The Incentive Effect of Abolishing China’s Imperial Civil Examination on the Adoption of Western Technology: A Regression Discontinuity Design BAI, YING * Hong Kong University of Science and Technology August 2013 Abstract Compared with the rigid political system of feudal Europe, Imperial China was a less oligarchic society that employed a civil examination to select scholar bureau- crats as ruling elites. This institution created a negative incentive to adopt West- ern technology and establish modern enterprises. Using prefectural-level panel data for the 1896-1910 period, this study compares the effects of the chance to pass the civil examination on the establishment of private firms adopting Western technology before and after the abolition of the examination system. Its findings show that prefectures with a higher quota of successful candidates tended to es- tablish more such firms once the examination system was abolished. As higher quotas were assigned to prefectures whose agricultural tax in the Ming Dynasty exceeded 150,000 stones, we adopt a regression discontinuity design to resolve the potential endogeneity, find the results to remain robust. Key Words: Incentive, Western Technology, Imperial Civil Examination JEL Code: N95, O10, O31 _______________________________ * Division of Social Science, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong. Email: [email protected] I. Introduction Institutions and the incentives they create determine the economic outcomes of a soci- ety (North, 1990, 1994). The recent literature suggests that good institutions, including secure property rights (Acemoglu and Johnson, 2005; North and Thomas, 1973), efficient legal sys- tems (La Porta, Lopez-de-Silanes, Shleifer and Vishny 1997, 1998), and fewer barriers to en- try or the absence of oligarchies (Acemoglu, 2008; Acemoglu, Cantoni, Johnson and Robin- son, 2011; Olson, 1982), are correlated with better economic performance. Institutional roles have taken center stage in explaining why some regions, particularly Western Europe, experi- enced rapid technological progress and an unprecedented period of sustained growth from the 16th century onwards, which has shaped today’s global income distribution (Acemoglu, John- son and Robinson 2001, 2002, 2005; Galor, Moav and Vollrath 2009). In the literature on new institutional economics, medieval Europe is regarded as an extremely oligarchic society is which political power rested in the hands of a small landed aristocracy and there were explicit entry barriers for other groups. Medieval England, for in- stance, was characterized by a rigid class system and a small landed nobility that dominated the sphere of politics. Under this rigid political system, the rising merchant class had no chance of becoming a ruling elite or sharing political power. Political reforms, such as those that took place in the wake of the 1688 Glorious Revolution in England and the French Revo- lution in the 19th century, removed many of the legal barriers protecting the ruling nobility (Acemoglu, Cantoni, Johnson and Robinson 2010). These institutional changes also intro- duced the protection of property rights and equity before the law, which paved the way for the Industrial Revolution and sustained economic growth (Acemoglu, Johnson and Robinson 2005; Jones 1981; De Long and Shleifer 1993; North and Thomas 1973). This body of litera- 1 ture suggests that the rigidity of the former system compelled economic elites to enrich them- selves and then demand and obtain favorable institutions. In late Imperial China, in contrast, political power was much more diffused, and the society less oligarchic. A large part of the ruling class – scholar bureaucrats – did not have hereditary positions, but were selected on the basis of the imperial civil examination. There was no “effective legal barriers to status mobility,” according to Ho (1976: 54). Historical evidence shows that the land gentry and merchants translated “their economic and social power into cultural and educational advantages that enabled mainly the sons of gentry and merchants to pass the civil examinations” (Elman 2000: xix), thus allowing these elites to ob- tain political power through the political system (Elman 2000). Compared with the European feudal system, this institution provided the Chinese elites with great incentives to invest in a traditional education and take the civil examination. The knowledge required to pass the ex- amination focused on memorization of the Confucian classics and other less productive do- mains (Jones 2008; Yuchtman 2009). Hence, the Chinese elites had few incentives to study other subjects, such as mathematics and science, which played key roles in launching the In- dustrial Revolution and a period of sustained economic growth in Europe (Clark and Feenstra, 2003; Huff 2003; Lin 1995). This paper examines the negative incentive effect of the civil examination system on growth-promoting activities and the adoption of advanced Western technology by exploring the effect of the system’s abolition.1 The main empirical difficulty is that the abolition was universal, with no regional variation in policy implementation. To better understand the adop- tion of Western technology that resulted from the examination system’s abolition, we derive a 1 The decision to abolish the civil examination was announced on January 13, 1904, and it was officially abol- ished on September 2, 1905. 2 simple model incorporating two choices open to Chinese families: to adopt Western technol- ogy and establish a modern firm or to invest in preparation for the civil examination. In this model, it is assumed that families with a greater chance of passing the examination would be less likely to adopt Western technology and that these families would tend to establish more modern firms after its abolition. Accordingly, the regions with the greatest numbers passing the examination should be the most affected, which makes it possible to employ a difference- in-differences (DID) method to identify the causal effect of abolishing the civil examination on the adoption of Western technology. We exploit the variation in the probability of passing the examination among prefec- tures – a level that falls between the provincial and county levels. To control the regional composition of successful candidates, the central government allocated a quota of successful candidates to each prefecture.2 In terms of the chances of individual participants, there were great inequalities among regions (Chang 1955). Using the number of private industrial firms above a designated size, with mechanization as a proxy for the adoption of Western technol- ogy, we compare the effects of these quotas on the establishment of private modern enterpris- es before and after the abolition of the examination system. Our empirical results show that the prefectures with a higher quota tended to establish more of these enterprises once the de- cision to abolish the examination system was taken on January 13, 1904. However, it is possible that the quotas are correlated with other omitted variables, such as economic prosperity or Confucian culture, whose effects may also have changed after the system’s abolition. To correct such biases and resolve the potential endogeneity, we em- 2 China’s civil examination system included three stages of testing: a licensing examination in the prefectural capital, a qualifying examination in the provincial capital, and an academy examination in the national capital, with re-examination in the imperial palace. Only candidates who were successful in the lower-level examina- tions were eligible to sit for the higher levels. The central government allocated a quota of successful candidates in the licensing examination to each prefecture and county, whereas the quota for the higher level examination applied to the provinces. 3 ploy a regression discontinuity design, and find our results to remain robust. In the Ming Dynasty (1368-1643), the prefectures whose agricultural tax exceeded 150,000 stones3 were classified as the most important. Higher quotas were allocated to the most important prefec- tures in the early Qing Dynasty (1644-1910). Mid-way through the period, a new rule for classifying regions by importance was adopted, but the quotas remained stable throughout the Qing Dynasty. This study makes three contributions to the literature. First, it enhances our under- standing of the role played by institutions in economic development. Extant studies find oli- garchic societies to erect entry barriers, which creates inefficiency and induces decline in the long term (Acemoglu 2008). In this paper, we propose that in non-democratic societies, more oligarchy may lead to elites without political power exploiting other economic opportunities and attempting to change the political system through wealth. Less oligarchic societies, in contrast, provide incentives to join the political game, and thus other economic opportunities are forgone. Second, this study sheds light on the reasons for the great divergence in technological expertise and per capita income seen across the globe in the past five centuries. A multitude of hypotheses, ranging from factor endowments and natural resources (Jones 1981; Diamond 1997; Sachs and Warner, 1995) to cultural and scientific traditions (Weber, 1930, 1964), and political and economic institutions (Acemoglu, Johnson and Robinson 2001, 2002, 2005; Galor, Moav and Vollrath 2009), have been proposed. We