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

C hina’s enormous boom, now well into its

fourth decade, invites inquiry into the
historical antecedents of an unprecedented
shortage of capable managers and accoun-
tants? How did millions of firms conduct
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
Europe and publishing in English are presented Western dynamism.4
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, Saitō, 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,
in so much that no empire, no sect, no star
1279), which is essential because specialists 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 NAIT​ O​¯   K​  o​
¯ n
 an. 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. The formal 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
17 Qing records present grain quantities and silver val-
households that owned land could obtain
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 m ­ etals 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.
22 Gardella reports calculations by WU Chengming
in the case of workmen selling their services
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, SAIT​  ¯  
O​
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
developed in such a way as to make profitable
that average Chinese per capita income dur- 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-
26 See Elman
disposition toward, and contribution to, 27 Pomeranz
2005 for an alternative interpretation.
(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

­ owerful state may threaten the security of

p 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.
For an easy life, no need to build a mansion:
cient tax revenues to finance these activities as 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:
In books there are girls with faces of jade.
tions were primarily selected from success- 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

i­ mperially-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 t­ axation,
supervisory layers increases agency costs

37 While agency costs constrain the ability to collect for-

36 A2010 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.
39 The Qing monetary system included multiple silver
capita terms (Liu 2005). While the Song fig-
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)

Kilograms of rice
17,500 – – 15

15,000 –

12,500 – – 10
10,000 –

7,500 –
– 5
5,000 –

2,500 –

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

61 1

11
91

43
41
40
39

42

03
66

12

18 8

93
52

44

1 8
18 849
17 2
62

46

08
84
45
25

47

18 5
18 –6
3

4
8

–7

19
17

18
18
18

18

19
17

18
18

18
16

18

18
16
16

18

19
18

18

50

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.

a­ dministrative 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 a­ ctivity (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 Y​ u​  ¯ j i (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-
istrate with his duties; from the maintenance
Although Qing ideology celebrated the bene-
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
duties, as well as on their support in the lead-
revenue and the lack of fiscal provision for
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-
enue which normally would have passed to the
The ubiquity of irregular taxation explains
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
43 Ch’ü (1962) offers a vivid portrayal of county clerks
officials solicited gifts from their bureau-
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- ­ rotect him from predatory local government
p
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)
was often dependent on a powerful local fig-
the “model” and, we believe, of the system
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.
50 Recent research has questioned the link between ris-
inflicted further shocks.48 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
51 Johnson cites multiple descriptions of the large scale
became de facto local revenue following
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 Tom​  o​ ¯  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).
53 Figures come from the Nankai quantity indexes of
4.2.2 Economic Change and Its Limits: The
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

­ arriers, which affected the expansion of rail-

b 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
was pulled down and the Chinamen that did
opium trade. When newcomers imported
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 arose when 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)

­ emanding complete solidarity of interest in

d 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 K ­ uomintang-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​ ¯ r u 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
57 Foreign-owned treaty port firms shared the Chinese
pressure enterprises located in Shanghai’s
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; Mansh​   ¯ 
​
u
  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
62 Liu (2005) highlights the parallel between the early
reputation for efficient, apolitical operation.
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
67 The dwindling trade ratio and near-elimination of
the ­CCP-controlled political order, the rents
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.
68 Official data show that gross capital formation
economy (Naughton 2008). These efforts
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
73 Xu (2011, p. 1144) emphasizes the importance of
multinational manufacturers to set up
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 p ­ rocesses.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).
80 On labor issues, see Rawski 2006 and Cai 2010. On
this gap had largely disappeared. (Brandt
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)

­ uring the two preceding decades (Xiaodong

d (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 s­ eniority-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 c­ apital 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
industrialist commented that] The Chinese are
rural management capability, highlighting 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-
ously complex bureaucracy—and have created
potential of this organizational repertoire. 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 within n ­ arrowly-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
85 Official data for 2009–11 show annual trade ratios of
China can maintain real annual growth
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

­ olitical monopoly . . . though hidden, are

p 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
87 China currently has over 120,000 state enterprises,
government and party personnel who man-
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 Anderliniand 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 p ­ revent
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
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