Asia’s Little Divergence: State Capacity in China and Japan before 1850
Tuan-Hwee Sng and
No 2014-6, CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University
This paper explores the role of state capacity in the comparative economic development of China and Japan. Before 1850, both nations were ruled by stable dictators who relied on bureaucrats to govern their domains. We hypothesize that agency problems increase with the geographical size of a domain. In a large domain, the ruler's inability to closely monitor bureaucrats creates opportunities for the bureaucrats to exploit taxpayers. To prevent overexploitation, the ruler has to keep taxes low and government small. Our dynamic model shows that while economic expansion improves the ruler's finances in a small domain, it could lead to lower tax revenues in a large domain as it exacerbates bureaucratic expropriation. To test these implications, we assemble comparable quantitative data from primary and secondary sources. We find that the state taxed less and provided fewer local public goods per capita in China than in Japan. Furthermore, while the Tokugawa shogunate's tax revenue grew in tandem with demographic trends, Qing China underwent fiscal contraction after 1750 despite demographic expansion. We conjecture that a greater state capacity might have prepared Japan better for the transition from stagnation to growth.
Keywords: Comparative Institutional Analysis; Geography; Principal-Agent Problem; Institutions and Growth (search for similar items in EconPapers)
JEL-codes: D73 N15 N40 O43 P52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-gro, nep-his, nep-pbe and nep-sea
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