Modifications arose pri- while comprising roughly two percent of marily from occasional imperial interven- the population, received 24 percent of tions that extended or contravened existing national income, enjoying per capita dis- codes; such actions constituted new laws or posable incomes approximately 17.7 times substatutes that served as precedents for the average for commoners (1962, pp. 326– subsequent decisions (SHIGA et al. pp. 12, 29). Chang also finds that informal income 120–21; SU Yegong 2000, chap. 9). obtained by subprovincial officeholders alone Legal outcomes reflected ideological approached 60 million silver taels, equivalent orthodoxy and social privilege. The punish- to three-quarters of the central government’s ment inflicted upon a son for attacking his recorded annual revenue of 80 million taels father or a wife for injuring her husband was during the 1880s (1962, 40, 42, 328). more severe than if the roles were reversed. Chang’s figures, however crude, reveal Trials of officials or gentry members could the capacity of officials at all levels to extract only be conducted by officials with higher wealth from the private sector and help to administrative rank; such prosecutions usu- explain the huge vested interest of Chinese ally occurred only after the accused was elites embedded in what was, after all, a demoted or stripped of his official rank, an conquest dynasty led by the descendants of arrangement mirrored in China’s current Manchu invaders whom most Chinese per- justice system, which imposes internal party ceived as “barbarians.” discipline in advance of criminal prosecu- tions. The imperial system was far from arbi- 3.3.5 Law, Economic Security, trary. Criminal verdicts followed elaborate and Patronage penal codes and were subject to mandatory Formation and disposition of property review; capital cases received the emperor’s rights are closely linked to the legal system, personal scrutiny (Ma 2011b). which, as in any nation, exerted substantial While county magistrates also ruled on influence over Ming–Qing economic activ- civil and commercial, as well as criminal ity. Chinese emperors, faced with the task of matters, broad swathes of economic and maintaining stability while seeking to govern social life were governed by private custom, a vast land mass with a tiny corps of officials, with disputes adjudicated and sanctions required sufficient flexibility to strike quickly imposed by family, clan, and village elders, and powerfully at potential nodes of counter- by local gentry, and by mercantile asso- vailing power—aside from the gentry, who, ciations (e.g. Chen and Myers 1978, 1996). as noted earlier, were indispensable bul- Unlike Western Europe, where autono- warks of the status quo. mous legal professionals contributed to the In the legal sphere, these requirements formalization of private customs and rules point to a system that is controlled by the and the specification of property rights, the Brandt, Ma, and Rawski: From Divergence to Convergence 75

Chinese hierarchy viewed nonofficial legal p. 28) describes as “fiduciary communities,” specialists with suspicion. Legal secretaries within which individual operators could limit who assisted county magistrates were not on risk and transaction costs to create zones of the official roster, but were personally hired protection from sudden and arbitrary official and paid by the magistrates. The Ming code exactions. banned “incitement to litigate”; the Qing Interaction among property holders’ went further, criminalizing the occupation pursuit of security and officials’ search for of “litigation master,” a profession remotely revenue led to a common pattern in which resembling modern-day lawyers (Macauley officials “granted commercial monopolies to 1998). This explains the curious coexistence groups of merchants in return for the deliv- of the proliferation of private customs and ery of supplementary taxes” and enforced rules with what many Western observers the “economic principle that no one could view as the absence of formal civil or com- acquire the right to do business without pay- mercial law (Bourgon 2002, Ma 2011b). ing . . . tax” (Motono 2000, pp. 3–4, 64). The absence of commercial and civil At the national level, the throne’s relations codes introduced an element of uncertainty with leading merchants, especially the ben- into private ownership. Private property eficiaries of officially-established monopo- rights in Ming–Qing China were genuine lies, presented an intricate minuet of ad and substantive. From the official perspec- hoc tax assessments, imperial confiscation, tive, however, private ownership remained and “voluntary” contributions to state cof- secondary to, or derivative from, the politi- fers.45 Similar circumstances, but with lower cal standing of the property holders. Faced stakes, prevailed within regional and local with the possibility, however remote, of jurisdictions. confiscatory intervention that no legal Such accommodations typically involved response could remedy, property hold- agreements between officials and commercial ers felt it necessary to seek shelter under groups (rather than individual merchants). an umbrella of political power (DENG Groups of merchants selected leaders whose Jianpeng 2006, p. 69). Despite elaborate authority was recognized by both officials and generally predictable informal arrange- and fellow tradesmen. Officials expected ments for recording, protecting, and trans- these “head merchants” to deliver tax rev- ferring rights over land and other tangible enues and control the actions of their associ- assets, the foundation of property rights in ates. In return, officials stood ready to utilize imperial China, particularly in the sphere their power—either directly or by allowing of commerce, rested on politics rather than authorized merchants or their agents to act law, with implications for economic change as informal official deputies—to block ini- during the nineteenth century and beyond tiatives that threatened the operations of to be discussed later on. the “legitimate” or “insider” merchants (and For property holders, risk reduction hence the established revenue streams). necessitated some accommodation with Examples abound. Ho observes that “the officialdom. Rich households could hope to interventionist state . . . protected the vested immunize their assets from routine exactions interests of all salt merchants,” that every by entering the official class through the Qing-era salt merchant, “owed his position attainment of examination degrees or the to government ­recognition” and that, “the purchase of official titles. Lesser folk relied on collective efforts that sought to extend the 45 Ho 1954, Kwan (2001, pp. 43–47); Greenberg (1951, elaborate network of what McElderry (1995, pp. 52, 63, 66–67) illustrates such transfers. 76 Journal of Economic Literature, Vol. LII (March 2014) right to sell salt was farmed out to those mer- ­protect him from predatory local government chants who were financially able to pay the functionaries. In return, the patron received expressions of gratitude and loyalty on which salt gabelle [tax] in advance” (1954, pp. 142, he built a stock of political capital (1996, 136). Observing the late nineteenth century, p. 183) Mann finds a “familiar historical pattern . . . [in which] local trade organizations began Similarly, Mann finds that “marketers and to purchase the right to collect [recently traders unprotected by patronage or family imposed] lijin taxes from their own members connections were vulnerable to harassment by . . . paying tax quotas in advance” (1987, and extortion” (1987, p. 62). p. 111). Faure goes on to observe that, “Ming and Such arrangements equipped mercan- Ch’ing [Qing] local as well as long-distance tile groups with substantial control of their trade was conducted under extensive patron- trades—at least within the territories admin- age networks just as rural life was” (1996, p. istered by cooperating officials. Mercantile 93). By emphasizing the ubiquity of “trading groups typically allowed newcomers to under patronage” but also observing that, enter their business, provided that they “ . . . Ming and Ch’ing markets were rela- observed collectively-agreed rules, which tively open . . . because the patrons com- might include provisions related to cur- peted” (1989/1996, p. 95), Faure offers a rency, weights and measures, product qual- bridge between competing visions that ana- ity, apprenticeship, wages, piece rates, and, lyze economic processes during the impe- of course, tax payments. rial era in terms of competitive markets Mercantile leaders—the so-called “head (e.g. Myers 1980, Myers and Wang 2002) or, merchants”—wielded considerable power: alternatively, in terms of rivalry among gen- their special status enabled ready access to try and official predators for opportunities to officials; they could enact and enforce rules extract resources from hapless commoners and sanction nonconforming members with (e.g. Feuerwerker 1958; Huang 1985, 1990). fines or even expulsion from the officially- As we shall see, the idea that genuine, but recognized trade body—the commercial limited or incomplete property rights lead to equivalent of capital punishment. Thus in what might reasonably be termed a “patron- the salt trade, “merchant chiefs and head age economy” makes sense not only for the merchants formed a powerful ruling clique. Ming–Qing era, but for contemporary China . . . [that] exerted powerful control over dis- as well. tribution and sale of salt” (Ho 1954, pp. 138, 3.4 The Long-Run Political Equilibrium 141). Relationships within these networks, Starting with the simplest of assump- including within families and lineages, often tions—the emperor rules his large domains took the form of patron–client ties rather with a nonhereditary bureaucracy selected than transactions among equals. Faure by competitive examination, employing the quotes Duara’s study of twentieth-century land tax as the primary source of fiscal reve- North China: nue—we derive implications that accurately depict major aspects of the actual Ming– In a society where neither the market nor the Qing regime. The following observations state fully regulated economic relationships, summarize the long-run properties of both the individual peasant (or village household) the “model” and, we believe, of the system was often dependent on a powerful local fig- ure . . . to ensure the fulfillment of a contract, that existed prior to the nineteenth-century to provide access to the market . . . and to escalation of western imperial pressure. Brandt, Ma, and Rawski: From Divergence to Convergence 77

3.4.1 Mutual Reinforcement between of formal and informal influence and power. Ideology and Incentives, between Public office was the most important source de Facto and de Jure Political of prestige and wealth. At the same time, and Economic Power money was essential to finance the long preparation needed to pass the civil service The combination of status, power, and high examinations: during 1834/35, 81 percent of incomes available to examination graduates, provincial examination graduates and 93 per- official appointees, and their families pro- cent of successful palace examination candi- vided incumbent elites and ambitious com- dates were over 24 years of age; over half of moners with powerful incentives to seek the palace graduates and nearly 40 percent advancement within the imperial system by of the provincial degree winners were over investing in Confucian education for bright 35 years (Elman 2000, pp. 704, 706). Ho sons in the hope that they might earn exami- notes that “the children of salt merchants nation degrees. The frequency with which probably received the best schooling in the poor households sought schooling for sons empire,” which enabled a group of fewer who, while eligible to compete, had no realis- than 300 families to produce 139 palace tic chance of achieving examination success, degreeholders and 208 provincial exami- reflected both the practical benefit of literacy nation graduates between 1646 and 1802 in a society permeated by written documents (1954, p. 162). This cross-fertilization of eco- and the long-term impact of Confucian ide- nomic resources, status, and political power ology, which accorded respect and status to represented both a bulwark of stability and a men whose educational attainments, how- formidable obstacle to reform. ever modest, exceeded the local norm. 3.4.2 Stability, Resilience, The result was a remarkable consistency and Path Dependency of objectives, incentives, and mobility strate- gies across social strata. Rich and poor, elites The institutional arrangements described and commoners, farmers and craftsmen, all above demonstrated great strength, resil- invested in education and relied on educa- ience, and stability throughout the Ming– tional attainment to promote both social Qing era, supporting the enormous expansion standing and economic gain. In this fashion, of territory and population depicted in table 1 generations of Chinese strengthened an ide- and map 1 in an increasingly commercialized ology that associated leadership with edu- but primarily agrarian economy. cational attainment and exalted hard work The dynastic regime demonstrated a and thrift as the proper route to upward capacity not only to withstand shocks but mobility through training, discipline, and also to restore stability in the wake of poten- self-cultivation. tially destabilizing disasters. The devastating Recent efforts by Acemoglu and others Taiping rebellion (1851–64), which exposed to investigate the institutional backdrop of the weakness of Qing rulers, was sup- long-term economic growth emphasize links pressed by regional leaders who possessed between de jure power arising from legal the highest-level­ Civil Service examination provisions and other formal institutions and degrees. These men mobilized troops and de facto influence attributable to custom, funds in their home provinces and defeated wealth, and other informal arrangements the rebel armies. The victorious generals, all (Acemoglu, Johnson, and Robinson 2005; of whom were Han Chinese, then restored Acemoglu and Robinson 2012). Imperial control to the throne, even though it was China displayed extreme interpenetration occupied by the non-Chinese descendants 78 Journal of Economic Literature, Vol. LII (March 2014) of Manchu invaders. They also contributed The Qing monetary system revolved prominently to the Tongzhi Restoration around two core elements: officially minted (1861–75), a joint Manchu–Chinese effort to copper cash, often joined in “strings” of up restore stability and prosperity by revitalizing to 1,000, mediated retail transactions, while orthodox Confucian ideology, reconstruct- wholesale trade and large transactions relied ing the traditional low-tax fiscal regime, and on a mixture of silver “shoes” (shoe-shaped restoring regular civil service examinations. ingots cast by private firms), bits of silver bul- This episode demonstrates how a com- lion, and, as European trade expanded, an mon ideology and close alignment of incen- array of imported silver coins from Europe, tives among the imperial household and the Americas, and Japan.46 The exchange overlapping bureaucratic, scholarly, com- rate between copper and silver, theoretically mercial, and landed elites created a tight constant at 1000 standard cash per silver tael, web of vested interests that, once estab- varied widely over time, across regions, and lished, proved extremely difficult to dis- among different trades. lodge. Unfortunately, the same forces that In the face of such monetary complexity, promoted stability also militated against local elites, guilds and mercantile groups reforms that might threaten the standing, sought to reduce currency risk by establish- the incomes, or the future prospects of inter- ing and enforcing uniform local monetary locking socio-economic leadership groups standards. These efforts, aimed at reducing that dominated the imperial polity. transaction costs for particular groups and districts, gave rise to a maze of exchange rates 3.4.3 Limited Monetary linking multiple varieties of silver ingots, and Financial Development coins and bits, copper cash, bills issued by The Qing economy operated under a merchants and financiers, and bookkeeping bimetallic copper–silver monetary standard currencies established in various localities with no regular issue of official paper cur- and trades.47 The resulting system imposed rency and no long-lived government debt a regime of high transaction costs result- or other financial instruments. This arrange- ing from unstable exchange rates, from the ment, which imposed high transaction costs expense of shifting assets from one currency throughout the economy, reflected the to another, and, for large transactions, from ­absolutist nature of political authority, which the need to hire specialists to mediate the was not limited by the sort of checks and fulfillment of payment obligations. balances that gradually emerged in leading The limited extent of property rights and European states prior to the British indus- the arbitrary nature of the underlying legal trial revolution. system seem to account for the restricted The absence of checks and balances led to development of financial instruments. the ironic result that China, which pioneered Unlike Holland or England, there was no the use of printed paper currency during the formal market for public debt. The absence Song dynasty (960–1279), reverted to a sys- of credible financial instruments restrained tem built around low-denomination copper state capacity and rendered the traditional tokens and uncoined silver because repeated episodes of official mismanagement evi- dently eroded the private sector’s trust in 46 Standard works on monetary history include Kann government monies as a store of wealth 1975, King 1965, and Peng 1958. 47 An early twentieth century report enumerated more or even as a medium of exchange for large than one hundred tael bookkeeping units (DAI Jianbin transactions (Ma 2013). 2007, pp. 58–79). Brandt, Ma, and Rawski: From Divergence to Convergence 79 state prone to fiscal predation or confisca- (1962, p. 25). In China, such inspira- tion in times of crisis (CHEN Feng 1992, tion came only in the twentieth century. chapter 7; Ma 2013). De facto governmen- Even the most progressive Qing reform- tal borrowing (or extraction) took the form ers, men who supported the expansion of advance collection of taxes, forced loans of factories and rail transport, failed to from merchants, and sale of official titles comprehend the potential of intensive and positions. Formalized public debt began growth to raise productivity and living only during the latter half of the nineteenth standards. century, when the bargaining power of lend- • Lack of fiscal capacity.Perkins ers (particularly Western bankers and gov- describes Qing public finances the ernments) was reinforced by extraterritorial last half of the nineteenth century as privilege or Western consular and military “almost unbelievably weak” (1967, presence (ZHOU Yumin 2000, pp. 277–87, p. 492). Available data indicate that Ma 2013). the share of Qing GDP that reached Insecure property rights and the lack of government coffers in the seventeenth institutional restraint on imperial power and eighteenth centuries was not much produced a domestic economy in which higher. Comparisons in table 3 show only land was suitable for long-term pas- that Qing revenue shares were consis- sive wealthholding. We see no emergence tently smaller than in leading European of tradable long-lived financial instruments states. and, indeed, no scope for financial transac- • Lack of administrative structure. tions beyond spot exchanges in the absence Modern economic growth leans heavily of personal links. The general absence of on the capacity of the state to formulate impersonal financial arrangements contin- and implement policies that support and ued well into the late nineteenth-century encourage development. Contemporary treaty port era, when “much share capital and retrospective accounts agree that was raised through private connections” such capacity was notably lacking in the (Faure 2006, p. 52). Qing empire, which Strauss describes as a “presiding state. . . . [that] was usu- 3.4.4 How the Imperial System ally content to reign and loosely regu- Constrained Growth late rather than vigorously rule” (1998, Despite its formidable economic achieve- p. 12). ments, the imperial systems were designed in • Patronage economy. Although pri- the ideological framework of the seventeenth vate ownership figured prominently in and eighteenth centuries and ultimately pre- China’s imperial economy, the absence vented China from moving rapidly to capi- of legal protection against official abro- talize on new opportunities arising from the gation of property rights obliged private industrial revolution in Great Britain. Five owners to seek protective alliances with items stand out: incumbent officials and local power holders. The rise of widely dispersed • Lack of vision. Gerschenkron empha- patronage structures across different sized the importance of ideology as a sectors of the economy obstructed inno- driver of modern economic growth in vation and also encouraged widespread follower nations: “in a backward country corruption. the great and sudden industrialization • Interlocking elite interests. Under effort calls for a New Deal in emotions” China’s imperial system, the interests 80 Journal of Economic Literature, Vol. LII (March 2014)

of the imperial household, the bureau- The challenge from Western imperial- cracy, and the intellectual, commercial, ism represented a watershed in Chinese and landed elites were closely aligned history—a novel threat unlike China’s tradi- and reinforced by a combination of de tional nemesis of land-based invasion across jure and de facto economic and political her northern frontier. Europe’s rising power power. This tight web of interests con- threatened the economic, political, institu- tributed to the system’s longevity, but tional, and ideological underpinnings of the also strengthened its capacity to resist Qing empire. The turbulent period from changes that threatened the wealth, roughly 1800 to 1949 helps to illuminate the power and status of these dominant dynamics of the Ming–Qing system, demon- groups. strating its resilience while simultaneously revealing institutional obstacles to economic We now turn to the long and painful pro- change highlighted in our political economy cess of pushing back these barriers. analysis. Prior to 1800, European trade with China was a lopsided affair dominated by the 4. Turbulent Century: China Confronts exchange of Chinese commodity exports, the Industrial Revolution, 1840–1939 notably tea and silk, for silver coin and bul- lion shipped from the Americas. British 4.1 China’s Opening, 1840–95 merchants, frustrated by the limitations of The stability of the imperial equilibrium the “Canton system,” which, from 1757, had hinged on its capacity to thwart internal and restricted European trade49 to that city (now external threats. Although China’s Qing rul- known as Guangzhou), urged London to ers, leaders of a seminomadic group with ori- demand wider access to the China market, gins along China’s northeastern frontier, were initially with little success. unusually adept at expanding and defending British and Indian traders made a com- China’s land borders through a combination mercial breakthrough by discovering a ready of diplomacy and force, the nineteenth cen- Chinese market for India-grown opium. tury brought a notable acceleration of politi- Believing the ensuing shift in China’s trade cal and economic change arising from both balance from surplus to deficit and the internal and external pressures. reversal of long-standing silver inflows were Beginning with the White Lotus (1796– linked to rising opium imports,50 a disturbed 1804), a series of domestic rebellions cul- Qing court dispatched a high official, LIN minating with the vast Taiping uprising Zexu, to extirpate the Canton opium trade. (1851–64) both reflected and contributed to the erosion of the Qing regime. The simul- evidence of low temperatures and declining rainfall; Man- taneous upsurge of European military and houng Lin cites contemporary accounts suggesting that sil- diplomatic pressure along China’s maritime ver outflows during the first half of the nineteenth century reduced China’s stock of monetary silver by 7–19 percent frontier—accentuated by falling terms of (2006, pp. 83–85). trade, unfavorable weather trends, and the 49 The Canton system did not affect trade with Asian reversal of long-standing silver inflows,— partners, which involved a number of port cities. 48 50 Recent research has questioned the link between ris- inflicted further shocks. ing opium imports and silver exports during the nineteenth century, citing other potential sources for the reversal of silver imports, including the rising gold price of silver, 48 Williamson (2011, pp. 33–34) concludes that China’s declining domestic demand for silver, as well as a break- external terms of trade fell by 85 percent between 1796 down in the Spanish Peso Standard. See Lin (2006) and and 1821; Zhang et al. 2007 and Li (2007, pp. 27–30) cite Irigoin (2009). Brandt, Ma, and Rawski: From Divergence to Convergence 81

When he did so, the British merchants that it was ideology and institutions, rather sought London’s protection from what they than resource limitations, that imposed bind- regarded as an illegitimate seizure of mer- ing constraints on China’s growth prospects cantile property. The result, fuelled by both before and after the start of the treaty British visions of a vast China market, was port system. As we will see, the insertion the Opium War of 1839–42.51 British arms of a treaty port economy in the traditional forced the Qing to accept the Treaty of Chinese empire represented initially what Nanking (1842), which ceded Hong Kong seemed like a small rupture to a giant closed to the British, forced the Qing to accept a political system that would only grow over regime of virtual free trade, and initiated the time to tear at the foundation of traditional “treaty port” system by opening five Chinese China’s long run political equilibrium. ports to British merchants. This agreement, 4.2 Change and Resistance to Change, which set the tone of China’s international 1840–95 economic relations during the century prior to the Pacific War, subsequently expanded to 4.2.1 Political Accommodation and include dozens of treaty ports where foreign Institutional Change to 1895 residents were protected by extraterritorial- ity at the expense of Chinese sovereignty.52 The new era marked by China’s forced While these innovations initiated a long opening began disastrously for the Qing, adjustment process that eventually resulted which barely survived the devastating in substantial economic advance, the initial Taiping Rebellion (1850–64). Confucian pace of change was slow. China’s response elites based in Hunan and Anhui provinces to the treaty system poses difficulties for mobilized funds, assembled regional armies, Pomeranz’ (2000) reliance on access to and led successful campaigns to defeat the cheap coal and other land-intensive goods Taiping armies. As noted above, the “Tongzhi to explain Britain’s unique economic suc- Restoration” (1861–75) engineered a recov- cess and the consequent “great divergence” ery through the revitalization of traditional between European and Asian incomes. If institutions. The likin (lijin) tax, levied on these were the key obstacles to Chinese eco- internal trade to help fund the anti-Taiping nomic expansion, the nineteenth century effort, developed into an important compo- treaty system—which allowed unlimited and nent within China’s fiscal system. Along with virtually duty-free importation of mining new taxes on seaborne international trade col- equipment as well as coal and other land- lected by the foreign-administered Imperial intensive products—along with the gradual Maritime Customs, an arrangement forced increase in migration of Chinese farmers on the Qing by European pressure, the likin into the fertile and sparsely populated plains system began to restructure the Chinese fis- of Manchuria should have provided a major cal regime. By 1908, the long-dominant land impetus to Chinese growth. The absence of tax had declined to 35 percent of officially any such outcome lends credence to our view recorded revenue (Wang 1973, p. 80). The rise of commercial taxation, which became de facto local revenue following 51 Johnson cites multiple descriptions of the large scale of Shanghai’s domestic trade prior to the Opium War, the suppression of the Taipings, reflected a including references to “forests of masts” and suggestions process of fiscal as well as political decentral- that Shanghai’s trade volume surpassed London’s during ization visible throughout Chinese history fol- the 1830s (1993, pp. 175–76). 52 So and Myers (2011) examine the treaty port lowing major rebellions or invasions (ZHOU economy. Zhenghe 2009). Aided by newly acquired 82 Journal of Economic Literature, Vol. LII (March 2014) fiscal resources, regional bureaucrats such port system, which opened a growing list of as LI Hongzhang (1823–1901) and ZHANG ports to European commerce while restrict- Zhidong (1837–1909) sponsored the Self- ing Chinese tariffs to a modest 5 percent. Strengthening movement (1860–94), a pro- China’s Maritime Customs data show the gram that aimed to expand Chinese military volume of exports doubling and imports ris- strength by developing a small number of ing by 77 percent between 1870 and 1895.53 Western-style, capital-intensive enterprises Despite its modest scale, trade gradually financed by the state and directed by presti- aligned major domestic commodity prices gious officials with impeccable academic cre- with international markets throughout the dentials. Although these enterprises, which Pacific Basin. Brandt’s discovery that, start- included arsenals, factories, and shipyards, ing in the late 1880s, domestic prices for rice, were fraught with inefficiency and corrup- wheat, and cotton moved in close harmony tion, they did record modest achievements with market shifts throughout the Pacific (Kuo and Liu 1978). The Jiangnan Arsenal, basin demonstrates that several decades located in Shanghai, impressed Japanese of unfettered trade forged unprecedented visitors in 1873. Japanese reformers initially global links with vast swathes of China’s relied on Chinese translations of European economy (1985, 1989). By the late 1880s, scientific treatises (Elman 2005, p. 411). millions of villagers inhabiting the Yangzi riv- China’s Hanyeping steelworks began pro- er’s drainage area who grew, bought, or sold duction five years ahead of Japan’s Yawata rice, or worked for or traded with partners complex. who engaged in those activities, had become Despite these innovations, traditional unwitting participants in far-flung networks thinking dominated, representing, as aptly of international commerce, influencing and suggested by the title of Wright’s classic being influenced by distant producers, con- book (1962), the last stand of Chinese con- sumers, and traders of rice. servatism. In contrast to the concurrent The treaty system accelerated the arrival Meiji reform in Japan, there was no effort to of new technologies, initially to the treaty overhaul the regime’s fundamentals. There ports themselves, which, in both the was no modern constitution or commercial ­nineteenth- and twentieth-century versions law, and no reform of the currency system. of expanded links to global markets, became Railroads were prohibited and steamships staging points for the domestic diffusion of were restricted to the Yangzi and other major technology. The development of manufac- rivers; (Wright 1962, SUZUKI Tomo ​ ¯ ​ 1992). turing, however, fell far short of the potential Perkins (1967) concluded that “If the impe- surrounding the expanded inflow of goods, rial government of China was an obstacle to technology, and knowledge during the latter industrialization, it was more because of what half of the nineteenth century. it did not do than because of harmful efforts Attempts by Chinese and European entre- which it did undertake. . . . The real problem preneurs to capitalize on opportunities linked was that although the . . . government . . . to new technologies and trade arrange- did take a number of positive steps they were ments encountered powerful resistance. The few and feeble” (1967, pp. 491–92). 4.2.2 Economic Change and Its Limits: The 53 Figures come from the Nankai quantity indexes of export and import reproduced in Hsiao (1974), p. 274. Partial Unraveling of Key Institutions Keller, Li, and Shiue (2010, 2011, and 2012) have begun to systematically exploit the trade data covering 1860s–1949 Expansion of China’s international trade compiled by China’s Maritime Customs agency and sum- was the most obvious effect of the treaty marized in Hsiao’s volume. Brandt, Ma, and Rawski: From Divergence to Convergence 83

­barriers, which affected the expansion of rail- a guild system in which groups of workers roads, inland steam shipping, and other public received government permission to monopo- infrastructure (Brown 1978; SUZUKI 1992), lize transport in a particular area. Official notices were pasted up in each sector, delim- emerge from the history of private efforts iting its boundaries and naming the autho- to introduce new technologies and business rized transport agent. From the Kangxi to the arrangements in the processing of agricultural Xianfeng reigns (1662–1861), the Qing gov- commodities like soybeans and silk larvae. ernment issued . . . notices of official approval When Jardine, Matheson, a rich and to the transport guilds. . . . Under the Guangxu Emperor [r. 1875–1908], successive magis- ­well-connected British firm, set out to estab- trates issued 11 orders supporting the special lish a steam-powered silk filature in Shanghai privileges of the guilds. (Hershatter 1986, during the 1860s, they anticipated difficul- p. 117). ties in installing imported machinery and training Chinese workers to operate it. What The resulting merchant–official combines they did not expect, and what stymied this joined forces to repel interlopers who threat- initiative, was their inability to obtain prompt ened mercantile profits and official revenues. and efficient delivery and storage of cocoons In response to complaints from merchant in the immediate rural hinterland outside clients, officials either intervened directly treaty port: (“the Chinamen that did assist me were put in chains . . . ”) or empowered incum- The mandarins [officials] were bribed to bent merchants and their agents to act as oppose me, people and brokers, more or less in official deputies in restricting entry. During the hands of the silk hongs [companies] fright- the 1870s, merchants from the southern city ened from me, suitable houses were refused of Swatow (Shantou) controlled Shanghai’s me or set fire to, and what I actually built opium trade. When newcomers imported was pulled down and the Chinamen that did assist me were put in chains (quoted in Brown large stocks in advance of an increase in 1979a, pp. 561–62). taxes, the Swatow guild obtained permission to bring in “runners” who assumed the role Efforts to establish a steam-powered of policemen. These agents facility for processing soybeans met a simi- lar fate (Brown 1979b). Chinese entrepre- attempted to collect the Lijin tax from anyone neurs fared no better: during the 1870s, riots who dealt in opium, regardless of [where and by whom] . . . it was stored. Moreover, they by traditional silk weavers caused a local charged . . . non-members of the Swatow . . . magistrate to order the closure of mecha- group a higher rate than their members. nized ­silk-reeling factories that an over- Furthermore, they confiscated all opium the seas Chinese merchant had established in moment it left the foreign importers’ hands Guangdong (Ma 2005). . . . unless the transaction was carried out by members of the group. In order to prevent Conflicts arosewhen new ventures clashed commercial activities by non-members, they with vested interests arising from restric- sent spies and informers around the shops. tive coalitions of merchants who arranged (Motono 2000, p. 98) informal trade monopolies by promising to deliver tax payments to official patrons Contemporary and retrospective accounts (Motono 2000, pp. 3–6). Such arrangements agree that such arrangements restricted inno- had a long history: in Tianjin, for example, vation. Writing in 1932, Morse noted that

By the early eighteenth century. . . groups of all Chinese trade guilds are alike in inter- transport workers had become organized into fering with every detail of business and 84 Journal of Economic Literature, Vol. LII (March 2014)

­demanding complete solidarity of interest in and, as is evident from the examples cited their ­members, and they are all alike also in above, to throttle interlopers. that their rules are not a dead letter but are Motono (2000) sees these merchant– actually enforced. The result is a tyranny of the many over the individual, and a system of con- official combines as the structural foundation trol which must by its nature hinder “freedom of traditional Chinese merchant groups and of enterprise and independence of individual networks. He shows how the small Western initiative” (p. 24). presence established a new source of power and authority in China that eroded the impe- Brown echoes this sentiment: “Caught rial system’s monopoly over political control between the guilds . . . and the officials . . . and undercut the authority of mercantile the Chinese merchant was hardly in a posi- guilds, fracturing traditional group solidar- tion to play the role of . . . Schumpeterian ity among members of particular trades and entrepreneur” (1979b, p. 183). enhancing the property rights and security As trade expanded, the treaty system itself available to Chinese businesses outside the began to undermine the merchant–official­ traditional patronage networks. nexus that tormented would be innovators. China’s treaty port system (and China’s An obscure provision of an 1858 Sino–British recent “opening up” policy) richly illustrates agreement allowed foreign merchants to Romer’s (1993) insistence that the impact of avoid domestic taxes on goods in transit to international trade resides in flows of ideas or from a treaty port by paying a fixed ad as much as in shipments of commodities. valorem fee. This “transit pass” privilege, The treaty system brought new organiza- often cited to illustrate the intransigence of tional forms into the treaty ports, into the local Chinese officials and the limited reach domestic economy and into China’s govern- of British power,54 became an unlikely cata- mental machinery. Early examples include lyst for institutional change once Chinese modern banks, the Shanghai stock exchange, operators recognized that transit passes shareholding companies with limited liabil- intended for the use of foreign traders ity, the foreign-managed Imperial Maritime could shield their own goods from domestic Customs, local self-government, and China’s taxation. new foreign ministry, the Zongli yamen. The Chinese merchants bought transit passes treaty ports served as transmission belts from British firms, paid foreign residents to for unfamiliar structures of knowledge and assume nominal ownership of goods in tran- belief: engineering, medicine, international sit, and even created “pseudoforeign” trad- law, legal jurisprudence, political represen- ing houses operated entirely by Chinese, tation, Christianity, pragmatism, democracy, who shared the resulting savings with their and Marxism, among others. XIONG Yuzhi passive foreign partners (Hao 1986, pp. 263– (2011) traces the diffusion of new ideas 67). The insightful work of Motono (2000) through multiple channels. The steady trickle reveals the full impact of these initiatives, of new perspectives was punctuated by which upset a long-standing equilibrium that sharp reminders of the wide gap separating had preserved local monopolies, allowed Chinese and international norms: ZHAO Jin local officials to share in commercial profits, describes the shock to Chinese sensibilities when authorities in Shanghai’s International Settlement refused to halt traffic to make 54 Thus the historian John K. Fairbank echoed contem- way for the entourage of high-level­ Chinese porary complaints to the effect that, “the British were quite unable to prevent the taxation of their goods” outside the officials, a common practice in imperial treaty ports (cited in Wang 2005, p. 18). China (1994, p. 118). Brandt, Ma, and Rawski: From Divergence to Convergence 85

It is easy to dismiss the nineteenth century a profound shock on Chinese sensibilities. treaty port system, along with the accompa- The Celestial Empire, having stumbled into nying expansion of foreign residence, trade, the unwelcome role of global laggard, now and investment, as too small and isolated to faced unprecedented mockery as the “sick alter the trajectory of China’s vast rural hin- man of Asia.” The ignominy of Japan’s vic- terland. Tawney, an eminent British historian tory magnified the impact of the 1896 Treaty who became interested in China, described of Shimonoseki, which granted foreigners China’s treaty ports as “small islands of privi- the right to establish factories in the treaty lege at the seaports and on the great rivers. ports, thus sparking a rapid expansion of for- . . . a modern fringe . . . stitched along the eign direct investment.55 Forced acceptance hem of the ancient garment” (1932, p. 13). of foreign-owned factories indirectly legiti- Murphey argued that the treaty system left mized Chinese modern enterprise, greatly “the great majority of Chinese . . . unaffected, reducing the harassment that conservatives directly or indirectly” and that “materially, had routinely inflicted on Chinese industrial China went on behaving for the most part ventures, especially those outside the protec- as it had always done” (1977, pp. 226–27). tion of prominent reform leaders. Indeed, Murphey’s pessimism led him to The final five years of the nineteenth cen- compare treaty ports in China as a fly on an tury saw a sudden and eruptive ideological elephant: “that a fly could ultimately irritate transformation of the sort modeled by Kuran its host enough to provoke a violent counter- (1995). Information about foreign realities action (from the elephant) but not to change and ideas, formerly confined to a narrow cir- the elephant’s basic nature” (cited in Motono cle of reformers, now commanded a nation- 2000, p. 166). wide elite audience. HUANG Zhongxian’s Despite their small size, the significance of account of his experience as the first Qing China’s nineteenth century treaty ports and ambassador to Meiji Japan received little trade rested on their catalytic role in initiat- notice when it first appeared in 1887; ten ing processes of change that, while slow to years later, demand soared following Japan’s develop, eventually resulted in a remark- naval victory over Chinese forces. Huang’s able transformation of China’s economy work joined a wave of translations, many that continues today. Ironically, Murphey, by YAN Fu, China’s foremost interpreter of while insisting that treaty ports were “tiny Western thought, that, for example, exposed and isolated islands in an alien Chinese Chinese audiences to Thomas H. Huxley’s sea,” concluded by predicting—accurately, social Darwinist idea that nations had to as subsequent events confirmed in short evolve, adapt, and progress or face extinc- order—that China might “come to travel . . . tion. YAN’s translation of Huxley’s famous along the same road which the western col- speech on social Darwinism went through onists first urged” (1977, pp. 225, 233–34). more than 30 editions in the ten years fol- As history shows, that journey was long and lowing the initial 1898 Chinese translation complex. (see XIONG 2011, pp.557–59). YAN’s 1902 translation of The Wealth of Nations also 4.3 The Shock of Defeat by Japan commanded a large audience. as a Turning Point New thoughts sparked political and social change. Military defeat encouraged Military defeat in the Sino–Japanese War of 1894–95 by a nation long regarded 55 Prior to the Treaty of Shimonoseki, foreign business as a student, rather than an equal, inflicted in the treaty ports was restricted to commerce. 86 Journal of Economic Literature, Vol. LII (March 2014)

(­perhaps excessively) negative evaluation of encouraged the founding of local chambers the self-strengthening effort and of China’s of commerce, and sought to reform the cur- overall backwardness (Elman 2005, pp. rency, establish modern banks, and expand 379–82, 392–93). The Qingyipai, a power- railroads and other public infrastructure ful alliance of prominent conservatives who (Chan 1977, chap. 8; Reynolds 1993). had steadfastly opposed self-strengthening New initiatives in taxation, law, and educa- initiatives, suffered a rapid loss of influ- tion began to erode major barriers to long- ence amid an explosion of new civic and term economic development. The newly academic associations (JIN and LIU 2011, established Ministry of Commerce set out “to pp. 64–69, 73). break the control of the Qing local govern- China’s naval defeat triggered the Hundred ments over the Chinese merchants’ groups Days’ Reform centered in the southern prov- and Chinese firms.” To this end, reformers ince of Hunan in 1898. Inspired by Japan’s sought to eliminate tax-farming arrange- Meiji reforms, sponsored by influential pro- ments involving cooperation between “the vincial leaders and nationally-prominent leaders of the prominent Chinese mer- intellectuals, and backed by the young chants’ groups and the officials of the Lijin Guangxu Emperor (r. 1875–1908), this effort tax bureau” (Motono 2000, pp. 154–56). to modernize China’s politics, economy, The decision to abandon the thousand-year education, and military was crushed by con- tradition of Confucian civil service exami- servatives led by the emperor’s aunt, the nations in 1905 shook the foundation of the Dowager Empress Cixi. The conservatives power structure that had long supported subsequently condoned the Boxer rebels’ the patronage economy of imperial China xenophobic violence against Westerners and and paved the way for the rise of a modern Christians, a movement which brought yet schooling system. another humiliating defeat at the hands of a 4.4 Economic Developments 1912–49: multicountry expeditionary force—this time Mixed Outcomes and Partial including Japanese troops—and an exor- Breakthrough bitant reparation extracted by the Western powers. Ironically, the late-Qing reforms, which Elite opinion then veered toward more rad- delegated greater political and fiscal author- ical Meiji-style reforms. Even the Dowager ity to the provinces, contributed to the Qing Empress, long an implacable enemy of mod- dynasty’s downfall in 1911, when a modest ernization, stepped forward as an improba- military rebellion in Wuhan (Hubei prov- ble proponent of constitutional reforms that ince) initiated a cascade of provincial seces- echoed the rejected 1898 initiatives (JIN sion. A new Republican era, inaugurated and LIU 2011, pp. 73–76). The new reform in 1912 with much fanfare and great aspi- plans were comprehensive and ambitious. rations, quickly collapsed into a welter of They envisioned a constitutional monarchy regional military regimes. It was not until with national, provincial, and local parlia- 1927, when the Kuomintang, led by Chiang ments. Military modernization was high on Kai-shek (Jiang Jieshi) established its new the reform agenda, which sought to modern- capital in Nanjing, that the Warlord Era gave ize public finance and adopt a national bud- way to some semblance of national gover- get. The reformers established Ministries nance. Surprisingly, these decades of politi- of Commerce (subsequently Industry, cal instability and fragmentation witnessed Agriculture and Commerce), Finance, the first major wave of Chinese industrializa- Education, and Posts and Communications, tion and economic change. Brandt, Ma, and Rawski: From Divergence to Convergence 87

4.4.1 Institutional Restructuring and State the 1919 Versailles Treaty56 expanded into Building in a Time of Instability a broad attack on traditional culture. While some reformers railed against the inability While historians continue to study China’s of Confucian thinking to encompass sci- failed experiment with parliamentary gov- ence or democracy, others joined a 1921 ernment and local self-rule during the first Shanghai conclave that established China’s four decades of the twentieth century, the Communist Party. so-called “Warlord era” that followed the Both the privileges and autonomy of Qing dynasty’s 1911 collapse recalls the polit- treaty ports, especially the largest of them, ical fragmentation commonly observed dur- Shanghai, strengthened in this time of weak- ing dynastic interregnums. One researcher ened central rule. Although tinged with for- counts 140 conflicts involving more than eign privilege and racial discrimination, the 1,300 rival militarists between 1911 and steadfast upholding of freedom of speech 1928 (Billingsley 1988, p. 24). Through and association in the treaty ports fostered much of the 1910s and 1920s, the self-styled an explosive growth of chambers of com- national government in Beijing lacked both merce and associations of bankers, lawyers, revenue and authority. Along with the loss of and accountants, most notably in Shanghai the power of personnel appointment at the (Xu 2001). Relative peace, stability and rule province and county levels, fiscal decentral- of law also nurtured the first generation of ization placed the Beijing administration on Shanghai industrial tycoons, including the life support from foreign loans collateralized Rong brothers (textiles and flour milling), by revenues from the Western-controlled LIU Hongshen (matches) and the Jian broth- (and efficiently managed) bureaucracies ers (tobacco), all of whom operated outside charged with collecting customs and salt the traditional bureaucratic patronage sys- taxes (Strauss 1998, Iwai 2004). tem. The legal and jurisdictional autonomy As had often occurred in China’s past, frag- of Shanghai’s International Settlement shel- mentation and prolonged weakness at the tered the local branch of Bank of China center offered opportunities for experimen- from the predatory attempts of the fiscally- tation with new ideas and institutions that strapped Beijing government (Ma 2011c). would later reshape the long-term trajec- The result was a unique symbiosis between tory of Chinese history. Despite the political Chinese entrepreneurs and foreign-con- chaos, the first three decades of the twenti- trolled treaty ports that flourished despite eth century brought an interlude of cultural the social discrimination that the expatri- enlightenment that Bergere (1989) identi- ate communities inflicted on their Chinese fied as the “golden age of the Chinese bour- neighbors and business partners (Coble geoisie.” New concepts such as democracy, Jr. 2003). The benefits of rule of law were science, and self-government, new styles of widely recognized; as one observer noted in Chinese writing, literature, and academic 1917: scholarship, new generations of politicians, scholars, and entrepreneurs, and new sys- The Chinese residing in the International tems of education achieved growing promi- Settlement have numbered 800,000. Although nence in the new environment of patriotism and nationalism (Furth 1983, Kuhn 1986, 56 China, which supplied over 100,000 noncombatant and Sun 1986). In the face of increasingly workers to support British and French forces in Europe, expected the Versailles settlement to include the return aggressive Western and Japanese penetra- of German concessions in Shandong province. Instead, tion, student-led demonstrations against Article 156 of the treaty awarded these territories to Japan. 88 Journal of Economic Literature, Vol. LII (March 2014)

they are unspeakably low in knowledge and much in evidence. In Tianjin, “Guild bosses [education] level, under the influence of British . . . opposed the efforts of some merchants to custom, their habit of following the law is supe- introduce motor vehicles. . . . threatened to rior to [Chinese in] the interior. . . . [whose] officials bully the people and the people dare kill the general manager of the factory [that not resort to the law, whereas the residents in had purchased trucks, so that] the factory the Settlement all know that detaining people had to turn control of transport back to the without warrant is kidnapping, and a kidnap- guild” (Hershatter 1986, p. 134). per, whether an official or a commoner, would The establishment of the Kuomintang-led­ be punished (cited in Xu 2001, p. 41). Nanjing government in 1927 marked a step Nonetheless, overall political uncertainty to recentralize state power. The regime across China in this period presented the mounted a vigorous effort to establish admin- reverse side of the North paradox: “a govern- istrative structures that could formulate and ment too weak to be a threat . . . [is also] too implement developmental policies. Strauss weak to enforce its writ and provide a stable finds that these efforts “coalesced in a number political and legal environment” (Kirby 1995, of important pockets of Republican govern- p. 50). China’s 1904 Company Law is a case ment” (1997, p. 340). These state-building­ in point. This measure, which introduced efforts drew on the model of China’s limited liability and aimed to provide uni- Western-controlled Maritime Customs and versal and formal property rights to Chinese Salt Inspectorate, organizations that dem- businesses through company registration, onstrated the potential of efficient, honest, attracted few registrants apart from banks transparent, apolitical bureaucracies led by and other large, officially-backed enter- expatriates but largely operated by Chinese prises (Kirby 1995). In an environment of personnel (Strauss 1998, chap. 3). The political uncertainty and civil unrest, formal Ministry of Finance, setting out to emulate registration was widely viewed as a danger- the Salt Inspectorate, which it absorbed in ous recipe for public exposure of private 1927/28, hired “personnel who were experi- assets. When Guangdong lineage-based enced, competent, and hard-working,” often firms sought Hong Kong registration under turning to “open civil service examination British common law, their objective was nei- as the preferred method of recruitment” as ther to secure limited liability nor to attract “new departments and sections were cre- outside capital, but rather to obtain shelter ated” during the 1930s (Strauss 1998, p. 187). from official predation rampant in the city of The Nanjing government pursued genu- Canton wracked by rebellion and revolutions ine tax reforms. After restoring China’s tariff (Chung 2010). autonomy in 1928 (KUBO T​ o ¯ ​ru 2005), the Most Chinese entrepreneurs operated regime sought to impose standard domes- outside the formal sphere, drawing on long- tic taxes in place of the likin system, which standing traditions of private contracting was encrusted with tax farming, extralegal and social networking to help resolve issues fees, and ad hoc imposts (Iwai 2004, pp. of information asymmetry and contractual 381–85). At the same time, CHIANG Kai- disputes. Family firms and lineage or rela- shek [JIANG Jieshi], the Nanjing regime’s tion-based partnerships dominated (Zelin strongman, used traditional tactics to extract 2009).57 The old patronage system remained resources from urban businesses. CHIANG enlisted Shanghai’s criminal underworld to pressure enterprises located in Shanghai’s 57 Foreign-owned treaty port firms shared the Chinese penchant for recruiting on the basis of family or regional foreign-controlled concessions, leading to links (Rawski 1969, pp. 464–65). confrontations with prominent Shanghai Brandt, Ma, and Rawski: From Divergence to Convergence 89 capitalists and eroding the rule of law within of global cotton piece goods (ILO 1937, the treaty port (Coble 1986, p. xi). vol. 1, pp. 57–58).58 China’s improving economic prospects 4.4.2 The Onset of Modern Economic attracted trade and investment. China’s for- Growth eign trade rose to a peak of more than two China’s first wave of industrialization percent of global trade flows in the late 1920s, occurred amidst political uncertainty. a level that was not regained until the 1990s Following the 1896 treaty settlement, activ- (Lardy 1994, p. 2). Remer calculated that, ity in mining and manufacturing accelerated between 1902 and 1931, inflows of foreign sharply from its tiny initial base. Output of direct investment grew at annual rates of 8.3, modern industry (i.e. excluding handicrafts) 5 and 4.3 percent in Shanghai, Manchuria showed double-digit real growth during and the rest of China (1968, p. 73). By 1938, 1912–36, in spite of political instability and China’s stock of inward foreign investment the impact of the Great Depression (Chang amounted to US$2.6 billion—more than 1969). Factory production clustered in two any other underdeveloped region except regions: the lower Yangzi area, where both for the Indian subcontinent and Argentina foreign and Chinese entrepreneurs pursued (Hou 1965, p. 98). Although estimates of industrial ventures in and around Shanghai, pre-war capital flows often blur the distinc- and the northeast or Manchurian region, tion between direct and portfolio holdings, where Japanese initiatives predominated it is evident that China played a considerable (Lieu 1936; Schumpeter 1940; Manshu ​ ¯ ​ role in global capital flows. The 1938 figure kaihatsu 1964-65; Ma 2008). World War I, of US$2.6 billion for China’s stock of for- which weakened competitive pressure from eign investments amounts to 8.4 percent of European imports, spurred the expansion of worldwide stocks of outward foreign invest- domestic manufacturing in the absence of ment; China received 17.5 percent of out- tariff autonomy. bound foreign direct investment in that year As in other nations, factory production (Twomey 2000, pp. 32, 35)—compared with initially focused on textiles, food processing, 2.1 percent of inward FDI in 2001 (Velde and other consumer products. The growth 2006, Table 2). of consumer industries spurred new private Domestic investment expanded rapidly. initiatives in machinery, chemicals, cement, “Modern-oriented” fixed investment (calcu- mining, electricity, and metallurgy. Official lated from domestic absorption of cement, efforts (including semiofficial Japanese activ- steel, and machinery) grew at an average rate ity in Manchuria) promoted the growth of of 8.1 percent during 1903–36, outpacing mining, metallurgy, and arms manufacture Japanese gross domestic fixed capital forma- (Rawski 1975; 1989, chap. 2). Foreign inves- tion in mining, manufacturing, construction, tors dominated the early stages of China’s and facilitating industries, which advanced modern industrialization, but Chinese at an annual rate of 5.0 percent. Defying entrepreneurs quickly came to the fore, so the effects of the Great Depression and that Chinese-owned companies produced political tumult, economy-wide gross fixed 73 percent of China’s 1933 factory output (Rawski 1989, p. 74). In some sectors, the 58 Hong Kong’s prominence in the textile sector during scale of operation became substantial: by the early postwar decades followed the arrival of Shanghai 1935, textile mills in China produced 8 per- textile entrepreneurs, who diverted shipments of imported equipment to Hong Kong as Communist prospects for vic- cent the world’s cotton yarn (more than tory in China’s civil war advanced during the late 1940s. Germany, France, or Italy) and 2.8 percent See Ma 2008. 90 Journal of Economic Literature, Vol. LII (March 2014)

­investment exceeded ten percent of aggre- regional specialties like cotton, fruit, sesame, gate output during 1931–36 (Rawski 1989, peanuts, and tobacco (Liang 1982, chap. 5). pp. 251, 261), with direct foreign investment A particularly sweeping transformation contributing at least one-eighth and perhaps occurred in money and banking. China’s more.59 Republican era inherited a pre-modern mon- Transport development also supported etary system that mixted silver bullion, coins, economic expansion. China’s growing rail- copper cash, and private notes. However, way network, although much smaller than from the early 20th century, minted sil- India’s, was particularly important. As the ver dollars, including a rising proportion of length of track grew from 364 kilometers domestic coinage, gradually replaced silver in 1894 to over 21,000 by 1937, newly con- taels even in rural areas.60 Meanwhile, a structed north–south lines slashed economic simultaneous shift toward widespread use of distances across a landscape dominated banknotes convertible into silver on demand by rivers flowing from west to east (YAN under China’s free banking version of a sil- Zhongping et al. 1955, p. 180). Completion ver standard delivered even larger benefits. of railway and telegraph connections link- Beginning in the early 1920s, public accep- ing Peking (Beijing) and the central China tance of banknotes issued by the Bank of river port of Wuhan, for example, reduced China and the Bank of Communication, the time needed to ship goods between these quasi-public Chinese institutions that ben- cities, sell them, and receive the proceeds efited from the political and legal security of from 150 to only 2–3 days (based on Whitney China’s treaty ports, grew rapidly. Innovative 1970, p. 46). Growing availability of rail arrangements that allowed smaller financial transport encouraged coal mining, with the institutions to exchange cash and govern- result that “falling energy costs stimulated ment bonds for notes issued by these two new activity in a wide range of industries. . . . banks accelerated the economy-wide substi- [including] railway workshops [and] manu- tution of bank notes for hard currency (Ma facturers of cement, textiles, flour, cigarettes, 2013). As a result, the estimated share of matches, chemicals” and others. Lower fuel notes and deposits in M1 money supply rose prices also “led to the revival of native indus- from 22.3–34.6 percent in 1910 to a mini- tries which had earlier languished because mum of 40.4 percent in 1925 and 83.2 per- of the high cost of fuel” (Rawski 1989, cent in 1936 (Rawski 1989, p. 157) following pp. 224–25; Wright 1984, p. 46). Railway the Nanjing government’s shift to a fiduciary transport also stimulated further commer- currency in 1935 (Shiroyama 2008; Brandt cialization of agriculture, raising farmers’ and Sargent 1989). By the 1930s, the nation- terms of trade and boosting production of wide branch network of Chinese modern banks extended to over 500 localities; some banks began to experiment with loans to 59 Rawski places average annual gross domestic fixed farmers as well as merchants and industrial- capital formation during 1931–36 at 3 billion 1933 yuan (1989, p. 260). Remer (1968, p. 83) estimates that China’s ists (Rawski 1989, pp. 136, 152). FDI stock (which he calls “business investment”), grew by US$1.43 billion between 1914 and 1931, or by an annual average of US$83.9 million, which converts to 370 mil- lion yuan or 12.3 percent of average capital formation for 1931–36. If, as seems likely, annual FDI inflows increased 60MA Junya (2008) explains how a nationwide network between 1914 and 1931, this calculation understates the of native banks shifted both bills and silver dollars to take share of FDI in aggregate investment. Exchange rate data advantage of differentials in dollar–tael exchange rates are taken from Remer (1968, p. 151) and Hsiao (1974, linked to varying agricultural cycles, particularly between p. 192). north and south China. Brandt, Ma, and Rawski: From Divergence to Convergence 91

Along with this impressive monetary sectors, including traditional finance and the expansion came the sustained development native banks (qianzhuang), handicraft tex- of new financial instruments and institutions. tiles, traditional water transport, and, most Major urban centers, especially Shanghai, importantly, agriculture, which occupied also saw the growth of new financial institu- two-thirds of GDP. tions, namely a stock exchange and insur- Constrained by the unreliability of avail- ance and trust companies (YAN Hongzhong able information on acreage and yields, 2012). Most notable is the growth of public Rawski appeals to indirect measures of labor debt during the Republican era. While, dur- productivity in agriculture: wages of hired ing the 1910s and 1920s, the bulk of the gov- farm labor and nonfarm wages available to ernment debt came from foreign bank loans unskilled rural migrants in male (coal mining) often securitized by governmental fiscal and female (cotton textile factories) occu- revenues from Maritime customs and other pations that competed for farm labor. The sources, the Nanjing decade (1927–37) saw argument is that, with ample labor mobil- the emergence of a vibrant domestic market ity and competitive labor markets, sustained for bonds issued by the Nationalist govern- increases in real wages paid to farm labor- ment (Goetzmann, Ukhov, and Zhu 2007; ers, miners, and mill hands imply parallel Yan 2012). increases in the marginal product of agricul- These forces resulted in increased per tural labor, and therefore, in the real income capita output and structural changes of the of the majority of self-employed farmers who sort associated with Simon Kuznets’ concept operated independently as owners or tenants of modern economic growth in two major (Rawski 1989, chap. 6).61 regions: the Lower Yangzi, where private These achievements occurred despite the domestic and foreign investment in and absence of a truly national government and around Shanghai served as the key driver (Ma the inability of the aspiring Nanjing regime 2008) and the Northeast (Manchuria), where to establish control over interior provinces Japanese investment and eventual take- or rural areas (Eastman 1984, pp. 219, 221) over provided key momentum (Chao 1982, or to push central revenue above 3 percent MIZOGUCHI Toshiyuki and UMEMURA of aggregate output (Rawski 1989, p. 15). Mataji 1988). Growth persisted in the face of multiple More controversially, Rawski (1989) shocks: the Great Depression, falling export argues that developments in industry, trans- demand, Japan’s severance of Manchuria in port, and finance precipitated a nationwide 1932, rapidly rising silver prices triggered episode of modern economic growth at by Britain’s decision to go off gold, and the the national level during the early decades United States Silver Purchase Act of 1934. of the twentieth century. His estimates of While debate surrounds the extent and modern-sector growth resemble earlier significance of this early wave of economic results (e.g. Chang 1969 for modern indus- expansion, there is little doubt about what try). But with the modern sector accounting followed. Japan’s 1937 invasion plunged for only 12.6 percent of GDP in 1933 (Liu China into an eight-year abyss of warfare, and Yeh 1965, p. 89), its growth says little about changes in aggregate output. In con- 61 Brandt (1989) makes a similar case for Central and trast to Murphey (1977), Rawski finds that Eastern China, focusing on increasing specialization and substantial spillovers from modern sector commercialization in the farm sector, a process that he ties to growing openness to the international economy, favor- activity pushed output expansion ahead of able terms of trade, and spillovers from China’s emergent population growth in several nonmodern modern/urban sector. 92 Journal of Economic Literature, Vol. LII (March 2014) followed immediately by renewed civil strife Taiwan and the People’s Republic (Kirby between Nationalists and Communists. 1990; Bian 2005). These conflicts took a massive toll of both Reflecting Leninist theory as well as expe- human life and physical capital. They also rience acquired from the administration imposed further costs arising from rampant of rural base areas during several decades corruption, fiscal predation and hyperinfla- of intermittent civil war (Schran 1976; Lai tion. These circumstances partly accounted 2011), the Communists came to power with for the rise of a new regime that quickly a disciplined party hierarchy, to which they achieved historically unprecedented cen- quickly added a vertically integrated admin- tralization and control under a socialist istrative structure that, for the first time in command economy. Chinese history, penetrated to the village level.62 This system, fortified by patron- age linked to the nomenklatura system 5. Development under the People’s of official appointments and the officially Republic of China controlled distribution of scarce resources under the new central plan, equipped the 5.1 Socialist Planning 1949–76 state with unprecedented capacity to ensure When MAO Zedong’s victorious armies nationwide implementation of official direc- marched into Beijing, the new regime inher- tives without relying on the cooperation of ited a shattered economy wracked by physi- local gentry or other independent agents. cal destruction and extreme macroeconomic Although provincial and local leaders often instability. But unlike Mao’s vision of the adapted and distorted messages from Beijing new nation as a “blank sheet of paper,” the to promote their own agendas, this new intellectual and mental outlook of China structure produced a historic expansion of in 1950 was fundamentally different from state power. the society that British traders and diplo- The broad contours of economic change mats had encountered a century earlier. following the establishment, in 1949, of Growing interaction with the outside world the People’s Republic of China (PRC) and had expanded the knowledge and broadened the reunification of China under Chinese the intellectual horizons of elites and many Communist Party (CCP) rule are well ordinary folk, especially in coastal regions, understood. The new government quickly with communism as a radical manifestation implemented an orthodox mix of fiscal and of such new departures. monetary policies to restore fiscal balance A century of change had endowed China and quell hyperinflation, steps that helped with a considerable, albeit unevenly dis- facilitate recovery from damage inflicted by tributed, physical and human infrastructure twelve years of war and civil strife. Following of modern transportation, administration, violent campaigns that expropriated the and enterprise. The National Resources assets of urban and rural elites, the latter Commission, “the technical and manage- through a land reform that redistributed rial agency” set up by the Nationalists that approximately 40 percent of the agricul- eventually employed 12,000 staffers to direct tural land (Schran 1969, p. 22; Wong 1973, and control most of China’s industries during the Sino–Japanese War of 1937–45, earned a reputation for efficient, apolitical operation. 62 Liu (2005) highlights the parallel between the early PRC and the system instituted by ZHU Yuanzhang (1328– Former staff members figured prominently 98), the first Ming emperor; both expanded state control in postwar economic administration in both and restricted market activity and labor mobility. Brandt, Ma, and Rawski: From Divergence to Convergence 93 p. 160; Roll 1980, chap. 4), the PRC moved accelerate the pace of development by amal- to implement a socialist planning system gamating rural households into large-scale loosely modeled after the Soviet Union, collective units (renmin gongshe or People’s which supplied loans, technology, and advice Communes), and promoting rural industrial- for China’s First Five-Year Plan (1953–57). ization. The communes proved to be a costly China’s plan system, like its Soviet coun- failure: poor incentives for farm households, terpart, sought to develop and expand a coupled with perverse incentives that led self-sustaining military-industrial complex. local officials to submit false reports of bum- This called for high rates of saving to finance per crops and encouraged higher echelons investment skewed toward heavy industry, to demand excessive grain procurement, as along with an elaborate planning apparatus well as massive reallocation of labor from to capture resources and channel them into agriculture to industry inflicted an immense high-priority investments. With most mar- famine on China’s peasantry that cost tens kets replaced by officially mandated alloca- of millions of lives.65 Efforts to revive for- tion of resources and outputs, the regime set ward momentum in the early 1960s met with prices to extract savings from farmers and some success, but the economy suffered consumers. These savings made their way to further setbacks in the mid-1960s when a the state coffers through profit remittances political campaign known as the “Cultural of state-owned enterprises.63 In the country- Revolution” sparked a new reversal in eco- side, collectivization and strict controls on nomic policies and incentive mechanisms. personal mobility through the hukou system Mixed economic outcomes characterize of residential permits facilitated resource China’s quarter-century of socialist planning extraction. In the cities, rationing contrib- under MAO and his colleagues. The plan era uted to a buildup in household savings. brought notable expansion of industrial and Despite these similarities, Chinese plan- technological capabilities, as well as major ning was never as extensive as the Soviet improvements in literacy, school attendance, Union’s and remained much more decen- maternal and infant survival rates, pub- tralized (Wong 1985; Xu 2011). In con- lic health, and life expectancy. Real annual trast to the U-form hierarchy of the Soviet GDP growth officially reported at roughly Union, the Chinese economy resembled an 6 percent (aggregate) and 4 percent in per M-form, with a large number of relatively capita terms66 surpassed gains in India, and self-sufficient provinces and prefectures other populous low-income nations, often by (Donnithorne 1972; Maskin, Qian, and Xu large margins (Morawetz 1978). 2000).64 Starting in 1958, China distanced itself from Moscow’s political leadership and eco- 65 On official incentives, see Kung and Chen (2011). nomic strategy, as MAO Zedong sought to Discovery of new materials has tended to raise estimates of famine deaths. Work by Ashton et al. (1984) and Peng (1987), based on census data, suggests excess mortality 63 The ratio of fiscal revenue to national product, which between 20–30 million. Dikötter’s recent review “puts the never reached 10 percent during the Qing or Republican number of premature deaths at a minimum of 45 million” eras, averaged more than 25 percent between 1952 and (2010, p. 325). 1977. (Compendium 2010, p. 18). 66 These official figures for 1953–78, based on what 64 Using terminology derived from studies of corporate the Chinese call “comparable prices,” are from China’s structures by Alfred Chandler and others, Maskin, Qian, National Bureau of Statistics (NBS 2007, p. 7). Use of 2000 and Xu (2000) describe Chinese industrial structures as prices, which avoids upward bias inherent in plan prices “M-form”—i.e. analogous to multi-divisional corporations, assigned during the 1950s, results in average annual growth which they contrast with “U-form” (resembling unitary of 4.4 percent for real GDP during 1952–78 (Perkins and corporations) structures observed in Soviet industry. Rawski 2008, p. 839). 94 Journal of Economic Literature, Vol. LII (March 2014)

These successes were accompanied by Long-term failure to provide an adequate shortcomings and setbacks, which occurred food supply reflected the conflict between in part because the PRC government, while central planning and individual incentives eliminating some institutional barriers endemic to socialist systems. State research inherited from the past, used its unprec- institutes made significant advances in the edented administrative capacity to imple- development of high-yielding varieties, ment a succession of antieconomic policies. but benefits were undermined by ineffi- These included an assault on individual and cient planning and weak incentives (Lardy ­firm-level incentives, persecution of intel- 1983).70 Industrial innovation languished lectuals and educators, forced collectiviza- because the plan system’s focus on physical tion of farming, a destructive regimen of output prompted factory leaders to focus on local self-reliance,­ the diffusion of unsuit- quantity and skimp on quality, variety, cost able technological innovations, and severe reduction, specialization, and customer ser- restriction of cross-border flows of trade, vice (Berliner 1976; Rawski, 1980). A typi- investment, people, and information.67 cal report complained that First Auto Works, Under socialist planning, growth concen- one of China’s premier manufacturers, found trated along the extensive margin, sustained its “obsolescence of equipment and models only by a rising share of GDP channeled worsening day by day” following “thirty years into investment.68 Although output per per- of standing still” (LI Hong 1993, p. 83). son increased, consumption did not. Calorie 5.2 The Reform Era since the Late 1970s availability for China’s immense rural popu- lation fell below World Bank standards for The death of MAO Zedong in 1976 minimum subsistence during the Great Leap marked a clear turning point. Although uni- Forward (1958–60) and did not regain that fied and far stronger than in 1949, China’s benchmark for two decades (Rawski 2007, economy remained isolated, backward, and p. 91). Millions of Chinese villagers were impoverished. The reform initiatives of the no better fed in the 1970s than in the 1930s late 1970s arose from twin concerns about (Lardy 1983; Bramall 1989). Food supply food security and the yawning gap between problems limited the growth of the urban Chinese productivity and living standards population, which, measured as a percentage and conditions in nearby market economies, of the total population, scarcely increased especially Taiwan and Hong Kong. Both between 1958 and 1978.69 Moreover, a sub- threatened the CCP’s political legitimacy. stantial gap emerged between the living After wresting political control from standards of urban and rural households Mao’s associates and supporters, reform (Rawski 1982). elements led by DENG Xiaoping imple- mented changes that sought to improve economic performance without threatening the ­CCP-controlled political order, the rents 67 The dwindling trade ratio and near-elimination of foreign investment characteristic of China during 1949–76 that cemented the loyalty of China’s power represents a joint outcome of U.S.-led efforts to isolate elite, or the central elements of the planned China and China’s own antitrade policies. economy (Naughton 2008). These efforts 68 Official data show that gross capital formation absorbed 22.2–25.8 percent of GDP during 1952–57 and were not without political risk in a society 32.2–36.0 percent during 1970–1977 (NBS 2007, p. 19). See also Ishikawa (1983). 69 Official data show that urban residents comprised 70 As discussed below, this untapped potential, espe- 16.2 percent of the national total in 1958 and 17.9 percent cially in major grains and cotton, likely played an important in 1978 (Compendium 2010, p. 6). role in the acceleration of agricultural growth after 1978. Brandt, Ma, and Rawski: From Divergence to Convergence 95 left cynical and demoralized following two Trust and Investment Corporation decades of hunger and instability. (CITIC)—“the investment arm of the Chinese state,”—and eventually appointed 5.2.1 The Role of Political Change to the ceremonial post of Vice President, China’s initial decade and a half of reform epitomized this change (Economist 2005). rested on important political changes that Of particular importance was a new system interacted with economic initiatives to facili- of performance evaluation for subnational tate the economy’s gradual shift toward officials based on quantitative algorithms that ­market-influenced outcomes. assigned major weight to local GDP growth Recognizing that improved living stan- (Whiting 2001). Facilitated by China’s dards were central to reestablishing political M-form hierarchy, these policies are widely legitimacy, China’s ruling Communist Party viewed as having inspired tournament-like shifted its objectives toward greater empha- competition among county and provincial sis on economic growth, particularly at the leaders, who recognized that accelerated intensive margin. At the same time, the party economic growth would bring recognition shifted its objectives away from the “ideologi- and promotion, and made strenuous efforts cal correctness” that had turned descendants to ramp up local economies (Li and Zhou of landlords, businessmen, and noncom- 2005).71 munist political leaders into pariahs and The new vertical alignment of incentives elevated “red” enthusiasm over “expertise” spanning the CCP leadership, local and derived from knowledge and experience. regional officials, and ordinary Chinese— The CCP also revised its own internal most of whom stood to benefit from rapid structure to emphasize governance based economic growth—reduced the agency costs on formal procedures rather than, as under inherent in any system of governance in a MAO, the personal inclinations of top lead- nation of China’s size. It also strengthened ers. Xu refers to the early years of reform as the capacity of China’s government and party a “watershed period in which the CCP began leaders to shape the behavior of lower-level to transform itself from a ‘personality-ruled officials assigned to implement the center’s party’” into what Shirk (1993) describes as policy decisions (Naughton 2011). “a system governed by rules, clear lines of Under the PRC’s authoritarian political authority, and collective decision making system, the Party defines policy objectives. institutions” (2011, p. 1090). The changes In doing so, leaders depend on a system of included personnel policies meant to elevate policy experimentation with deep historical objective criteria over seniority or personal roots—both during the pre-1949 experi- ties as the chief determinants of appoint- ence in Communist-controlled base areas, ments and promotions. and, at greater remove, during the imperial Elite recruitment reflected this shift, as era, when local experimentation gave birth both government and party welcome new to the nationally implemented likin (lijin) tax graduates of China’s universities follow- on domestic trade during the second half of ing the revival of merit-based admissions in the nineteenth century.72 Heilmann traces 1977. Elite recruitment gradually encom- passed entrepreneurs and other former pariahs: the rehabilitation of RONG Yiren, a 71 Montinola, Qian, and Weingast provide examples of ­Christian-educated entrepreneur disgraced such behavior (1995, p. 74). 72 On policy experimentation in contemporary China, during the Cultural Revolution but tapped see Perry and Goldman 2007 and Heilmann and Perry in 1978 to establish the China International 2011. On the origins, of likin, see Beal 1958, chap. 3. 96 Journal of Economic Literature, Vol. LII (March 2014)

Chinese Communist experimentation, par- was the revival of household farming. ticularly in the area of land policy, back to Initially permitted as an experiment in a the 1930s, and identifies “experimentation few poverty-stricken areas, the “Household under hierarchy . . . the volatile yet produc- Responsibility System” (HRS) spread rapidly tive combination of decentralized experi- as villagers “voted with their feet” to aban- mentation with ad hoc central interference, don collective agriculture in favor of the new resulting in the selective integration of local system, which established what amounted experiences into national policy making” as to household tenancy, with cultivators pay- “the key to understanding China’s policy pro- ing fixed rents to the local government and cess” (2008, p. 29). retaining the rest for themselves. Along with Under this system, proponents of specific the HRS, the reform raised state procure- policies promote experimental implemen- ment prices for grain and relaxed controls tation, typically at a subregional level. This over rural markets for both products and structure also permits “bottom-up” experi- farm inputs. mentation by ambitious local officials aim- These reforms elicited an explosive ing to attract favorable attention from their response (Lin 1988, 1992). Grain output immediate superiors or higher-level offi- rose by almost a third between 1978 and cials. Decollectivization of agriculture, the 1984; output of cash crops and farm sidelines first step in China’s post-1978 reform pro- grew even faster. Rapid productivity growth gram, began with local initiatives in Anhui in farming freed up a large pool of labor and Sichuan provinces (Bramall 2009, formerly trapped in collective agriculture pp. 337–39). (Rawski and Mead 1998), which combined Successful trials generate information that with a growing supply of agricultural goods, buttresses recommendations for widespread rising household incomes, and expansion of implementation; skeptics can review such markets for both inputs and outputs to spark reports and inspect the trial sites. If trials fail, a boom in rural industry, especially in China’s costs to the national economy are slight. The coastal provinces (Bramall 2009, chap. 3). advantages of such experimentation depend Within fewer than fifteen years, employ- on sufficient local autonomy, capability, ment in China’s township–village enterprises and resources to allow trial implementa- (TVE) expanded by nearly 100 million. The tion, critical review of initial results (notably success of both the HRS and TVEs dem- absent from 1958 until the late 1970s), and onstrated the resilience of China’s tradition the capacity to ensure widespread diffusion of private contracting in an environment of of successful initiatives (often absent during vaguely defined property rights, as well as the imperial era). the capacity, noted by Xu (2011), for China’s The resulting initial reform tranche administrative system and the associated focused on four areas: rural liberalization, patronage structures to provide a partial (and expansion of foreign trade and investment, perhaps temporary) substitute for genuine “enlivening” state-owned enterprises, and rule of law. fiscal decentralization (Riskin 1987; Lin, Cai, and Li 2006; Naughton 2007). Fiscal decentralization. China’s early reforms included important fiscal changes 5.2.2 Policy Initiatives during that replaced the former system, in which the the First Decade of Reform center had controlled tax revenues and then Agriculture and the rural economy. assigned funds and responsibilities to lower The central feature of China’s rural reform governmental levels (tongshou-tongzhi). The Brandt, Ma, and Rawski: From Divergence to Convergence 97 new setup divided revenue sources among in ­labor-intensive manufactured exports. various levels of government and included Guangdong and Fujian welcomed invest- an array of multi-year fiscal contracts, which ments by overseas Chinese entrepreneurs, committed lower levels of government to many with local family ties, who were clas- deliver specified revenue flows to their sified as “compatriots” (tongbao), rather immediate superiors (Montinola, Qian, and than “foreign merchants” (waishang), and Weingast 1995). Combined with an ongo- accorded special privileges. China benefited ing decentralization of authority over eco- from a historical accident: Beijing’s decision nomic management begun during the plan to allow inflows of foreign direct investment era, this gave local governments the incen- came just as steep increases in labor costs tive, resources, and policy tools to promote prompted Taiwanese and Hong Kong entre- local economic growth with intensity rarely preneurs to seek new locations for labor- visible elsewhere.73 However, lower rates of intensive export operations. The resulting growth and rapidly falling profitability in the marriage of ethnic Chinese business opera- state sector (Naughton 2008, pp. 107–09), tors with what soon became a tidal wave of agency problems in the collection of central domestic migrant workers boosted nascent government tax revenue, and a combination reform efforts and launched China toward of nominal tax contracting and inflation con- its current status as “workshop of the world.” tributed to sharp erosion in central tax rev- Foreign direct investment focused on enues (Wong and Bird 2008). labor-intensive export production soon spilled beyond the zones to encompass Globalization. Following a period of China’s rapidly expanding rural factories, intense debate in which, as in late Qing, con- first in Guangdong and Fujian, and then in servatives insisted that international contacts other coastal provinces. When early experi- threatened to erode the cultural foundations ments with openness delivered large ben- of Chinese society (LI Lanqing 2009; ZHAO efits, regional competition sparked growing Ziyang 2009), the PRC embarked on pol- enthusiasm for expanding foreign trade and icy of gradual opening. This policy initially investment. This sent officials at every level focused on the establishment of four Special scrambling to capture opportunities linked Economic Zones (SEZ) in the southern to growing flows of trade, inbound direct coastal provinces of Guangdong and Fujian, investment, and inflows of knowledge and along with increased autonomy for those information, both through personal inter- provinces to approve foreign investments action and via the gradual diffusion of tele- and retain foreign exchange earnings. phone, fax, computers, and the Internet. After an initial period of confusion,74 At the same time, falling interna- the new zones powered a steep increase tional transport costs and new computer/ information technologies encouraged large multinational manufacturers to set up 73 Xu (2011, p. 1144) emphasizes the importance of local governments in China’s boom, citing Bardhan and ­far-flung supply chains to take advantage of Mookherjee (2006, p. 48) who note that, “China is the only international differences in capabilities and country where the local governments have played a leading costs. These firms viewed China as a stable role in increasing rates of growth.” 74 Overseas Chinese visitors expressed dissatisfaction source of inexpensive and cost-effective with the Xiamen SEZ during the summer of 1982, com- labor; for China, the multinationals prom- plaining that it was impossible to formulate business plans ised new sources of capital, managerial because the SEZ authorities could not specify the cost of critical elements including land, water, and electricity knowledge, market access, and technology. (1982 interview). This confluence of interests produced first a 98 Journal of Economic Literature, Vol. LII (March 2014) trickle, and then a torrent of capital inflows plant insisted that he did not know the unit as local governments raced to attract top cost of the products coming off his assembly international companies. Following an initial line, telling visitors that, “our job is to pro- focus on export production, China’s ongoing duce sewing machines; costs are the con- economic expansion sharpened the interest cern of the general company office” (1982 of multinational firms in China’s domestic interviews). market as well. This enabled Chinese offi- China’s reformers, dissatisfied with the cials to hone their strategy of offering market passivity of firms that were intended to lead access in exchange for large-scale technology China’s economy, set out to “enliven” state- transfers to the foreign firms’ domestic sup- owned industry by injecting new incentives, pliers and joint venture partners. flexibility, and technology.76 Neither privatiza- As a result, China, formerly among the most tion nor bankruptcy was considered. Instead, isolated economies, moved rapidly to rejoin managers of state enterprises were granted the global system of exchange. Between 1978 modestly expanded autonomy. Funding was and 1993, official data show a rise in China’s shifted from government grants to loans trade ratio from 9.7 to 31.9 percent along from newly established state banks. Hints of with rising inflows of foreign investment. a labor market began to appear: retirees and workers with special skills concluded infor- Enlivening state enterprises. Between mal moonlighting arrangements. A new class 1955 and 1978, the number of industrial of “contract” workers emerged without the enterprises increased from 125,000 to lifetime job security promised to incumbent 348,000, output rose by a factor of 10, and workers in state-owned enterprises. factory employment expanded from 5.9 to Rather than transferring profits (and 61 million workers. In 1978, state-owned losses) to the state, firms could now keep enterprises contributed 77.6 percent of a share of their profits and deploy them industrial production, with the remain- to upgrade equipment, pay bonuses, or der coming from collective firms, most improve workers’ housing. To supply nascent controlled by local governments or state- markets, firms were allowed to find their owned firms.75 Most firms, most managers, own outlets for production that exceeded and many workers had no market-economy plan quotas, which in China tended to be experience. Enterprises carried out instruc- considerably below actual capacity. In 1984, tions. Pricing, advertising, marketing, prod- a new “dual track policy” institutionalized uct selection, and responding to market these initiatives, partitioning most commod- developments played no role in day-to-day ity markets into plan and market compo- operations. Observations from 1982 regard- nents. This horizontal bifurcation represents ing two manufacturers of sewing machines a genuine policy innovation, retaining the illustrate prereform circumstances. When tax/subsidy elements implicit in plan alloca- a visitor suggested that the work force at a tions of inputs and outputs, while revealing Guangzhou factory was three times the nec- current information about marginal costs to essary size, the manager agreed, but asked, agents throughout the economy.77 “if we did not employ them, where would they go?” The manager of a large Shanghai 76 Accounts of initial reforms affecting state-owned industry include Naughton (1995) and Steinfeld (1998). 75 Data in this paragraph are from Chen (1967, pp. 77 Under modest assumptions, this regime approaches 182, 475); Industry 2000, p. 21; Compendium 2010, p. 40; Paul Samuelson’s vision of a market system with initial Yearbook (1991, p. 96). lump-sum transfers. Brandt, Ma, and Rawski: From Divergence to Convergence 99

5.2.3 Assessment of the First Decade stopped suppressing such activity. . . . and a Half of Reform Shops, ­restaurants and many other service units popped up everywhere . . . [because] Despite obvious limitations, China’s ini- Chinese . . . had not forgotten how to trade tial reforms—economic as well as politi- or run a small business” (1995, p. 231). This cal—represent a watershed in Chinese sudden reappearance of an extensive entre- economic history. For the first time, China’s preneurial repertoire following a lengthy economy avoided most of the Qing-era hiatus signals the importance of human institutional constraints, as well as the most capital legacies and underlines the persis- restrictive of the fresh obstacles imposed tence of “stock[s] of knowledge transmitted by the PRC. With the environment of the from generation to generation” including 1980s and early 1990s still far from ideal “practical knowledge, or ‘knowing how’. and powerful restraints still limiting both . . . [leading to] shared behavioral regulari- domestic markets and global participation, ties or shared routines within a population” the scale of the response to new opportu- (Mantzavinos, North, and Shariq 2004, nities, which astonished both domestic and p. 77). overseas observers, attests to the underly- Rapid expansion of international trade and ing potential of capabilities and behavior investment eliminated long-standing short- patterns inherited from the decades and ages of foreign exchange, began to tap the centuries prior to 1949 as well as the scale wealth and expertise of Overseas Chinese of human and physical capital accumulation and of multinational corporations, and intro- under the PRC. duced a long-absent element of economic The greatest success occurred in the coun- rationality into investment policies by chan- tryside, where the explosive response to the neling resources into labor-intensive export household responsibility system banished production. the specter of hunger and sparked the larg- Efforts to upgrade state enterprises were est episode of poverty alleviation in human less successful. Losses mounted despite history (Ravallion and Chen 2007; Rawski massive direct and indirect subsidies. 2011b). China’s rural economic revival went Throughout much of the 1980s, China’s far beyond an intensification of individual economy was a halfway house combining effort. The reform unleashed a torrent elements of old and new. While the plan sys- of entrepreneurship replete with written tem, the state sector, and the official alloca- contracts, formation of supply chains and tion of labor and capital remained much in market networks, circumvention of official evidence, the reform policies of agricultural restrictions, bribery, and profiteering. This liberalization, domestic market expansion, dramatic upsurge of commerce highlighted international opening, and fiscal decentral- the persistence of petty capitalist behav- ization accelerated growth, expedited the ior that official regulations and campaigns acquisition of new knowledge, and propelled had denounced, restricted, and often pun- a substantial injection of market forces along ished during China’s twenty years of rural various margins. collectivization.78 Although the reform process spawned epi- Similar phenomena appeared in the cit- sodes of social unrest—the 1989 Tian’anmen ies. Perkins observed that “when China protests reflected public anger over inflation and corruption, as well as divisions within 78 Typical descriptions include Chan, Madsen, and the leadership—several features acted to Unger (1992, pp. 271–82) and Lyons and Nee (1994). limit social friction. The first fifteen years 100 Journal of Economic Literature, Vol. LII (March 2014) of reform produced no substantial group the late 1980s/early 1990s, ensured that the of losers—a rare outcome in episodes of gains from rapid growth were more widely ­substantial socio-economic change (Lau, shared than would otherwise have occurred Qian, and Roland 2000). Income ­inequality (Brandt and Zhu 2000). retreated during the first reform decade, 5.2.4 Political and Economic Change as rural reform success eroded the gap since the mid-1990s between rural and (much higher) urban incomes (Ravallion and Chen 2007). The Despite more than a decade of rapid eco- early reforms mainly affected resource flows: nomic expansion, China reached a critical adjustments of stocks in the form of layoffs, juncture during the early 1990s. Growth had bankruptcy, or privatization were notably become increasingly cyclical, with successive absent. periods of liberalization and reform accom- Reforms such as the dual-track system, panied by rising inflation along with acceler- which protected the nominal value of long- ating growth. Soft budget constraints in the standing economic rents, stand out in this state sector saddled the state-owned banks regard. In addition, potential reform losers with non-performing loans that may have often became its strongest advocates and exceeded one-half of their asset portfolios beneficiaries. Dissolution of collective farm- (Brandt and Zhu 2007). Central government ing undermined the power and perquisites fiscal revenue fell to twenty percent of rev- of rural leaders, but simultaneously endowed enue collected by all levels of government, them with new opportunities to turn politi- and only 3 percent of GDP. Many of these cal networks into economic assets by form- problems reflected one central issue: the ing new businesses or taking over former drag on an increasingly liberalized economy commune and brigade enterprises. Similarly, arising from bloated, plodding, and inef- the retreat from planning encouraged wide- ficient state-owned enterprises burdened spread commercialization of government with surplus workers, weak management, lax agencies, partly in response to the fiscal labor and financial discipline, rising losses, squeeze described earlier, which enabled and overdue debts. government officials to turn what began as Urban unrest culminating in the June a reduction in their authority into economic 1989 crackdown in Beijing and other cities, gain. combined with the subsequent fall of the Of equal or perhaps greater importance Berlin Wall and collapse of the Soviet Union in preserving stability was massive resource confronted China’s leaders with a profound redistribution from China’s rapidly grow- crisis of legitimacy. Following initial moves ing and dynamic nonstate sector to the to roll back previous reform efforts, DENG sluggish state sector. Wages and employ- Xiaoping’s Southern Tour of 1992 revived the ment in the lagging state sector continued momentum of market-leaning reform, pav- to grow because of ongoing injections of ing the way for the CCP’s 1993 decision to credit through China’s state controlled finan- adopt the long-term objective of building a cial system. Limited channels for deploying “socialist market economy.” This surprisingly China’s rapidly rising savings—a product of explicit document proposed a long-term financial repression—meant that much of objective of limiting government’s economic the increase in savings ended up in China’s role to macroeconomic control; prudential state-run banks, which in turn recycled them regulation of such matters as competition, to state-linked firms and institutions. These social safety nets, health, and environment; flows, which exceeded 10 percent of GDP by and strategic planning, with other choices to Brandt, Ma, and Rawski: From Divergence to Convergence 101 reflect the outcome of market processes.­ 79 industrial parks to attract overseas and The 1993 decision led to a succession of domestic investors, loosened restric- fresh reform initiatives, including tions on overseas travel and study for its own citizens, encouraged Chinese firms • A sweeping fiscal overhaul that sharply to invest overseas, and extended legal, increased the center’s fiscal strength tax, and regulatory changes initially (Wong and Bird 2008). restricted to special economic zones and • Comprehensive restructuring of the coastal regions throughout the domestic enterprise sector, including the fur- economy. loughing and eventual dismissal of tens • Major efforts to expand domestic market of millions of redundant state sector orientation, including extensive priva- employees, substantial privatization of tization and deregulation of domestic both state and collective enterprises, trade and transportation, a major roll- along with further reforms—including back of official involvement in pricing virtual elimination of planned allocation and allocation of both commodities and of materials—that sharply increased the labor, and a rapid increase in the share market orientation of the remaining of private business in output and espe- government-linked firms.80 cially employment, backed by new con- • Financial reorganization that tightened stitutional and legal provisions affirming central control, strengthened the central the legitimacy of private ownership and bank, injected new assets, and removed the state’s responsibility to protect pri- nonperforming loans from the balance vate (along with state and collective) sheets of state-owned banks, increased property. the banks’ commercial orientation, and reduced the power of provincial and The new reform efforts were far more sys- local officials to influence lending deci- tematic than earlier initiatives. They were sions (Allen, Qian, and Qian 2008; Yi also far more aggressive, including measures 2010). that imposed substantial costs on large and • Broad embrace of globalization that potentially powerful groups, such as urban transformed China into a major par- state sector workers and state enterprises ticipant in global flows of commodities, inundated with competition from imports capital, and technology (Branstetter following steep reductions in trade barriers. and Lardy 2008). To this end, China They also appear to have had the desired reduced tariffs and other trade barri- effects. Productivity growth in the state non- ers in advance of its 2001 entry into agricultural sector during 1998–2007 was as the World Trade organization, estab- high as that in the nonstate sector (Brandt lished numerous economic zones and and Zhu 2010). Analysis of enterprise-level total factor productivity (TFP) results shows steep improvement in state-sector perfor- 79 The text of this decision is available at http://www. mance. In 1998, the average gap between gov.cn/gongbao/shuju/1993/gwyb199328.pdf, pp. 1286­ TFP levels in state-owned and (more pro- 1303 (Chinese version) and China Daily, Supplement, November 17, 1993 (English translation). Qian and Wu ductive) nonstate firms in 425 manufacturing explain the background and impact of this document subsectors was nearly 30 percent. By 2007, (2003, pp. 35–42). this gap had largely disappeared. (Brandt 80 On labor issues, see Rawski 2006 and Cai 2010. On state enterprise reform, see Holz 2003; Garnaut, Song, and et al., in progress). Aggregate TFP growth Tenev 2005; Yusuf, Nabeshima, and Perkins 2006. during 1998–2007 surpassed growth rates 102 Journal of Economic Literature, Vol. LII (March 2014)

­during the two preceding decades (Xiaodong (suzhi), for which the metric is university Zhu 2012). or postgraduate training. The result—leap- What allowed these new reforms to go frogging a generation of potential leaders forward? Interpretations differ, but several whose main qualification was loyalty to the are prominent. First, reform success per- CCP and to MAO Zedong—surely acceler- suaded growing numbers of policymakers to ated the pace of market-oriented reform. move beyond the 1980s slogan of “planned Strong emphasis on educational attainment economy as the mainstream, with market in recruiting for official positions and Party allocation as a supplement” (jihuajingji wei membership may have reduced the commit- zhu, shichang tiaojie wei fu). Qian (2000) ment of policy elites to planning and state emphasizes the accumulation of experi- ownership.81 Migration of policymakers and ence among China’s leaders, who absorbed administrators from dynamic coastal juris- the lessons of China’s initial reforms, stud- dictions to interior regions eager to replicate ied international transition outcomes, and the economic gains of places like Shenzhen used the resulting knowledge to inform the and Shanghai may have homogenized views evolution of Chinese policy. Rapid improve- within the policy community. Additionally, ment in the quality and penetration of eco- promotion of some of the same individuals nomic research, bolstered by the arrival of to even higher positions in both the CCP graduates trained at leading overseas institu- and government helped to further reinforce tions, may have encouraged policymakers to these trends. address long-standing problems such as the costly conflict between decentralization and 6. Conclusion supporting a large and diverse population of state-owned enterprises. 6.1 China’s Economic Achievement While recognizing the importance of this learning process, the expansion of reform In 1800, China was the world’s largest likely built on important political shifts. national economy by the sheer weight of her Naughton (2008) emphasizes the effect of population. Over the next 175 years, China’s personnel changes among China’s top lead- relative position suffered a long decline due ership. During the 1980s and early 1990s, to her failure to ride the waves of industri- party elders and retired officials retained the alization that swept the world. During the capacity to block measures that threatened 1960s and 1970s, most Chinese had inad- specific interest groups—for example, work- equate diets and no savings. Three and a ers in state-owned firms. Beginning in the half decades of reform have produced a mid-1990s, the death and decline of these genuine leap forward in the size of China’s “veto players” empowered JIANG Zemin, economy and the prosperity of its citizens. ZHU Rongji and their successors to under- The recent boom has reshaped China’s take far-reaching moves that were formerly economic structure, sharply lowering the beyond the reach even of China’s highest importance of agriculture in production officials. and especially employment while raising Several additional factors may have rein- the share of industry and, more recently, of forced this trend. Educational disruption services, and beginning a protracted ­process during the Cultural Revolution decade (1966–76) provided reformers with an accept- 81 Emphasis on educational credentials has created a able rationale for discarding ­seniority-based strong demand for both full- and part-time training pro- promotion in favor of personnel “quality”­ grams, as well as a lively market for forged credentials. Brandt, Ma, and Rawski: From Divergence to Convergence 103 of ­urbanization. Chinese producers and con- To understand the long delay in China’s sumers are increasingly engaged with sophis- response to the new landscape of modern ticated technologies like smart phones and economic growth that unfolded during the high-speed trains. Formerly ­state-controlled ninettenth and twentieth centuries, this and internationally isolated, China’s economy essay has focused on ideology and institu- once again reflects the deep and expand- tional constraints. We view the trajectory ing influence of domestic and global market of China’s twentieth century economy as a forces. gradual and ongoing process of rolling back old and new institutional barriers obstruct- 6.2 Linking China’s Economy with the Past: ing prosperity and growth. We begin by com- Continuities and Departures paring the Qing imperial regime with the China’s growth spurt has stimulated efforts reform-era People’s Republic. 82 to define a “Chinese model” of growth, or 6.2.1 Major Institutional Continuities to establish a “Beijing consensus” of devel- opment-enhancing policies (e.g. Hsu, Wu, Our review reveals substantial areas of and Zhao 2011). Such thinking assumes institutional continuity linking China’s past that China’s economic, political, and social and present. circumstances sufficiently resemble prevail- ing conditions in other low-income nations, Authoritarian system. Major ele- so that application of Chinese policies may ments of institutional continuity begin with produce something akin to recent Chinese China’s authoritarian political system. In outcomes. But the deep historical roots the People’s Republic, as under Qing rule, surrounding important features of China’s ­self-perpetuating elites exercise supreme current institutions and the central role of authority with no formal checks and bal- China’s unusual legacy of human capital ances. Although the Qing memorial sys- undermine this approach. tem and the Communist Party’s practice of We attribute China’s recent economic suc- democratic centralism provide avenues for cess to a combination of beneficial historic lower ranking-individuals to influence policy legacies, recent and past accumulations outcomes, decisions emanating from the of capital, skill, and policy expertise, and throne or politburo are final. Despite the important economic and political changes growing influence of international norms that facilitated the realization of old and new potentials. Despite the success of China’s imperial system in absorbing vast population 82 These challenges are evident in Fukuyama’s recent increases, the administrative, organizational, work, which showcases imperial China as the prototype of an empire with strong state capacity. While recogniz- and entrepreneurial skills, commercial and ing issues such as corruption, Fukuyama largely neglects transport networks, and other developmen- the patrimonial nature and inherent weakness of the Qing tally promising resources visible in the Qing political system as well as efforts to engage in modern state building from the beginning of the twentieth century. To economy proved incapable of generating a explain why high-speed growth occurred only after 1978, rapid and effective response to new opportu- Fukuyama resorts to a more cultural explanation: “What nities arising from the British industrial revo- China did not have was the spirit of maximization that economists assume is a universal human trait.” He goes on lution. If historic accumulation of resources to claim that, “It is far likelier that cultural attitudes towards and capabilities deserves recognition as an science, learning, and innovation explain why China did so important contributor to China’s recent poorly in the global economic race in previous centuries, and is doing so well at the present, rather than any funda- growth, why does China’s boom begin only mental defect in political institutions” (2011, pp. 316–17). in the late 1970s? We disagree on both points. 104 Journal of Economic Literature, Vol. LII (March 2014) and ­practices and the façade of a separate fees, local leaders turned the power of emi- and independent legal structure, China’s nent domain into a new source of revenue tradition of strong official control over the by commandeering farmland with nominal administration of law and justice, especially compensation and reselling it for business over politically sensitive cases, remains use at much higher prices. intact. Today, as in the past, the top echelon of political leaders often decides matters Economic decentralization and local behind closed doors that, in other societies, experimentation. Both Qing and the might be determined by legislative action, People’s Republic combine centralization of legal codes or judicial verdicts. political authority with relatively decentral- ized economies. The Qing economy was a de Personnel, agency and central–local facto market system with private ownership. tensions. To implement central policies, During the prereform decades under the both the Qing and the People’s Republic People’s Republic, China’s planned economy, rely on centrally-managed, merit-based per- though patterned after the Soviet example, sonnel systems. The Confucian approach was far less centralized than the USSR’s, emphasizing “rule of (properly trained, with provincial and local governments con- selected and motivated) men” rather than trolling numerous state-owned enterprises “rule of law” prevails. Both systems rely on and managing substantial resource flows. a combination of ideology and oversight Reforms have increased these decentraliz- to limit the inevitable agency costs associ- ing tendencies, albeit within the context of ated with granting substantial autonomy to a largely market economy in which the state lower-level officials, whose career prospects sector generates less than 30 percent of GDP depend more on outcomes than on adher- (Brandt and Zhu 2010). ence to carefully prescribed procedures. Chinese governments consistently pref- With imperfect monitoring, we observe ace major policy initiatives with local experi- similar agency problems today as under the ments, which form “an essential part of the Qing. Like the Qing, the current regime has central decision-making process” in China implemented vigorous measures to curb today (Xu 2011, p. 1079). Experimentation what the center views as corrupt diversion of continues: in October 2011, four sub-national tax payments intended for the central trea- jurisdictions were authorized to issue provin- sury. The reform efforts of the Yongzheng cial or municipal bonds (http://english/caijing/ emperor (r. 1678–1735) failed to dent “infor- com/cn/2011-10-25/110916003.html). mal networks of local power and influence” or to eliminate “the tax evasion and tax farming Education, human capital and entre- that [had] decreased the level of remittances” preneurship. The historical legacy of to the central treasury (Zelin 1984, p. 307). national civil-service examinations designed These tensions persist: Shue observes that to support the imperial administration rural administration in the PRC both before helped to make pursuit of education a hall- and after the start of reform “perpetuated mark of Chinese society throughout the the contained but unrelenting central–local past millennium. It also promoted remark- struggle characteristic of imperial politics” able cultural homogeneity across China’s (1988, p. 114). Local governments continue vast landscape. Even though PRC empha- to resist Beijing’s efforts to limit the scale of sis on basic education has delivered notable taxation and fee collection. When the center improvements in school attendance and eliminated agricultural taxes and rural school other dimensions of human development, Brandt, Ma, and Rawski: From Divergence to Convergence 105 stocks of human capital­ accumulated before migrants to Thailand, many of whom “came 1949 figure prominently in recent economic . . . almost straight from the farm,” quickly gains. Reflecting long-standing cultural val- came to dominate Thailand’s domestic and ues, three decades of negative financial international commerce. In contrast to Thai returns for graduates,83 school closures and natives, Skinner comments that Chinese suspension of merit-based admissions during migrants hailed from “a grimly Malthusian the Cultural Revolution (roughly 1966–76), setting where thrift and industry were essen- and persecution of intellectuals did not deter tial for survival.” Ideology reinforced this millions of Chinese families from emphasiz- divergence: Chinese struggled for wealth to ing learning and study. Restoration of univer- preserve family and lineage continuity, while sity entrance examinations in 1977 attracted Thai norms frowned on “excessive concern swarms of self-taught candidates. for . . . material advancement.” Differences The legacy of human capital extends in proverbs tell the story: for the Chinese, beyond reverence for education. The room “Money can do all things,” but for the Thai, allowed for small private plots and rural “Do not long for more than your own share” markets under collective agriculture helped (1957, pp. 97, 92, 93, 95). to preserve commercial instincts in the A century later, Chinese migrants display Chinese countryside, which in turn contrib- similar capabilities in Italian city of Prato: uted to the boom that followed the restora- Chinese laborers, first a few immigrants, then tion of household farming. Rapid expansion tens of thousands. . . . transformed the textile of production, employment, and exports hub into a low-end garment manufacturing in millions of “township and village enter- capital—enriching many, stoking resentment prises” relied on China’s deep reserves of and prompting recent crackdowns. . . . [A local rural management capability, highlighting industrialist commented that] The Chinese are very clever. They’re not like other immigrants. what Wright has termed China’s historic . . . [Reporters noted that] what seems to gall “abundance of small-time entrepreneurs” some Italians most is that the Chinese are (1984, p. 325). Comparisons across time and beating them at their own game—tax evasion space draw attention to the coherence and and brilliant ways of navigating Italy’s notori- potential of this organizational repertoire. ously complex bureaucracy—and have created a thriving, if largely underground, new sector Rawski (2011a) and others have remarked while many Prato businesses have gone under that China’s post-1978 boom drew heavily (Donadio 2010). on an informal revival of traditional com- mercial mechanisms that several decades of Alignment of Incentives. The Qing Communist regulation and propaganda had achieved considerable success in aligning endeavored to suppress. incentives among the throne, the bureau- The economic success of Chinese migrants cracy, the gentry, and the masses—all of illustrates the economic potential of these whom sought prosperity and stability. The cultural elements. Nineteenth-century plan era, during which the state called on ordinary Chinese to suppress their desire for better living standards for the sake of “build- 83 According to HOU Fengyun, “large-scale wage ing socialism,” emerges as a historical anom- reductions for high-level mental workers” occurred in 1957, 1959, and 1961, and “mental workers . . . were aly. Following the death of MAO Zedong, mostly excluded” from wage increases in 1959, 1961, 1963 reform policies restored the traditional unity and 1971. Hou describes 1976–90 as an era of “no payoff of objectives, with leaders, officials, and to education.” Apparently referring to the late 1980s, Hou notes that average monthly pay in universities was RMB 57 populace all pursuing, this time not just eco- less than in the food and drink sector (1999, pp. 181–85). nomic security, but also growth. 106 Journal of Economic Literature, Vol. LII (March 2014)

Patronage economy and income with data from the widely studied China inequality. Today, as in imperial times, the Household Income Project (CHIP) survey, absence of legal checks on official power Sicular (2011) shows China’s Gini coeffi- and the consequent uncertainty surround- cient for household income distribution ris- ing property rights compels individuals and ing from 0.40 in 1988—no different from its businesses to seek the patronage of pow- estimated value during the 1930s (Brandt erful individuals or agencies, typically by and Sands 1992, p. 205)—to 0.47 in 1995 and offering gifts, services, or cash in exchange 2002 and then to 0.50 in 2007, with house- for enhanced security and preferential treat- holds in the top decile receiving 34.5 percent ment. In both systems, protection seekers of 2007 incomes. Since the CHIP data appear devote substantial resources to construct- to exclude the highest income earners and ing alliances with incumbent powerholders, are unlikely to incorporate “hidden income,” promising young officials, or well-connected which Wang and Woo (2011, table 7) place at individuals.84 There is also a “top-down” ele- approximately two-thirds of the convention- ment in which official policy nurtures and ally reported total for 2008, a full accounting protects flows of rents that strengthen the would surely push the Gini coefficient well adherence of elite beneficiaries to existing above 0.50, placing China’s income distribu- power structures. Insiders at every level reap tion among the world’s most unequal. Since large benefits: a typical account describes an Wang and Woo find that inclusion of “hid- urban housing official whose family accu- den incomes” more than triples the earn- mulated “as many as thirty-one houses” ings of households in the highest income (AN Baijie 2013). In this case, as in Kuhn’s group, (2011, Table 6), it seems entirely pos- account of an episode from the 1840s, the sible that the share of top earners in China miscreants “operated their business right out today matches or even exceeds comparable of government offices” (2002, p. 90). outcomes of gentry elites during the 1880s, Once in place, these patronage struc- when Chang (ZHANG Zhongli) estimates tures are self-reinforcing and therefore that 2 percent of the population received extremely difficult to dislodge. Just as the 24 percent of overall income (1962, p. 327). Kangxi emperor failed to overcome gentry resistance to a nationwide cadastral survey, 6.2.2 Key institutional departures recent efforts by China’s current leaders “to under the PRC narrow the vast gap between China’s rich and poor” have foundered after encounter- Vision/objectives. Like many of their ing “formidable opponents” in the shape of British contemporaries (McCloskey 2010, “hugely profitable state-owned companies” chapter 10), China’s Qing emperors failed that fiercely resist proposals to limit salaries, to recognize the enormous potential returns reduce their market power, or increase their associated with the Industrial Revolution. contributions to state coffers (Davis 2012). But even if the Qing had grasped the long- These structures contribute to high and term prospects arising from steam engines, rising levels of income inequality. Working railways, and other new technologies, con- cerns that unleashing such forces might disrupt the delicate balance of power and 84 Recent revelations about the family finances of alignment of interests that supported their prominent PRC officials echo historical accounts, for continued rulership might have discour- example in GAO Yang’s account of links between the ­nineteenth-century scholar official Zuo Zongtang and the aged them from pursuing new economic merchant–banker Hu Guangyong (1993). opportunities. Brandt, Ma, and Rawski: From Divergence to Convergence 107

Mao’s China built a military industrial elite recruitment that include multiple chan- complex strong enough to resist external nels of education, wealth or connections. military threats, completing a century-long Along with globalization, urbanization and effort that originated with the Qing self- industrialization, opportunities for eco- strengthening movement. This achievement, nomic gains have greatly widened, absorbing however, imposed huge costs on China’s peo- potential regime opponents into elite ranks ple. DENG Xiaoping’s famous observations (Dickson 2008) and assisting official efforts that “to get rich is glorious” and “it does not to marginalize dissident groups. matter if a cat is black or white as long as it catches mice,” summarized his determina- State capacity. Building on experience tion to harness Chinese energies to elevate accumulated in the administration of iso- living standards, as well as national strength. lated rural areas during China’s protracted This expansion of national goals motivated civil war and in the civil war itself, the PRC pragmatic policies of economic opening and demonstrated unprecedented capacity to expansion to generate economic growth, formulate, implement, and monitor nation- which, under China’s post-1978 reform wide policy initiatives that, for the first time administration, was “seen as a life and death in Chinese history, penetrated directly to the matter for the regime” (Xu 2011, p. 1088). village level. Campaigns to expand school Indeed, the capacity to deliver economic attendance, reduce infant mortality, attack growth and high living standards has become “rightists,” and force villagers into collectives a key source of legitimacy for Communist demonstrated the reach of these new mech- rule in the reform era. anisms. Following the post-1978 restoration of individual incentives and the associated Elite recruitment and absorption of shift toward more market-oriented policies, newly emerging interests. During the often built upon local experimentation, these Ming–Qing era, elite status derived from structures enabled a scaling up of efforts examination success, which required can- that were essential to delivering economic didates and their families to undertake growth. prolonged educational investments. Qing Enhanced capabilities have endowed the gentry resisted efforts to open the door to state with unprecedented leverage over newcomers whose nontraditional mobil- resources. Vast foreign exchange reserves, ity paths threatened to devalue traditional official control over the financial system, Confucian education (Mosk 2011). They sweeping privatization of urban housing and did so with good reason, as the abolition of of state-owned and TVE assets, and wide- the traditional examination system (1905) spread confiscation and reassignment of and the collapse of the Qing dynasty (1911) farmland all illustrate newfound state power, produced a rapid decline in the financial often exercised through local government payoff to Confucian learning. By the late agencies, to accumulate and allocate assets 1920s, the returns to “modern” education on an immense scale, partly to promote had far surpassed the financial benefit from growth and efficiency, but also to benefit Confucian learning among employees of the powerholders in ways that widen inequality Tianjin–Pukou railway (Yuchtman 2010). and may even retard economic development. Following the MAO years, which enforced even stricter ideological limits on its politi- Globalization. Foreign military power cal elites and actively persecuted excluded compelled the partial opening of China’s groups, the reform-era PRC has broadened nineteenth-century economy. Qing elites 108 Journal of Economic Literature, Vol. LII (March 2014) sought to limit foreign activity; individual source of more than three-fourths of China’s foreigners, as well as their products and ­reform-era increase in per capita output technologies, faced powerful informal (Zhu 2012, Table 1); at the micro level, lead- opposition by local gentry. China’s initial ing international firms in a growing range reform policies resembled those of their of industries find themselves facing intense Qing predecessors, confining foreign com- pressure from rising Chinese competitors. merce to a few localities. But over time, Amidst its unprecedented growth spurt, Chinese reform deepened, leading to the China’s economy remains hugely inefficient. gradual dismantling of the fundamen- Improved performance among state firms tal institutional structure of the planned has not closed the huge gap in the returns economy. The prolonged era of peace and to capital favoring the non-state sectors order in the last few decades—a sharp con- (Brandt and Zhu 2010). Even in manufactur- trast with China’s Republican era (1912– ing, the leading source of rising productiv- 49) marked by two world wars, Japanese ity, Hsieh and Klenow (2009) find enormous aggression, and protracted civil strife— inefficiency in the allocation of labor and provided time and space for gradual reform. capital among firms withinnarrowly-defined ­ The peaceful and prosperous rise of Japan ­subsectors (see also Brandt, Van Biesebroeck, and several smaller East Asian economies and Zhang 2012). Large-scale misalloca- offered powerful models of ­export-oriented tion arises from systematic policy distortions success. Following their lead, China’s favoring state-connected­ entities and urban reforms have moved the PRC from extreme residents, the survival of plan remnants in isolation to global engagement, achieving an increasingly marketized economy, and trade ratios that dwarf those of other major persistent adherence to widely discred- economies,85 absorbing large inflows of for- ited industrial policies. Perhaps the central eign investment, and, most recently, emerg- source of inefficiency is a political system ing as a substantial originator of outbound that uses control over resources, especially foreign direct investment.86 land and credit, to maintain patronage net- works and mobilize support for aspiring 6.3 Unfinished Business, leaders. A central aspect of these inefficien- Uncertain Prospects cies is the redistribution of income and assets (land, urban housing, and market power) to As China’s long boom approaches the regime insiders, often at the expense of the end of its fourth decade, a new leadership economy’s most dynamic sectors. group has inherited a powerful, yet deeply Widespread agreement about the flawed, economy. Despite nagging ques- strengths and weaknesses of the pres- tions about the reliability of official data, the ent system conceals divergent expecta- reality of immense growth and dynamism is tions about China’s economic prospects. beyond doubt. At the macro level, academic Assuming domestic political stability and studies identify productivity growth as the continued access to overseas markets, Perkins and Rawski (2008) anticipate that China can maintain real annual growth 85 Official data for 2009–11 show annual trade ratios of 44.2, 50.2 and 50.0 percent (Yearbook 2012, pp. 44, 234). in the 6–8 percent range to 2025. Others 86 In 2012, China’s outbound overseas direct investment question the assumption of political sta- reached $77.2 billion, while incoming FDI amounted to bility. Citing evidence of corruption, pre- $111.7 billion (see http://www.chinadaily.com.cn/business/ 2013-01/16/content_16125737.htm and http://www.cnbc. dation, and rent seeking, Pei argues that com/id/100382634 2012 ). “the economic costs of ensuring the CCP’s Brandt, Ma, and Rawski: From Divergence to Convergence 109

­political monopoly . . . though hidden, are enterprises.87 Without transparency or over- real, ­substantial, and growing . . . . ,” lead- sight, the vast resources held by a small elite ing to “a set of self-destructive dynamics” group that is partly hereditary, tightly net- that endanger China’s “most vital political worked, and intensely factionalized invites institutions” (2006, p. 206). malfeasance in pursuit of personal gain or Major developments of the past two political advantage. decades lend credence to Pei’s concerns. Beijing’s tight control over domestic media The reform push of the mid-1990s, while and foreign journalists cannot suppress evi- certainly increasing the grip of market dence of rampant corruption at all levels. A forces, also delivered a dramatic increase in well-informed international business execu- the central government’s control over fiscal tive estimates that illicit payments absorb and financial resources. 30–40 percent of outlays on public construc- Efforts to centralize fiscal and adminis- tion projects (2012 interview). Chinese press trative powers have coincided with changes accounts report that “the departments of in leadership thinking that have diminished government services, government project core or “commanding heights” that the CCP bidding, and . . . government procurement sees as essential to maintaining control, and . . . have long been rife with bribery” and therefore reserves for state-owned enter- that “services at local governments . . . are prises answerable to top leaders. The CCP provided only after gifts are offered to offi- initiated China’s reform process by relin- cials . . . [such as] banquets, entertainment, quishing tight control over farming. As the shopping cards . . . and money” (LI Wenfang reforms unfolded, a succession of policy 2012). changes punctuated the steady contraction of Corruption threatens to undermine this core—the sectors and firms that populate China’s merit-based system of appointment what Pearson (2011, pp. 28–35) describes and promotion. Reports surrounding the as the “top tier” of China’s economy: ter- recent ouster of a “senior provincial leader” mination of the material allocation system, include charges of “selling ­lower-level the transformation of numerous industrial party posts” (Spegele 2012). Nepotism is ministries into trade associations, the grant- reportedly commonplace “in government ing of import–export licenses to thousands departments and state-owned enterprises” of companies, and so on. The list of sectors (McGeary 2012). Against this background, and activities cut off from state support and new findings indicating that promotions at generally expected to fend for themselves the upper levels of China’s hierarchy reflect amid market competition—Pearson’s “bot- factional ties, educational qualifications, and tom tier”—now extends to large segments of tax delivery rather than success in managing foreign trade, construction, domestic com- economic growth take on added significance merce, manufacturing, road transport, and (Shih, Adolph, and Liu 2012). urban housing, as well as most of the urban While such abuses partly reflect what labor force. Shleifer and Vishny (1998) call the “grabbing This combination of centralizing reforms hand,” there is a larger pattern of systematic and streamlining the state-controlled core efforts to secure and redistribute resources has concentrated massive power and wealth in the hands of the top leadership and the government and party personnel who man- 87 China currently has over 120,000 state enterprises, mostly managed by provincial and local offices of the age the official hierarchy and operate China’s ­State-owned Assets Supervision and Administration one hundred-odd centrally-controlled state Commission (ZHANG Wenkui 2012). 110 Journal of Economic Literature, Vol. LII (March 2014) in order to preserve and increase cohesion Thus far, the momentum of China’s long within the ruling groups and their associates boom, buoyed by high levels of personal sav- and supporters. The institutional structures ing, has pushed aside these costs and other surrounding the selection, approval, financ- seemingly daunting obstacles. External ing, and execution of investment represent a events, especially the advance of globaliza- major arena for such activity. tion, with the attendant expansion of over- Access to investment opportunities, credit, seas markets, international supply chains, and land are routinely used to buttress the and transnational flows of capital and tech- current regime and its allies. Official approval nology, have provided enormous benefits. (pizhun), an essential step in business for- Most important, perhaps, is the robust devel- mation and expansion, may be reserved for opment of China’s nonstate economy, where well-connected insiders, especially in sectors steep expansion of productivity and retained promising high profits. China’s state-owned earnings has sustained rapid growth despite banks specialize in lending to favored cli- the distortions, graft, and rent seeking that ents, particularly state-owned enterprises, bedevil the public sector. at below-market rates and with lax repay- Today, as in the mid-1990s, costs and pres- ment provisions. Allocation of land is simi- sures appear to be on the rise. Economic larly tilted in favor of official associates and rebalancing and management of corruption clients. As in imperial times, the patronage represent areas where the state has failed to economy is much in evidence: relatives and attain its own widely advertised objectives. associates of top leaders readily parlay per- In both instances, policy failure may reflect a sonal connections into lucrative business clash between publicly-stated objectives and positions. As in the past, private entrepre- the inner workings of China’s elite politics neurs invest in informal security umbrellas and patronage economy. Although Beijing to deflect arbitrary disruption of commercial has vowed to lessen the economy’s depen- activity.88 dence on exports and investment since the Although this system is not without advan- late 1990s, the GDP share of fixed invest- tages—as when China’s government, by ment, already at unprecedented levels, con- ordering state-owned banks to dispense tinues to rise. Recent infrastructure failures, massive loans, achieved a V-shaped recovery such as the 2011 high-speed train disaster, following the 2008 financial crisis, the cost highlight the costs of a system that combines of such arrangements, although difficult to massive investment with rampant corrup- specify, is surely high. India’s economy, which tion. Objections from state-run companies, is no paragon of efficiency, has approached which constitute “some of the most formi- Chinese growth rates despite investing a dable opponents of change,” apparently far smaller fraction of GDP. Pouring cheap stymied a major effort by the outgoing HU credit into the state sector increases financial Jintao-WEN Jiabao administration to “nar- risk, fuels outsized seasonal fluctuations, ele- row the vast gap between China’s rich and vates capital intensity, contributes to sluggish poor” and thus spur the growth of consump- job creation, and aggravates long-standing tion (Davis 2012). unemployment problems (Rawski 2002). Repeated announcements of anticorrup- tion drives—most recently in the form of experiments requiring local officials in sev- 88 A typical description notes that “the price that private eral Guangdong districts to divulge their entrepreneurs had to pay to ensure political protection was in the form of de facto extortion on the part of cadres“ (Tsai personal assets (ZHENG Caixiong 2011), 2002, p. 128). have produced no visible results: China’s Brandt, Ma, and Rawski: From Divergence to Convergence 111 score in Transparency International’s corrup- • If, as is widely argued both within and tion perceptions index was the same in 2010 outside China (e.g. World Bank 2012), as in 2001, as was its relative position: better continued dynamism will require sub- than India or Russia, but worse than Turkey stantial reform, is China’s current politi- or Brazil. cal equilibrium sufficiently flexible to Inability to implement policy changes withstand large-scale dissolution of rents advanced by top leaders raises the possibil- that might accompany a steep reduc- ity that China has moved from a flexible and tion in the share of credit reserved for effective system of “authoritarian resilience” government projects and state-owned (Nathan 2003) to a new stage in which clashes enterprises? Or a ­no-holds-barred effort among inner-party factions and powerful to uproot corruption such as Hong interest groups obstruct efforts to address Kong accomplished during the 1970s widely-recognized difficulties (Li 2012). (Manion 2004)? Equally noteworthy is growing evidence • China’s government channels growing of disaffection among successful participants resource flows to pursue strategic eco- in the Chinese system, many of whom are nomic objectives, including long lists of reportedly moving funds offshore (Frangos, specific products (e.g.­large-scale pas- Orlik, and Wei 2012) and considering over- senger aircraft and engines) and technol- seas migration. “You can feel the anxiety of ogies (e.g. nuclear power generation). the ultra-wealthy and even of the political Will state management of resource and elite. They feel there’s no security for their development resources generate ineffi- wealth or possessions, and that their assets ciency and distortions on the same scale could be taken away at any time. Nobody feels that is evident in state-influenced alloca- protected against the system anymore.” 89 tion of financial resources? Might such These observations raise a series of distortions, together with the conse- questions: quences of graft and rent seeking, limit resource flows available to dynamic sec- • Can the current institutional struc- tors of China’s economy, with negative ture continue to support rapid growth consequences for aggregate productiv- as population aging, a declining labor ity growth? force, and rebalancing efforts lower • Could the outsized returns available to household saving rates? As rising wages individuals and enterprises connected erode long-standing comparative advan- to China’s power elite spark a diversion tage in labor-intensive industries? As of talent from innovation and enterprise technological advance eliminates easy into politics and rent seeking, with neg- gains from absorbing imported equip- ative consequences for incentives and ment and manufacturing processes? hence for economic performance? As limited enforcement of intellectual property rights inflicts growing damage Such concerns are not new. Writing in the on domestic innovators and discourages mid-1990s, two prominent China specialists FDI? If international recession and expressed doubts about the system’s viability. protectionism slow the growth of world Naughton wrote that trade? The political system is simply not adequate to 89 Anderlini and Waldmeir 2011, quoting an informant cope with the challenges that confront it. The whom they describe as a “publishing and fashion mogul.” dysfunctional political system might prevent­ 112 Journal of Economic Literature, Vol. LII (March 2014)

the Chinese people from quickly building While striving to avoid this error, we must the kind of future system they would prefer; also recognize that, as is painfully evident it might even jeopardize the achievements of from Japan’s recent history, past success can- recent decades (1995, p. 310). not guarantee the future efficacy of institu- Lardy concluded his 1998 study by empha- tional structures. sizing the long-run importance of Careful historical study must figure promi- nently in serious efforts to grapple with these . . . restructuring the banking system, particu- and many other issues surrounding the his- larly eventually allowing the emergence of pri- vate banks. . . . [even though this] will require toric path and future prospects for China’s the state and the party to surrender a great economy. This review reveals powerful com- deal of economic and political power. . . . In the plementarities between efforts to fathom the long run . . . delay is an almost certain path to structures and mechanisms undergirding a lower pace of economic growth, a declining China’s recent economic advance and studies rate of job creation, and thus an even greater challenge to political stability (pp. 221–22). of China’s imperial past. Our survey demon- strates the insights that historical study can These deeply knowledgeable authors (and bring to the analysis of contemporary affairs. many others) underestimated the strength Several years of struggling to comprehend an of China’s unconventional system. Although immense body of historical scholarship has there was no political reform, no major finan- reinforced our conviction that contemporary cial restructuring, no reduction in the domi- developments can also provide fresh per- nance of China’s big four state-owned banks, spectives for addressing the vast storehouse and no retreat from state–party control over of materials on the history of what once was financial institutions and resources, China’s and soon will become the world’s largest economy has continued its powerful advance national economy. in the face of major shocks from the Asian financial crisis of the late 1990s and the 2008 References global financial crash. Acemoglu, Daron, Simon Johnson, and James A. Rob- China’s recent trajectory demonstrates the inson. 2005. “Institutions as a Fundamental Cause capacity of a dynamic economy to prosper of Long-Run Growth.” In Handbook of Economic Growth: Volume 1A, edited by Philippe Aghion and despite heavy burdens. China’s boom, like Steven N. Durlauf, 385–472. Amsterdam and San earlier growth spurts in Japan and Korea, Diego: Elsevier, North-Holland. confirms the wisdom of Schumpeter, who Acemoglu, Daron, and James A. Robinson. 2012. Why Nations Fail: The Origins of Power, Prosper- insisted that static efficiency was neither nec- ity, and Poverty. New York: Random House, Crown essary nor sufficient for long-run dynamism Publishers. (1942, p. 83). It is equally true, however, that Allen, Franklin, Jun Qian, and Meijun Qian. 2008. “Chi- na’s Financial System: Past, Present, and Future.” In changing circumstances may undermine the China’s Great Economic Transformation, edited by effectiveness of institutional structures. As Loren Brandt and Thomas G. Rawski, 506–68. Cam- we have seen, the institutions of China’s Qing bridge and New York: Cambridge University Press. Allen, Robert C. 2009. The British Industrial Revo- dynasty supported immense demographic lution in Global Perspective. Cambridge and New and geographic expansion, but proved inca- York: Cambridge University Press. pable of responding constructively to new Allen, Robert C., Jean-Pascal Bassino, Debin Ma, Christine Moll-Murata, and Jan Luiten van Zanden. challenges arising from nineteenth-century 2011. “Wages, Prices, and Living Standards in China, globalization. 1738–1925: In Comparison with Europe, Japan, and With the aid of hindsight, we can see that India.” Economic History Review 64: 8–38. An, Baijie. 2013. “Official Whose Family Owns pessimistic predictions of the 1990s failed 31 Houses Arrested.” China Daily, January 15. to comprehend China’s dynamic potential. Anderlini, Jamil, and Patti Waldmeir. 2011. “Chinese Brandt, Ma, and Rawski: From Divergence to Convergence 113

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