Institutions and Chinese Economic Development: A Comparative Historical Approach [1 ed.] 1032063904, 9781032063904

Table of contents :
Cover
Half Title
Series Information
Title Page
Copyright Page
Table of Contents
Preface
1 Introduction
Interpreting the Chinese Miracle
The Analytical Framework
Theoretical Ground and Related Literature
Focus On the Core Institutions
Comparison of Institutional Paths
Importance of International Settings
Notes
Bibliography
2 Core Institutions in China and England Before the Industrial Revolution
Core Institutions as the Ultimate Cause of the Divergence
England in the 18th Century
China in the 18th Century
The Evolution of the Core Institutions in Pre-1750 England
Initial Setup and Early Developments
Incentive Mechanism and Subsequent Developments
The Evolution of the Core Institutions in Pre-1750 China
Initial Setups and Early Developments
Incentive Mechanism and Subsequent Developments
Notes
Bibliography
3 Core Institutions and the First Industrial Revolution
The Industrial Revolution in Britain
Expansion of the “Useful Knowledge”
The Agents of the Industrial Revolution
Patent Rights for Individuals
Lack of Techno-Economic Breakthrough in Pre-1750 China
A Narrow Knowledge Base
The Missing “New Men”
Upward Mobility Verses Legal Rights
Notes
Bibliography
4 The Chinese and Japanese States in the 19th Century
The Role of the State for Latecomers’ Economic Catch-Up
The State’s Additional Role in the New International Settings
The Quality of the State
Comparing the Chinese and Japanese States in the 19th Century
The Chinese State Institutions and the Dynastic Cycles
Lack of Autonomy
True Autocracy and the Emperor’s Personal Rule
The Incentive Mechanism Embedded in the State Institutions
The Dynastic Cycles
The Development of the Japanese State Institutions
“Pseudo Autocracy” and Reliance On Written Rules
Complete Autonomy
The Incentive Mechanism Embedded in the State Institutions
Notes
Bibliography
5 Externally-Induced Industrial Developments in Qing China and Meiji Japan
The Success of Industrialization in Meiji Japan
A State With Developmental Capability
Domestic Source for Capital Formation
Central Coordination and Self-Reliance
Government-business Relationship: Separable Entities
The Role of State Enterprises
Government Assistance for Private Companies
The Failure of Industrialization in Late Qing China
A State in Frailty
Loss of Central Control Over Capital Supply
Uncoordinated Programs and Foreign Dependency
The Government–business Relationship: Fusion of Roles
Personalized Channels for Sponsoring Modern Enterprises
The Emergence of Official Entrepreneurs
Institutional Changes in Meiji Japan and Late Qing China
Meiji Japan: Moving Towards Pluralistic Institutions
Late Qing China: Persistence of Absolutism
Notes
Bibliography
6 The Chinese Miracle: Economic Growth in Contemporary China
Strong State Leadership for Economic Modernization
A State in a Cyclical Upswing
Central Coordination
The Open-Door Policy
State Enterprises and Local Governments as Major Players
Improvements in Economic Liberty
Re-establishment of Private Ownership
Short Falls in Property-Rights Development
Favorable External Conditions
Two External Factors: Technologies and Globalization
Meiji Japan, the Asian Tigers and Contemporary China
Notes
Bibliography
7 Prospects of the Chinese Economic Development
The Differences in the State-Led Developments
State Institutions at the Root of the Differences
South Korea and Taiwan
Contemporary China
State Autonomy Matters
Sustainable Growth in Doubt
Institutional Changes and the Dynastic Cycles
The Tenacity of the Chinese Core Institution
Reforming the State Institutions
Notes
Bibliography
Index

Citation preview

Institutions and Chinese Economic Development

China’s rise as an economic power has posed some challenging questions: how did China achieve GDP growth that was even faster than the Four Asian Tigers? Is the “Chinese model” superior? Why hasn’t the rapid economic growth lead to democracy in the country as many observers expected? And can China sustain its rapid economic growth with its existing social system? Institutions and Chinese Economic Development:A Comparative Historical Approach explores these questions by studying the historical relationship between institutions and economic development in China, drawing comparisons with England, Japan and other Asian economies as appropriate. The investigation focuses on several junctures in China’s economic development: the starting point of the divergence between China and the West; the externally-​provoked industrial development in the late 19th century; and the contemporary Chinese Miracle. The analysis foregrounds the role played by Chinese institutions and examines their effects on both the country’s failure to industrialize in the past and its economic achievements in recent times. The book also asks whether, without reform to the existing state institutions, China might still be subject to the historical dynastic cycles today, despite its recent economic success. This work is of great interest to students and scholars of the Chinese economy, economic history and institutional economics, as well as comparative history and Chinese studies more broadly. Li Tan is a retired economist and former senior research analyst at a large financial company in New York. Holding a Ph.D. in economics, she has also worked at economic forecasting firms and taught economics at universities in the USA.

Routledge Explorations in Economic History Edited by Lars Magnusson Uppsala University, Sweden

The Economic Development of Europe’s Regions A Quantitative History Since 1900 Edited by Nikolaus Wolf and Joan Ramón Rosés Family Firms and Merchant Capitalism in Early Modern Europe The Business, Bankruptcy and Resilience of the Höchstetters of Augsburg Thomas Max Safley An Economic History of Famine Resilience Edited by Jessica Dijkman and Bas van Leeuwen Modern Advertising and the Market The US Advertising Industry from the 19th Century to the Present Zoe Sherman A Global History of Money Akinobu Kuroda An Economic History of Regional Industrialization Edited by Bas van Leeuwen, Robin C. M. Philips and Erik Buyst The Political Economy of International Commodity Cartels An Economic History of the European Timber Trade in the 1930s Elina Kuorelahti Paper and the British Empire The Quest for Imperial Raw Materials, 1861–​1960 Timo Särkkä Institutions and Chinese Economic Development A Comparative Historical Approach Li Tan For more information about this series, please visit www.routledge.com/​series/​ SE0347

Institutions and Chinese Economic Development A Comparative Historical Approach Li Tan

First published 2022 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10158 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2022 Li Tan The right of Li Tan to be identified as author of this work has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-​in-​Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-​in-​Publication Data A catalog record has been requested for this book ISBN: 978-​1-​032-​06390-​4 (hbk) ISBN: 978-​1-​032-​06391-​1 (pbk) ISBN: 978-​1-​003-​20204-​2 (ebk) DOI: 10.4324/​9781003202042 Typeset in Bembo by Newgen Publishing UK

Contents

Preface  1 Introduction 

Interpreting the Chinese Miracle  2 The analytical framework  5

vii 1

2 Core institutions in China and England before the Industrial Revolution 

18

3 Core institutions and the first Industrial Revolution 

49

4 The Chinese and Japanese states in the 19th century 

78

Core institutions as the ultimate cause of the divergence  18 The evolution of the core institutions in pre-​1750 England  24 The evolution of the core institutions in pre-​1750 China  32 The Industrial Revolution in Britain  49 Lack of techno-​economic breakthrough in pre-​1750 China  61 The role of the state for latecomers’ economic catch-​up  78 The Chinese state institutions and the dynastic cycles  85 The development of the Japanese state institutions  97

5 Externally-​induced industrial developments in Qing China and Meiji Japan 

107

6 The Chinese Miracle: Economic growth in contemporary China 

138

The success of industrialization in Meiji Japan  108 The failure of industrialization in late Qing China  118 Institutional changes in Meiji Japan and late Qing China  130

Strong state leadership for economic modernization  138 Improvements in economic liberty  155 Favorable external conditions  160

vi Contents

7 Prospects of the Chinese economic development  The differences in the state-​led developments  170 State institutions at the root of the differences  174 Sustainable growth in doubt  185 Institutional changes and the dynastic cycles  192

Index 

170

202

Preface

I have been working on this book, part-​time or full time, in the past ten years or so. It is an effort to explain China’s economic development from institutional perspectives.The associated goal is to gain a better understanding of the Chinese institutions, particularly the Chinese state institutions. Also, it is my long-​time interest to compare China with other societies as political economies. The writing of this book involved extensive reading on a range of literature in both English and Chinese. I’m deeply indebted to the scholars whose works were cited in this book. Their works provided theoretical guidance and/​or empirical basis for my study. This book investigates several key junctures in China’s economic development and employs the concepts of “core institutions” and “state institutions” to structure the analysis. A major challenge is to find consistent explanations for the country’s failure to industrialize in the past and its recent economic success, given the continuity of societies’ institutions. This study recognizes that the institutional requirements for a country’s success in industrialization are related to its relative position in the world’s economic development. The Chinese core institutions, though incompatible with pioneering the modern economic growth in the world, could be effectual for achieving latecomers’ catch-​up industrialization. However, having narrowed the gaps with the technological leaders in the world, the country runs into ever-​increasing difficulties to sustain economic growth with the existing institutions. The Chinese state institutions, which determined the characteristics and quality of the Chinese state, are examined in detail in the book. Different from the views that regard the Chinese state as either “developmental” or “predatory”, this book proposes that the Chinese state has highly variable quality, as reflected by the dynastic cycles in Chinese history. Also different from the theories that emphasize the role of the middle class in the transition to democracy, this book considers the autonomy of the state critical for introducing pluralistic institutions in authoritarian societies. For the publication of this book, I wish to thank Andy Humphries at Routledge Press for his invaluable support for this project and his suggestion for the succinct title of this book, as well as the two reviewers whose comments and critiques were essential for improving the original manuscript. In addition,

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viii Preface I am grateful to Professor Stephen Morgan, the then Editor-​ in-​ Chief at Australian Economic History Review who made important suggestions and recommended reference literature for an article I published in the journal in 2013. I expanded some ideas that originated in this article and merged them into the comparative analysis on China and England in Chapter 2 and 3 of this book. I am also grateful to Professor Bai Gao at Duke University for his valuable comments on Japan’s industrial development in Chapter 5 of this book and his recommendation of reference sources. Nevertheless, the shortcomings of this book are by no means a reflection of their advice. I am solely responsible for the viewpoints expressed and errors made in this book. Last not least, my thanks go to Emma Morley for her great help in the editorial process and Bronwyn Hemus, whose copy editing has improved the book’s prose.

1  Introduction

China’s rise as an economic power in the 21st century posed some challenging questions for intellectual thinking. First, what accounted for the super-​rapid growth of the Chinese economy in the past few decades? A popular view attributed the Chinese high growth to the introduction of free markets in 1978. Yet this view cannot quite explain why China remained a low-​income agrarian society until the end of the 20th century, even though it had developed markets and private ownership since an early time in history. Why did the re-​ introduction of markets in our day lead to rapid industrialization? Next, why hasn’t the rapid economic growth brought forth democracy in China? By the theory of modernization, economic growth will lead to democracy as a middle class emerge in the industrialization process. People in the middle-​class, with material affluence and good education, will demand civil rights and democracy will follow. But, in the case of China, despite the huge increases in the Chinese GDP, the authoritarian institutions remain largely intact. What impeded the introduction of the pluralistic institutions in the Chinese society? Finally, could China sustain the economic growth and move onto high-​income levels with the existing social system? The last question is actually similar to an old one raised about the Soviet Union in the 1950s and 1960s, amid the competition between the capitalist and communist systems in the Cold War period. Nevertheless, contemporary China is not the Soviet Union. Unlike the latter, the contemporary Chinese economy has a large market-​driven content and is closely integrated with the world’s capitalist economies, although the party-​state has retained its control over the society. Then, allowing for these differences, could the Chinese authoritarian system sustain the economic growth and outperform the Western democracies? This question carries profound implications for the world, as it concerns whether a country could achieve long-​term economic prosperity by social systems other than modern democracy. To explore these questions in depth, one must turn to the historical developments of Chinese society. As Douglass North (1990) put it, “[h]‌istory matters. It matters not just because we can learn from the past, but because the present and the future are connected to the past by the continuity of a society’s DOI: 10.4324/9781003202042-1

2 Introduction institutions.Today’s and Tomorrow’s choices are shaped by the past. And the past can be made intelligible as a story of institutional evolution.” This book investigates the historical relationship between institutions and economic developments in China from a comparative perspective. It seeks to gain a deeper understanding of the institutions that underline China’s failure to industrialize in the past as well as its economic success in our time. A better understanding of these institutions not only helps assess the growth prospects of the Chinese economy but also provides clues to the choices the country could possibly make today and in the future in order to achieve long-​term economic prosperity.

Interpreting the Chinese Miracle The Chinese Miracle is a known story in our day. In 2010 China overtook Japan to become the world’s second largest economy. The Chinese gross national income (GNI) per capita surged from US$190 in 1978 to US$8,805 in 2017.1 The astonishing economic growth has lifted hundreds of millions out of poverty and turned the country into a middle-​income economy from a low-​ income one in a matter of decades. The interpretation of the Chinese Miracle, however, diverged vastly and the controversy over China’s growth prospects has continued. The optimistic views hold that China will maintain rapid growth for another 20 years or more (Lin 2011; Hu 2015). Although the Chinese growth has slowed to around 6–​7 percent per annum since 2014, this “new normal” rate is still way above the world average. With the new normal rate, China’s per capita GDP measured by purchasing power parity could reach about half of that of the US by 2030 (Lin 2011). It means that China would become a high-​income economy by then. The optimistic projections of China’s future growth reflected the strong confidence in the so-​called “Chinese model” or Chinese domestic institutions. The belief is that the Chinese model must be superior, as it delivered super-​ rapid GDP growth that no country has ever achieved in history. China’s GDP increased at an average rate of about 10 percent per year from 1978 to 2012, which exceeded not only the growth records of the old industrial countries in their respective take-​off periods in the 18th and 19th centuries, but also that of the East Asian Tigers in the 20th century. But is the Chinese model solely responsible for the unprecedented growth of the contemporary Chinese economy? A critical factor that should not be neglected in comparing China’s miracle growth with the growth records of older industrial economies is the international environments or external conditions. The global environment has changed dramatically from the 19th century to the 21st century. Two aspects of the international conditions particularly affected the growth rates of late developed economies: the continuous progress of the world’s technologies in the modern era and the continuous deepening of globalization. As will be

Introduction  3 elaborated later in this chapter and Chapter 6, both technological progress and globalization provided the latecomers in the 20th century with tremendous benefits that were not available to the early developers in the 18th and 19th century.These benefits, including much higher levels and much larger stocks of technologies in the world, as well as much closer trade and investment links with the world’s advanced economies, are indispensable for the progressively faster GDP growth some latecomers achieved in their catch-​up industrialization. Thus, contemporary China’s super-​rapid rate of GDP growth could not be fully explained without considering the factors outside of the Chinese model, namely, the international conditions. With that said, the Chinese model was still worth a thorough study because China alone, among all the low-​income countries in the same international environments, achieved the super-​ rapid GDP growth. As some Chinese scholars summarized, the Chinese model has the following main features: state-​ led development; development as the top priority; focus on good governance of the government; and gradual and pragmatic reform (Zhang 2011; Li 2015). By these features, the Chinese model looks very similar to the East Asian growth model. Indeed, the Chinese government purposely emulated the East Asian export-​oriented growth strategy at the beginning of the economic reforms and expanded it on a large scale. Thus, the Chinese model is not unique after all. Then, could one infer that the Chinese growth will lead to long-​term economic prosperity since the Asian Tigers have successfully moved onto high-​ income economies? On the other side of the controversy, the collapse of the Chinese economy has been frequently predicted and the decay of the China’s communist regime continually proposed (Chang 2001; Shambaugh 2015; Pei 2016; Ringen 2016). In general, the negative views about China’s economic prospects are based on the proposition that economic growth cannot be sustained under authoritarian regimes. Acemoglu and Robinson argued that Chinese growth is not sustainable under the country’s current political institutions because these extractive institutions could not tolerate innovations and the creative destruction associated with innovations required by sustainable growth. Additionally, the struggles for the highly-​coveted power under extractive institutions tended to push the society towards political instability (Acemoglu and Robinson 2012). Thus, China’s long-​term prosperity is conditioned on the country’s transition to the democratic system, by these views. While the economic prosperity of the modern world is sourced from the institutions of pluralism and rule of law, the leadership of authoritarian or absolutist states could also generate rapid economic growth in catch-​up industrialization, as evidenced by Russia and Japan in the 19th century, the East Asian Miracle in the 20th century, and the extreme case of the Soviet Union. Nonetheless, the state-​led developers that succeeded in achieving long-​term economic prosperity, such as Japan, South Korea, Singapore and Taiwan, have also succeeded in establishing democratic system. In their cases, the authoritarian governments also launched social/​political reforms for introducing pluralistic

4 Introduction institutions while leading the catch-​up industrialization. Democracy eventually prevailed at respectable income levels obtained through the industrialization. In the case of China, the state-​led industrialization has not brought in pluralistic institutions. Instead, the economic success somewhat enhanced the legitimacy of the authoritarian regime based on the absolutist institutions that survived all the endeavors to establish democracy in China in modern times. Thus, the more imperative question is why it is so hard for China to make the transition to democracy or what impeded the transition? Meanwhile, the Chinese Miracle also encouraged scholarly enthusiasm in searching for the historical roots of the economic strength demonstrated by contemporary China. The comparative studies on the relative developmental levels of China in the late 18th century had inclusive results. Some researchers suggested agricultural developments and living standards in China’s most advanced region, the Lower Yangzi, were largely comparable to that in the North-​western Europe in the 18th century. Commercialization and urbanization in certain Chinese regions also reached high levels with the development of sophisticated craft manufacturing and extensive trade networks among the regional markets (e.g. Wong 1997; Pomeranz 2000; Li 2000; Rosenthal and Wong 2011). On the other hand, other researchers provided the evidence that living standards in China were far lower than in North-​western Europe around that time (e.g. Broadberry and Gupta, 2006; Li and van Zanden, 2010; Allen et al, 2011). Even if it is assumed that the markets in China were no less developed than Western Europe up to the 18th century, we still need answer the question of why China, given the similar levels of market developments up to the 18th century, didn’t shift to Kuznetian growth through techno-​ economic breakthrough like the first Industrial Revolution? Kenneth Pomeranz’s study leaned on the difference in resource endowments as the explanation for the economic divergence between China and the West since the first Industrial Revolution.2 Nonetheless, the first Industrial Revolution was not just about labor-​saving technologies per se. It opened up a whole new era of sustained increases in productivities of human society through systematic application of science and technology. If the differences were just in resource endowments, the traditional Chinese economy should have experienced some other kind of “techno-​economic breakthrough” based on the resource endowments in Lower Yangzi, instead of no techno-​economic revolution at all. The causes of the economic divergence went beyond resource endowments, as suggested by the burgeoning literature that takes economic and political institutions as the ultimate determinants of long-​term economic growth. The absence of industrial revolution (or techno-​economic breakthrough) in the traditional Chinese society is an unavoidable subject in interpreting the contemporary Chinese Miracle, as the country’s economic catch-​up today was connected to the point where it fell behind the West through the continuity of institutions in society. The market developments in traditional China had

Introduction  5 brought about advancements in agriculture and commerce but did not lead to a meaningful techno-​economic breakthrough that could give rise to modern economy. Why? The similar levels of agricultural and commerce developments before the first Industrial Revolution and the divergence afterwards between China and England (or Western Europe) suggest that the market developments in the two traditional agrarian societies could be supported by different sets of institutions. The differences in those institutions may have played a critical role in determining the occurrence or non-​occurrence of the Industrial Revolution in the two societies. Put another way, the market-​supporting institutions in the Chinese society may have been incompatible to the occurrence of the Industrial Revolution. From historical perspectives, also accounting for China’s economic backwardness in the past two-​plus centuries, was the fact that the country again missed the opportunity to industrialize in the late 19th century when the waves of industrialization spread from Western Europe to Eurasia and Asia. While Western Europe and the United States led the second Industrial Revolution with new technological breakthroughs, Russia and Japan industrialized by resorting to the state as an instrument in the technological diffusing process of the second Industrial Revolution. The rise of imperial Russia and Japan as industrial powers in the East presented a rather different way of industrialization from the West, namely, the state-​led approach. However, the Chinese Empire, which had a long history of centralized state, did not succeed in state-​led industrial developments in the late 19th century and fell to semi-​colonial status. It is puzzling that the Chinese state failed yet the Japanese state that emulated the Chinese model of centralized government in history succeeded in the state-​ led industrialization. Again, an investigation of China’s economic success is inevitably a study of the past. Only when the past is better understood could we better tell how Chinese society reached its current place, where it is heading to and what choices it faces in the future.

The analytical framework To come up with a consistent explanation of China’s failure to modernize in the past and its economic success today, a coherent analytical framework is needed.The simple framework employed in this study is based on the principle thesis that institutions are the ultimate source for economic growth and the institutional requirements for a country’s success in industrialization are related to its relative position in the world’s economic developments. The framework has three dimensions: First, it focuses on the core institutions in societies as the ultimate source for economic growth. Second, it compares the institutions and economic development in China with those in other societies in the relevant periods.Third, it incorporates the international settings as a key determinant for the potential growth achievable by latecomers like China.

6 Introduction Theoretical ground and related literature This book takes institutions and institutional changes as the fundamental cause for the divergences in economic growth across societies and over time. That is, this study does not take technological progress or resource endowments as the primary source for economic growth. It is not that technological progress and resource endowments are unimportant for growth. On the contrary, technological progress is a key factor for economic growth in the analysis throughout this book. Nevertheless, as Douglass North (1993) pointed out, technological progress is economic growth itself or the proximate source of economic growth, but not the ultimate source.The primary source of economic growth is the institutional and organizational structure of a political economy. Institutions are “the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction,” according to North (1990, 3). Institutions consist of formal written rules, such as constitutions, statute and common laws, specific bylaws and individual contracts, and informal unwritten rules, such as codes of conduct, norms of behavior and conventions. Organizations consist of groups of individuals bound by some common objectives and interests, such as firms, trade unions, cooperatives, political parties, clubs and government agencies (North 1990). The interaction between institutions as the rules and organizations as the actors produces institutional changes in a society. Undoubtedly, there are other ways to explain a country’s economic development or to compare economic developments across countries. However, the institutional approach appeals to this author, as it is more promising to provide a consistent explanation for the Chinese story. The role of institutions in modern economic growth or economic developments3 has been studied extensively, and a huge body of literature has developed in the field of economics and related disciplines (e.g. North and Thomas 1973; North and Weingast 1989; North 1990, 1993; Greif, 2005, 2008; Mokyr, 2002, 2008; Greif and Tabellini 2010; Acemoglu, Johnson and Robinson, 2005; Acemoglu and Robinson, 2012). It is widely acknowledged in mainstream thinking that the institutions that provided secure property rights and greater economic liberties accounted for “the rise of the West” and were crucial to economic developments in other parts of the world. However, some issues remain. Subjects such as why some latecomers could achieve rapid economic growth without meeting those requirements, what institutions enabled their economic success and whether these institutions could sustain the growth beyond the catch-​up period, deserve further studies. China is a good case to explore these subjects. To a varied extent, institutional economics was also applied to the comparative studies on the historical divergence in modern economic growth between China and Europe (e.g.Wong 1997; Ma 2006; Greif and Tabellini 2010; Rosenthal and Wong 2011; Brandt, Ma and Rawski 2013). In these studies, the economic institutions, including the contract-​enforcement institutions in the

Introduction  7 two regions, were compared and researched rather thoroughly.Yet the political institutions, particularly the effects of the political institutions on the central event that set off the modern economic growth, the first Industrial Revolution itself, were relatively less researched from a comparative perspective. This book integrates political and economic institutions in the analysis and addresses this central event directly as the starting point of the “great divergence” between China and the West. Instrumental to the conceptualization of the core institutions in this framework is the literature that explicitly included political institutions, along with economic institutions, as the source for modern economic growth. In their book on the prosperity and poverty of nations, Acemoglu and Robinson (2012) described the institutions conducive to economic growth as “inclusive” political and economic institutions. Inclusive political institutions are pluralistic and sufficiently centralized. Inclusive economic institutions are characterized by secure property rights, an unbiased system of law and freedom to exchange and contract for the people. They held that inclusive political and economic institutions, as against exploitive political institutions and exclusive economic institutions, ultimately accounted for the prosperity of the rich nations. From a slightly different angle, Avner Greif (2005) proposed that contract-​ enforcement institutions and coercion-​constraining institutions (CCI) are the two institutional pillars supporting the markets in a society. He defined CCI as the institutions that constrain those with coercive power from abusing other’s property rights. CCI influence whether individuals will bring their goods to the markets in the first place. Greif ’s notion of CCI brought out the importance of the coercive-​power distribution to the productivity and innovative capability of a society. The other source of reference for this book is the literature on the state and the state’s role in economic development. In his study on “economic backwardness” in the world’s industrial developments, Alexander Gerschenkron (1962) linked the institutions and organizations that a country relied on for industrialization with its relative position in the world’s economic developments, and proposed that “late” latecomers in industrial development tended to use the state as an instrument for their catch-​up industrialization. The experiences of the developing countries since the 1960s, particularly the miracle growth of the East Asian economies, led to further studies on the state’s role in the industrial transformations of latecomers as well as the quality of the state as a key determinant for the success of state-​ led industrialization (e.g. Bates 1981; Johnson 1982; Migdal 1988; Amsden 1989; Wade 1990; Evans 1995). This line of studies distinguished developmental states from predatory states. A developmental state, with high degree of bureaucratization, was capable of promoting economic developments. A predatory state, controlled by exploitive despots or captured by rent seekers, was most likely to obstruct economic developments. From these studies, particularly Gerschenkron’s proposition, this book develops the basic thesis that the institutional requirements for pioneer economies

8 Introduction to originate radical innovations may differ from those for latecomers to adopt radical innovations. The Chinese core institutions, though incompatible with pioneering modern economic growth, could be effective in achieving catch-​up industrialization through the adoption of new technologies from abroad. This basic thesis is substantiated throughout the book. This set of literature also provided insights to the analysis on the Chinese state institutions that determined the quality or capability of the Chinese state for leading the country’s catch-​up industrialization.The analysis on the Chinese state institutions is critical for explaining the vastly different results of the state-​ led industrial developments in late-Qing China and contemporary China. For evaluating the quality of the Chinese state, this study especially benefits from the observations made by Theda Skocpol (1979) on the Chinese state. In comparing the Chinese and Japanese states in the 19th century, Skocpol described the Chinese state as “semibureaucratic,” which provided an important clue to comprehending the resilience and intrinsic weakness of the Chinese state institutions. Focus on the core institutions The analytical framework in this book will use North’s definition of institutions and organizations: institutions are the rules of the political/​economic game in a society, and organizations are the actors in the game4 (North 1990). The first dimension of the framework is the focus on the core institutions as the ultimate source for economic development in societies. In this study, the core institutions are defined as the set of rules governing the power structure and the major mode of coordination in a society. The term “power” here refers to institutionalized coercive power including both political and economic power. Political and economic power is not separable here. Instead, they are closely intertwined, especially in the case of China. The power structure refers to the power distribution between the ruler/​state and his subjects as well as the power distribution among various social groups. The mode of coordination refers to how individuals and organizations coordinate with one another in economic and political activities.While in all societies the ruler/​state enforces laws to keep peace and social order, the effectiveness of written laws and the applicability of written laws to the ruler and elites varied greatly among societies. The focus on the “core institutions,” rather than all elements in political-​ economic institutions, means that the analysis will be conducted at rather broad level or from a bird’s eye view in this book.This method may risk generalization but helps capture the essentials from the complex of political-​economic systems developed in various societies in history. For instance, the specific arrangements of political systems varied even among the Western democracies, but these systems are all pluralistic at the core. A bird’s eye view is especially helpful when comparing institutions across societies from different origins of civilizations. The hugely different institutions among societies are the consequences of long evolutions over time. The focus on the core institutions allows the research

Introduction  9 to grasp the main mechanism of the institutional evolutions in the respective societies. Furthermore, this study has developed the concept of state institutions for the analysis on China’s experiences in employing the state as an instrument for economic catch-​up. State institutions are defined as the set of rules governing the internal relations of the state organization, mainly the relations between the ruler (or state leader) and state officials as well as its external relations with society, mainly its relations with the propertied class. A state organization is made up by the ruler or state leaders and state officials at all levels in the state government. For the Chinese society that has evolved along the “state-​centered” path from an early time in history (Fukuyama 2011), the state institutions stand as the central part of its core institutions. In general, this analytical framework stresses the importance of the incentive mechanism in the interactions between institutions and organizations. Institutions determine the incentive mechanism for individuals and organizations as actors, and define the constraints facing the actors. Actors can change the institutions but not freely. In this framework, economic developments could provide opportunities for institutional changes, and actors could take the opportunities to alter the institutions to their favor, but their actions were constrained by the existing institutions. The incentive mechanism embedded in the existing institutions in a society determines how the actors utilize such opportunities to advance their interests, to what extent their actions could alter the institutions, as well as in which direction the core institutions would evolve. The interactions between institutions and organizations shape the path of the institutional development in a society. Comparison of institutional paths The second dimension of the framework is the employment of a comparative analysis on institutions as the source of economic development. The method of comparison is beneficial, as it can bring out the main features of the Chinese institutions and economic development more clearly than “single-​country” studies. There were undoubtedly similarities in institutions between China and the societies selected for comparison in this book. Nevertheless, it is the differences that accounted for the divergence in economic developments in history. Comparative analysis will be conducted on three junctures in China’s economic development: first, the starting point of the divergence between China and the West. Comparisons will be made on the core institutions in the Chinese and English society before 1750 to investigate why the first Industrial Revolution occurred in England but not in China. The year of 1750 is used as the ballpark divide of time, because the first Industrial Revolution, the central event that marked the beginning of the divergence between the West and China, took place in the second half of the 18th century. The core institutions accounting for the occurrence or absence of industrial revolution in the two

10 Introduction societies in the late 18th century were the results of long-​term evolutions in the historical period before 1750. It is proposed that markets could prosper in the traditional agrarian-​commercial societies, but the expansions of commerce do not necessarily lead to a techno-​economic breakthrough like the first Industrial Revolution. Then, China will be compared with Japan for their externally-​induced industrial developments late in the 19th century. The analysis is about why the Japanese state succeeded yet the Chinese state failed in the catch-​ up industrialization when they were faced with the same external threats from the Western industrial powers. The analysis will narrow down to the state institutions of the two countries, taking the quality of the state as a key determinant for the results of their state-​ led industrial developments as latecomers. Finally, in the study of the contemporary Chinese Miracle, comparison will be made between China and the two Asian Tiger economies, South Korea and Taiwan, that succeeded in moving onto high-​income levels through state-​led industrialization. The differences in the state-​led industrial developments between China and the two Tiger economies should shed lights on the assessments of China’s growth prospects. Central to the comparative analysis in this study is the notion that institutional changes are continuous and path dependent in a society. Scholars mostly agree that societies evolved along different paths of institutional developments, although their views differ about the relative ease of institutional changes in societies (see North 1990; Greif 2005; Fukuyama 2011, 2014; Acemoglu and Robinson 2012). Generally speaking, societies took different institutional paths first because they started out from different initial institutional conditions or initial set-​ups of institutions. Initial conditions are arbitrary, but once set up, the institutions would begin to mold the incentive mechanism that would begin to limit the choice-​sets facing individuals and organizations as actors. And whatever choices the actors made, through conflicts or comprises, would affect the institutional developments in the downstream. Therefore, the path of institutional evolution in a society was continuously shaped by the choices made collectively by the actors constrained by the incentive mechanism embedded in the existing institutions in the society. While institutional changes are continuous and path dependent for all societies, the core institutions in some societies are much harder to change than in others. As history shows, the core institutions in Chinese society exhibited much more tenacity than the other societies discussed in our comparative analysis. In this analytical framework, the alterability of the core institutions in a society is also determined by the incentive mechanism embedded in the existing institutions that developed from the initial set-​ups.The core institutions in societies such as England evolved towards greater pluralism over time because the initial set-​ups and earlier institutions contained elements that permitted the actors to redistribute the coercive power in society via the incentive mechanism. Comparatively, the core institutions in the Chinese society lacked changes because the existing institutions resultant from the initial set-​ups motivated

Introduction  11 actors to make choices that tended to maintain the present power structure of the society. The tenacity of the Chinese core institutions will be discussed in Chapters 2 and 7. Last, it is necessary to point out that “path dependence” does not mean that institutional developments are historically pre-​determined. It simply means that institutions in a society are not freely moldable at any given time. The members of the society as actors could change institutions only within a limited choice-​set constrained by the existing institutions at the time. However, within the choice-​set, actors do have a range of possible options to select from, and the choice they make would affect the institutional developments hereafter. Therefore, in this framework, a society’s institutional evolution is an incessant process in which social members make choices in changing institutions when opportunities arise. It involves many contingencies but is not entirely random. The path of a society’s institutional developments is shaped by the initial conditions as well as by the choices made by the members of the society in the past. Importance of international settings The third dimension of this framework is the inclusion of “international settings” or “external conditions” as a major determinant for China’s economic developments since the 19th century. While institutions are hard to transplant across societies, modern technologies could be adopted much more easily from the originating countries. The transferability of technologies and managerial methods underscores the importance of international settings for latecomers in the era after the first Industrial Revolution. The first Industrial Revolution opened up the new age of modern economic growth and changed the international environments. In the era before the first Industrial Revolution, developments in the world were somewhat compartmentalized by geographic regions, with the lack of transportation and communication means. In particular, the Chinese civilization developed largely in isolation from the Western civilization. What happened in the Western Hemisphere had a negligible role in economic development in the traditional Chinese society, and vice versa.Therefore, in this study the comparative analysis on China and England is based on the presumption that domestic institutions alone accounted for the occurrence or absence of the Industrial Revolution in the two societies. Nonetheless, starting from the first Industrial Revolution, the “international conditions” began to play an increasingly greater role in the economic developments of the unindustrialized nations in the world. There are several reasons. First, the rise of industrial powers in Western Europe posted challenges to and provided examples for the unindustrialized nations, and caused externally-​induced industrialization in other parts of the world. Second, new technologies originating in the industrial nations became increasingly available to late developed countries, as the world became increasingly “smaller” with

12 Introduction the advancement in modern communication and transportation. Given the availability of new technologies from abroad, the set of core institutions that enabled the first Industrial Revolution was no longer a “must” for latecomers to get industrialized, simply because they could adopt technologies from abroad instead of making radical innovations themselves. Consequently, those latecomers that had strong state organizations had the option of employing the state as an institutional instrument for industrialization. Third, in the era of modern growth, the industrialization of latecomers has been part of the dissemination process of the new technologies from the originating countries. Thus, the continuous progress of the world’s technologies and the continuous deepening of globalization had strong effects on the pace of industrialization or the rate of GDP growth of latecomers in their catch-​up periods, as mentioned earlier. The third point needs some further elaboration. The world’s technological progress provided potentials for latecomers to achieve faster growth than the older industrial nations in their catch-​ up industrialization, due to the progressive and cumulative nature of technological developments. As proposed by Schumpeter and the evolutionary theory, technology-​ driven economic growth in modern times proceeded in fluctuations like long waves or “Kondratiev waves.”5 In each wave, the cluster of path-​breaking or radical innovations gave rise to a new “age” or “techno-​economic paradigm”6 that would replace the old one with new leading sectors and industries. Chris Freeman and Francisco Louca (2001) documented the five Kondratiev waves that propelled the modern growth: the first Industrial Revolution or the first Kondratiev wave (1780s–​1848) introduced the “age of textile and iron,” with the radical innovations on cotton-​spinning, iron products and water wheels. In the second Kondratiev wave (1848–​1895), the radical innovations of railways, steam engines, machine tools and steamship transportation created the “age of steam and railways.” In the third wave (1895–​1940), the radical innovations of electricity, electrical equipment, heavy engineering, heavy chemicals and steel products created the “age of electricity and steel.” The fourth wave (1941–​ late1990s) brought about the “age of automobile and aviation,” with the radical innovations of automobiles, petrochemical, airplanes, automation, nuclear energy, as well as the mass production method of assembly lines.The latest wave of technological revolution that began at the end of the past century introduced the “age of information and communication,” with the radical innovations of electronics, personal computers, internet, wireless devices, telecommunication and biotechnology. Other scholars may come up with different periodization for technological developments, but that won’t affect our analysis here because different classificatory schemes do not change the progressive and cumulative nature of technological developments. Each new paradigm that brought the world’s technologies to a higher level also increased the stock of technologies available in the world. This is because older technologies and industries do not disappear suddenly with paradigm-​ shifting. Older industries absorbed new technologies, and some of them moved

Introduction  13 from the center to a peripheral sphere of the pioneer economies, or to less developed economies through technological diffusion. Therefore, compared with the countries that industrialized in the earlier paradigms, the latecomers that began to industrialize in the more recent paradigms had access to much more advanced, and a much wider spectrum of technologies for them to use in their catch-​up industrialization. Also affecting a latecomer’s speed of industrialization is the degree of its integration with the advanced economies at the time of its industrialization. New technologies are disseminated mainly through direct technology transfer, such as licensing and consulting, foreign trade and foreign investments. Foreign trade and foreign direct investment (FDI) also provide markets and financing sources for latecomers’ industrialization. A latecomer’s economic links with the advanced countries was correlated with the intensity of globalization.The world experienced three periods of rapid increases in international flows of trade and investments: 1887–​1914, 1945–​1980 and 1980–​the present (see Salvatorie 2010). In the first period (1887–​1914), foreign trade and investment outside of Europe were confined mainly to the flows between European industrial countries and the “new lands” in the Americas, Australia and South Africa. Britain, as the largest investor, mostly invested in the primary product sectors in those countries and exported manufactured goods to them. In the second period (1945–​1980), the worldwide markets for free trade emerged, with the dismantling of the trade protections in industrial countries, the formation of GATT and WTO, and establishment of global trade system. The third period (1980–​ present) was characterized by massive international capital flows, in addition to free trade. With the elimination of most restrictions on capital flow across borders, the FDI from the multinational corporations of the industrial countries reached all regions in the world (Held et al. 1999). The trend of intensifying globalization enabled closer integration of the world’s developing economies with the developed ones. The closer trade and investment links with the advanced economies allowed latecomers to speed up their catch-​up industrialization. The liberalization of international trade and capital flows in the 20th century greatly facilitated technological transfers to less developed economies through the trade and investment vehicles. Free trade and FDI permitted latecomers to access the consumer markets in the high-​income economies as well as to tap into foreign capital for financing their domestic industrialization. Neither benefit was available to the early developers in the 19th century. Therefore, the continuous progress of the world’s technologies and the continuous deepening of globalization are indispensable factors in accounting for the faster GDP growth of the late developers than the early developers, in their respective industrialization periods. Hence a hypothesis could be made: for latecomers, the higher the levels of technological developments in the world, the larger the stock of the world’s technologies, the closer the ties with the advanced economies at the time of their industrialization, the faster GDP growth they could achieve potentially in the catch-​up industrializations.

14 Introduction However, whether a latecomer could realize the growth potentials depends on its domestic institutions. In summary, the roles of international settings in the economic developments of the late developed nations could no longer be ignored in the modern era. Whilst domestic institutions still held the key to the success of a latecomer’s industrialization, it is a latecomer’s capability to utilize the international conditions rather than its capability of making radical innovations that determined its success in industrialization. And the state could be a powerful instrument in utilizing the international conditions. The comparative analysis in Chapter 5, 6 and 7 of this book takes into account the impacts of the international conditions on China’s economic developments since the late 19th century. The rest of the book proceeds as follows. Chapter 2 compares the core institutions in England and China in the 18th century, and examines how these institutions came into being from the vastly different initial conditions in the two civilizations. Chapter 3 connects the core institutions to the economic developments in the two societies, and investigates why the first Industrial Revolution occurred in England yet no similar techno-​economic breakthrough took place in China. Chapter 4 proposes the importance of the state institutions for latecomers that employed the state as an instrument for industrialization in the new international settings. It compares the Chinese and Japanese states in the 19th century and traces the historical evolutions of the state institutions in the two countries. This chapter prepares for the discussion on the state-​led industrial developments in the two countries in the next chapter. Chapter 5 compares the state-​led industrialization in Meiji Japan and late Qing China in the late 19th and early 20th century, and investigates why the former succeeded but the latter failed. Chapter 6 studies the economic success of contemporary China and analyzes the reasons for such success from institutional perspective. Chapter 7 assesses the prospects of Chinese growth through the comparison on the state-​led developments between contemporary China and the Asian Tigers (South Korea and Taiwan). The current perils in the Chinese economy were also delineated. The chapter explores why the Chinese high growth is unlikely to be sustained with the existing institutions and why the reforming of the state institutions appears to be the key to the introduction of the pluralistic institutions in Chinese society.

Notes 1 GNI per capita, Atlas method (current US dollars), World Bank database 2019. 2 Kenneth Pomeranz argued that the industrial growth in Europe owed much to the rich coal deposits and the supply of natural resources from the New World. The lack of natural resources including coal deposits in the Lower Yangzi of China kept the production labor-​intensive. 3 “Economic development” is generally considered a broader concept than “economic growth.” In development economics, development includes, in addition to economic

Introduction  15 growth, improvements in socioeconomic aspects such as reduction in poverty and inequality as well as gains in literacy, schooling and health condition. In institutional economics, however, the emphasis is on the relations between institutions and economic growth that is usually defined as “per capita rise in income.” This study views economic growth as the basis for the overall development or emphasizes the economic aspect of development. Thus, the two terms are consistent with one another in the discussions of this book. 4 This book refers to organizations and individuals as “actors” in general. The word “players” will be used specifically to delineate the role of business companies as against the role of “referee” of the state in Chapter 6 and 7, consistent with the commonly-​used terminology in contemporary studies. 5 The observation of a wave-​like fluctuation of about every 50–​60 years in economic growth was originally made by Russian economist Nikolai Kondratiev. Joseph Schumpeter, one of the most influential economists in the early 20th century, further developed the long-​wave theory of economic growth. Schumpeter emphasized the role of technological innovations as the generator of the long waves or cycles in economic growth. By his long-​cycles hypothesis, fluctuations in innovations caused rise and fall in investment and the cyclical movements in investment led to periods of acceleration in aggregate-​output growth. 6 The term “new techno-​economic paradigm” was used by Carlota Perez (1983) to describe the structural transformation brought by the path-​breaking innovations, which involves not only the rise of new leading industries but also changes in managerial and organizational models, government regulations, as well as general culture in society.

Bibliography Acemoglu, D. and J.A. Robinson. 2012. Why Nations Fail:The Origins of Power, Prosperity, and Poverty. New York: Crown Business. Acemoglu, D., S. Johnson and J.A. Robinson. 2005. Institutions as the Fundamental Cause of Long-​Run Growth, In Handbook of Economic Growth, Volume 1A, ed. P. Aghion and S. Durlauf, 386–​414. The Netherlands: Elsevier, North Holland. Allen, R.C., J. Bassino, D. Ma, C. Moll-​Murata and J.L. van Zanden. 2011.Wages, Prices, and Living Standards in China, Japan, and Europe, 1738–​1925. Economic History Review 64 S1, 8–​38. Amsden, A. H. 1989. Asia’s Next Giant: South Korea and Late Industrialization. Oxford: Oxford University Press. Bates, R.H. 1981. Markets and States in Tropical Africa: The Political Basis of Agricultural Policies Berkley and Los Angeles: University of California. Birdzell, L.E. and N. Rosenberg. 1986. How theWest Grew Rich:The EconomicTransformation of the Industrial World. New York: Basic Books. Brandt, L., D. Ma and T. Rawski. 2013. From Divergence to Convergence: Revaluating the History behind China’s Recent Boom. www2.warwick.ac.uk/​fac/​soc/​ economics/​research/​centres/​cage/​research/​wpfeed/​117.2013_​brandt.pdf. Broadberry, S. and B. Gupta. 2006. The Early Modern Great Divergence: Wages, prices and Economic Development in Europe and Asia, 1500–​1800. Journal of History Review, LIX 1: 2–​31. Chang, G.G. 2001. The Coming Collapse of China. New York: Random House.

16 Introduction China Statistical Yearbook, National Bureau of Statistics of China. Evans, P. 1995. Embedded Autonomy, States & Industrial Transformation. Princeton: Princeton University Press. Freeman, C. and F. Louca. 2001. As Time Goes by: from the Industrial Revolutions to the Information Revolution. Oxford: Oxford University Press. Fukuyama, F. 2011. The Origins of Political Order: From Prehuman Times to the French Revolution. New York: Farrar, Straus and Giroux. Fukuyama, F. 2014. Political Order and Political Decay: From the Industrial Revolution to the Globalization of Democracy. New York: Farrar, Straus and Giroux. Gerschenkron,A. 1962. Economic Backwardness in Historical Perspective. Cambridge: Belknap. Greif, A. 2005. Commitment, Coercion, and Markets: The Nature and Dynamics of Institutions Supporting Exchange. In Handbook of New Institutional Economics, ed. C. Menard and M. Shirley, 727–​86. New York: Springer. Greif, A. 2008. Coercion and Exchange: How Did Markets Evolve. www.stanford.edu/​ ~avner/​. Greif, A. and G.Tabellini. 2010. Cultural and Institutional Bifurcation: China and Europe Compared. American Economic Review: Papers & Proceedings 100 2: 1–​10. Held, D., A. McGrew, D. Goldblatt and J. Perraton. 1999. Global Transformations, Politics, Economics and Culture. Stanford: Stanford University Press. Hu, A. 2015. Embracing China’s “New Normal”, Why the Economy is Still on Track. Foreign Affair, May/​June Issue. Huang, Y. 2017. Cracking the China Conundrum: Why Conventional Economic Wisdom Is Wrong. Oxford: Oxford University Press. Johnson, C. 1982. MITI and the Japanese miracle: the growth of industrial policy, 1925–​1975. Stanford: Stanford University Press. Li, B. and J. L. van Zanden. 2010. Before the Great Divergence: Comparing the Yangzi Delta and the Netherlands at the Beginnings of the Nineteenth Century. CEPR Discussion Paper 8023. Li, B. 2000. Jiangnan’s Early Industrialization, 1550–​ 1850. Beijing: Social Sciences Academic Press (China). Li, H. 2015. The Chinese Model of Development and Its Implications. World Journal of Social Science Research 2 2: 128–​138. Lin, J.Y. 2011. Demystifying the Chinese Economy. Cambridge: Cambridge University Press. Ma, D. 2004. Growth, Institutions and Knowledge: A Review and Reflection on the Historiography of 18th–​20th Century China. Australian Economic History Review 443: 259–​77. Ma, D. 2006. Law and Commerce in Traditional China: An Institutional Perspective on the “Great Divergence”. Keizai-​Shirin 73 4: 1–​28. Migdal, J. 1988. Strong Societies and Weak States: State-​Society Relations and State Capabilities in the Third World. Princeton: Princeton University Press. Mokyr, J. 2002. Thinking about Technology and Institutions. Paper presented to the Macalester College International Roundtable “Prometheus’s Bequest: Technology and Change” (October). Mokyr, J. 2008.The Institutional Origins of the Industrial Revolution. In Institutions and Economic Performance, ed. E. Helpman, 64–​119. Cambridge: Harvard University Press. Mokyr, J. and J. Nye. 2007. Distributional Coalitions, the Industrial Revolution, and the Origins of Economic Growth in Britain. Southern Economic Journal 74 1: 50–​70. North, D.C. 1990. Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press.

Introduction  17 North, D.C. 1993. The Paradox of the West. http://​ideas.repec.org/​e/​pno11.html. North, D.C. and B.R. Weingast. 1989. Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-​Century England. Journal of Economic History, 49 4: 803–​832. North, D.C. and R.P. Thomas. 1973. The Rise of the Western World: A New Economic History. Cambridge: Cambridge University Press. Pei, M. 2016. China’s Crony Capitalism: The Dynamics of Regime Decay. Cambridge: Harvard University Press. Perez, C. 1983. Structural Change and the Assimilation of New Technologies in the Economic and Social System, Futures 15: 357–​75. Pomeranz, K. 2000. The Great Divergence: China, Europe, and the Making of the Modern World Economy. Princeton: Princeton University Press. Ringen, S. 2016. The Perfect Dictatorship: China in the 21st Century. Hong Kong: Hong Kong University Press. Rosenthal, J. and R.B. Wong. 2011. Before and Beyond Divergence: The Politics of Economic Change in China and Europe. Cambridge: Harvard University Press. Salvatorie, D. 2010. International Economics. 10th edn. Hoboken, NJ: John Wiley. Shambaugh, D. 2015. The Coming Chinese Crackup, Wall Street Journal (March 6). Skocpol, T. 1979. States and Social Revolution: A Comparative Analysis of France, Russia and China. Cambridge: Harvard University Press. Vries, P. 2015. State, Economy and the Great Divergence: Great Britain and China, 1680s-​ 1850s. London and New York: Bloomsbury Academic. Wade, R.H. 1990. Governing the Market: Economic Theory and the Role of Government in East Asia’s Industrialization. Princeton: Princeton University Press. Wong, R.B. 1997. China Transformed: Historical Change and the Limits of European Experience. Ithaca: Cornell University Press. World Bank 1993. The East Asian Miracle: Economic Growth and Public Policy (World Bank Policy Research Report). Oxford: Oxford University Press. Zhang, W. 2011. The China Wave, Rise of a Civilizational State. Hackensack, NJ: World Century Publishing Corporation.

2  Core institutions in China and England before the Industrial Revolution

The investigation in this book begins with the first Industrial Revolution, because it marked the starting point of the divergence between China and the West. From that point on, China had increasingly lagged behind in economic developments until the very recent catch-​up. The question raised here is why was China left behind in beginning? The Industrial Revolution in Britain in the late 18th century is an epoch-​ making event for the world. In the thousands of years before the Industrial Revolution, the world’s per capita income stayed flat at a low level, with only minor fluctuations. Human society as a whole was caught in the Malthusian trap. The first Industrial Revolution made the fundamental change. Since the 19th century the world’s per capita income has been rising incessantly along an upward-​sloping curve, as shown in Figure 2.1. For the first time in history, the Malthusian trap was broken. As Joel Mokyr (2002) put it, “[t]‌he Industrial Revolution remains the central event of economic and social history of the past half millennium, simply because it altered the material lives of more people in more radical ways than any event before in recorded history.” Put another way, the first Industrial Revolution opened up the new era of modern economic growth. Modern economic growth is described as “per capita long run rise in income” (North and Thomas 1973) or sustained increases in output per head population. As one of the oldest civilizations in the world, China has a long, brilliant history. Enormous advancements in agriculture and commerce were achieved, magnificent cities were built and great inventions made.Yet, neither the agrarian-​ commercial developments nor the inventions led to a meaningful techno-​ economic breakthrough that could raise per capita output on endurable basis and break the Malthusian trap for the society. Until the end of 20th century, China had largely remained a low-​income, agrarian-​commercial society, despite its early start in civilization.

Core institutions as the ultimate cause of the divergence A misconception about industrialization in traditional agrarian-​commercial societies is that it would occur “inevitably” when the developments of commerce reached certain levels. For instance, by Marxist “stage theory,” all DOI: 10.4324/9781003202042-2

Core institutions in China and England  19 GDP per capita , China, W. Europe and the world (1990 internatinal Geary-Khamis Dollars)

W. Europe

18,000

GDP per capita, 1990 international GK$

15,000 12,000 9,000

the world

6,000

China

3,000 -

1

1000

Year

1500

1600

1700

1820

1900

2000

Figure 2.1 Per Capita Income of the World (from year 1 to year 2000) Source: Data from Angus Maddison, Statistics on World Population, GDP and Per Capita GDP, 1-​2008 A D . www.ggdc.net/​maddison/​oriindex.htm

societies evolve along the universal or “unilinear” path through the same stages, from the primitive to slavery system, then to feudalism, and to a capitalist system sooner or later, as production moves into successive higher modes with technological progress. However, as evidenced by history, the European feudal system was unique rather than common among the world’s civilizations. Also, some societies remained tribal or in the so-​called “primitive” and “slavery” stage even today, and may stay that way without interferences from outside. Some other societies introduced the capitalist system only under strong external pressures and influences. Thus, contemporary theories generally recognize that societies have evolved along their own institutional paths. The main proposition here is that trade and commerce thrived in many parts of the world before 1750, but market expansions did not necessarily lead to the emergence of the industry system. This is because traditional markets were supported by different institutions in various societies. Among all the traditional agrarian-​commercial societies, England was the first to industrialize because it had developed institutions conducive to the making of radical techno-​economic change, as suggested by the huge body of literature on institutions and modern economic growth (see Chapter 1). The comparative analysis on the “great divergence” will focus on the core institutions as the ultimate cause for the absence or occurrence of industrial revolution in China and England in the late 18th century. Note that in this comparison, England should be viewed as a representative case of Western Europe, as China lagged behind Western Europe as the world’s first industrialized region

20  Core institutions in China and England rather than behind England alone, although England pioneered the industrialization in the region. Societies in Western Europe shared the same origin of civilization, developed similar traditional institutions in medieval times and complemented with one another in economic developments.The rest of Western Europe industrialized rapidly soon after the first Industrial Revolution in England. The differences in institutions between England and other Western European societies were much smaller than those with China as an oriental society. Hence, it makes more sense to view England as an exemplar of Western Europe. As defined in Chapter 1, the core institutions are the rules governing the power structure and mode of coordination in a society. The core institutions determine how the coercive power is distributed among the ruler/​ state and various social groups, as well as how individuals and organizations coordinate with one another in a society. The ruler/​state, of course, has the exclusive coercive power in enforcing law and order domestically as well as in commanding the military for national defense. Social members other than the ruler/​state could also hold coercive power. In this analytical framework, the non-​state actors’ coercive power is based on institutionalized economic and political rights. Economic rights refer to property rights. Secure property rights enable property-​owners to turn their economic advantages into coercive power. Political rights mainly refer to the legislative rights, that is, the rights to make and change laws. The rules governing the power relations between the ruler/​state and his subjects are important, as they set the extent to which the social members could restrict the power of the ruler/​state and protect their properties from the state’s predation. The rules governing the power relations among social members are also important, as they set the extent to which the weaker social members could resist the coercion of the stronger ones and protect their interests from being intruded by the latter. By the time of the Industrial Revolution in the late 18th century, both China and England were mature agrarian-​commercial economies. Nevertheless, the core institutions that supported the markets and economic activities in the two societies were very different. The core institutions in 18th-​century China can be briefly summarized as entrenched absolutism and relation-​based coordination. In comparison, the core institutions in 18th-​century England can be summarized as pluralism and rule of law or rule-​based coordination.1 A further difference is about the alterability of the core institutions. In Chinese society the core institutions of absolutism had hardly changed by the 18th century, with the coercive power concentrated in the hands of the ruler/​ state. Comparatively, in England the core institutions evolved towards greater pluralism, with the power distribution becoming gradually dispersed in society from the beginning of the Middle Age to the 18th century. England in the 18th century On the eve of the Industrial Revolution in the late 18th century, the core institutions of pluralism and rule-​based coordination were largely in place in England.

Core institutions in China and England  21 For the power relations between the ruler and his subjects, the power of the crown was collectively restricted by a parliament comprising representatives from the major social groups, including nobility, clergy, landed gentry, merchants and artisans. Note that peasants were not among these major social groups discussed here, as they were not significant actors in the industrial revolution. The major social groups had developed their political and economic power through organized group actions over a long period of time. After the Glorious Revolution in late 17th century, parliament established its permanent role in the day-​to-​day management of the government. The independence of justice was assured through legislation. The principle that the state should not contravene the rights of its constituents was established through the passing of the Bill of Rights (North and Thomas 1973; North and Weingast 1989; Fukuyama, 2011). For the power relations among social groups, the distribution of coercive power among the major social groups had become more balanced in the 18th century. That is, the major social groups were also able to check one another’s power while collectively checked the ruler’s. Consequently, people in lower social classes were shielded not only from the grabbing hands of a ruler but also from that of the elites. Put another way, members in the major social groups were equally protected in their rights by formal institutions, regardless their wealth and social status. The relative parity in rights for individuals across societies carries important implications for the first Industrial Revolution, just as the restriction on the ruler’s power. The development of pluralism and rule-​based coordination reinforced one another. The first social group that established economic and political rights by restricting the crown’s power was the upper nobility, and, more important, they did so through written rules, namely, formal institutions. The great barons forced the hands of King John in signing the Magna Carta in 1215, although it took some time for the charter to become truly effective. The barons’ actions set the precedent not only for restricting the ruler’s power but also for resolving social conflicts through written rules in English society. In the following centuries, social groups such as landed gentry, including low-​rank noblemen and yeomen-​turned landholders, traders and merchants, craftsmen and artisans, gradually developed independent coercive power one after another by acquiring economic rights, namely, property rights, and political rights, mainly representation in legislation through formal institutions. While the power structure in English society became increasingly dispersed, the activities of social members became increasingly coordinated by the writing of rules or laws and contracts. Based on the customary laws, common law developed and expanded from the 13th century. Parliament acquired the power to make statute laws after the Glorious Revolution in the 17th century. As the dispersion in power distribution continued to shift the legislative power into the hands of more social groups, the laws took into account the interests of an increasingly larger portion of the population. Indeed, England was not yet a democracy in modern sense in the 18th century. The people’s access to the government was still modest, and less than 2 percent of the population could vote (Acemoglu and Robinson 2012, 192).

22  Core institutions in China and England Peasants who accounted for the majority of the population were not socially organized to have their interests represented. It was in the 19th century that workers, mostly coming from landless peasants, started to organize trade unions. Nevertheless, it appears that the amount of rights individuals in the relevant social groups had obtained by that time was already sufficient for them to carry out innovative activities. In other words, the core institutions in England appeared sufficiently conducive by the 18th century to the making of radical techno-​economic changes. China in the 18th century Around the time of the industrial revolution in 18th century, Chinese society had largely kept the same core institutions of entrenched absolutism and relation-​based coordination as those in the Qin-​Han dynasties at the beginning of the imperial era. For the power relations between the ruler and his subjects, the coercive power in the traditional Chinese society was concentrated in the hands of the ruler and his state. None of the social groups had ever established independent power vis-​à-​vis the emperor through formal institutions. As a result, all social groups, including the elites, were subject to the absolute rule of the emperor. A main feature of the Chinese civilization is the early success in state-​building (Fu 1993; Bai 2002; Fukuyama 2011). As early as 221B C , the Qin Empire (221–​ 207BC ) unified China with a centralized bureaucratic state that controlled the entire population through layers of local administration. The state bureaucracy equipped the ruler with enormous capability to collect taxes from his subjects, control the trade and production of staple goods, and organize economic activities directly on large scales. The Chinese legal apparatus was an integral part of the state bureaucracy, government officials administered justice at all levels and the emperor had the final say in ruling of major cases (Fu 1993; Bai, 2002; Ma, 2004). In brief, by the 18th century the Chinese emperor still held unrestricted coercive power over his subjects. Some soft constraints for the ruler did exist. The Chinese emperor was restrained mainly by two concerns: the moral obligation of caring for his people endorsed by Confucianism and the fear of peasant rebellions or a palace coup that could oust his rule. But neither constraint was binding (Tan 2013). Note that the power struggles within the imperial court or among high-​ranking imperial officials did not have the effect of dispersing the ruler’s power because these “inside struggles” were aimed at usurping or making use of the ruler’s absolute power, instead of building laws as written rules to restrict his power. Similarly, the regional division of smaller kingdoms in between the periods of unified empires or the rivaling of warlords under a weak emperor in the Chinese history did not disperse the coercive power in society because the rulers of these small kingdoms or warlords possessed the same absolute power over their own subjects just as the emperor.

Core institutions in China and England  23 For the power relations among social groups, the lower-​stratum or weaker social groups held no power to resist the coercion from the stronger social groups or upper class.The Chinese elites, as the most prestigious class below the emperor and the imperial clan, were made up of two groups of people: imperial officials and their families, who possessed large amount of land, and wealthy landowners who had family members holding state offices. In reality, it is hard to disentangle the two groups, given that traditional China was a kinship-​ dominated society. In brief, the elites in Chinese society held a combination of state-​office power and land wealth. Characteristically, the coercive power in Chinese society worked “downward” in one direction. While the ruler held absolute power over all his subjects including the elites, the elites held tremendous power to coerce the people in lower social strata. Unlike the upper nobility in medieval England who acted as a group, the elites in Chinese society participated in the government as imperial officials on an individual basis. Through the state offices the Chinese elites could capture the state power for personal use in coercing the common people, but developed no independent power against the ruler as a collective force. Consequently, the elites in Chinese society could easily intrude on the rights of the commoners on the one hand, yet were vulnerable to the emperor’s power on the other. Offense to the emperor could cost not only their entire fortunes but also their lives and the lives of their families and clans. The major mode of coordination in 18th-​ century-​ China was still characterized with heavy reliance on personal relations. At the state level, the management of the state bureaucracy was subject to the emperor’s personal rule or, simply, rule of person (see Chapter 4). Society-​ wise, agricultural production and commercial activities were still organized around families and clans by the 18th century. The kin-​based organizations expanded in scale with the development of commerce, and a region’s degree of commercialization was usually associated with the strength of lineage organizations there (Ma, 2004). Kin-​ based organizations mainly relied on family/​ lineage rules and moral obligation in governing clan members’ conduct within the organization, and a personal trust and reputation mechanism in sustaining trade relations across organizations. China developed written law in early civilization, but the Chinese laws, consisting of mainly penal codes, served as an instrument for the ruler to control his subjects. Due to lack of commercial laws and independent courts, private actors were motivated to protect their properties or expand their businesses by building personal relations with state officials or through informal institutions. The heavy reliance on personal relations in coordination greatly reduced the effectiveness of written laws as well as the development of written laws, especially laws on the rights of social members. As Jing Junjian (cited in Tan 2013) commented, aside from occasional revisions and additions following the dynasty changes, the Chinese laws were permeated by the same basic principles from the beginning to end of the imperial era. Without formal institutions

24  Core institutions in China and England on property rights in traditional Chinese society, the common people were inferior to the elites in rights, while all social members were exposed to the expropriation of the ruler and his state.

The evolution of the core institutions in pre-​1750 England How did the vastly different core institutions in the two societies by 18th century come into being? The initial conditions are important. The formation of initial institutions was spontaneous and thus, accidental. But once set up, the institutions began to mold the incentive mechanism that began to limit the choice-​set for the actors even in early developments. The major actors in the initial developments of a society were the rulers and the elites. As the economy developed, other social members would join in and play roles in the institutional developments. Actors may have had a wider range of options at earlier times in history, but the choices they circumstantially made already had effects on the institutional developments downstream. The vastly different core institutions in 18th century China and England were the results of long-​term evolutions via different paths that were continuously influenced by the choices made by the actors in each society, given the initial setups. Initial setup and early developments England is part of the European civilization based on the Greek-​ Roman heritages, Christianity and the “contractual” feudal system. After the collapse of the Roman Empire in the fifth century, Western Europe fell into anarchy and the Christian church became the spiritual leader that united the region through religious belief. The Germanic tribes that overran Western Europe formed numerous kingdoms and duchies, and developed the feudal system over time. The conditions of fragmented polities in Western Europe looked somewhat similar to China, which also had fragmentation of territory power among many vassal states in the Eastern Zhou period, as will be discussed next. Yet, the institutions supporting the fragmented polities in the two civilizations were different from the very beginning. The Greek-​ Roman heritage, in particular Greek philosophy, Greek democracy and Roman law, certainly laid the foundation for the developments of the European civilization. Although the developments of the Greek and Roman cultures were interrupted by the Barbarian Invasion in Western Europe, the Christian church preserved the Greek-​Roman learning during the thousand years of the Middle Age. The Greek-​Roman cultures were fully revived after the Renaissance in the 15th century. In addition to the Greek-​Roman heritage and directly responsible for the initial institutions set-​ups in Western Europe were the other two pillars of European civilization, Christianity and the feudal system.

Core institutions in China and England  25 Christianity set the stage for the development of pluralism in European societies, first because the Roman Catholic Church was not only the spiritual authority but also the predominant organization in medieval Europe that held coercive power independent from the secular kings or emperors. The church possessed enormous wealth, fiscal resources and strong bureaucratic capacity. It owned a quarter to a third of all land in most European countries. Bishoprics and monasteries held ecclesiastical manors all over Europe, many of which were larger than lay manors.Through the Gregory Reform and investiture conflict in the 11th century, the Catholic Church developed into a coherent hierarchical bureaucracy with full control over the appointments of its staff, long before the establishment of national states in Europe (Lopez 1967; Fukuyama 2011). The power wrestling between the church and kings gave feudal lords the leverage to resist the coercion from the secular rulers. The restriction on the monarch’s power in England started with the checking hand of the Roman Catholic Church that held papal authority over the English church until the English Reformation in the 16th century.The Pope controlled the appointment of the Archbishop of Canterbury, the principle leader of the English church, and could excommunicate the English king or issue a local interdict.2 The Magna Carter was essentially the outcome of a three-​way struggle among the church, the English crown and the English lords. Pope Innocent III excommunicated King John and placed England under an interdict for five years from 1208 to 1213 as King John refused to accept the Pope’s appointee, Stephen Langton, as the Archbishop of Canterbury. Overpowered by the Church, King John yielded in 1213. In 1215 Archbishop Stephen Langton assisted the barons in forcing the king to sign the Magna Carter. Drafted by Stephen Langton based on an old charter, the Magna Carter promised the protection of the rights of the church, then the rights of the barons against the crown’s abuses (Daugherty 1956). Moreover, Christianity provided the basis for the development of the rule of law in England. As Francis Fukuyama pointed out, in European societies the rule of law was rooted in Christianity. Since the conversion to Christianity in the seventh century, the English society developed the perception that God’s law was older, higher and more legitimate than the secular ruler. Secular kings acknowledged that they lived under a law that preexisted and came from divine authority (Lopez 1967; Fukuyama 2011). The sovereignty of religious laws led to the general respect for law and social belief that rulers have to operate under those laws. Christianity also contributed to the development of the rule of law or rule-​ based coordination by shifting the European societies out of tribal or kin-​ based organizations at an early time. The Catholic Church banned cross-​cousin marriage, promoted exogamy and endorsed women’s rights to property, albeit for its own interests (Fukuyama 2011). In England, Christianity had begun to undermine the Anglo-​Saxon tribal organizations since its arrival. The early exit from tribal society cleared the way for development of non-​kin organizations. The main organizations in medieval England, including manors, towns,

26  Core institutions in China and England merchant gilds and craft gilds, were basically organized on a non-​kin basis. Non-​kin organizations facilitated the development of rule-​based coordination in economic and social activities, as the exchanges across non-​kin organizations and among members within the organizations tended to be impersonal. For impersonal exchanges, organizations need to rely on written rules and contracts rather than kinship and acquaintance ties among individuals. The feudal system, the other pillar institution in Medieval Europe, emerged in the Frankish Realm under Charlemagne in the ninth century. The Norman Conquest brought the feudal system to England in the 11th century.William the Great rewarded his warriors with fiefs in every part of England (Lopez 1967). The development of the feudal system in Christianized societies was a further step towards pluralism and rule-​based coordination. In feudal relations, the king who granted lands to his lords and the lords who held the land under the king were bonded by reciprocal obligations through the oath of allegiance. So were the lords who further granted their landholdings and their vassals who received the land. That is, the feudal relations underlining the manorial organizations were contractual exchanges by nature. In the exchange, the king provided the defense of the kingdom in return for military services and feudal revenues from his lords. Within a manor, the lord provided protection and justice for the peasants or villains on his demesne in exchange for their labor services (North and Thomas 1973). The “contractual” feudalism further weakened the coercive power of the English monarchy. The English kings did not have full control of an army, and neither did they have a bureaucratic system for tax collection. They depended on their lords for the army and revenues. With manors, land, serfs, armored knights and fortified castles, the lords as the landowning subjects were in a good position to defy the king, although they owed an alliance to him. This was in contrast to the Chinese kings in the late Warring State period (475–​221B C ) who had direct control over the standing armies to keep their landowning subjects subdued, as will be discussed later. Therefore, the English crown had rather limited power over its subjects from the very beginning. But weak rulers could result in endless disorder and chaos, instead of the development of pluralistic institutions. The weak monarchy in the case of England led to gradual dispersion of power based on written rules, because the kingdom developed from a “contractual” feudal system in a Christianized society where the rulers were compelled to obey laws and tribal organizations were broken down. Incentive mechanism and subsequent developments The initial institutional setups of Christianity and the feudal system in England produced an incentive mechanism supportive of the development of pluralism and rule-​based coordination. The split of power between the Christian church and secular rulers at the onset of the Middle Age motivated both sides to seek allies in order to gain the

Core institutions in China and England  27 upper hand in the power struggle, which allowed the feudal lords to develop power independent of the king. Similarly, when the lords grew stronger in power, the crown began to seek new allies from other social groups to counteract the challenges from the nobility. Thus, the initial setup gave the ruler incentives to grant “rights” to his subjects, for his own needs of counteracting his present rivals or obtaining new revenue sources, which were essentially the same. On the other hand, his subjects in various social groups had incentives to leverage their advantages to request for rights when opportunities arose, because there were reasonable chances that the ruler would grant such rights for his own interests. Furthermore, the initial institutional setups motivated social members to pursue their interests by creating or altering the written rules, namely, formal institutions. The sovereign of religious laws put the ruler under the law and laid the ground for the development of rule-​based coordination among the actors, including the ruler. Impersonal exchanges among non-​kin organizations also supported the development of written laws and contracts as the basis for coordinating activities in society. In this account, the actions of the upper nobility in the Magna Carter event set a precedent not only in restricting the ruler’s power but also in settling power struggles through written rules. In written form, the Magna Carter specified the following provisions: the Great Council had the power to meet outside the authority of the king and was not appointed by him; the members of council were allowed to renounce their oath of allegiance to the king in pressing circumstances and could overrule the will of the king; and the king was not supposed to impose major taxes without the consent of the council. The Magna Carter was confirmed in common law in the late 13th century. Briefly, the way in which the upper nobility imposed restrictions on the ruler deeply influenced other social members in their respective struggles for rights in subsequent developments. Generally speaking, the opportunities for other social groups to establish economic rights mainly came from economic developments.The developments of the economy produced profits or gains in new economic areas, and social members in the areas could then leverage their advantages to bargain for rights over the gains through their organizations. The ruler was likely to grant the rights, out of the self-​interests as described above, by issuing written documents that bonded the relevant sides with specified obligations. To consolidate their economic rights, these social groups would further seek for political rights that would back up their economic rights as part of their independent coercive power. Following the nobility, self-​governed towns acquired coercive power. Towns or boroughs gained autonomy by receiving a charter of liberty from the crown or lords. By the end of the 13th century about 500 towns or boroughs had been chartered in England (Greif 2005). Basically, the townspeople, such as merchants, traders, small retailers, craftsmen, artisans and laborers, had opportunities to attain liberty, because the expansion of trade and commerce made the towns as potential sources of revenue in addition to the manors. Yet, what enabled the

28  Core institutions in China and England towns to use the opportunities for gaining independence was the incentive mechanism described above. The king was willing to grant royal charters, as he needed a balancing force to countervail the lords whose power threatened the crown. As Adam Smith (cited in Fukuyama 2011) described, both the king and the burghers hated and feared the lords, so the king and burghers supported one another for mutual interests. The king granted cities independent charters and laws allowing them to counterweight the lords.3 The king also chartered the towns to create a revenue source alternative to the manors so that he would not be overly dependent on the lords as revenue providers (Greif 2005). The growth of independent towns was closely intertwined with the development of merchant gilds and the rise of merchants in coercive power. In many cases merchant gilds developed side by side with the towns. Some towns were, from the very beginning, controlled by organized merchants who specialized in various lines of trades. “Some scholars even argued that the earliest form of municipal constitution and merchant gilds were one and the same thing” (Unwin 1904, 17). Thus, merchants, no matter if they were local retailers in small inland towns or large exporters in port cities, were the most prominent town-​dwellers who controlled the major businesses in towns and cities as well as the town or city councils. As well known, the wealthiest merchants in England in the 14th century were those engaged in wool trade with continental Europe. And the leading wool traders were the mayors of the port cities or towns, including London. The expansion of commerce, especially the overseas trade in the following century, provided greater leverages for merchants to acquire coercive power. The most important organizational instrument for merchants to establish their economic and, further, political rights were merchant gilds. Merchants in England developed their gild organizations as early as in the 11th century. Merchant gilds proliferated in the next few centuries and governed the independent towns (Milnes 1926; Werveke 1963). Strong merchant gilds, such as the Merchants of the Staple and the Merchant Adventurers arose, with the expansion of the wool trade with the European continent in the 14th century. These organizations enabled the merchants to obtain exclusive rights over a specific trading area from the crown. In return, the crown collected tax revenues from the gilds (Power 1963). For instance, the Merchants of the Staple, incorporated in 1354 under a royal charter, was granted a total monopoly over the wool exports from England to the continent in exchange for tax revenues to the crown. The Merchant Adventurers received a royal charter from the crown in 1407, under which the company was granted a monopoly over the exports of wool cloth to the European continent in return for tax revenues. Merchants engaged in domestic commerce, big or small, established their rights in a similar way. In general, merchants obtained a royal charter or charters from town councils that granted them exclusive rights over a well-​defined line of trade in which they specialized, and in return they took the obligation of paying taxes. Such rights were in effect property rights or economic rights for the merchant organizations.

Core institutions in China and England  29 Underpinning the contractual exchanges between the ruler and the merchants were the ruler’s motives for getting new sources of tax revenues and new allies against the lords, as well as merchants’ motives for securing rights over the economic gains in trade. Supporting the contractual exchanges and the rights of merchants was the legal infrastructure rooted in “rule of law.” The court of Common Pleas was set up for commoners after the Magna Carter. Common law developed into recognizable form between the 13th century and 16th century. Merchants had access to local courts such as municipal courts run by the self-​governed towns.They could appeal to or petition higher courts, such as the Chancery and Common Pleas, to protect their rights. There were also specialized jurisdictions such as mercantile and admiralty courts for judging commercial cases across regions (Richardson 2004; Greif and Tabellini, 2010). The protection of economic rights provided great incentives for merchants to expand their business, to explore new areas of trade and to build up their wealth. The expansion of trade with continental Europe, the Far East and across the Atlantic further enriched and empowered merchants as a social group. The Tudor monarchs began granting exclusive rights to trade across seas and oceans worldwide in the 16th century. The Muscovy Company attained the right to the trade in Northern Europe beyond the Baltic in 1555; the Levant Company took the Mediterranean region in 1560; the East India Company, formed in 1600 under the reign of Queen Elizabeth I, monopolized the trade in Southeast Asia (Richardson, 2004). These organizations greatly increased the economic muscle of the merchants as a social group. Backed by their wealth and economic power, merchants gradually developed political power as well, but it took a long time and many setbacks. At the time of the Magna Carter, merchants were in a low social stratum and vulnerable to the lords. Although each borough could send two burgesses to Parliament as representatives after the Model Parliament of 1295, the burgesses did not have much say over tax matters, and the crown could enfranchise or disfranchise boroughs at will.The division of Parliament into two houses in the 14th century did not increase the power of the town representatives right away. The Lords, made up by the nobility and clergy, remained much more powerful than the Commons, made up mainly by merchants and landed gentry, for a long period of time. In the 16th century, the crown, confronted by the Lords for the royal confiscation of church lands, cultivated the Commons as allies in Parliament. The Commons began to rise in political power. The Commons secured its final victory over the Lords a century later through the Civil War and Glorious Revolution in which merchants played a critical role (North and Thomas 1973; Acemoglu and Robinson 2012). Thus, in the case of England, the incentive mechanism embedded in the initial institutions set in motion a social mechanism that can be described as “group upward mobility” or “group mobility” (Tan 2013). Briefly, group mobility refers to the alterability of power distribution not only between the ruler and his subjects but also among major social groups or classes. Under

30  Core institutions in China and England group mobility, lower-​stratum social groups were able to establish coercive power vis-​à-​vis the ruler and elites over time, as the organizations in these groups gained more economic and political rights through formal institutions. As will be discussed in the next chapter, artisans and small manufacturers as a social group subordinate to merchants also gained independent coercive power in the 17th century, with the further expansion of the economy. By granting economic rights to towns and merchant organizations, the ruler in effect gave up part of his control over his subjects, which started the process of redistributing coercive power between the ruler and his subjects as well as among his subjects. The ruler chose to grant rights, not because he was benevolent but because this was a better choice for him, constrained by the existing institutions. Thus, the ruler started with self-​interested motives of strengthening his power, yet ended with a further dispersion of the coercive power in society, given the constraints. Of course, it was easy for the ruler to renege his promises on his subjects in earlier developments, as evidenced by the tug-​of-​war between the lords and the king in the immediate post-​Magna-​ Carter period. However, once institutions further developed as the consequence of the choices made continuously by the actors, it became increasingly harder to reverse the direction of the institutional evolution. In brief, the core institutions in England evolved towards greater pluralism and rule-​based coordination. In the 15th century, feudal monarchs in Western Europe began to turn into the so-​called absolute monarchs. Yet, with the traditional institutions such as the Estate-​General or the Cortes, rule of law, free towns and customary rights of the elites, even the strong monarchs such as the French and Spanish kings achieved only a kind of “weak absolutism,” which is qualitatively different from the “oriental despotism” (Fukuyama 2011). In England, the royal power was even more limited than on the continent. By the 16th and 17th century, it was already hard to reverse the direction of the institutional evolution in England, with the “lock-​in” effects produced by the cumulative developments of institutions in the past. The lock-​in effects refers to the symbiotic relationship between organizations and institutions (North 1990). As the rules governing the power distribution in society, the core institutions provide incentives for those actors who had a stake in the existing institutions to maintain them. Other actors may want to alter the institutions to their favor when circumstance allowed. Whether the for-​change actors could succeed in reversing the direction of institutional developments depended on the relative strength of the relevant actors. In the case of England, the crown, who intended to move towards absolutism, did not succeed. In the intensive state-​building in the late 16th and early 17th centuries, the English crown expanded its power in attempt to build up an absolute monarchy on the European line.The Stuart kings tried to combine the executive, legislative and judicial power in the monarchy. Major measures included: imposing royal prerogatives of issuing proclamations that carried the quasi-​legislative power; employing the king’s Court of Star Chamber as the higher court to rule cases by the crown’s preference; extending the royal administrative apparatus to bypass

Core institutions in China and England  31 parliament; and strengthening the royal control over the judiciary system and firing chief justices for ruling against the crown’s will. As a result, the rights of the social members protected by the traditional institutions were “considerably less secure,” in comparison with the previous century (North and Weingast 1989, 814). Nevertheless, the ruler’s expanding his dominion at the expanse of his subjects met fierce resistance from the social members whose rights and interests were intruded. The major social groups, including the lords, clergy, landed gentry and merchants, formed a coalition led by parliament to regain their rights and interests associated with these rights.These social groups won the fight eventually, as they were well organized, coordinated and possessed enough economic and political power under the existing institutions. The struggles in the period from the Civil War to the Glorious Revolution resulted in the strengthening of pluralism and rule-​based coordination as the core institutions in England. The Star Chamber was abolished and the royal administrative apparatus dismantled. The supremacy of common law courts and independence of judiciary were assured through legislation. Parliament established its permanent role in the day-​to-​day running of the government. Although it managed the government jointly with the king, parliament gained a central control over financial matters, particularly, exclusive authority to raise new taxes. Finally, the Bill of Rights reiterated the rights of parliament and specified certain rights of individuals as constitutional principles. The ruler was unable to establish an absolutist state in 17th-​century England because the core institutions in society had evolved along the path of pluralism and rule-​based coordination for a sufficiently long time by then. Those actors who had stakes in the traditional institutions had developed enough coercive power to fight against the ruler’s push towards absolutism. Institutional changes are path-​dependent but not deterministic, of course. The political happenings in the period from the Civil War to Glorious Revolution were full of twists and contingency did play a role. However, no matter what would have happened, the chance of constructing a Chinese-​style despotic state in 17th-​century England was close to nil, given the upstream institutional developments. Dictatorship in various forms could occur, as it did, yet it could not last. The actors, including the rulers and his subjects, could change the institutions, but only within a limited choice-​set underlined by the core institutions via the incentive mechanism. There could be a reversal in the direction of institutional changes, but the changes would be slow and gradual rather than sudden and radical. Finally, England, as the forerunner of industrialization, was part of the story of “the rise of the West.” Other societies in Western Europe had the same initial conditions that shaped similar traditional institutions as England, although the power distribution among the ruler and the major social groups in these societies were not as balanced as in England. Due to these differences, plus historical contingencies, these societies did not achieve what England had achieved in the late 17th century. However, within the next two centuries,

32  Core institutions in China and England these societies established political and economic systems underlined by the same core institutions as England, and industrialized in the second Kondratiev wave around the mid-​19th century.

The evolution of the core institutions in pre-​1750 China The initial settings for the formation of a large-​scale absolutist or despotic state in China at least could be traced to the Zhou dynasty (from the 11th to the third centuryB C ). Unlike the Greek-​Roman civilization that was somewhat interrupted by the Barbarian Invasion in Western Europe, the Chinese civilization has been relatively continuous. The initial period for China’s institutional development that required investigation was much earlier than in the case of England. Initial setups and early developments The Zhou Dynasty consisted of two periods,Western Zhou (the 11th century–​ 770BC ) and Eastern Zhou (770–​249BC ). On the surface, the initial settings looked alike in the cases of China and Western Europe. China slipped into chaotic wars among vassal states4 or dukedoms in Eastern Zhou after the Zhou kings lost control over the vassal states towards the end of Western Zhou, just as Western Europe fell into anarchical wars among small kingdoms after the collapse of the Roman Empire. However, from the seemingly similar setting of fragmented polities, the warring vassal states in China were unified into a single centralized state in 221BC , soon after the Zhou dynasty ended, whereas the warring kingdoms in Western Europe, including England, continued to evolve as separate polities and eventually turned into independent nation states in the 16th century. Two major factors in the initial settings in the Zhou Dynasty stood out in distinguishing the Chinese case from the case of England: kinship-​based feudalism and the early dominance of the secular philosophies of Legalism and Confucianism. Both factors were favorable for the unification of warring vassal states, as well as the development of absolutism and relation-​based coordination as the core institutions in Chinese society. The Zhou Dynasty was China’s only feudal period.5 However, the feudal system developed in Western Zhou differed considerably from the feudalism in medieval Europe. As discussed above, the European feudal system started in Christianized societies where tribal organizations were already broken down, and the manors were organized on non-​kin basis. In contrast, Zhou China was a society dominated by kinship. The feudal system in Western Zhou was built strictly upon zongfazhi (patriarchal lineage scheme), a complex lineage system. Basically, the scheme held the oldest son as the hereditary head of the major lineage and other sons as the hereditary heads of the minor lineages. The Zhou king as the head of the major lineage infeudated his clansmen by lineage order. He granted fiefdoms, in the form of vassal states, to the heads of minor lineages

Core institutions in China and England  33 who received aristocratic titles of zhuhou6 (vassal duke).Within each vassal state, the vassal duke who stood as the head of major lineage in that state then granted lower-​rank aristocracy to his kinsmen in minor lineages (sub-​minor lineages to the Zhou king). At the beginning of Western Zhou, the Zhou king, King Wu, granted 71 vassal states and 53 of them were ruled by his clansmen under the same surname.The succeeding Zhou kings continued to enfeoff their clansmen while conquering more geographical areas (Fu 1993; Wang et al 2002; Zhao and Zhao 2008). The kinship base of the feudal system in Western Zhou made the wars among the vassal states “centripetal” in the Eastern Zhou period. Although the Zhou king lost control over the vassal states, the fact that all the vassal states were infeudated by the Zhou king as the head of the Zhou clan planted the seeds for re-​unification. That is, the patriarchal lineage scheme maintained the ethnic identity of the vassal states while the Zhou territory expanded in size. The Zhou dynasty had a small territory initially at the time of King Wu. In the three centuries of Western Zhou, the Zhou territory was greatly enlarged, yet all the Zhou vassal states over this enlarged area identified themselves, the Zhou or Huaxia people, as against the neighboring tribes that were called “yi,” “rong,” “di” and “man” (Zhao and Zhao 2008). Thus, the stronger dukes of the vassal states in Eastern Zhou carried the ambition to unify the entire Zhou territory. In comparison, the medieval kingdoms in Western Europe were set up and developed by different Germanic tribes with no history of unification such as the Anglo-​Saxons, Franks, Visigoths, Ostrogoths, Vandals, Burgundians, Lombards, and so on.That is, they were not fiefdoms granted by a single “higher” kingship, unlike the vassal states in Western-​ Zhou China. Tracing back further, the Roman Empire that the Germanic tribes brought down was a confederation of city-​states essentially, in contrast to the Western Zhou realm organized by the hierarchical lineage system. As Robert Lopez (1967, 15) described, Rome, born a civitas (city state), constantly endeavored to extend her rule not by destroying other city-​states but by attracting them into her orbit and making them junior partners. Where no city-​states existed, she founded them or encouraged the local population to set them up.Thus, the Roman commonwealth grew as confederation of urban cells, held together by a skeleton provincial administration, but fully autonomous in internal affairs. In short, the heterogeneous origins of the kingdoms in medieval Europe made it hard to create a single centralized polity over the large geographic area. Reflecting the “centripetal” nature of the wars waged by the vassal states in Eastern-​Zhou China, the number of vassal states declined from over a hundred at the beginning of the Spring and Autumn Period (770–​475B C ), the first period of Eastern Zhou, to seven major ones in the Warring State Period (475–​ 221BC ), the second period of Eastern Zhou. Finally, the Qin state conquered the other six states and unified China.

34  Core institutions in China and England The kinship-​based feudalism favored not only the formation of a single centralized state but also the development of absolutism. Different from the kings in medieval England who held a contractual relationship with their vassal lords, the dukes of the vassal states in Zhou China held unconditional authority over their vassals simply because they were the heads of the major lineages within the respective states. As the feudal relations in Western Zhou were entirely cemented by patriarchal lineage orders, a vassal duke’s absolute rule over his state came strictly from his superior status in the lineage order. His vassals, qing, dafu and shi, as the heads of minor lineages in the state, had to obey him unconditionally simply because they had lower status in the lineage orders. Additionally, under the Zhou system the rulers of the vassal states had armies to command directly,7 without depending on the noblemen’s private troops. Therefore, the Chinese noblemen were “born” inferior and held much less leverage against their rulers, compared with the lords in medieval England. For the three centuries of Western Zhou, the patriarchal lineage scheme provided the organizational structure for the feudal system and established the unconditional authority of the vassal dukes in their respective states. The patriarchal lineage scheme slowly fell apart in Eastern Zhou, but the absolute rule of the vassal dukes was already in place. Ambitious noblemen, despite their inferior ranks in the lineage order, began to vie for the ruler’s position in the vassal states, attracted by the absolute power. In the Warring State period, the vassal dukes started calling themselves kings, and the kings of all the major states developed their standing armies. In brief, vassal dukes or kings in Zhou China started as strong absolute rulers, compared with the weak position of the feudal monarchs in medieval England. Note that the vassal dukes or kings’ absolute authority does not mean that they faced no dangers to their rule. On the contrary, the rulers of the vassal states were faced with great dangers of usurpation or court revolts that intensified in the Eastern Zhou period.The desire for the ruler’s absolute power and material extravagance often caused deadly struggles for the ruler’s position inside the courts, among the top-​official noblemen who were mostly the vassal duke’s kinsmen or relatives.Yet, these court struggles, either motivated by greed or inspired by political ambitions, were always carried out through personal maneuvers or intrigues, without producing any written rules on the restriction of the ruler’s absolute power. The kinship-​ based feudal system also laid the groundwork for the developments of kin-​based organizations as the dominant form of social and economic organizations in society. Although the formal scheme of zongfazhi fell apart, the patriarchal principles survived and continued to support the development of kin-​based organizations.After private landownership developed towards the end of Eastern Zhou, families, to be exact extended families, became the basic units in agricultural production and individuals were closely tied with lineage in landownership. The headship of families always passed in the male line from fathers to sons. Kin-​based organizations also expanded from farming to trade activities, with commercial properties derived from landed wealth

Core institutions in China and England  35 in early developments. The growth of kin-​based organizations facilitated the expansion of relation-​based coordination in economic activities from early on. The other major factor in the initial settings, the early dominance of Legalism and Confucianism in thinking, also accounted for the formation of a centralized absolutist state early on in Chinese civilization. Like in ancient Greece, there emerged many great philosophers and thinkers in ancient China. The Eastern Zhou period was well-​known for the flourishing of a “Hundred Schools of Thought,” including Confucianism, Legalism,Taoism, Laozi, Zhuangzi, Mozism, and so on. These schools of philosophies and political thinking competed with one another and were put into practice in the vassal states. The leading scholars of various schools, such as Confucius, Shang Yang, Han Fei and Mozi, moved across the states spreading their ideas and persuading the rulers to adopt their theories. The competition and the experiments led to the selection of the best or the “fittest” theories by the rulers in state-​building.The successful application of fajia (Legalism) by the Shang Yang reforms transformed the Qin state from the weakest to strongest one among the seven vassal states, and the Qin king eventually unified China with the founding of Qin Empire (221–​207B C ). The Han Empires (206BC –​220A D ) further improved and perfected the Chinese absolutist state by adopting rujia (Confucianism) as the state “official ideology.” Therefore, the formation of the centralized bureaucratic state in China was not merely the result of military conquering but also the triumph of the early philosophical thinking. The Hundred Schools of Thought served as a rich source of political theories for state building in the Eastern Zhou period. Also, thanks to the theoretical underpinning, the Chinese absolutism was not only strong but also long-​lasting. The two major schools, Legalism and Confucianism, both supported the absolutist polity. Legalism is principally despotic. It regards the law as a mere tool for the ruler to control his subjects. The ruler, as the embodiment of the highest legal authority, is above the law. Confucianism is more sophisticated and benevolent. It rationalized the ruler’s absolute authority by prescribing the necessary order for a stable society. By Confucius, an orderly society requires that the subjects should obey the ruler and sons obey fathers unconditionally, which was derived from the patriarchal principles in Western Zhou. Meanwhile, Confucian doctrines also required that the ruler should care for his subjects just as fathers should for their children, viewing the state as an enlarged family. In brief, Confucianism offered both the legitimacy for absolutism and the standards for a good ruler. Moreover, the adoption of Confucianism as the official orthodoxy since the Han Dynasty hindered the formation of independent religious organizations that had the potential to check the secular ruler’s power in early history. As a secular yet profound theory, Confucianism provided the Chinese society with moral doctrines that were usually provided by religions in other civilizations such as Europe, India and Muslim countries. Yet, Confucianism is not a real religion that has a hierarchical organization of clergy to exert the sovereign of religious law. The absence of independent religious authority allowed

36  Core institutions in China and England a secular ruler to assume total power over his subjects in all aspects of life including spiritual belief. Thus, the Chinese state was by nature Caesaropapist (Fukuyama 2011). In Chinese society, religions such as Buddhism and Daoism were subordinate to the secular rulers. In addition, the lack of preexisting law sanctified by religion tended to encourage relation-​based rather than rule-​based coordination in society because it allowed the secular rulers to grow personal authority unimpeded by the law. Incentive mechanism and subsequent developments The initial institutional setups of the kinship-​based feudalism and the early dominance of Legalism and Confucianism in thinking produced an incentive mechanism in favor of the development of the entrenched absolutism and relation-​based coordination in the case of China. As the secular rulers of the vassal states, the vassal dukes or kings enjoyed absolute rule over their subjects and luxurious lives, while society progressed in agriculture, commerce and military technologies in the Eastern Zhou period. The Chinese kings were not challenged by any independent religious authority, neither were they bonded by reciprocal obligations with their vassals, qing and dafu. Without the needs of counteracting independent coercive forces against them, the Chinese kings had no incentives to grant rights to any groups of their subjects. Moreover, their absolute rule was justified by the great thinking of the time. The state-​building drives in the major vassal states towards the end of Eastern Zhou period was initiated by the rulers of these states. With strong incentives to improve and expand their absolute rule territorially, the kings of the major states employed some brilliant legalist scholars to carry out state-​ building reforms. The Shang Yang Reforms in the Qin State was the most successful one. Legalism was selected and adopted by the kings because it offered the most effective way to build up military power for kings to defeat the rivaling states. In other words, Legalism fits the needs of the kings in unifying China through wars. As Fukuyama pointed out, the Chinese state formation was chiefly driven by war and the requirements for war (Fukuyama 2011). As the most successful state-​building reforms in the warring states, the Shang Yang Reforms (356–​338B C ) included several key measures, First, the reforms removed fiefdom and created a state bureaucracy with multi-​level administration. Under the new Jun-​Xian Zhi (prefecture-​ county system), the Qin territory was divided into 36 Xian8 (counties) as the grass-​ root administrative units. The counties were then grouped into six Jun (prefectures) that functioned as middle-​level administration between the central government and counties. The state officials in charge of Xian and Jun were directly appointed by the king at the central government. With the creation of state bureaucracy, the Jun-​Xian Zhi further shifted the political power from the nobility to the ruler. Second, the reforms abolished the Jingtian zhi (well-​field system) based on inalienable common land of fiefs, and instituted private land

Core institutions in China and England  37 ownership. Meanwhile, laws were issued to allot a great portion of nobility land to peasants and former slaves who became landowners responsible for state taxes. The private ownership of land created a stable source for state taxation. The Qin king now had tax revenues to finance his wars, without relying on nobility contribution. Third, Shang Yang set up a new scheme of merit-​based feudal ranks to replace hereditary ranks, for the purpose of encouraging the Qin solders to win the battles. Under the new scheme, commoners could be awarded aristocratic ranks with land and slaves, as well as state offices associated with the ranks, according to their military performance. Fourth, laws were issued to prohibit the noble clans from battling one another over land and slaves. Those who engaged in the clan fights would be punished severely according to the law. This measure had the effect of invalidating and weakening the private troops of the nobility. Fifth, the reforms issued uniform weights and measures for commercial and economic activities. To some extent, the upper nobility stood to lose in the ruler-​driven legalist reforms. With the abolishment of fiefdom and the weakening of the private troops, the nobility lost their feudal base to act as an independent social force against the ruler. The noblemen yielded to the rulers in the state-​building reforms without much fight, although they revenged themselves with the execution of the legalist reformers such as Shang Yang in the Qin state and Wu Qi in the Wei state. The Chinese nobility compromised with the rulers, not only because they were “born” weak, but also because their basic interests, namely their wealth and prestige over the common people, were largely retained under the new system. Even though fiefdom was removed in general, the noble families and clans had kept large amount of land and slaves on the land as private landowners. More importantly, the noblemen continued to hold all the high offices in the state bureaucracy. With the prestige, the noblemen could evade the state taxes or shift the burden downward to slave peasants, without being bonded with any obligations to their slaves in contractual terms. The legalist reforms in the major warring states were certainly a huge victory for the rulers. By the end of the Warring State period, all the seven states established the embryonic form of state bureaucracy with multi-​level administration, private landownership in support of state taxation and standing armies based on conscription. And all the states promulgated written laws consisting of mainly penal codes (Zhao and Zhao 2008). In the Qin state, the Shang Yang reforms boosted agricultural production and, particularly, strengthened the king’s standing army, which paved the way for the Qin ruler to unify China. And the Qin Empire was built solely on the legalist principles. The Chinese nobility, on the other hand, was not exactly the losers in the state-​building reforms. As said above, they only lost the opportunities to develop independent coercive power vis-​à-​vis the king as a group force. However, the failure of the nobility in restricting the ruler’s power through formal institutions in the late Zhou Dynasty had left profound impacts on the subsequent developments of Chinese institutions. As the only social group that had the potentials to check the ruler in early developments, the Chinese nobility’s

38  Core institutions in China and England compromise to the rulers made it difficult for other social groups to restrict the ruler’s power through formal institutions in downstream developments. The centralized bureaucratic state established in the Qin dynasty and developed in the Han dynasty was a further success of the Chinese rulers. The Chinese state bureaucracy that integrated the administrative, legislative and judiciary functions served as a powerful organizational instrument for the emperor to rule society.The emperor not only governed a much larger territory but also ruled his subjects more effectively through the state bureaucracy. The Qin-​Han administrative system, with further specialization of state offices, was described as the system of Sangong Jiuqing (three lords/​chancellors and nine vassal/​ministers). The three chancellors, chengxiang, yushidafu and taiwei, held the three highest offices overseeing the overall administrative and military affairs. The ministries were specialized in well-​defined functional areas such as: ancestral-​temple ceremonies and selection of officials; state revenues, taxation and granaries; judicial matters, trials and prisons; horses and chariots; imperial guards and so on. Each ministry was subdivided into offices and bureaus (Fu 1993, Meng and Bai 2002). The state administrative system was highly centralized. The heads of the local governments were appointed by the central government and the local governments were strictly subject to the central control in all fiscal, judicial and military matters. The Chinese state started the long tradition of directly organizing economic activities as early as in the Qin-​Han period. With the establishment of the bureaucracy, the emperors acquired a strong capability of drafting labor and craftsmen for royal projects, in addition to collecting taxes, conscripting solders and enforcing imperial decrees. The Qin Empire, known for its enormous capacity to mobilize resources, drafted almost half of the male labor force in the empire to build the Great Wall, roads and the imperial palaces.The emperor also moved 120,000 wealthy households from the former vassal states to the capital city, Xianyang (Zhao and Zhao 2008). In the Han Dynasty, the government set up a series of specific offices to organize the production of salt, iron, gold, silver and copper. The state-​run workshops in textiles already reached large scale in the West Han Dynasty and produced high-​quality products for the imperial government (Wang and Wang 2012). The imperial government had also monopolized the trade of staple articles such as salt, iron and tea,9 as additional channels for state revenues. However, the imperial state of the Qin-​Han Dynasty, layered on the top of the kinship-​dominated society, was not an abrupt departure from the past. As Douglass North put it, the changes in institutions are continuous, marginal and overwhelmingly incremental (North 1990). The Qin-​Han state had a distinct patrimonial-​feudal component inherited from the Zhou institutions. In other words, the Qin-​Han state was not the “ideal type” of modern bureaucracy defined by Max Weber. Instead, it was a mixture of bureaucratic and patrimonial-​ feudal arrangements. In the Qin-​Han period, the emperors continued to enfeoff the upper tier of the Chinese elites, mainly, the imperial clans and emperors’ close associates,

Core institutions in China and England  39 based on the patrimonial principles. The imperial clans and relatives included the emperors’ kinsmen with the same surnames and the empresses’ kinsmen with different surnames. The aristocratic clans were large in number, due to the system of polygamy that lasted throughout China’s imperial era. Moreover, the upper elites were granted not only aristocratic titles with large fiefs but also state offices in accord with their aristocratic ranks. It was also a formal system of the Qin-​Han state that high-​ranking officials nominated sons, brothers and grandsons for state offices (Meng and Bai 2002). In the following centuries, aristocratic clans and large landowning families continued to dominate the state bureaucracy with full control over the nomination of officials, until the Sui and Tang Dynasties that introduced the Keju, the examination-​based recruit system, as a formal institution. The emperor’s kinship ties with his top officials in the court and bureaucracy supported relation-​based coordination at the state level.With the entanglement of state and clan affairs, the emperor’s personal will often prevailed over the pre-​ set regulations in bureaucracy management and state administration. Furthermore, the conflicts between the ruler and the noblemen continued to be carried out through personal maneuvers or informal institutions, in the tradition of the Zhou vassal states. The court intrigues and plots in the Qin-​Han period were all about making use of the ruler’s power or replacing him rather than restricting his power through written rules. This is not to say that the medieval kings and nobility in England were not engaged in court intrigues and revolts. The difference is that in medieval England there was also the possibility of settling conflicts by setting written rules. But in Qin-​Han China such an alternative appeared out of reach, given the initial developments in the Zhou period. The legalist reformers intended to build a society ruled by the emperor-​ made laws or simply ruled by law, but ended up with “rule of person.” This is basically because Legalism rendered the ruler unlimited personal power over the law. By Legalism, only the ruler is entitled to make laws and the purpose of the law was for the ruler to subdue his subjects through harsh punishments. The Qin Law was made up mainly by criminal laws that listed about 200 types of crimes and more than 70 forms of punishments, including 14 forms of execution and 16 forms of corporal tortures. It contained administrative laws covering some economic activities, but there were no self-​standing civil laws and commercial codes (Fu 1993; Zhao 2006). The Han Code was compiled on the basis of the Qin Law, with minor modifications. The first set of civil and commercial laws in China were compiled under the western influence at the turn of the 20th century (Fu 1993; Ma, 2006). In brief, the legalist practices left ineffaceable imprints on the Chinese institutions. The Qin Empire lasted only 14 years, due to ferocious tyranny. The rulers of the Han Dynasty (206BC –​8A D ; 25–​220A D ) learnt lessons from the short-​lived Qin Empire, and adopted Confucianism as the official orthodoxy, upon the foundation laid down by Legalism. Confucianism, which was expanded and refined by Dong Zhongshu and other scholars in the Han

40  Core institutions in China and England period, added a benevolent dimension to the Chinese imperial state. By the refined Confucianism, the emperor has the mandate of heaven to rule and his subjects should obey him unconditionally. Yet the rulers should be morally qualified to hold that mandate of heaven and should govern his people with benevolence or by “Dao.”10 A ruler is no longer qualified to rule if he becomes morally decayed and ferocious to his people. In this way, Confucianism legitimized the emperor’s absolute rule on the people on the one hand, and set a moral constraint to the ruler on the other. But the moral constraint was hardly binding, as it was entirely subject to the ruler’s self-​disciplining. Thus, Confucianism enhanced the quality of the emperorship while maintained the absolutism of the Chinese state. Confucian ethics advocated absolute loyalty to the ruler. The refined Confucianism in Han delineated three bonds (ruler-​subjects, father-​son and husband-​wife) and five constants (benevolence, righteousness, proper rites, wisdom and integrity) to regulate social and family relations. The virtues of absolute loyalty to the ruler, filial piety to father and obedience to husband were particularly emphasized as moral obligations for social members. As the dominant “secular religion” since the Han Dynasty, Confucianism also helped strengthen the Chinese kinship system and encouraged the developments of kin-​based organizations in society. Confucian doctrines glorified ancestors and placed family and clan above individuals, and bonded individuals with family and clans through the provision of behavior codes for family and clan members.With the dominance of Confucianism as the moral principles, family-​ and kin-​based organizations further developed in agricultural production and trade activities. As Francis Fukuyama observed, “[o]‌ne of the great constants in Chinese history is the importance of family and kinship to organizations” (Fukuyama 2011). As kin-​based organizations mainly resorted to family/​lineage rules and moral obligations within the organization, and personal trust and reputation mechanisms across organizations in regulating economic activities, relation-​ based coordination gradually took root in the traditional Chinese society. In brief, the adoption of Confucianism as the official orthodoxy in the Han Dynasty put the Chinese state on a much more solid foundation. Confucianism and Legalism complimented one another in supporting the absolutist state. Without the legal apparatus imposing ruthless punishments, the ruler could not coerce and subdue his subjects effectively. Without the education of Confucianism, social members would not accept the absolute rule of the emperors willingly and wholeheartedly. The success of the Qin-​Han Empire produced not only four centuries’ domestic peace and order but also the prototype of Chinese bureaucratic state based on absolutism and relation-​based coordination. As the choices made by the Qin-​Han rulers and elites given the initial setups in the Zhou period, the Qin-​Han institutions left lasting impacts on the subsequent developments of Chinese society. Since the Qin-​Han time, the core institutions of absolutism in Chinese society had hardly changed, despite peasant rebellions, regional

Core institutions in China and England  41 divisions and dynastic changes. This is in contrast to the case in England, where the power distribution in society turned increasingly dispersed. The Chinese core institutions lacked changes first because of the initial institutions. As described above, the initial setups strongly favored the development of the absolute rule of one person, and provided little incentives for the ruler to give in to his elite subjects in coercive power. Furthermore, the early developments of institutions had produced strong “lock-​in” effects. By lock-​in effects, as discussed in the case of England, the existing institutions provide incentives for those actors who had a stake in these institutions to maintain them. Whether other actors could change the institutions to their favor depended on the relative strength of the “for-​keep” (or against-​change) and for-​change actors. In the case of China, the institutional developments up to the Qin-​Han period had produced the strongest interest group consisting of the ruler and the elites, the two major actors in the early development of institutions. The strength of their union sustained the institutions of absolutism. Through the state bureaucracy the ruler and the elites jointly held organizational capability unmatched by any other social groups as actors in the subsequent developments. As the biggest beneficiary, the ruler and his imperial clan had every incentive to maintain of the despotic emperorship. The Chinese elites were also motivated to maintain the absolutist state because their interests were integrated tightly with the ruler’s through the state institutions (see Chapter 4). As incumbents of bureaucracy, the elites held an unconstrained “downward” coercive power over the common people, as well as the prestige and wealth associated with such power. In other words, the early formation of the centralized bureaucratic state in China created a steady union between the ruler and elites as the strongest defender for the absolutist institutions. This is very different from the case of medieval England where the upper nobility developed their group interests outside of the king’s court long before the building of the national state. After the Magna Carter, the English crown was often at odds with the lords as a group force. In the Chinese case, the success of the bureaucratic state practically blocked the chances for the nobility to act for their group interests as a collective force. Conflicts in interests certainly existed between Chinese elites and the ruler, yet the Chinese elites, who participated in the state government on individual basis, mainly resorted to the cultivation of personal ties within the court or bureaucracy for protection and promotion. Individual officials were bonded more closely with their own kin than with their colleagues, and they carried the interests and fate of their extended families or clans. There had been institutional changes or institutional reforms since the Qin-​ Han Dynasty. However, the grand reforms were invariably initiated by the emperor and his top officials, with the purpose of strengthening and improving the emperor’s rule. Those ruler-​initiated reforms could hardly alter the monopolistic power structure of the society. A major improvement to the imperial state made by the rulers and elites was the introduction of the Keju system as formal institutions, in the Sui and Tang

42  Core institutions in China and England Dynasty (581–​618A D , 618–​907A D ). The Keju system offered direct channels for talented commoners to enter the state bureaucracy through imperial examinations. As a merit-​ based recruitment system for imperial officials, Keju greatly enhanced the competence of the state bureaucracy, and equally importantly, provided upward mobility for social members including those from lower social classes.With the improvements of the state bureaucracy and further developments in agriculture and commerce, the Chinese empire reached the zenith in the Tang dynasty. However, the Keju system did not change the absolutist nature of the Chinese state. Instead, it helped sustain the absolutist institutions. First, the Keju system made a large portion, or at least, the educated portion of the population, the potential beneficiaries of the existing political system, thus provided them the incentives to maintain it. In other words, Keju strengthened the social support for the absolutist state. Second, the Keju system offered upward mobility for individuals and their clans in lower strata of the society.The upward mobility for the common people greatly enlarged the talent pool for the state administrators on one hand, and on the other reduced the necessity for the commoners to demand political rights through other channels that could possibly threat the absolutist rule of the emperor. Finally, the Keju system strengthened Confucianism as the state orthodoxy, as it made Confucian learning the basis for the imperial examination and the core curriculum for education and scholarship. As discussed above, Confucianism provided the theoretical backing for the absolutist state. Generally speaking, in early institutional developments, the ruler and the elites usually dominated the political scene, before other social groups developed any economic capability to act as relevant actors. As the economy further developed, other social members would have opportunities to leverage their economic clout for advancing their own interests. In the case of China, the expansion of commerce and trade particularly after the Tang Dynasty, did create some opportunities for city-​dwellers such as merchants to obtain economic rights. However, unlike their English counterparts, the Chinese merchants were unable to utilize the opportunities to establish independent coercive power when faced with the powerful bureaucratic state. In the case of England, merchants were able to leverage the advantages brought by the commercial expansions to bargain for rights and to push for new legislation, basically because the power distribution in society was somewhat dispersed already among the church, the crown and the lords, and the common law system was largely in place.Thus, the ruler had the incentive to grant rights to merchants for his own interests, and the developments of these rights were supported by the legal infrastructure. Comparatively, with the failure of the Chinese nobility in establishing independent coercive power, the emperor had no motivation to grant rights to his subjects in other social groups. In addition, law-​based exchange relations were hard to develop in Chinese society due to the dominance of kin-​based organizations, as well as the lack of independent justice and civil codes. As mentioned earlier, kin-​based organizations tended to

Core institutions in China and England  43 rely on informal institutions such as family/​lineage rules, personal trusts and reputation mechanisms in commerce and trade. There was lack of independent justice and self-​standing commercial codes in traditional China. With the state in total control over judiciary and commercial affairs, personal connections with the officialdom stood as the most effective way for merchants to protect and advance their interests. Thus, the Chinese merchants were motivated to build close personal relations with state officials for protection, instead of requesting formal rights. Gild organizations emerged in the Chinese cities as early as in the eighth century or the late Tang Dynasty (Peng 1995; Wang 2007). The main function of these early gilds, called hang, tuan or zuo, was to assist the state administration in urban areas. The gilds in the Tang Dynasty were initially set up by the government for the purpose of keeping commercial orders in the cities. Unlike the self-​governed cities and towns in medieval England, Chinese cities developed as administrative centers (Fairbank 1979; Zhao 2006). Local shopkeepers and craftsmen were allowed to organize their own hang later on, with license from the government, and local governments supervised both the official and private hang closely. The heads of hang were either chosen by or had close relations with the local state officials, and they mainly assisted the local governments in collecting taxes and fees and dispatching labor works (Peng 1995). Although they carried out some similar duties as their English counterparts, such as checking the quality of goods and regulating prices, the Chinese hang differed from the English gilds in the relationship with the ruler/​ state (Tan 2013). The English gilds, developed with the self-​governed towns, held some sort of contractual exchange relations with the crown, although in weak bargaining position initially. The Chinese gilds mainly served to supplement the state administration in the cities, with total subordination to the emperor. As commerce and trade further developed in the Ming Dynasty, long-​distance traders and migrant merchants developed a new type of gild organization, shangbang (regional merchant group), to serve their needs for conducting businesses in host cities and towns. These organizations operated huiguan11 in the major cities all over the country. Different from the old type of gilds, shangbang were self-​sponsored associations and much larger in scale. A regional merchant group could have huiguan in many cities and market towns. A main feature of shangbang was that they were organized on the basis of native place. Take the example of the famous Shanxi shangbang –​all hiring was restricted to Shanxi natives. As an organization based on native place, shangbang united the merchants from the same region in dealing with migrant merchants from other regions, the local hang and most importantly, the government (Wu 1985; Wang 2007). To a great extent, shangbang were the extension of the traditional kin-​based organizations in the rural areas. As they moved from villages to alien cities in flocks, migrant merchants and their families kept the kin-​based networks with them. For instance, the Huizhou shangbang, one of the strongest merchant

44  Core institutions in China and England groups, was built upon the particularly sophisticated lineage system in Anhui province (Ma 2006). With the native place as the organizational base, shangbang worked well in protecting and promoting the interests of the merchant families/​ lineages from the same region. The emperors were willing to grant legitimacy to shangbang for the same needs of state administration. With the expansion of long-​distance trade, the old type of gilds as local organizations was no longer adequate for order-​keeping in the growing cities and towns. Shangbang could fill the vacuum of the state administration over the migrant population in the urban areas (Tan 2013). Shangbang in the Ming and Qing Dynasty played a greater role than hang in protecting merchants’ interests and promoting commerce. However, shangbang still differed from English gilds in their ways of interacting with the government. Shangbang sought for business protection from the officialdom mainly by building personal connections with state officials, while English gilds mainly resorted to formal institutions to establish rights. Certainly, through relationship-​building shangbang did get the official protection needed for expanding operations and accumulating wealth. Yet, the “official umbrella” based on personal relations at best could only yield what can be called “quasi-​property rights” as part of the informal institutions, namely, unwritten rules or conventions. Quasi-​property rights could protect some merchants for some time, but could not lead to the establishment of coercive power of merchants as a social group. Without their formal rights recognized by law, or without protection of the formal institutions, the Chinese merchants’ wealth remained subject to the grabbing hands of the ruler and elites. On the other hand, without the restrictions from any group of his subjects through formal institutions, the emperor’s absolute rule continued to motivate social members to attain property protection through relationship-​ building, instead of changing laws. Social members’ dependence on relation-​ based coordination in turn reinforced the absolutist institutions. Briefly, there had been little change in the Chinese core institutions by the mid-​18th century. Economic developments in pre-​1750 China had led to neither the dispersion of coercive power in the society nor the expansion of laws in terms of granting rights to social members. Despite the huge mercantile wealth, the Chinese merchants had no access to the making of state laws via their own representatives in the government. Until the end of the 19th century, Keju remained the only formal institution for lower-​stratum social members to enter the government, but the power of lawmaking remained in the hands of the emperor, and the law remained the ruler’s penal instrument for his subjects. It is noteworthy that in pre-​1750 England, institutional changes were mostly initiated by the organizations in the social groups that had substantial interests in the changes. That is to say, the relevant actors, such as lords and merchants, pushed for new legislation or changes in the existing laws in the strife for their own economic and political rights. The changes in the laws were sustained because they could be enforced effectively by the legal system based on the rule of law. Also, the social actors who obtained some rights or improved their rights from the new legislation were able to prevent the retraction of these changes in

Core institutions in China and England  45 the laws. As each small change in the laws was sustained through the lawmaking and enforcement process, cumulative changes in the power structure of the society were made possible over time. Comparatively, in imperial China, grand reforms that altered the existing institutions to the benefit of the weak social groups were invariably taken by the emperor and his top officials. In various dynasties since the Qin-​Han time, the rulers advised by their close associates did initiate some changes in laws, mainly the administrative laws on land distribution and taxation in favor of the peasants, usually at the beginning of a new dynasty. Yet, such changes in laws were not sustained. This is not only because they were often circumvented by the elites in the enforcement process but also because the weaker social members as the beneficiaries of the changes held no institutionalized coercive power to preserve them, and the emperors could reverse the changes for their own interests at any time. In summary, this chapter shows that the core institutions in China and England evolved along very different paths: China along the state-​centered path and England along the path of greater pluralism. The initial setups in England were far more favorable for the development of pluralistic institutions than in China, given that the essence of pluralism is the spread of coercive power among social actors on contractual basis. The weight of long-​time institutional developments from different initial setups explains why it is much harder for a society to adopt institutions than technologies from foreign origins. In addition, it is noteworthy that the development of pluralistic institutions in England started from written contracts between the ruler and the elites. It is the upper nobility rather than the mass of the poor people who checked the ruler’s power through formal institutions at the beginning. The reason is perhaps that the elites possessed stronger economic and military leverages against the ruler, and the small number of the upper nobility made it easier to conduct organized actions. This observation carries some implications for the transition to pluralistic institutions for societies with despotic traditions like China, as will be discussed later.

Notes 1 Contract-​ enforcement institutions in traditional Chinese society were often described as relation-​based and those in pre-​modern England were described as rule-​based. For comparative studies on the market-​supporting institutions in China and England or the West, see J.T. Landa (1994), J.S. Li (2003), D. Ma (2006) and A. Greif and G. Tabellini (2010), for example. However, in this book the expression “relation-​based” and “rule-​based” are used more generally to describe the institutions of coordinating all economic and political activities in a society. 2 Interdict refers to an ecclesiastical penalty. A local interdict against a country or kingdom is like an excommunication against an individual. It would cause all churches in the country to be closed and almost all sacraments not to be allowed. 3 See A. Smith, An Inquiry into the Nature and Causes of the Wealth of the Nation. Indianapolis: Liberty Classics, 1981. Book III, ­chapter 3 (cited in Fukuyama 2011).

46  Core institutions in China and England 4 The vassal states were feudal dukedoms and later, kingdoms, not bureaucratic states, although they were called “states” in ancient Chinese. 5 Feudal system generally refers to the institutions of fief and vassalage, featured with the grant of fiefdom, benefice or a delineated territory to the vassals. By the general definition, China was under feudal system only in the Zhou Dynasty. Yet, historians in China (since 1949) regarded China’s entire imperial era as the feudal period, influenced by the Marxist view that the “feudal stage” is a precursor of the “capitalist stage” (see Fukuyama, 2011). 6 The vassal dukes had five ranks: gong, hou, bo, zi and nan, depending on the size of their vassal states deemed by their position in the hierarchy of lineage order. For simplicity, all the heads of vassal states are called vassal dukes in the discussions here. 7 The state army was made up by the rulers’ clansmen, mainly middle and lower nobilities and commoners dwelling around the capital of the states. They were engaged in farming regularly but trained for warfare. All the vassal states had standing armies in the Warring State period (see Yang, 2002). 8 The number of counties was increased to 41 later. See Meng and Bai, 2002. 9 For a summary of the state monopoly over staple goods in the entire imperial history, see Fu, Zhengyuan, 1993. pp. 94–​95. 10 “Dao” meant a stable equilibrium between the heaven and humans in Dong Zhongshu’s doctrines but was usually interpreted as moral principles by the common people. A demoralized ruler or a ruler who acts against the moral principles would upset the equilibrium or lose the “Dao.” 11 Huiguan refers to both the organizational form of the merchant groups and the physical place of their headquarters or meeting halls. Huiguan first appeared during the Reign of Emperor Wanli (1573–​1619A D ) in the Ming Dynasty. See Ho, Ping-​ti 1966, p. 39.

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3  Core institutions and the first Industrial Revolution

As shown in Chapter 2, the core institutions supporting the economic activities in Chinese and English societies were very different by the mid-​18th century. This chapter will explore the mechanism that connected the core institutions to the economic developments and examine how the differences in these institutions ultimately accounted for the occurrence or absence of the Industrial Revolution in the two societies. The significance of the first Industrial Revolution lies not with the GDP growth per se in that period but with the fact that it started the era of modern economic growth based on continual technological progress. By today’s standards, Britain’s1 GDP growth during and immediately after the first Industrial Revolution was not impressive at all. By the estimation of Crafts (cited in Freeman and Louca 2001, 154), Britain’s national income grew at an average annual rate of 1.32 percent from 1780 to 1800 and 1.97 percent from 1800 to 1834. But, “[t]‌his is nonetheless a very substantial change, and it marked a transition to a sustained rate of economic growth over a long period greater than any that had ever been previously achieved” (Freeman and Louca 2001, 154). As denoted in Chapter 1, some late-​developed economies in the following centuries achieved much faster growth in their catch-​up industrialization than Britain did in the late 18th century. That is mainly because they benefited from increasingly higher levels and larger stocks of technologies made available by the proceeding of successive techno-​economic paradigms since the first Industrial Revolution. Thus, faster growth of latecomers should not diminish Britain’s role of pioneering modern economic growth.

The Industrial Revolution in Britain By the mid-​18th century, the core institutions of pluralism and rule-​based coordination were largely established in society. The coercive power was dispersed through formal institutions between the ruler and his subjects as well as among the major social groups such as nobility, clergy, landed gentry, merchants and artisans. For the ruler-​subjects relations, the ruler could neither expropriate the properties of his subjects at will nor raise taxes without the consent of his subjects in the major groups. For relations among social groups, DOI: 10.4324/9781003202042-3

50  Core institutions members in the major social groups all had relatively secure economic rights, regardless of their wealth and social status. This means that the property of individuals from lower social strata was protected not only from the grabbing hand of the ruler but also from the predation of the elites. Economic rights in this study mainly refer to property rights (see Chapter 1). It has been widely acknowledged that secure property rights held the key to modern economic growth. In the context of this study, the relative equality in economic rights for individuals across social classes appeared crucial to the happening of the first Industrial Revolution. Members in the major social groups in 18th-​century Britain could protect their economic rights and advance their interests through formal institutions in several ways. First, they had some say in legislation through their representatives in parliament. In parliament, the House of Commons had gained considerable power vis-​à-​vis the House of Lords by then. Second, individuals could also protect their rights and settle disputes through the court system based on common law. By the 18th century, Britain had developed an independent judicial system that could uphold justice for the common people, free of the control of the Crown. Third, as the most important way to influence the legislation, commoners could petition parliament directly. And practically anybody can petition (Acemoglu and Robinson 2012). Around the time of the Industrial Revolution, social members petitioned parliament intensively, on behalf of individuals, gilds, companies, sectors or industries. The petition activities led to the enacting of many bills that facilitated the growth of new industrial interests. There was a sharp increase in parliamentary activities after the Glorious Revolution and the number of acts that involved altering property rights and the provision of public goods grew enormously (Mokyr and Nye 2007). Compared with the case of 18th-​century China, the core institutions in Britain were conducive to the happening of the first Industrial Revolution at least in three major ways. First, the dispersion of coercive power allowed social members to challenge the authority in learning. And the relative equality in economic rights for individuals across social classes enabled close communication between elite scholars and the working people. Thus, the pluralistic institutions helped accelerate the expansion of what Joel Mokyr (2003) called “useful knowledge” as the epistemic base for technological innovations in Britain. Second, equal economic rights for social members also permitted the emergence of the new class of industrial entrepreneurs. The Industrial Revolution was not possible without these entrepreneurs acting as the agents of change. Finally, the creation of state-​enforced patent rights as part of the economic rights for individuals shielded innovators from the grabbing hands of the ruler and elites, and directly motivated the making of radical innovations in the Industrial Revolution. Expansion of the “useful knowledge” The British Industrial Revolution is, first of all, a technological revolution. It introduced a constellation of technological innovations in a range of industries

Core institutions  51 and created the first techno-​economic paradigm, “the age of cotton and iron.” The innovations, particularly those on cotton-​spinning, iron-​making, water wheels and steam engines, led to mechanization of production as well as the emergence of the modern factory system. The resultant improvements in productivity brought about an acceleration of growth in industrial outputs in Britain.The output of the cotton industry grew at an annual rate of 6.2 percent from 1770 to 1780 and 12.76 percent from 1780 to 1790 in real term. The output of the iron industry grew at an annual rate of 4.47 percent from 1770 to 1780 and 3.79 percent from 1780 to 1790 in real term (Freeman and Louca 2001). Associated with the industrial growth was a wave of canal and turnpike road constructions in Britain from the 1760s onward. Before the first Industrial Revolution, there had been great technological inventions in both European and Chinese societies. However, these inventions had been sporadic in time and space, limited by the narrow base of knowledge. They could generate some output growth, but the growth always petered out when the knowledge base for the new techniques were exhausted. Thus, an important reason for unsustainable economic growth prior to 1750 was the lack of “useful knowledge” to support continuous development of new technologies, as Joe Mokyr (2003) pointed out. “Technology consists of instructions or recipes on how to make things or supply a service” and “useful knowledge is the background knowledge of natural phenomena and regularities that can be exploited to yield these instructions” (Mokyr (2002). Before 1750, the bulk of techniques in the world rested on very limited useful knowledge. Inventions or techniques had been discovered largely through trial-​and-​error experimentation, without much understanding of why they worked. As Mokyr (2002, 11–12) described, [i]‌ t is not an exaggeration to say that before 1750, most technology consisted of engineering without mechanics, iron-​ making without metallurgy, farming without organic chemistry, animal breeding without genetics, water power without hydraulic theory, food preparation without nutritional science, and medical practice without physiology and microbiology. One of the important reasons for the occurrence of the Industrial Revolution in Britain is that the useful knowledge in society expanded to such a point that it made possible a technological breakthrough in the mid-​18th century. So why did useful knowledge develop relatively faster in Britain (or Western Europe) than elsewhere in the world? In comparison with the case of pre-​ 1750 China, the Scientific Revolution of the 17th century that gave birth to modern science stood as a crucial factor for relatively faster expansion of useful knowledge in Britain and Western Europe. Modern science, in the fields of mathematics, physics, astronomy, biology and chemistry, as the essential part of useful knowledge, provided the theoretical foundation for technological developments.

52  Core institutions Of course, the birth of modern science could be traced to the origin of European civilization, the Greek-​Roman culture. The Renaissance of the 15th century prepared the Scientific Revolution of the 17th century by reviving “the classic era” and secularizing the European societies. And modern science owed its methodologies to the Greek philosophy (Hirst 2012). However, to a large extent, it was also the dispersed power structure in Western European societies that permitted the Scientific Revolution to proceed as a monumental event in challenging the spiritual and intellectual authority in society. The split of coercive power between secular rulers and the church made it easier to challenge one of them than in the case of “Caesaropapism.” As a result, despite the strong opposition of the church in the beginning, the Scientific Revolution that disputed Biblical teaching and overturned the Greek’s theory on the universe went on and eventually got its way. It appears to be no coincidence that Britain, where pluralistic institutions were better developed, took the lead in the establishment and application of modern science. The secular ruler of Britain had given support for the development of modern science since the 1660s, if not earlier, much thanks to Francis Bacon’s theory on the social utility of science. Bacon, the scientist, philosopher and the Lord Chancellor of England, harnessed science for the service of state-​building and advocated that science could increase the prosperity and wealth of the state (Jacob 1997). The British Royal Society was chartered by the crown in 1660, a century before the Industrial Revolution. In the following decades, the Royal Society, for which Isaac Newton was an early president, played an active role in promoting modern science in Britain, with emphasis on technological improvements, mechanical devices intended for industry and agriculture, as well as learning from artisans about their techniques (Heilbroner 1962; Jacob 1997). The Scientific Revolution transformed the society’s views about the future and brought about the belief in progress among the populace. Ordinary people began to believe that they could use their understanding of nature to improve the quality of life. The scientific culture permeated through Britain more broadly and deeply than any other place in Europe, also because the Glorious Revolution established the constitutional government and some degree of religious tolerance for all English Protestants (Jacob 1997). The belief in science and progress among the ordinary people profoundly affected resource allocation collectively made by society. More resources, particularly human talents, had been dedicated to the study and application of modern science in British society from the late 17th century on. Useful knowledge, however, included not just pure science but also technological knowledge such as artisanal and engineering knowledge (Mokyr 2003). Thus, the expansion of useful knowledge requires interaction between science and technology based on close communication between those who study abstract theories and those who carry out productions. While modern science provided the theoretical base for new technologies, technologies validated or refuted the theories and posed well-​defined problems that led to more scientific discoveries. In other words, for useful knowledge to expand,

Core institutions  53 “a lot depends on the connections between intellectuals who had the time and education to give free reign to their imagination and creativity, and the people slaving away in fields and workshops who faced the actual challenges of production” (Mokyr 2003). Britain saw a faster expansion of useful knowledge also because the institutional developments gradually reduced the barriers among social classes. Relative equality in economic rights for social members made the communication between academic scientists and the working people, such as artisans, craftsmen, mechanics and small manufacturers, easy. The knowledge-​ sharing among scholars and entrepreneurs was mainly facilitated by the informal networks of various science-​engaged associations, friendly societies and social clubs that emerged all over the country in the 18th century. These associations organized lectures, symposiums, public experiments and discussion groups, and served as vehicles for information exchange among those social members who were interested in science and scientific applications. For instance, British freemasonry actively promoted scientific education as an association of scientific devotees. Although a club of gentlemen of substantial means, the masonic lodges kept libraries and sponsored reading societies open to the populace. As another example, the Manchester Literary and Philosophical Society and the Birmingham Lunar Society regularly organized gatherings where entrepreneurs and engineers could mingle with leading chemists, physicists and medical doctors (Jacob 1997; Mokyr 2002). The activities of those societies also offered excellent settings for provincial entrepreneurs to educate themselves in science. In a word, the close communication between those who “think” and those who “do” led to rapid expansion of useful knowledge in British society. Meanwhile, the spread of scientific knowledge among provincial entrepreneurs harbingered the emergence of the first generation of industrialists. The agents of the Industrial Revolution The first Industrial Revolution was also an economic revolution that turned an agrarian-​commercial society into an industrial one. Leading the Industrial Revolution was a group of innovative entrepreneurs who represented the new industrial interests. And the emergence of the industrial entrepreneurs was made possible by the core institutions in Britain that provided a social environment flexible enough to allow new interests to grow even with the resistance of the established interests. As denoted in Chapter 1, industrialization in traditional agrarian-​commercial societies is not the inevitable result of commercial development. Societies may stay as agrarian-​commercial economies despite the expansion of trade activities, and merchants may not turn into industrialists even when commerce and trade reached a high degree of sophistication, as will be shown in the case of China. Certainly, wealthy merchants held abundant capital. But they were mostly unwilling to invest in risky manufacturing projects as they had already

54  Core institutions established their commercial operations as the stable source of wealth in the existing commercial system. They may have resisted or even blocked industrial ventures if these ventures threatened the mercantile control over manufacturing activities (Unwine 1904; Mantoux 1961; Soly 2008).The agents of the Industrial Revolution came from somewhere else. The Industrial Revolution in Britain was initiated by a class of “New Men” (Heilbroner 1962, 77) rather than wealthy merchants. The examples included John Kay, Richard Arkwright, Samuel Crompton and James Hargreaves in textile; John Wilkinson, Abraham Darby, Joseph Smeaton and Henry Cort in iron-​making and coal; Thomas Newcomen, James Watt and Matthew Boulton in steam engines; Josiah Wedgwood in pottery and infrastructure, and so on. These entrepreneurs were mostly common folks engaged in craft-​making or manufacturing. With few exceptions, none of them possessed money capital (Mantoux 1961; Heilbroner 1962; Freeman and Louca 2001). It was these New Men who launched industrial ventures through a cluster of radical innovations and created the modern factory system. Once profits were made in the new ventures, other social members, including wealthy merchants, jumped on the bandwagon.The technological innovations began to diffuse and spread to other sectors of the economy. Take the example of textile industry, the leading industry in the first Industrial Revolution. Modern factories first appeared in the cotton sector where commercial operations were much less developed, rather than the woolen sector although it had accumulated huge commercial wealth. Woolen textiles became the staple industry in England as early as in the 14th century and boasted a well-​established “putting-​out” system, with wool merchants in control of the trade and production process through contracting and subcontracting with artisan masters, spinners and weavers. Yet, despite its commercial maturity and abundant capital, this sector did not take the lead in making industrial ventures. It was in the cotton textile, the new textile sector introduced in England in the 17th century that the Industrial Revolution made the first break through. The cotton sector also operated under the putting-​out system, but the commercial interests were far less established (Mantoux 1961; Tan 2013). The leading innovators and entrepreneurs in the cotton industry were not wealthy merchants: James Hargreaves, the inventor of “spinning jenny” was a weaver, and Samuel Crompton, the inventor of “spinning mule,” was a spinner. Richard Arkwright, the originator of the factory system, was from a poor family and apprenticed to a barber and wig-​maker. Arkwright launched the first water-​powered cotton mill at Cromford in 1771, in partnership with two hosiers, as he himself had little money, but a patent on the water frame. The Cromford mill and other factories Arkwright set up under the same model in the following years started the wave of mechanization of the cotton industry. The first generation of factory manufacturers in the cotton industry was mostly local weavers and spinners in the countryside. They started their undertakings usually in a small way, with no capital but their own savings, and then used the profits to purchase more elaborate machines. By 1788 there were over 200

Core institutions  55 Arkwright-​type mills in Britain, mostly constructed in the 1780s (Mantoux, 1961; Freeman and Louca 2001). Arkwright also advocated for legislation in favor of the cotton industry.There had been various regulations restricting the development of the cotton industry, resulting from the campaign of the established commercial interests in the woolen industry that dreaded the competition of cotton products. Arkwright defended his nascent industry before parliament. He argued that if properly licensed and subject to moderate taxation, this new industry would increase the employment and revenues of the country. His petition to parliament led to the passing of the 1774 Act that removed the regulatory impediments for the development of the cotton industry (Mantoux 1961; Mokyr and Nye 2007). With the success in the cotton sector, the modern factory system gradually spread to the woolen sector. Like the New Men in cotton textile, the leading industrial entrepreneurs in other industries mostly came from modest origins, such as blacksmiths, brass workers, foremen, clockmakers, mechanics, innkeepers, potters and so on (Mantoux 1961). They demonstrated similar creativity and determination to push through their industrial projects. These New Men served as the agents of the Industrial Revolution, leading the very first what Joseph Schumpeter called “creative destruction” (Schumpeter 1942) in the modern era. What enabled the emergence of the New Men was the institutional environment in British society. The core institutions of pluralism and rule-​based coordination ensured relative equal economic rights across major social groups.That is to say, members in various social classes were protected equally in terms of property rights by the legal system, although society was much stratified in wealth and social status. Equality in economic rights not only made scientific knowledge accessible to the working people, but also provided necessary incentives for them to carry out industrial ventures. Equal economic rights for the people engaged in craft-​ making or manufacturing were especially important as these people had direct interests in raising the efficiency of manufacturing and were most likely to push for the new industrial interests. Essential for the emergence of industrial entrepreneurs was the fact that artisans, craftsmen and small manufacturers had attained the same economic rights as wealthy merchants, great landowners and noblemen in terms of obtaining patents, setting up companies or organizing business ventures.With the equality, or relative equality, in rights, individual artisans such as blacksmiths, potters and mechanics were able to deal with merchants, bankers and financiers on equal footing over business matters. They were motivated to make radical innovations because their rights over their inventions, business properties and profits from the industrial ventures were somewhat guarded by the laws. How did artisans or small manufacturers obtain their economic rights? As discussed in Chapter 2, the evolution of the core institutions in pre-​modern England permitted consecutively more social groups to attain independent coercive power as the economy expanded. Artisans or craftsmen rose in

56  Core institutions economic power as a social group in the 17th century and the turn of the 18th century. Accounting for the rise of artisans was the same mechanism of “group mobility” that allowed merchants to gain power against the lords at earlier time in history. Similar to the case of merchants, further economic expansion opened up opportunities for artisans to obtain rights, and the crown’s desire for new sources of revenues made it possible for artisans, as a weaker social group, to bargain for rights. In both cases, the weaker group was able to leverage their economic advantages against the strong one, with the support of the crown. And in both cases, gilds served as an organizational instrument for the strife for economic rights (Tan 2013). Historically, artisans and craftsmen were subordinate to merchants and traders in England just as in China. For most of medieval times, merchants dominated the commercial schemes, to which the manufacturing activities were attached. Although craft gilds began to develop in the 12th century (Milnes 1926;Thrupp 1963), craftsmen had remained subordinate to the control of merchants until the early 16th century. London, the commercial center, was governed by the “mercantile oligarchies,” and trade and commerce were controlled by the livery companies, predominantly merchant organizations. Some livery companies admitted master artisans but only as unliveried members, distinguished from their wholesaler/​trader members who held the status of liveryman. In the provincial towns and cities, craft gilds were subject to the regulation of merchant gilds whose leaders controlled the town or city councils. The merchants dictated what terms they liked in most cases, and manufacturing artisans dependent on merchants for material supplies were allowed to sell their products only to local dealers, members of the merchant gilds (Swanson 1988). Nonetheless, merchants, as the stronger social group, were unable to keep the artisans in subordination for very long. As commerce and trade continued to expand in the 16th and 17th centuries, manufacturing became increasingly important to the economy. This increased importance gave the craft gilds economic leverage in dealing with the merchants, and the merchants’ dominance over artisans gradually weakened in the 16th century. In London, master artisans in the livery companies that had been set up in the 16th century became independent segments within those companies. The artisan segments in a number of livery companies eventually separated from the larger organizations to become independent companies by receiving royal charters in the 17th century (Unwin 1904). In provincial towns, the balance of power between merchants and craftsmen also shifted in favor of the latter beginning in the 16th century. Some craftsmen began to be employed in the higher offices of city governments, and a few provincial craft gilds even acquired the privileged status of incorporated companies in that century (Swanson 1988; Soly 2008). The development of economic rights for artisans was facilitated by the Crown’s introduction of a patent system, as well as the royal policies on manufacturing in the late Tudor and Stuart dynasties. In the late 16th century, the expansion of the economy generated many new areas in manufacturing as potential revenue sources. To encourage further developments of these new

Core institutions  57 areas, the English Crown adopted the continental practice of granting patents to individuals and organizations who introduced new products in the country. Under the royal policy on patents and incorporation, individual artisans could form a corporation to produce a new product upon receiving a patent or royal charter that conferred monopoly power over the product, at the price of annual rent to the Crown. During the reign of Elisabeth I, 55 grants of monopoly privileges were issued on the manufacturing of such products as soap, ovens and furnaces, leather, drinking glasses, grinding machines and so on (North and Thomas 1973). The Crown did abuse the power in issuing letter patents, as will be discussed later. But the royal policies on patents and incorporation raised the importance of manufacturing and provided favorable conditions for small manufacturers to attain economic rights. During the Stuart dynasty (1603–​1714A D ), it became common that master craftsmen set up companies of manufacturing with monopoly charters. Just as merchants did in commerce and trade, artisans and craftsmen attained their rights in manufacturing in a similar way. That is, they supplied revenues to the Crown in exchange for the rights of incorporation. Again, artisans and craftsmen as the weaker social group were able to leverage their advantages gained from the expansion of manufacturing basically because the incentive mechanism embedded in the existing institutions provided motives for the Crown to grant economic rights in manufacturing for its own interests. As George Unwin (1904, 142) pointed out, the Crown was motivated by the intention of curtailing the stronger forces of merchants or commercial capitalists by encouraging the weaker forces of manufacturers as industrial capitalists. And, of course, by granting monopoly rights to manufacturers in the new profitable sectors, the crown opened up new sources for revenues badly needed for the wars (North and Thomas 1973; Hoffman 2011). In brief, given the existing core institutions, the ruler’s self-​interested actions in effect helped the artisans in their strife for equal rights with merchants. Backed by their economic strength, craftsmen and artisans also gained some political rights by the early 18th century. Skilled craftsmen and artisans in towns, along with landed freeholders in the countryside, were regarded as “accredited elements of the society” whose interests were represented in the House of Commons (Smellie 1962, 30). Master artisans not only increasingly assumed offices in town or city councils but also sat in the House of Commons, although they were not as politically influential as the great landowners, wealthy merchants and distinguished attorneys. Patent rights for individuals Finally, the path-​breaking innovations made during the Industrial Revolution required specific institutions for protecting the interests of innovators. Further developments of the core institutions in Britain led to the creation of patent rights, and the reliable enforcement of patent rights in society precisely offered such protections.

58  Core institutions The type of innovations made during the first Industrial Revolution was unprecedented in both quantity and quality. Different from the sporadic inventions in the pre-​ 1750 history, innovations in the first Industrial Revolution came in “clusters” or “constellations” and disrupted the existing economic structure. These type of innovations were described as “radical,” “basic” or “path-​breaking,” as they gave rise to new key industries and opened up a new techno-​economic paradigm or “new possibilities for long-​run trend rate of growth” (Freeman and Louca 2001; Fagerberg and Verspagen 2002). As observed, so far the radical innovations that gave rise to new techno-​economic paradigms since the first Industrial Revolution had been originated invariably by societies in possession of pluralistic institutions, although countries under other social systems could adopt, adapt and improve the radical innovations through incremental innovations in the technological diffusion process. In other words, the making of radical innovations had rather stringent requirements for institutions. The making of radical innovations required not only economic rights in general but also well-​specified rights of the owners of the innovations. In this account, the creation of patent rights in Britain in the 17th century played a more direct role in the origination of the radical innovations in the first Industrial Revolution. Patent rights, as part of economic rights for individuals and organizations, internalized the gains from innovations for their owners through the provision of legal protection for innovators’ ownership over their inventions. Such protections were essential for inducing radical innovations because the innovators of these types of undertaking bore extraordinary risks with the viability and profitability of their completely unknown ventures. The creation of the state-​ enforced patent rights in Britain was closely intertwined with the development of economic rights in manufacturing. As illustrated previously, merchants and artisans used gilds as organizational instruments for developing independent coercive power in the medieval period. The actions of gild organizations in obtaining their economic rights laid the groundwork for the creation of patent rights because their interplay with the ruler/​state started the practice of specifying the exclusive privileges for an entity in commerce or manufacturing through written rules. Although gilds became obstacles to free competition around the time of the Industrial Revolution, their historical role should not be neglected. The exclusive privileges the gilds obtained from the Crown or town councils in the medieval time were “group rights” in nature. That is, these rights were shared by all members of the gild. For instance, under the royal charter received by the Merchants of the Staple, only the members of this gild could export wool from England (Power 1963). As for craft gilds, the charters usually granted the recipient gilds the rights over a particular line of craft or manufacture within a town (Rosenburg and Birdzell 1986). Thus, a merchant or craftsmen would lose the exclusive rights if he was expelled by his gild. Although they were just for groups, these rights internalized the gains from trade and manufacturing activities for the gilds through contracts or laws. Therefore, the collective

Core institutions  59 actions of gild organizations in acquiring their exclusive privileges served as the precedent for the specification of rights for individuals in manufacturing. Additionally, the interaction of the gild organizations and the ruler/​state expanded the enforcement mechanism of laws and contracts. The enforcement of gilds’ rights bound the gilds and the Crown or town/​city council in a contractual relationship. Upon receiving the rights, the gilds obtained an exclusive right over the gains in a line of trade or craft. In exchange for such rights, the gilds were obliged to pay taxes and fees and fulfill other duties such as setting quality standards, sanctioning against frauds and moderating price fluctuations (Tan 2013). The gilds’ rights were enforced through external and internal rules. Externally, the rights of the gilds were enforced by the common law system through local tribunals, specialized jurisdictions and national courts. Internally, the gilds’ rights were ensured by the internal regulations that obliged the members to carry out their own duties. With the improvements of law-​enforcement systems and the expansion of laws, the application of property rights to innovations was readily enforced when the Crown introduced the continental practice of granting patents to individuals in the late 16th century. The original purpose of adopting the patent system was to encourage foreign artisans to settle in England, to bring in continental technologies in certain fields and to promote the production of import-​ substituting commodities (Macleod 1988). Under the royal policy, individual artisans, foreign or domestic, could form a cooperation to produce a new product upon receiving a patent. To a great extent, the introduction of the patent system marked a new stage for the development of property rights in manufacturing. From that point on, an individual artisan could be awarded exclusive rights over the making of a new product without depending on his gild. The conferring of patent rights was subject to the royal whims in the beginning. The Crown’s abuse of power in issuing royal charters on patents led to proliferation of monopolies. Besides new products, Elisabeth I and the Stuart monarchs issued patents on some existing products too, and reaped large sums of revenue incomes. They also granted monopoly rights in established industries as a form of patronage. To restrict the Crown’s power in conferring monopoly, parliament enacted the Statute of Monopolies in 1624. The statute stipulated that the letters patent should be issued to first and true inventors alone and cases concerning monopolies, letters patents, licenses and so forth should be tried and determined at common law. Although the loopholes on conferring monopoly rights were not sealed until the Civil War (Richardson 2004; Macleod 1988), the Statute of Monopolies marked the beginning of state-​ enforced property rights over innovations. As the first statutory patent law in Britain, the 1624 statute placed the creation of property rights over innovation in a set of impersonal laws guarded by the courts (North and Thomas 1973). It laid down the legal foundation for protecting the ownership of innovations for individuals and organizations. In a broader background, the traditional institutions of “individualistic” landownership based on non-​ kin organizations also contributed to the

60  Core institutions establishment of property rights, including patent rights, for individuals in England. Some earlier researchers attributed the first Industrial Revolution to “English Individualism.” They held that industrial revolution occurred first in Britain mainly because English society had developed individualistic ownership and social mobility for individuals (Macfarlane 1978). To a great extent, English individualism, as demonstrated by the individual ingenuity in the first Industrial Revolution, was made possible by the early development of non-​kin organizations that freed up individuals from family/​clan bondages. This point was particularly relevant to the comparative analysis on China. With an early exit from tribal society, the medieval English society had developed landownership free of kinship relations, in contrast to the Chinese society where individuals were tied with extended families and clans in landownership throughout the imperial era (221BC –​1912A D ). By Macfarlane’s study, as early as in the 13th century landownership in England laid in the individual rather than family. There was no legal link between family and land under common law, at least in regard with freehold land. The state-​enforced patent rights played a key role in motivating individuals and organizations to carry out innovations that entailed substantial risks and costs (North and Thomas 1973). As evidenced by statistics, the number of patents rewarded was closely correlated with the surge of innovations in the first Industrial Revolution. In Britain, “[t]‌he number of patents sealed had been about 80 per year in the 1740–​49 period but increased to nearly 300 in 1770–​ 79 and to over 600 in 1790–​99”. A high and growing proportion of the number was in capital goods, related to the cotton industry and other leading sectors of the Industrial Revolution (Freeman and Louca 2001). From 1750 to 1800, the leading branches, textiles (including hosiery and lace) and metalworking (including plating and gun-​making), each accounted for about 14 percent of total patents. Engine making, which was crucial to industrialization, accounted for 11 percent of total patents. The leading entrepreneurs in the Industrial Revolution, such as James Watt, Henry Cort, John Wilkinson, Richard Arkwright, Josiah Wedgwood, Henry Maudslay, Samuel Bentham, Joseph Bramah and many more, all patented their innovations. “For most of the eighteenth century, patents inhabited in the frontier regions of the economy. They became desirable when an invention had to be sold, or when an entrepreneur was breaking into a new sphere of manufacture” (Macleod 1988, 95). Patents not only offered the legal protection for the profits of the innovation that the bearers deserved, but also served as certificates that equipped the bearers with the credentials to launch ventures in a new field, to attract partners and to extend the innovative operations for greater profits. For example, Arkwright’s first patent was important for the success of his factories, not only as a motivator for his own ceaseless efforts to carry out those ventures but also as a motivator for his partners who were convinced to make investments in his ventures. There have been some controversial views on the role of the British patent system in the Industrial Revolution (Mokyr 2008). Certainly, patent rights

Core institutions  61 for individuals could not take all the credits for the innovations made in the British Industrial Revolution. Entrepreneurs could safeguard their innovations through other ways and they could be motivated by factors other than profits. However, in comparison to the case of 18th-​century China where the patent system did not exist at all, the central role of state-​enforced patent rights stood out in encouraging radical innovations in the British Industrial Revolution. It appears that only when the legal framework for innovation protection was in place could other ways of protection, such as “secrecy,” other ways of rewarding inventors, such as public recognition of un-​patented innovations, and other motives of innovators, such as promoting public knowledge, work as supplements in bringing about innovations in the scale and intensity as shown in the first Industrial Revolution.

Lack of techno-​economic breakthrough in pre-​1750 China The Chinese agrarian-​ commercial economy achieved a high degree of sophistication, especially in the Song Dynasty (960–​1270A D ) and the Ming Dynasty (1368–​1644A D ). Song China was among the leaders of technological development in the world at the time, with the making of great inventions such as gun-​ power, the magnetic-​ needle compass, movable type printing, seismological detectors, and so on. Commercial activities, measured by the size of cities, were also extensive. The capital city of North Song, Bianjing, with a population of 1.4 million, and capital of South Song, Linan, with population of 2.5 million, were the largest cities in the world at that time. In comparison, the most prosperous cities in Medieval Europe before the 14th century, Milan, Florence, Venice and Genoa, each had a population of around 90,000 (Zhao 2006). Commerce and craft-​ making flourished in the Chinese cities. For instance, it is estimated that there were more than 20,000 shops and 80,000 craftsmen working in Bianjing (Chen 1983 cited by Zhao 2006, 111). The Ming Dynasty, with the development of “capitalist sprouts” or proto-​ industrialization, was considered the most promising period for industrialization in the imperial era by many contemporary scholars in mainland China. In the Ming period, the expansion of long-​distance trade, including domestic inter-​ regional trade and the trade with foreign lands such as Japan, Mongolia and South Asia, led to rapid developments of manufacturing production. There were large increases in the manufacture of textiles, porcelains and iron products, and so on, particularly in the southern part of China, including the Lower Yangzi Region. Meanwhile, the technologies of shipbuilding and navigation made considerable advances as well, as evidenced by the expedition of Zheng He’s fleet to the coastal territories and islands in the South China Sea and the Indian Ocean. Given the high levels of commercialization and achievements in technologies before the mid-​ 17th century, China should have broken the Malthusian trap much earlier than Britain (or Western Europe), if industrialization is the inevitable result of commercial development in traditional societies.

62  Core institutions Nonetheless, despite earlier prospering of commerce and trade, China remained an agrarian-​commercial society living on the verge of subsistence after the Ming Dynasty and increasingly lagged behind the West in the 19th century. Again, the advancements of commerce and technology were part of economic developments. To explain the absence of an industrial revolution in China, we need to look at the institutions of the society as the ultimate source of economic growth. The core institutions in Chinese society were still characterized by entrenched absolutism and relation-​based coordination by the 18th century. For ruler-​subjects relations, the emperor and his state held absolute control over his subjects, and none of the social groups had developed independent coercive power. Social members, including the elites, were subject to arbitrary expropriation and persecution by the ruler, without formal institutions to protect their rights. For the power relations among social groups, the elite class of imperial officials enjoyed enormous privileges and could easily coerce lower-​stratum social members with their office power, although they themselves were susceptible to the emperor’s absolute power. There were strong barriers among various social classes in the society. In the absence of an independent judiciary and commercial laws, private businesses in commerce and manufacturing were facilitated mainly by the “quasi-​property-​rights” attained through relationship-​building with state officials and across the kin-​ based organizations. In short, the incentive structure embedded in the Chinese core institutions was unsupportive for revolutionary techno-​ economic changes. First, the institutions of absolutism permitted no challenge to the dominance of Confucianism as the authority of learning, and the strong barriers among social classes also deterred the development of “useful knowledge.” Second, the ruler’s grabbing hands and highly unequal rights for social members provided no incentives for those people in manufacturing productions to initiate industrial ventures as entrepreneurs. Third, relation-​ based coordination without legal protections for innovators’ rights might be good enough to support production activities in agrarian-​ commercial economies, but insufficient for inducing radical innovations that could create a new techno-​economic paradigm. A narrow knowledge base As denoted in the case of Britain, the technological breakthrough of the first Industrial Revolution was made possible by the faster expansion of the useful knowledge. The monumental event that accelerated the expansion of useful knowledge in Britain was the Scientific Revolution.The birth of modern science greatly enlarged the epistemic base for technological progress. Compared with British institutions that had some degree of tolerance for the non-​conformist thinking, the Chinese institutions with absolutism at the core allowed no challenges to the authoritative learning on one hand, and offered the greatest possible incentives for social members to conform to the authority in thinking

Core institutions  63 on the other. That is, the Chinese institutions hindered the developments of science as the knowledge base for technological innovations. Confucianism stood as both the “secular religion” and the dominant school of learning in imperial China since the Han Dynasty.The Emperor Wudi (140–​ 87B C ), in the Han Dynasty, decreed Confucianism as the official orthodoxy, banning other schools of thought.2 The emperor also set up taixue (the Imperial School) and made the five Confucian classics, shi, shu, li, yi and chunqiou, the main textbooks for the Imperial School, as well as for all the xueguan or shuguan (private teaching-​house) in the country. Since then, the dominant position of Confucianism in learning had been established. Scholarship was judged on one’s knowledge of Confucian classics. After the Keju system was instituted in the Sui-​Tang Dynasties, Confucian learning became the major subjects of the imperial examinations for state-​official recruitments. That is, the knowledge of Confucianism directly determined the upward-​moving opportunities for social members. In the Song Dynasty, another four Confucian books, daxue, lunyu, zhongyong and mengzi, annotated by the renowned scholar Zhuxi, were added to the Confucian classics. Then the candidates for imperial examinations had to master the four books and five classics in order to enter the elite class of imperial officials through the Keju system. In addition, Confucian education was also necessary for landowners to obtain the respectable status of scholared gentry in their villages. That is, the authority of Confucianism in learning was translated into formal institutions underlying the upward mobility of social members. These institutional arrangements provided strong incentives for Chinese individuals and families to pursue self-​interests by conforming to the state orthodoxy. Given the overwhelming benefits offered by the knowledge of Confucianism, people with ambition and talents devoted life-​time energy to mastering, interpreting, and at best, improving the Confucian classics. As a result, society’s most valuable resource, human talent, was channeled to the study of Confucianism, as well as literary composition associated with such studies. There had been great technological achievements in the Chinese history, yet these achievements did not lead to the formation of modern science as systematic studies of the nature. As Mokyr (2003) put it, Europe was perhaps only pulling even with the Orient in important technologies as late as in 1500, “[b]‌ut after that, the signs that the two paths had very different slopes became too clear to ignore. Europe was not only advancing faster, but its progress was accelerating.” As discussed earlier, an important reason for the acceleration of the technological progress in Europe was the birth of modern science in the 17th century. Comparatively, in China, the developments of technologies remained rested on a narrow epistemic base without the guidance of scientific theories. Confucianism taught people to awe nature instead of investigating the regularities of nature. It was not that there was no order in nature for the Chinese, but rather that it was not an order ordained by a rational personal being, and hence

64  Core institutions there was no conviction that rational personal beings would be able to spell out in their lesser earthly languages the divine code of laws which he had decreed aforetime. (Needham and Wang 1954, 581) However, if Confucianism, as the dominant secular religion in China, did not encourage the systematic study of nature, neither did Christianity as the dominant religion in Britain and Western Europe. Although the Greek philosophy quested for the nature of the universe with the methodology of logic and mathematics, in the long period of the Middle Ages the Christian church used the Greek learning mainly to build Christian theology that dominated people’s thinking and learning in society. What made the difference, to a great extent, is the tolerance of the dominant religion or the relative ease at which the intellectual authority in a society could be challenged. And the relative ease to challenge this authority in learning was very much determined by the incentive mechanism embedded in the core institutions of a society. In the case of England and Western Europe, the institutional evolution towards pluralism or the split in coercive power allowed non-​conformist thinking to develop against the intellectual authority of the church. The secular rulers’ support for modern science encouraged scientific studies and the spread of scientific knowledge.Whereas, in the Chinese case, the secular rulers’ control over society’s ideology left little room for social members to challenge the spiritual and intellectual authority, Confucianism. The Chinese rulers relied on Confucianism as the official orthodoxy to govern society and set the mastery of Confucian classics as the stringent requirements for candidates to enter the state bureaucracy via the Keju system. For ordinary Chinese, the mastery of Confucian classics was the only avenue to reach the top of the social echelons. In other words, the “unshakable” authority of Confucianism in learning was rooted in the ruler’s need and ensured by the incentive mechanism embedded in the Chinese core institutions. The Caesaropapism or the secular ruler’s power over people’s intellectual life allowed much less chance for the rise of new thinking. And the complete devotion to Confucian learning stifled the intellectual interest to explore science at the society level. It was not until the New Culture Movement3 in the early 20th century that the intellectual authority of Confucianism was challenged by a group of Chinese intellectuals under Western influence. The other reason for the slower developments of useful knowledge in China is that the rigid social stratification and strong barriers among social classes blocked the communication between the scholars and the working people. The social gap between the Confucian literati and the illiterate was immense in traditional Chinese society. By the famous sayings of Mengzi, the “second Sage” of Confucianism, “[t]‌hose who labor with their minds govern others and those who labor with their physical strength are governed by others.” The Confucian scholars were a privileged and restricted group because Confucian education required numerous years of arduous works and economic supports few poor

Core institutions  65 families could afford. In addition, the Chinese written language itself was extremely hard to master, thus practically inaccessible to the mass of ordinary people doing manual work. The Chinese written language in the 18th century hardly changed from its ancient forms. As Fairbank (1979, 43) described, “[t] he Chinese writing system was not a convenient device lying ready at hand for every schoolboy to pick up and use as he prepared to meet life’s problems. It was itself one of the life’s problems.” The difficulty of learning the written language increased the barriers in communication between the scholars and the working people. Again, it was not until after the New Culture Movement in the early 20th century that the classical written Chinese was reformed and gradually replaced by Baihuawen (written vernacular Chinese). The strong social barriers impeded the exchange of ideas between the scholars and artisans or craftsmen. On one hand, the Confucian literati had little interest in artisanal knowledge and disdained those engaged in manual works. They buried themselves in the study of Confucian classics and paid little attention to scientific problems, with very few exceptions. “Most scholarly works became hairsplitting annotation and explication of ancient classics based on official interpretation” (Fu 1993, 50). On the other hand, artisans and craftsmen, mostly illiterate or semi-​literate, carried out their works with skills acquired from practices. They had little theoretical knowledge to guide the exploitive works. Consequently, the inventions they made on “trial and error” experimentation could not be validated and improved by theories and could not develop further for more uses. For instance, China had discovered magnetism much earlier than the West, but without the guidance of scientific theories, particularly the electromagnetic theory, the discovery had been confined to the straightforward use of magnetic-​needle compasses since the Song Dynasty. Comparatively, in the West with the guidance of science, the scientists made the leap to connect electricity and magnetism (Mokyr, 2003). In brief, the expansion of useful knowledge as the epistemic base for new technologies required the enlightenment of modern science as well as the accessibility of scientific theories to the common folk engaged in production. Unfortunately, neither condition was met under the core institutions in 18th-​ century Chinese society. As will be discussed in Chapter 4, industrialization in China was externally provoked, rather than internally generated. The missing “New Men” The analysis in this section will concentrate on the Ming Dynasty (1368–​ 1644AD ) as an example. The Ming and early-​Qing period saw the vigorous expansion of inter-​regional trade and thriving manufacturing productions, and was considered the most promising period for an industrial revolution. However, neither the expansion of long-​distance trade nor the thriving manufacturing activities brought about a techno-​economic breakthrough. The commercial prosperity in the Ming Dynasty indeed generated considerable mercantile wealth in the private sector. However, the commercial

66  Core institutions capital was not channeled into industrial projects with technological innovations. The wealthy Chinese merchants, instead of investing in industrial ventures, used their money for acquiring farmlands to obtain the status of landowner, building luxurious mansions in home villages and towns, renovating clan-​properties, such as ancestral temples, purchasing office posts in the imperial government, as well as for plough-​back in commercial operations (Wang 2007). Why didn’t the high degree of commercialization in the Ming China lead to industrial revolution? Besides the lack of useful knowledge, also missing in the picture was the class of “New Men” as the agents of industrial revolution. In the case of Britain, industrial entrepreneurs emerged because the social members engaged in manufacturing had the same economic rights as merchants, large landowners or nobilities, despite the gaps in wealth and social status. They were able to operate businesses independently and had legal protection for their business assets, profits and gains from innovations, just as the upper-​class social members.The relatively equal and secure rights motivated them to launch industrial ventures. Comparatively, the institutions in Ming China provided little protection for the labor and incomes of lower-​class social members including artisans and craftsmen. Chinese society was stratified not only in wealth and social status but also in economic rights. Those engaged in craft-​making or manufacturing were subject to the exploitation of both the government and merchants. As a result, they were neither motivated nor capable of carrying out industrial ventures. As discussed in Chapter 2, the Chinese imperial state had a long tradition of drafting craftsmen and artisans directly for imperial projects and state manufacturing centers. The Ming Dynasty continued the artisan registration system from the Yuan Dynasty, with some modification. Under the Ming system, artisans had to register their residence by craft with the government. Registered artisans had to either provide labor service for imperial projects, mostly in the capital city, in rotation, or work at the state-​run workshops at various craft-​manufacturing centers. It is estimated that there were around 300,000 registered artisans directly controlled by the government in the Ming Dynasty. Major state-​run operations included the silk-​making bureau in Suzhou and Hangzhou, the porcelain kilns in Jingdezhen, the shipyard in Nanking and the iron plant in Zunhua (Chen 1958). The artisan registration system became less rigid around the mid-​Ming period as the registered artisans increasingly escaped from their duties in the state-​run workshops. The government began to accept money payments from registered artisans in place of labor service in the second half of the 16th century. With the easing of state restrictions, the registered artisans turned to local retailers and the long-​distance traders for earnings (Chen 1958; Zhao 2006). In addition to the government’s direct control, Chinese artisans, registered and unregistered, were subordinate to merchants. Similar to the case of Britain, the Chinese merchants controlled the buying and selling of the handicraft products in the local and regional markets historically. With commercial expansion in the Ming Dynasty, the long-​ distance traders who developed

Core institutions  67 access to the national markets expanded businesses beyond the government-​ dominated sectors and regions, and organized manufacturing activities on larger scales.Yet, dissimilar to the case of Britain, with the “double” controls of the government and merchants, the Chinese artisan manufacturers did not get rid of their subordinate position to merchants, despite the increased importance of manufacturing fueled by the commercial boom in the Ming period. Take the example of the textile industry. In the Ming Dynasty, both the traditional silk textiles and newer cotton textiles expanded rapidly in the region of Lower Yangtze. There was rapid growth of new market towns as the trade and/​or production centers for textile products. By estimation (Fan 1987 cited by Zhao 2006, 193), the number of new market towns in the six textile-​producing prefectures in the Lower Yangtze increased by more than fourfold to 316 in the Ming Dynasty from 71 in the Song Dynasty. The prosperity of commerce greatly increased the importance of textile manufacturing in the region. Silk-​making was a traditional industry in China, and the imperial state had a strong presence in silk-​making since early time in history. For instance, the Han, Tang and Song Dynasties all had special governmental offices in charge of silk production. In the Ming Dynasty, with the growing silk production, the government set up state-​ run workshops, called zhiran ju (official silk-​ making bureau) in more than 20 locations over the country. The major ones were located in the three leading silk-​making cities, Suzhou, Hangzhou and Jiangning. The main task of the state silk-​making bureau was to produce silk products for the use of the imperial clans and government. The state-​run workshops produced the best silk products in the country, with the possession of the most skilled artisans and a stringent requirement for quality. In the early Ming period, the registered artisans had to work at the state-​run workshops and were allowed to do extra work only in their spare time. With the loosening-​ up of artisan registration systems around the mid-​Ming period, the registered artisans could carry out the state-​assigned works at their own homes, which was called lingzhi or lanzhi. In the leading silk-​making centers, such as Suzhou, the state silk-​making bureau managed lingzhi or lanzhi through local gilds. Those gilds were headed by silk merchants who usually owned silk-​making workshops themselves (Peng 1963). The state bureau dispatched works to the gilds. Upon receiving the work assignments, along with materials such as silk yarns from the bureau, the gild heads allotted the works to artisan households. After the work was done, the merchant heads collected the silk cloth and handed it over to the bureau, and they usually pocketed a good portion of the government pay for their artisan members. As the silk trade continued, silk manufacturing reached a higher degree of specialization and spread to more households in the silk-​making cities, as well as new market towns such as Puyuan, Shuanglin, and Shengze. In these cities and towns, merchants dominated the manufacturing activities beyond government operations. In Suzhou and Hangzhou, households engaged in silk manufacturing amounted to several thousand, respectively, in the late Ming period. Some wealthy merchants were able to set up large workshops

68  Core institutions employing artisan workers specialized in different steps in silk-​making, although most silk-​making workshops remained small and run by artisan households. Artisan households obtained their work allotments from the merchants in a similar way as they did from the state silk-​making bureaus. The merchants supplied the artisan households with materials, leasing looms or small tools to them if needed, and paid the artisans upon the receipt of the finished products (Peng 1963; Zhao 2006). The artisans in these cities remained subordinated to the merchants despite the expansion of manufacturing. It is recorded that in the early Qing period, some artisans in Suzhou attempted to set up their own gilds through strikes, in resistance of the unfair treatment from their merchant heads. Yet merchants in the city made pleas to the government to ban the artisan gilds. In response the government issued official orders that permanently barred artisans from setting up their own organizations (Peng 1963). Cotton textile, introduced in Lower Yangtze in the 13th century, was not a major consumption good for the imperial clan and elites. The government had much less presence in the cotton sector and merchants managed the manufacturing of cotton products. Unlike the silk sector, the making of cotton products was carried out mainly by rural households as sideline works in the countryside. The new market towns that specialized in raw cotton, cotton yarns and cotton cloth served only as trading centers in the cotton-​producing areas. In the major market towns for raw cotton and cotton yarns, such as Xinjing, Hewang and Qibao, the trade was mostly handled by yahang, the local middleman merchants. The yahang purchased cotton and yarns either by sending agents to the surrounding countryside or through their in-​town storehouses that dealt with the rural producers who traveled to town. Then the yahang would sell their cotton products to long-​distance traders and/​or local customers. The known market towns for trading cotton cloth were Zhujing, Fengjing, Nanxun, Luodian and Zhujiajiao (Zhao 2006). In these towns, local clothier merchants operated drapery stores as well as some small cloth-​ processing workshops to offer more varieties of products. They bought cloth from the rural weavers, just as the yahang. The long-​distance merchants, who came to acquire cotton cloth in large sums for sale in other parts of the country, traded with either the clothier or yahang. In all cases, the rural cotton-​planters, spinners and weavers, as unorganized small households, were in no position to bargain with the merchants. In sum, the artisan manufacturers in the textile industry, both the silk and cotton sectors, were kept subservient to the government and merchants throughout the Ming period. Basically, the state bureaus (in silk-​making) and merchants (in both silk and cotton-​making) set the terms of payments to the artisan workers or households, who were dependent on the government and merchants for living.There were some craft gilds in other sectors and other cities or towns, but they held no leverage versus the state. In general, manufacturing interests remained attached to commercial interests and subject to the ruler’s appropriation in Ming China.Those people engaged in manufacturing activities

Core institutions  69 were unable to establish their economic rights, despite the increased importance of manufacturing in that period. Fundamentally, the inability of artisan manufacturers to develop economic rights was attributable to the Chinese core institutions of absolutism and relation-​based coordination. The rise of the artisans as a weaker social group in 17th-​century England was made possible by the already dispersed power distribution among the ruler and the stronger social groups. The dispersion of coercive power motivated the ruler to encourage the weaker force of artisan manufacturers out of self-​interests, namely, the need to create new revenue sources and to curtail the stronger force of merchants. In comparison, the monopolistic power structure in traditional Chinese society offered no incentives for the ruler to grant formal rights to lower-​stratum social group, regardless the levels of commercial development. The Chinese rulers were not motivated to grant rights to manufacturers for two reasons. First, the Ming government had direct access to manufacturing products through the artisan registration system and state-​ operated manufacturing centers. Thus, there was no need for the ruler to exchange rights for state revenues with the artisan manufacturers. In particular, the artisan registration system as a formal institution placed the labor of artisans and craftsmen in direct appropriation of the ruler/​state. In the early Ming period, the main way for registered artisans and craftsmen to get rid of the state control was to escape physically from the place of service (Chen 1958). Around the mid-​Ming period, the artisan registration system was relaxed, but registered artisans and craftsmen were still obliged to make money payments to the governments by imperial decree. The artisan registration system, though significantly weakened later on, lasted till the very end of the Ming Dynasty. Second, the Chinese ruler had no fear for the Chinese merchants who held no institutionalized coercive power vis-​à-​vis the ruler. Thus, there was no need for the ruler to cultivate new allies or foster new social forces to counteract the merchants. In the Ming period, shangbang merchants indeed acquired certain protections for their businesses from the officialdom. Yet, they obtained these protections mainly through building personal relations with state officials. The way in which the merchants interacted with the ruler/​state actually reinforced the absolute power of the ruler and made it even harder for the artisan manufacturers, as a weaker group, to establish economic rights through formal institution. Expectedly, the artisan households, including the rural households engaged in manufacturing, also sought for protections by building personal ties with state officials and with merchants as well. But they were much less successful as they were much less organized and had less financial means in dealing with state officials. The static power relations in Ming society bore out the point made in Chapter 2 –​the initial failure of the Chinese nobility in restricting the ruler’s power through formal institutions made it difficult for other social groups to establish formal rights in the subsequent developments. In brief, without economic rights, social members engaged in manufacturing were exposed to the grabbing hands of both the ruler/​state and merchants

70  Core institutions and had no incentives to carry out industrial ventures. The disparity in rights among social members, with the degree of business protection based on the strength of personal relations with the officialdom, discouraged the growth of new industrial interests and the emergence of industrial entrepreneurs. Upward mobility verses legal rights In the Ming period, manufacturing technology remained at handicraft levels in general, although the handicraft production became more specialized and larger in scale. In other words, the expansion of commerce and manufacturing did not lead to a meaningful techno-​economic breakthrough. It appears that the incentive mechanism embedded in the Chinese core institutions was capable of promoting the expansion of existing economic sectors but incompatible with the making of radical innovations, namely, the type of technological innovations that could give rise to new economic sectors and change the structure of the economy. The Chinese institutions did offer upward social mobility for individual families/​clans. In the traditional Chinese society, farmlands had been alienable under the private landownership since the Qin Dynasty, although individuals were always tied up with family/​clans in landownership (Fairbank 1979; Zhao and Chen 2006). Families could buy, sell, rent or pawn land relatively freely, and poor households had opportunities to become landlords by accruing farmlands. Similarly, merchants without roots in landed wealth could also obtain the coveted status of landowners by purchasing farmlands. Furthermore, the Keju system, as a key formal institution in imperial China, offered a direct channel for social members to join the elite class of imperial officials. As Keju was open practically to individuals in all social strata, even members from poor families had the opportunity to enter the state bureaucracy through the imperial examinations, although the chances were rather slim given the time and money required for education and preparation for the examinations. Nonetheless, “upward social mobility” and “property rights,” though related to one another, are not the same concepts. And they are not interchangeable in the effects on the making of radical innovations. In Chinese society, with upward mobility people could make it to higher social classes.Yet, even when in the upper class, their properties were not secure from the ruler’s arbitrary confiscation. As noted previously, the Chinese elites were also vulnerable to the emperor’s absolute power, although they had better protections than the common people. Under the Chinese core institutions, the coercive power worked downwards. The degree of property-​protection for social members depended on the proximity to the state power.The closer to the power center, the better protections one could have. But even the top imperial officials were exposed to the expropriations of the ruler. That is, Chinese upward mobility did not address the key issue for innovation-​ making –​legal protection for private properties. Moreover, the upward mobility in Chinese society did not motivate the innovative activities of individuals. To begin with, the upward mobility was

Core institutions  71 more for individual families or clans than individuals in imperial China. With the dominance of kinship in society, individuals were always bonded with families or clans in economic and social activities. In the villages, “[e]‌ach family household has been both a social and an economic unit. Its members derived their sustenance from working on its fields and their social status from the membership in it” (Fairbank 1979, 25). It was also a family endeavor for getting members into the state offices through the Keju recruitment. The family or clan provided its members with Confucian education and various assistances for taking the imperial examinations. Once a family member succeeded in entering the state office through Keju, the entire family and close kin would move up in social strata. Additionally, in traditional Chinese society, individuals were inculcated with Confucian teachings of filial piety and obedience from childhood and compelled to follow those moral doctrines throughout their lifetime. Confucianism, as the state orthodoxy, smothered the originality of individuals, although supported the upward mobility. With that said, upward social mobility stood crucial to the stability and advancements of the Chinese agrarian-​commercial economy, as it provided good incentives for social members to increase production and create wealth in the existing economic structure. In addition to upward social mobility, “quasi-​property-​rights” also played an important role in the developments of commerce and trade in imperial China. One of the factors accounting for the vigorous expansion of commerce and manufacturing in the Ming Dynasty was the further spread of “quasi-​property-​ rights” with the facilitation of merchant organizations. “Quasi-​property-​r ights” refer to the entitlements over specific areas of trade obtained by merchants through relation-​ building with state officials. They were not legal rights guarded by an impersonal judicial system, but offered necessary protections for the merchants to carry out commercial activities on larger scale. As discussed in Chapter 2, in the Ming Dynasty, long-​distance traders and migrant merchants were able to obtain official protections more effectively through the employment of the new type of gild organizations, shangbang or regional merchant groups. A major function of Shangbang was to build personal connections with the imperial government as well as with merchants of other regional groups. In some cases, the huiguan of these organizations were sponsored directly by imperial officials from the same native place (Ho 1966). In general, merchants were motivated to attract same-​origin officials to join their huiguan, as the joining of state officials both increased the reputation of the organization and provided the direct contacts with the local official circles (Wang 2007). Through the personal connections with state officials, the shangbang secured the so-​ called “official umbrella” for protecting their businesses. In general, the arrangements between a shangbang and acquainted officials could yield its members certain control over the trade in the areas administrated by the officials. The official umbrella also provided some protection for the members of the shangbang from the arbitrary confiscations of the state and the extraction of extralegal taxes or surcharges (Brandt et al 2013). In addition, close relations

72  Core institutions with government officials were important for winning commercial disputes, because state officials, such as county magistrates, administrated the courts and had the full power in ruling commercial cases (Fu 1993). Finally, close and steady relations with high-​ranking imperial officials could yield business opportunities for substantial profits for long periods of time. For instance, the Hui shangbang dominated the salt trade under the state monopoly in the Ming and early Qing period, with strong connections in the government.The Shanxi merchants were able to expand the money remittance business rapidly, with the same well-​built “official umbrella.” In brief, quasi-​property-​rights encouraged merchants to build mercantile wealth and facilitated commercial expansions. But the expansions of commerce did not bring about a techno-​economic breakthrough because quasi-​property-​ rights, though sufficient for encouraging commerce, were not sufficient for motivating the making of radical innovations. Quasi-​property-​rights were insufficient to motivate the making of radical innovations for several reasons. First, these rights were largely confined to those social members, such as shangbang merchants, who had money and personal access to state officials. People in lower social strata, such as artisans and craftsmen, were largely left unprotected, as they had lesser financial capability to build personal ties with state officials. As discussed earlier, relatively equal economic rights across social classes was essential not only in facilitating the communication in knowledge between scholars and the working people but also in motivating individuals from a broad spectrum of social backgrounds to carry out innovative activities. Secure economic rights for social members engaged in crafts-​making or manufacturing were especially important because they had direct interests in improving the efficiency of manufacturing through path-​breaking innovations (Tan 2013).Yet, these people were unwilling to take on innovative ventures if the potential earnings from the ventures were fully exposed to the appropriations of the rulers, the elites and the merchants. Second, being built upon personal relations, quasi-​property-​rights cannot provide reliable and lasting protection even for the “holders” of such rights. Thus, they were inadequate for generating radical innovations that typically had unknown prospects for profitability and involved substantial costs in terms of time and money. With quasi-​property-​r ights, some merchants might have good protection when the acquainted officials were in charge, but the protection could be weakened, or even disappear, if the acquainted officials were demoted, removed from office or died unexpectedly. The protection could also become ineffective if the merchant’s business rivals obtained stronger backings from officials in higher positions. Consequently, with mere quasi-​property-​rights, private players tended to invest in businesses with predictable profits and lower risks. In other words, given the circumstantial nature of quasi-​ economic-​ rights, social members were unlikely to undertake innovations that broke into unknown territories of the economy. Last, quasi-​property-​r ights, as part of the relation-​based coordination, could not lead to the creation of patent rights through formal institutions. And the

Core institutions  73 absence of legal protection for innovators further diminished the chances for the forthcoming of radical innovations. In the case of Britain, the establishment of patent rights was the product of rule-​based coordination and the result of long-​term institutional evolution. In the process of securing their economic rights through formal institutions, merchant and craft gilds helped built up the enforcement infrastructure and further expanded laws, which prepared the ground for the creation and reliable enforcement of patent rights over innovations for individuals and organizations. Comparatively, in traditional Chinese society, the attainment of quasi-​property-​r ights by merchants through personal relations led to neither expansion of laws nor improvement in law-​ enforcement mechanisms. Relation-​based coordination provided no condition for the creation of state-​enforced patent rights. Then, what accounted for technological developments in manufacturing in traditional Chinese society? Generally speaking, the state or ruler’s policies played a key role in the economic developments including the developments of manufacturing technologies in imperial China. Periods of advancements of agriculture and commerce in various dynasties were always related to the emperor’s benevolent policies on taxation, land distribution, trade restrictions and other regulations. For the example of the Ming Dynasty, Emperor Muzong lifted the ban on sea trade for the private sector, and the policy brought about the expansion of overseas trade in Ming China. As scholars pointed out, economy can prosper sometimes under autocracy, as self-​interested autocrats had an incentive to support production and trade activities for the purpose of increasing taxable income in society (Olson, 2000).The expansion of commerce and trade increased the demand for manufactured goods, which could lead to the development of manufacturing technologies. Specifically, the state-​run operations usually took the lead in improving the manufacturing technologies in imperial China. As discussed previously, a feature of the Chinese traditional economy was the government’s direct participation in manufacturing through state-​run workshops or craft centers. In the Song Dynasty, the state-​run operations already embraced a wide range of sectors, such as mining, construction, armory and mintage, salt-​distilling, silk textile, ship-​building, porcelain-​making and tea-​processing. The government set up a special management system for state-​run workshops at the central and local levels, with detailed regulations on the appointment of supervising officials, quality control, production quota, accounting schemes, standards for rewards and penalties, and so on (Xu 2012). In the Ming Dynasty, the government further expanded the networks of state-​run operations all over the country under the artisan registration system. In most dynasties, the state-​run workshops and manufacturing centers took the lead in technological improvements because the government could draft the most skillful artisans, provide adequate capital and impose stringent quality-​standards for the production. Newer techniques were usually spread from state-​run operations to the private sector through the artisans who had worked in state workshops or manufacturing centers (Zhao 2006; Xu 2012).

74  Core institutions Despite the positive role in technology developments, the state operations were unlikely to bring about path-​breaking innovations due to not only the narrow knowledge base for innovations but also the very nature of the state operations. The state-​run operations aimed at satisfying the consumption of imperial clans and the government, as well as controlling the key sources for state revenues. Thus, technical improvements at these facilities were very much limited to the existing sectors. More importantly, artisan workers at the state workshops were mostly drafted through coercion and managed by state officials with little knowledge of the production (Xu, 2012). Without basic economic liberty, the artisans and craftsmen lacked the initiatives to make innovations. On the other hand, the state operations occupied valuable human and physical capital. With less resources available to the private sector, it was hard for innovative activities to take place in broad scopes. In certain cases, the ruler was capable of launching large state projects that could spur considerable technological advances in some sectors. But such state undertakings could not make lasting impacts on the structure of the economy as they were largely the fruits of the personal will of a single emperor. For instance, in the Ming Dynasty, impressive progresses were made in the technologies of shipbuilding and sea navigation, under the personal direction of Emperor Chengzu (Yongle). The emperor’s close eunuch associate, Zheng He, organized the expedition voyages in the South China Sea and the Indian Ocean, as well as shipbuilding projects for the fleets in the early 15th century. However, these achievements did not lead to further advancement in navigation technologies and continuous expansion of the country’s shipbuilding industry. The expeditions and related shipbuilding projects were discontinued after the death of the emperor and Zheng He. For the technological developments in the private sector, without the protection of state-​enforced patent rights, artisans and craftsmen mainly relied on the methods of “secret-​keeping” for the protection of inventors’ interests in manufacturing. In traditional Chinese society, new discoveries or unique craft-​ making techniques were usually kept within a family or extended family and passed on to a male heir. Take the example of silk-​making. In the Tang Dynasty, the silk-​making techniques reached higher levels in several regions.To maintain the profits of production, some producers kept their unique manufacturing techniques secret. In an extreme case in Bozhou (Anhui province), the techniques of making a special type of ultra-​light silk yarn were kept secret within two families tied through marriage for as long as 300 years, with the production confined to the two families (Xu 2012). Unlike the patent system that could document and allow access to the new techniques after certain periods and/​or through the sale of inventions, “secret-​keeping” limited the use of new techniques to a small scope. The new techniques could neither be disseminated to more producers to expand the industry nor further improved for better use or more variety of products. They could even get lost, with the extinction of a family line, say in natural disasters or war. For instance, the techniques of making “Jinlingjuan,” a type of thin tough

Core institutions  75 silk-​cloth known for its exquisiteness, developed in the Song Dynasty, were totally lost without surviving long-​term secret keeping (Xu 2012). In brief, with “secrecy” as the major way of invention-​protection in a society, it is difficult to expand the knowledge base for innovations and to build the momentum for extensive innovative activities.

Notes 1 Britain is used in this chapter, as England and Scotland were united into Great Britain in 1707. 2 Legalism was not set as the official orthodoxy explicitly as its teachings were addressed exclusively to the rulers instead of all members of the society. Legalism remained the dominant political philosophy for the rulers and state officials to improve their “ruling techniques” throughout the imperial era. The imperial Chinese polity was described as “overt Confucianism combined with covert Legalism” by some Chinese scholars. 3 The New Culture Movement from the mid-​1910s to 1920s criticized the traditional Confucian culture and promoted a new Chinese culture based on democracy and science. The movement was led by a group of intellectuals in Peking University, Beijing, including Chen Duxiu, Cai Yuanpei, Hu Shih, Li Dazhao, Lu Xun, Qian Xuantong, Liu Bannong and others. With the journal “New Youth” as the forum for spreading their new ideas, these intellectuals blamed the Confucianism for China’s weakness and called for “Mr. Confucius” to be replaced by “Mr. Democracy” and “Mr. Science.” An important outcome of the movement was the promotion of baihuawen, written vernacular Chinese, over the classical written Chinese.

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4  The Chinese and Japanese states in the 19th century

The first Industrial Revolution fundamentally changed the international settings for the rest of the world. To oriental societies like China that had developed civilizations largely in separation from Europe, the rise of the Western industrial powers and their full arrival in East Asia in the 19th century caused extreme shock. On one hand, the Western powers with superior technologies, particularly military technologies, posed serious threats to the security of these unindustrialized nations, but on the other, they offered examples of economic developments. In the new international settings, Russia and Japan achieved rapid industrialization by employing the state as a major instrument, yet China, as the oldest bureaucratic state, failed in the state-​led industrial developments. While Japan rose as a new industrial power in Asia around the turn of the 20th century, China fell to a semi-​colonial economy. This and the next chapter will compare the Chinese and Japanese state to explore why Meiji Japan succeeded but Qing China failed in the state-​led industrialization, when they were faced with the same external threats from the Western industrial powers in the late 19th century.

The role of the state for latecomers’ economic catch-​up Since the first Industrial Revolution, international settings had begun to play an increasingly important role in the economic development of unindustrialized nations, as laid out in Chapter 1. This is not only because the rise of Western countries caused externally-​provoked or externally-​induced industrialization in other parts of the world, but also because late developed countries or latecomers now could industrialize by adopting the new technologies innovated in the advanced economies. As Alexander Gerschenkron (1962) proposed, latecomers had the “advantage of backwardness,” namely, the advantage of adopting the technologies and organizational methods readily available in the advanced countries. Gerschenkron also observed that, as the most backward economies in 19th-​century Europe/​ Eurasia, Russia and the Hungarian part of the Austria-​ Hungary Empire resorted to the state as an institutional instrument in their industrialization. DOI: 10.4324/9781003202042-4

The Chinese and Japanese states  79 But he did not offer much explanation for why these backward economies did so other than that they were faced with “greater pressures for high-​speed industrialization.” The state’s additional role in the new international settings From an institutional perspective, it is the new international conditions that made it possible for latecomers to employ the state as a major institutional instrument in industrialization. With new technologies obtainable from abroad, latecomers no longer needed to possess the set of core institutions accounting for the Industrial Revolution in Britain to get industrialized simply because they could adopt instead of innovating new technologies. Consequently, those latecomers that had strong state organizations had the option of employing the state as an instrument for industrialization. Therefore, it can be proposed that in the new international settings, latecomers could achieve industrialization without possessing the institutions of pluralism and rule of law required for the making of radical innovation. As shown in Chapters 2 and 3, Britain pioneered industrial revolution because it had developed the core institutions conducive to the making of radical innovations, such as those in cotton spinning, iron-​making and water wheels, that gave rise to the first tech-​economic paradigm. While the origination of radical innovations had rather stringent institutional requirements, the adopting and improving of radical innovations may not necessarily require the same set of core institutions, as evidenced by history. Here the distinction between radical and incremental innovations is critical. Radical or path-​breaking innovations are the type of innovations that can give rise to new industries leading to new paradigms in the world’s economic developments. For each Kondratiev wave, the radical innovations introduced the cluster of dominant technologies that defined the structure of the new paradigm. Incremental innovations, on the other hand, are the innovations that adopt, adapt and improve the radical innovations in the technological diffusion process (Fagerberg and Verspagen 2002). In each Kondratiev wave, when the profitability of the new dominant technologies introduced by radical innovations became evident, many more firms and sectors, or “swarm of imitators” a la Schumpeter, would jump on the bandwagon.Then the new technologies began to spread to other industries and further, to other countries. In the phase of technological diffusion, incremental innovations would take over worldwide. The key difference between the two types of innovations is that for radical innovations, the viability and profitability are completely unknown at the time of innovating, yet for incremental innovations, the viability and profitability are already shown in the originating industries or countries. Thus, the institutional requirements for the making of incremental innovations may not be as stringent as that of radical innovations.That is, incremental innovations could be made by late developed countries that did not possess the institutions of pluralism and rule of law.

80  The Chinese and Japanese states For the second Kondratiev wave, the group of Western countries that have similar institutions as Britain originated the radical innovations of railway, steam engines and machine tools.With these radical innovations opening up the second techno-​economic paradigm, Russia and Japan, as the late developed economies back then, achieved industrialization by adopting the new technologies from the advanced economies in the technological diffusion. However, different from the Western European countries and the United States where private companies took the lead in launching industrial ventures, the industrialization in the case of Russia and Japan was led by the state. There are several reasons for why the state could serve as a major institutional instrument for the industrialization of late developed countries. To begin with, the industrialization of latecomers was often provoked externally. That is, the industrialization endeavors in late developed countries were often motivated by the urgency to ward off foreign military threats as well as the aspiration to match the economic strength of the advanced nations. Under such circumstances, the rulers’ and state leaders’ self-​interests became consistent with the national interests. Consequently, the state would play a leading role in these nations’ industrialization. As contemporary researchers suggested, genuine external threats could provide the incentive for the state leaders to support a stronger economy and productive practices (Smith 1965; Kang 2002). Second, for some latecomers the state government “had to” take the leadership in industrial development as private businessmen had neither the incentives nor the capability to initiate industrial ventures. In societies such as 19th-​century Russia, Japan and China, the core institutions of absolutism subjected private actors to the total control of the ruler/​state. Private producers were too weak in coercive power or too vulnerable in economic rights to launch risky and costly industrial projects. Third, in the new international settings latecomers could get economic information, in addition to new technologies, from the advanced economies. The availability of economic information allowed the state organization to take a leading role in latecomers’ industrial developments. Economic information refers to the information on the overall pattern of specialization or industrial structure of the advanced economies (Tan 2005). Basically, it tells what the pillar industries or what the dominant technologies are, how the industrial sectors are linked with one another, as well as how they are linked to the final demand in the advanced economies.This type of information can be termed as “economic information,” as it helps answer the fundamental question of “what to produce” for a latecomer trying to industrialize or provides the broad guidance for a latecomer in allocating resources for the purpose of industrialization. As Chalmers Johnson (1982, 24) put it, “the goals of the developmental state were invariably derived from comparisons with external reference economies.” Economic information, being from external sources, could be gathered, analyzed and employed relatively easily by centralized intelligence, unlike the dispersed market information described by Friedrich Hayek (1944). The broad information on the industrial structure in the Western countries could

The Chinese and Japanese states  81 be obtained through plenty of channels already in the late 19th century, such as media reports, direct visits, personnel exchanges, foreign trade, and so on. In the 20th century, aggregate economic and industrial statistics of the Western industrial countries were collected, compiled and published increasingly on regular basis. There were also more and more up-​to-​date research in academic and non-​academic journals, periodicals and books that could be circulated across national borders through modern communication means. In the 21st century, the popularization of the internet and wireless devices accelerated the flow of information and made it even easier to collect economic data. Furthermore, economic information can be obtained freely or at low costs, unlike new technologies that had to be licensed and purchased at high prices. In essence, economic information was revealed by the very existence of the advanced economies. Thus, it carries some characteristics of what economists called “public good.” That is, it is non-​rival and its usages are non-​exclusive (Tan 2005). Fourth, and closely related to the third reason, the governments of latecomers had certain advantages in utilizing the economic information for industrial developments. Given the aggregate nature of economic information, the state government is in a better position than individual firms to collect, process and translate the information into nation-​wide developmental goals. The state governments are also at the “commanding-​heights” to coordinate capital flows to set up new industries and organize research projects for technological adaptation. Focused investment in the “winner” industries and incremental innovations could produce dynamic gains in overall outputs or GDP and lead to rapid industrialization for late developers. “Dynamic gains” refers to the output gains from the direct adoption of new technologies and patterns of specialization by a latecomer, as against the static gains derived from voluntary exchange and specialization of production in the markets at given time (Tan 2005). Of course, there are efficiency losses at microeconomic levels from the suppression of the market mechanism with the employment of state as the coordinator. But, for latecomers that are far behind the technology leaders, the dynamic gains obtained by state-​led developments could more than offset the efficiency loss for quite some time. In short, in the new international settings since the first Industrial Revolution, the state could serve as effective developmental instrument for latecomers thanks to the information revealed from the advanced economies.The successful stories of state-​led development or “authoritarian economic growth” continued in the 20th century and in our day, as evidenced by the East Asian Miracle, the Chinese Miracle, and to some extent, the high-​growth decades of the Soviet Union. In contemporary words, for state-​led developments, the state government went beyond the “textbook-​defined” roles of enforcing laws and regulation (the referee), supplying public and social goods, maintaining macroeconomic stability and providing social welfare through income-​redistribution. The state took on the additional role of coordinating the nation’s industrial transformation or acted as the coordinator of production, at least partially.

82  The Chinese and Japanese states Nevertheless, the recognition of state’s leading role for latecomers’ catch-​ up industrialization by no means relegates the importance of the pluralistic institutions. Quite the opposite, the feasibility of a state-​led approach was conditioned on the very existence of the advanced market economies supported by pluralism and rule of law. Furthermore, once they narrowed the gaps with the advanced economies, latecomers would lose the informational advantage of employing the state as the coordinator.The dynamic gains would fall over time. GDP growth could stall with massive misallocation of resources, as shown by the extreme case of the Soviet Union. The quality of the state Although the state has certain advantages in utilizing the economic information for latecomers’ catch-​up industrialization, not all late developers could succeed in state-​led industrialization. Key to the success of the state-​led economic development for latecomers is the quality of the state or the developmental capability of the state. There have been extensive studies on state bureaucracy and the state’s role in economic development (e.g. Bates 1981; Johnson 1982; Migdal 1988; Amsden 1989; Wade 1990; Evans 1995; Fukuyama 2014). In this set of literature, a developmental state is distinguished from a predatory state. A developmental state, capable of promoting economic growth, is characterized by autonomy from society and strong internal coherence. State officials tend to be well-​ disciplined and fully committed to the state’s collective goals. In contrast, a predatory state is characterized by its capricious extraction from society and an incoherent internal structure. State officials tend to use their offices for personal benefits. In this case, the state is “captured” by corrupt officials to prey on the common people. Predatory states obstruct economic development. Usually, a developmental state has high degree of bureaucratization. According to Max Weber, the ideal type of state bureaucracy or a modern state is characterized by continuity, hierarchy, well-​ defined regulation, use of documentary records, separation of public office from private ownership and the salaried employment of full-​time professional experts with career-​ long tenure (Weber, 1978, pp. 956–​63). A fully bureaucratized state or a full bureaucracy should have all the characters prescribed by Weber. In particular, a full bureaucracy is completely insulated from the propertied class or separated from “private ownership of resources.” The complete autonomy allows the state to formulate and pursue its own goals as an independent corporate body. Furthermore, a state with high degree of bureaucratization has coherent internal structure. The incumbents of the state bureaucracy operate in accordance with well-​ defined regulations and norms. In general, state officials consider the advancement of career within the bureaucracy as the best way to maximize their self-​interests. The literatures on state bureaucracy provided great insights for our investigation on China’s experiences of industrialization in the 19th century.

The Chinese and Japanese states  83 From these studies, the quality or the developmental capability of a state, to a large extent, is underscored by the degree of its bureaucratization that could be evaluated by the state’s relations with society and its internal structure. This chapter will investigate the state institutions in China and Japan as the major determinant of the developmental capability of the two states. As specified in Chapter 1, in this analytical framework, state institutions refer to the set of rules governing the internal relations of the state, mainly the relations between the ruler and state officials, as well as its external relations with society, mainly the relations with the propertied class. State organization is made up by the ruler and his imperial officials at all levels of the state government. The incentive mechanism embedded in the state institutions dictated behaviors of imperial officials as the incumbents of the state organization. For societies with a long tradition of absolutist state like China and Japan, state institutions stand as the central part of the core institutions and deserve further study. In the second half of the 19th century, both the Chinese and Japanese imperial states responded to external threats with industrialization endeavors, with the goal set at “rich nation and strong army.”Yet the two states’ endeavors ended in vastly different results in the economies. As will be shown by our comparative analysis, mainly responsible for the divergent results in the two nations was the differences in the state institutions between China and Japan in the 19th century. Comparing the Chinese and Japanese states in the 19th Century In the mid-​19th century, China and Japan, as traditional agrarian-​commercial societies, were both faced with external threats or challenges. The Western industrial powers arrived in China and Japan roughly around the same time. They demanded for trade and other rights, and imposed unequal treaties on both countries. For China, the First and Second Opium Wars (1840–​1842, 1856–​ 1860) with Britain and other Western powers resulted in a series of unequal treaties. These treaties forced China to open up its major seaports, restricted the Chinese government’s rights to levy tariffs, granted extraterritoriality to foreigners in the designated port cities, and imposed war indemnities. For Japan, the American navy, under Commodore Perry, sailed into Edo Bay in 1853 and demanded Japan open its ports for trade with official orders. In 1858 and 1866 Japan was forced to sign a set of unequal treaties with various Western countries, which gave foreign traders some unrestricted access to the Japanese markets through the designated ports, put Japan’s tariffs under international control and exempted foreigners from obeying the Japanese laws while in Japan. In both cases, the superior militaries of the Western industrial countries threatened their national sovereignty, and the unequal treaties brought the flood of foreign manufactured goods that endangered the very livelihood of the indigenous industries. The similarities in external conditions accentuated the importance of the state institutions in determining the end results of the state-​ led industrial

84  The Chinese and Japanese states developments in the two societies. Two questions are raised here: first, what were the major differences in the state institutions between China and Japan, as of the mid-​ 19th century when they encountered the Western powers? Second, how did these differences lead to the divergent results of the state-​led industrialization in the two countries? The first question will be explored in this chapter and the next chapter will deal with the second question. The Chinese and Japanese imperial states in the 19th century were both centralized absolutist monarchies. Both states held absolute coercive power over the society they ruled, unrestricted by any social groups. Both the Chinese and Japanese emperors were above the law. In both cases, local governments were subject to the central control in fiscal, judicial and military matters, in principle. Nonetheless, the two states differed greatly in the degree of bureaucratization. The Chinese state, although much older and more sophisticated, had much lower degree of bureaucratization than the Japanese state. Our analysis will focus on the differences in the state institutions because the differences ultimately accounted for the divergent results of the state-​led industrializations in the two countries. Theda Skocpol (1979) made some valuable comments on the Chinese versus Japanese state in the 19th century. She described the Chinese imperial state as “semi-​bureaucratic” and pointed out that the Chinese imperial officials simultaneously held government offices and ownership of land and commercial properties. That is to say, the Chinese state bureaucracy was not insulated from the propertied class. The Chinese imperial officials could derive income and wealth from private property ownership other than the state salaries. The entrenchment significantly reduced the autonomy of the Chinese state. In contrast, Imperial Japan had developed virtually complete bifurcation between private wealth and administrative power in the Tokugawa period (Skocpol 1979, 101). The daimyo and their samurai, as the administrators of the government living in the castle towns, had been separated from direct ownership of land since the 16th century. On the other hand, landlords and merchants were forbidden to hold government offices except at community level. Thus, government stipends were the only source of income for the Japanese imperial officials. The total insulation from the private properties as an income source gave the Japanese state complete autonomy. Skocpol’s observations captured a major difference in the state institutions between China and Japan. Autonomy was a necessary attribute for a fully bureaucratized state. In our analysis here, the rules governing the state’s relations with the propertied class was a crucial component of state institutions because the extent to which the state organization was insulated from private wealth directly determined the state’s capability of formulating and pursuing its independent goals. In addition, there is another major difference in state institutions between the two countries –​the effectiveness of written rules in state administration, as will be discussed. The differences in the state institutions between China and Japan in the 19th century were the consequences of long-​ term evolutions along paths

The Chinese and Japanese states  85 continuously shaped by the relevant actors in the respected societies. As well known, Japan was strongly influenced by China’s centralized imperial system in its early history. Yet the evolution of Japan’s state institutions had begun to diverge from that of Chinese state at least since the 12th century. To better understand why the Chinese and Japanese states stood as they were in the mid-​19th century when faced with foreign threats, it is necessary to examine historical developments of the state institutions in China and Japan prior to then.

The Chinese state institutions and the dynastic cycles China was the world’s first civilization that created a state bureaucracy (Bai 2002; Fukuyama, 2011). At the time around the fall of the Roman Empire, the Chinese bureaucratic state had already developed many attributes of modern bureaucracy or the ideal type of bureaucracy described by Max Weber (1978), including an administrative hierarchy, a salary system for staff, specialization in office functions and regulations for internal management and recruitment. With the development of state bureaucracy, the Chinese empire had acquired a strong administrative capability for collecting taxes, enforcing imperial laws and decrees, conscripting solders for the standing army, organizing public projects, as well as managing trade and production activities. In the Sui-​Tang period (581–​ 907AD ), the Chinese empire reached its zenith, with further improvements in the organizational structure of the government and the introduction of a merit-​ based recruitment system for imperial officials. The Chinese bureaucratic state became the model for neighboring countries to emulate. However, the Chinese state had a sturdy patrimonial-​feudal component precisely because it was created at an early time of civilization in a kinship-​ dominated society (See Chapter 2). The rulers of the Chinese imperial state invariably enfeoffed their imperial clans and relatives, namely the emperor and empress’s kinsmen, and granted them state offices in addition to fiefs. The simultaneous holding of state offices and private land contradicted the Weberian criterion of “separation of public office from private ownership of resources” (Weber, 1978) for modern state. Furthermore, the autocracy and ruler’s kinship relations with his top officials considerably personalized the management of the bureaucracy and state administration, which greatly mitigated the effectiveness of written rules. In brief, the Chinese state was only partially bureaucratized, as pointed out by Skocpol (1979). Lack of autonomy Again, autonomy here refers to the independence of the state organization from the propertied class, namely, the owners of production properties such as land, commercial and industrial capital. The degree of autonomy determines a state’s capability to formulate and pursue its independent goals. Weber considered insulation from the society as a necessary precondition for a

86  The Chinese and Japanese states functioning bureaucracy (Evans 1995, 41). The Chinese state lacked autonomy, with the state officials being the vital constituents of the landowning class. The institutions combining office-​holding with land ownership were attributable to the concurrent developments of state administrations and the kinship-​based feudalism in ancient China. As early as in the Western Zhou period, China developed government administration, with formal office posts specializing in some basic functions, such as sima, situ, sigong, sikou (offices in charge of military, farmland, construction and crime-​penalty) at both the center, with the Zhou king, and the vassal states. In the vassal states, the vassal dukes as rulers granted their kinsmen not only fiefs with land and laborers but also office posts in the government. The aristocratic titles received by the noblemen, such as qing and dafu, stood also for office ranks. The fiefs served as fenglu (the source of income/​salary) for office-​holding. This system was described as shiqing shilu, meaning that both the office posts and fiefs were hereditary (Fu 1993; Wang et al. 2002). The system of shiqing shilu started the long tradition of the simultaneous holding of offices and land properties in the Chinese state. It was also responsible for the patrimonial-​feudal component in the Chinese state institutions. The Qin Dynasty ended Chinese feudalism with the establishment of a centralized bureaucratic state. The fiefdom-​ based feudal government was replaced by the multi-​level state administration, Junxianzhi (the prefecture-​ county system), and the administrative hierarchy was staffed by salaried officials. However, the Qin-​Han Empire was not a clean break from the feudal past (see Chapter 2), and the institution of combining office-​holding with land ownership was maintained. At the top level, the Qin and Han1 emperors continued to enfeoff their kinsmen and close associates, with the granting of aristocratic titles and farmland, as well as office posts associated with the titles. Consequently, high-​level offices in the state bureaucracy were mostly held by landed nobles. The selection of state officials in general was based on nomination and recommendation, including the recommendation of one’s own brothers, sons and grandsons, of current officials. The emperor held the power in the final appointments. Among the standards for official selection, an important criterion was that the candidates must own a certain amount of land properties. It was also popular that the government sold office posts to wealthy people (Meng and Bai 2002). Thus, state officials at all levels were landowners. Their income came from both government salaries in kind (grain) and harvests from their own land. The institution of combining office-​holding with land ownership was greatly strengthened in the Wei-​Jin period (221–​420A D ). Under Jiupin Zhongzheng zhi (the Nine Ranking system), the recruitment of new state officials was based on the recommendations from current officeholders, mainly the high-​ranking officials. As the current high-​ranking officials, who were mostly landed nobles, regularly recommended their family members or close kin for state offices, the middle-​to high-​level state offices were occupied by aristocratic landowners. The dominance of landed nobility in the government not only strengthened

The Chinese and Japanese states  87 the bonds of state offices with landownership, but also led to the rapid growth of latifundia in the period. The aristocratic landowners, backed by their office power, had acquired land and slaves on large scales. They also used their office power to secure tax exemption for themselves and their slaves/​dependents working on the latifundia. Consequently, the state bureaucracy as a corporate organization was fatally weakened. The Wei-​Jin period was an extreme case where state officials as individuals captured the state to enrich themselves at the expense of the state. The introduction of the Keju system in the Sui-​ Tang Dynasties (581–​ 618AD ; 618–​907A D ) invigorated the imperial state by making the exam-​based recruitment as the main avenue to government offices. Now that the emperor appointed officials from the degree-​holders, talented commoners from lower social classes could enter high offices of the state by getting degrees through imperial examinations. Keju, as a meritocratic recruiting system terminated the aristocratic dominance in the state office and greatly enhanced the competence of the imperial bureaucracy. The Sui-​ Tang emperors also improved the organizational structure of the government and administrative efficiency, with the establishment of the Sansheng Liubu (Three Departments and Six Ministries) system. Under this system, the central government operated through three “head” departments: Shangshu sheng (Department of the Master of Documents), Zhongshu sheng (Department of Secretariat) and Menxia sheng (Department of Attendant). Zhongshu sheng was responsible for drafting imperial decrees and documents that articulated the decisions made by the emperor and his senior officials. Menxia sheng reviewed and corrected these documents and Shangshu sheng implemented the imperial decrees through the six ministries under it: the Ministries of Personnel, Revenue, Rites, War, Punishment and Works. The administrative system of the six ministries was followed by the succeeding dynasties until the very end of the imperial era. Nevertheless, the introduction of Keju and other improvements in the state bureaucracy in the Sui-​Tang period did not sever the ties between office-​ holding and landownership in the Chinese state institutions. In fact, the land law/​decrees in the Sui-​Tang period formally granted state officials Yongyetian (permanent land) in accordance with their office ranks, in addition to their existing privately owned land. For instance, in the Tang Dynasty, the first-​rank officials were entitled 60 qing (over 400 hectares) of land.The low-​level officials, such as officials in the eighth and ninth rank, were entitled two qing (about 14 hectares) of land. Once granted, the Yongyetian were permanently owned by the officials as private land (Li 1985; Wang and Wang 2012). Thus, the Sui-​ Tang Dynasty greatly improved the recruitment system of state officials, but maintained or reinforced office-​holders’ direct ownership of land properties. That is, the imperial state was firmly entrenched in the propertied class just as in the previous dynasties. The institutions of combining office-​holding and landownership persisted in the following dynasties and throughout the imperial era. First, the emperors in all the following dynasties continued to grant aristocratic titles, land and

88  The Chinese and Japanese states office posts to the imperial clans and close associates. It was also a common practice that the emperors rewarded land to his favored state officials. In particular, the emperors in the Yuan, Ming and Qing Dynasties, the last three dynasties, bestowed large amounts of aristocrat-​entitled land to the members of the imperial clans and state officials. Second, from the West Jin to Ming Dynasty, the imperial officials were allotted zhitian (office land)2 according to their office ranks, as a supplement to their salaries. The official could use the land any way they wanted, including leasing it. Although they were supposed to return the zhitian to the state upon leaving the office, it was not unusual that officials kept some or all their zhitian after retirement, with the emperor’s permission or illicitly (Zhao and Chen 2006; Wang and Wang 2012). The third channel of binding state offices with private wealth was the system of zina juanguan (buying state-​office posts) or maiguan yujue (selling office posts by the state). Under the practice, landowners, merchants and anyone who had financial capability could purchase government office posts, and the levels of the office positions they got depended on the amount of money they could pay or donate. The governments in all dynasties adopted this practice as means of expediency from time to time, to replenish the state revenues. Finally, at the basic level, imperial officials were tied with the propertied class through kinship relations. The degree-​holders mostly came from landowning families. As Fairbank (1979, 39) put it, “[t]‌he landed gentry mainly produced the scholar class from which officials were chosen”. The imperial exams required lengthy period of Confucian education. In most cases, only landowning families could afford the education. Imperial officials invariably kept close relations with their propertied families and kin during their office career, and returned to their home villages to join the families after retirement. True autocracy and the emperor’s personal rule The Chinese state was only semi-​bureaucratic also because the emperor’s personal rule considerably mitigated the role of written regulations in the operation of the state bureaucracy. Effective and impersonal enforcement of regulations was an important criterion for a full bureaucracy. Only when its incumbents were disciplined with regulations could the state organization function as a coherent corporate body in pursuit of its collective goals, as suggested by the literatures on the state.The Chinese state was semi-​bureaucratic as it lacked the capability to enforce written regulations consistently with the emperor’s personal rule. The Chinese imperial state was a true autocracy, the rule of one person.The emperor’s absolute power was real (versus nominal), and the state bureaucracy was responsible to him alone. As Zhengyuan Fu (1993, 119) described, [t]‌he emperor, as the embodiment of highest legal authority, was above and beyond the law. All legislative, judicial and executive powers were concentrated in his hand. The emperor was the sole lawgiver, and he alone

The Chinese and Japanese states  89 could make or disclaim any law arbitrarily. He was also the supreme judge whose decision was the ultimate court-​ruling. Thus, the impartiality and effectiveness of the Chinese laws was severely compromised by the emperor’s personal power. In addition, the Chinese state had a strong patrimonial-​feudal tradition. As said above, the emperors in all dynasties carried on the practice of enfeoffing their imperial clans and relatives, namely, the emperors’ kinsmen under the same surnames and the empresses’ kinsmen with different surnames. These kin or clan members were granted not only aristocratic titles with large fiefs but also state-​office posts, mostly top office positions. The ruler’s absolute power plus his kin relations with some of his top officials made the Chinese state what could be called a “patrimonial-​feudal autocracy.” The patrimonial-​feudal tradition further personalized the rule of the emperor, as he held even more discretionary power when mingling the state affairs with his family or clan matters in decision-​making. The dominance of kinship in society and the Confucian ideology helped reinforce the patrimonial-​feudal autocracy.As discussed previously, the kin-​based organizations in society supported the patrimonial tradition of the Chinese state. Confucianism justified the personal power of the emperor without setting hard constraints on the ruler. In Chinese society the emperor was regarded as the parent of his subjects. As the parent, the ruler had an obligation to take good care for his people, but he also held the absolute authority in penalizing his subjects, including his imperial officials, for the wrong-​doings on his personal judgment. Due to the patrimonial-​feudal autocracy, the Chinese state had a heavy reliance on personal relations rather than written rules in internal management and administration. The problem was not short of laws and regulations. As a matter of fact, the Chinese imperial state had developed comprehensive laws for internal management from the very beginning. These laws had been improved and expanded in each dynasty to embrace every aspect of internal management, including the rules on office ranks, grades and salaries, office-​ assignment categories, office terms and tenures, transfer and rotation of posts, avoidance in appointment, leave and absence, retirement, performance appraisals, as well as penalties for various offences (Bai 2002; Fu 1993). There was no shortage of supervising agencies for the incumbents of the state bureaucracy either. Since the Qin-​Han dynasties, there had been two main offices at the central government for managing the bureaucracy and enforcing internal regulations: the Office of Censorate and the Office of Personnel, which may have assumed different names in various dynasties. The Office of Censorate conducted interior surveillance and monitored the behaviors of state officials. The Office of Personnel was responsible for the recruitment, appointment and evaluations of performance of state officials at both central and local levels. Since the Tang Dynasty, in addition to the Keju examinations, the Ministry of Personnel also conducted job-​assignment exams for new officials recruited

90  The Chinese and Japanese states through the Keju and annual exams for performance evaluations for existing officials. The laws and supervising offices certainly enhanced the bureaucratic capability of the state and played an indispensable role in upholding the emperor’s rule. Yet they could hardly maintain the internal cohesion of the state organization for long. Despite the comprehensive or even redundant codes and close surveillance, the internal disciplines of the Chinese state always deteriorated in due course and in some dynasties, collapsed quickly. For all dynasties, office corruption and abuse invariably got out of hand in the late periods and led to the disintegration of the entire state organization. The proposition here is that the Chinese laws on the state internal management looked comprehensive but were actually ineffective in areas essential to the internal cohesion of the state. As the ineffectiveness of written rules spread wide and deep to all areas, the disintegration of the state organization became unavoidable. Fundamentally, the ineffectiveness of written rules came from the strong partiality in both law-​making and law-​enforcement under the patrimonial-​feudal autocracy. To start with, the primary purpose of the laws for the state management was to safeguard the emperor’s absolute control over the bureaucracy. The prevention of office abuse and corruption came only secondary, at best. That is, the laws and regulations mainly focused on the preclusion of conspiracy among the imperial officials and revolts at central and local levels, with much less emphasis on the measures of stopping imperial officials from abusing their office power over the people under their administration, although office abuse was more corrosive to the cohesion of the state bureaucracy. In correspondence, the penalties on the offences involving disrespect, disobedience and potential harms to the emperor were extremely harsh and meticulous, yet those for office abuse such as graft, bribery and embezzlement were much less severe and less detailed. Also, state officials could have their penalties decreased by resigning from office posts for short periods or paying redemption fines (Fu 1993). The fundamental partiality in the laws left ample room for state officials to evade the laws through manipulation. At the enforcement levels, the laws and regulations designed to preclude conspiracy and treason were imposed strictly, yet those meant to prevent office abuse and corruption were never enforced effectively on consistent basis. Adding to the fundamental partiality, the personal rule of the emperor further reduced the effectiveness of the preset laws. Under the true autocracy, the ruler had the ultimate say on all the decisions made by the Office of Censorate and the Office of Personnel. “In fact, his ruling could override the existing law. He could at will create, change, override, abolish, suspend and interpret the laws” (Fu 1993, 119). Consequently, the enforcement of the laws was subject to the personal will or judgment of the emperor. On one hand, the emperor could punish those officials he regarded as threats to his rule with harsh sentences such as confiscation of properties, exiles, execution in cruel forms and execution of close branches of clans. On the other hand, the emperor could

The Chinese and Japanese states  91 indulge his favorite officials with blatant, outrageous corruptions, disregarding the relevant laws. The most famous examples were the cases of Yan Song in the Ming Dynasty and He Shen in the Qing Dynasty. Both Yan and He were top state officials. They amassed stunning personal wealth illegally during their long office careers under the personal protection of the emperors. Generally speaking, it was quite common in all dynasties that the emperor sheltered his top officials, and high-​ranking officials sheltered their protégés from penalties deemed by the laws. Although office abuse and corruption posed no immediate danger to the rulers, impunity on this type of offence allowed state officials to pursue private gains at the expense of the state fearlessly. The ineffectiveness of laws would spread into the areas directly concerning the security of emperors’ rule and would cause a total breakdown of the disciplines of the state organization sooner or later. In the meantime, the widespread office abuse meant intensification of expropriation on the peasants by officials, and the deprivation of the peasants made the regime-​ending peasant rebellions inevitable. That is to say, the laws that held the state officials accountable only for the emperor would endanger his rule in the end. With the institutions of true autocracy, the degree of reliance on written rules also depended on the ruler’s personal character. Laws and regulations might be better enforced on an impersonal basis under a wise emperor, but even a wise emperor could not stay away from wielding his absolute power. For instance, Emperor Xuanzong in the Tang Dynasty managed a relatively disciplined government that kept fairly good social order in the early period of his reign. Yet in the later period of his rule, the emperor lived in profligacy, promoted corrupt officials deft at pleasing him, and let his favorite eunuch and top-​official relatives use the power of office to build personal fortunes. His reign ended in a disastrous civil war and social turmoil caused by military revolts. The ineffectiveness of written rules in the Chinese state administration was often remedied by discretionary measures and ad hoc actions by the rulers. In various dynasties, the emperors employed eunuchs, or informants to monitor his imperial officials.The rulers also dispatched cohorts of personally appointed inspectors to check on local officials, instead of relying on preset procedures. Yet, when stationed at the locality long enough, the inspectors began to act just as local officials with their offices turning into a permanent part of the local governments. Then the rulers would send out new cohorts of personal inspectors to monitor the enlarged local governments.The result was overstaffed state offices with overlapping functions, but the problems of enforcement were never solved. The incentive mechanism embedded in the state institutions The Chinese state institutions, with the time-​honored office ranking system and comprehensive internal management, certainly provided incentives for state officials to pursue the state-​set goals. However, the state’s lack of autonomy

92  The Chinese and Japanese states and patrimonial-​feudal autocracy greatly discounted such incentives. Thus, the Chinese state officials developed a high propensity to capture the state for private gains and a low propensity to adhere to written regulations. The simultaneous holding of state offices and private land motivated state officials to use office power to increase their own landholdings when opportunities allowed because their private land, as an alternative source, could generate potentially much greater incomes than government salaries. Moreover, state officials’ kinship ties with the propertied class also motivated them to employ office authority to protect family assets or kin-​related wealth. Put another way, the lack of autonomy served as the institutional source for office abuse and corruption. With the imperial officials or their families being landowners, office abuse would occur whenever the chances of getting caught were perceived small or whenever the gains from abusing office power exceeded the losses from penalties, despite the written regulations. The patrimonial-​feudal autocracy provided incentives for state officials to seek for personal patronage for promotion and protection within the bureaucracy, and discouraged them from following written regulations consistently for career advancement. In other words, the emperor’s personal rule fostered a low propensity of state officials to adhere to written regulations. The reliance on personal patronage significantly weakened the internal coherence of the state organization. As personal protection from higher-​ranking officials could get them quick promotions or shield them from penalties, state officials could become fearless in abusing offices for private gains, once they secured close personal ties with the imperial nobles, retinues/​associates of the emperor or the emperor himself, as evidenced in the cases of Yan Song and He Shen. The low propensity to obey written rules was not limited to central officials who were close to the emperor. Officials at local governments could turn equally bold in office abuse under the personal protection of their superiors. For instance, it was common for all dynasties that local officials embezzled the formal or informal taxes, fees and labor services extracted from the people under their administration. Therefore, with the existing set of state institutions, the quality of the Chinese state or its capability to achieve the collective goals was highly variable. Again, the behaviors of the state officials or the internal coherence of the state organization depended on the effective enforcement of internal regulations that in turn depended on the ruler’s personal character and circumstances. The variable quality of the Chinese state was shown by the phenomenon of dynastic circle as will be discussed next. In general, the intrinsic weakness in the Chinese state institutions deeply affected the way in which the state governed society. In particular, the reliance on personal relations in the internal management of the state bureaucracy sustained relation-​based coordination society-​wise. As discussed in Chapter 2, in the absence of independent judiciary and commercial laws, private actors were motivated to cultivate personal connections with imperial officials as this was the most effective way for them to protect or advance their own interests.

The Chinese and Japanese states  93 This tendency was buttressed by state officials’ high propensity to use offices for private gains and low propensity to obey regulations. As a result, bribery in various forms became a regularity for private businessmen in dealing with state officials to obtain protections against arbitrary confiscation and better business opportunities as well. A more serious consequence is that once personal relations with officialdom became an important, if not major, way of solving economic conflicts, social members were further discouraged to resort to written laws and legislations in promoting or defending their interests. Consequently, Chinese society drifted further away from rule of law. The dynastic cycles The interplay of the state institutions and state organization led to a unique pattern of development of the Chinese polity, often described as dynastic cycles. The term of “cycles” suggests not only the changes of dynasties but also the repetitive experiences in that the new dynasties kept returning to the same set of state institutions of the old dynasties. Dynasties could demise but the state institutions always survived. Furthermore, with the survival of the state institutions, the Chinese core institutions of absolutism and relation-​ based coordination also persisted despite the changes of dynasties. First, the dynastic cycles demonstrated both the resilience and intrinsic weakness of the Chinese state institutions. The resilience came from institutional arrangements that bureaucratized the Chinese state, such as the centralized administrative hierarchy, specialization in office functions, office-​ ranking system for staff, regulations for internal management and merit-​based recruitment system, including Keju. With the resilience, the Chinese state institutions gave rise to some great dynasties, such as Han, Tang, Song and Ming Dynasties, which brought about long periods of domestic peace, steady agrarian-​commercial progress and solid population growth. The long-​lasting imperial system of Chinese civilization has proven that the Chinese state was very capable of providing stable social order over a large population and vast territory. However, the Chinese state institutions also had intrinsic weakness due to the lack of autonomy and patrimonial-​feudal autocracy. The imperial state, even in the great dynasties, invariably turned predatory in later periods, and the predation of the state eventually led to the demise of the dynasties. Underscoring the cyclical changes of dynasties was the incentive mechanism embedded in the state institutions that made the quality of Chinese state highly viable. The state organization usually had relatively stronger bureaucratic capability in the early period or upswing of a dynasty, but the quality of the state invariably deteriorated with the loss of internal coherence in the late period or downswing of a dynasty. Except for a few short-​lived dynasties, such as Qin and Sui, which were infamous for the immediate tyranny of the founding emperors, most dynasties experienced periods of upswings and downswings.

94  The Chinese and Japanese states In the beginning of a dynasty, the new state usually had a relatively high degree of bureaucratization, because the new regime just physically removed the old emperor and imperial clan, and replaced the incumbents of the old state organization. The new emperor could grant land and aristocracy to his clansmen and imperial officials right away, but it usually took time for the agricultural production to recover from the destructive wars, for the landed wealth to develop, and for the propertied class to build up ties with the state officials in the new regime. Thus, the new state organization could function relatively autonomously in the early period before it became fully entrenched in the landed wealth. A relatively autonomous state made it easier for the new rulers to implement productivity-​enhance measures. Moreover, the emperor, with fresh memories of the lessons from the previous dynasty, was more likely to adopt benevolent policies towards his subjects, such as distributing farmland to deprived peasants, reducing taxes, fees and corvee (labor service) as well as providing public goods, such as constructing dams and irrigation systems. The emperor also tended to be vigilant in disciplining the imperial officials through the relatively strict enforcement of internal regulations and he tended to reward or to punish his state officials by merit-​based standards. As a result, the state bureaucracy could function relatively effectively as a coherent organization, with office abuse and corruptions contained. Thus, it was not uncommon for a new dynasty to see solid recovery in agricultural production and commerce, higher taxable income in society and adequate tax revenues for the state in earlier periods. However, the intrinsic weakness of the state institutions would prevail eventually for all dynasties. In the later periods of the dynasties, the state organization invariably got fully entrenched in the propertied class, with the development of the new landed wealth centered on the imperial clan and high state officials of the new regime. As state officials employed their office power to expand their private landholdings on large scale, the state turned predatory. Meanwhile, in the absence of institutions countervailing the ruler’s absolute power, the emperors became increasingly indulgent in extravagant consumption and capricious use of personal power after the new regime was fully established. The ruler’s arbitrary exercise of authority and resultant nepotism in the bureaucracy weakened the interior disciplines of the bureaucracy over time. Once office abuse and corruption became rampaging, the state organization would fall into the irreversible process of disintegration. In the long history of imperial China, the demise of dynasties was always associated with large-​scale peasant uprisings.The peasant uprisings were usually triggered by two factors, as widely acknowledged by contemporary Chinese historians: the concentration of farmland in wealthy landowners and heavy state taxation on peasant households. Both were attributable to the intrinsic weakness of the state institutions caused by the lack of autonomy and patrimonial-​feudal autocracy. In Chinese society, the peasants or small landholders had no institutional means to resist the annex of farmland by large landowners who captured the

The Chinese and Japanese states  95 state power. As discussed in Chapter 2, there were no civil organizations or an organized social force to counteract the ruler/​state’s power in imperial China. In traditional Chinese society, extended families, clan or lineage were the basic organizations in social and economic activities. The ruler’s state bureaucracy was the dominant organization in society and state officials possessed downward coercive power. When the state bureaucracy deteriorated irreversibly in its internal structure, nothing could stop individual officials from capturing the state for private gains. Once they used state offices for fortune-​making, individual officials had enormous capability to amass farmlands. Then, the state turned highly predatory. With more and more peasants as small landholders losing their farmlands, the iron law of latifundia (Fukuyama 2011), by which “the rich became richer and poor poorer,” would kick in quickly. To make things worse, the government always hiked taxes in the later period of a dynasty, as the state coffer was increasingly drained by the extravagant consumption of the imperial clans and the government, as well as the large expenses on construction projects or wars. While the central government kept raising taxes in desperation to replenish fiscal revenues, the large landowners with official backgrounds always had ways to evade taxes either by hiding their lands from registration or by obtaining tax exceptions formally or informally. As a result, the tax burdens were entirely shifted onto the peasants as small landholders. With the deterioration of internal discipline, local officials also intensified their collection of various extralegal taxes and fees from the peasants.The widespread loss of farmland by peasants plus the unbearable tax burden made a large-​scale peasant uprising inevitable at the end of almost all dynasties. In addition to peasant uprisings, the other force that toppled the existing regime was from inside of the state organization, that is, the usurpation or military revolt of imperial officials. Fatal military revolts usually occurred when the throne was seriously shaken by peasant uprisings or when the state organization almost fell apart. In other words, the imperial officials who captured the state could use the power not only to plunder the peasants but also to tear down the state organization itself. For the Chinese state, revolting officials were capable of dealing deadly blows to the existing regime as they were deeply rooted or entrenched in the propertied class. Being wealthy landowners themselves, the revolting officials had the economic means to organize military action and to support drawn-​out wars to replace the old regime. They could also form alliances with local gentry through kinship webs and develop a regional power-​base. In Chinese imperial history, there were prolonged periods of regional divisions between “unified” dynasties. However, as denoted in Chapter 2, regional division is not equivalent to pluralism that dispersed the coercive power on contractual terms (between the ruler and his subjects as well as among the subjects) because the regional rulers or warlords held the same absolute power and ruled their smaller territories the same way as the emperor did in a unified country. Second, the dynastic cycles reflected the tenacity of the Chinese core institutions. As discussed in Chapter 2, the core institutions in England evolved

96  The Chinese and Japanese states gradually to greater pluralism from the beginning of the Middle age to the 18th century. Comparatively, the core institutions in Chinese society remained largely unchanged in the entire imperial period (221B C –​1912A D ). Over the span of the two millennia since the Qin time, new emperors and their imperial officials only replaced the incumbents of the old state organization at the change of dynasties, but the set of basic rules governing power relations in society stayed the same. There had been grand reforms initiated by the ruler and his top officials, but these reforms were taken invariably for the purpose of improving or strengthening the rule of the emperor. They were never meant to change the basic power relations in society. The Chinese state institutions as the central part of the Chinese core institutions were mainly responsible for producing strong “lock-​in effects” and “trophy effects” that preserved the institutions of absolutism in Chinese society. By the lock-​in effects, those actors with heavy stakes in the existing institutions had strong incentives to keep these institutions, against any attempts to make changes. The direction of the institutional evolutions depended on the relative strength of the “for-​keep” actors and “for-​change” actors (see Chapter 2). In the case of China, the core institutions of entrenched absolutism were hard to change because the for-​keep actors, made up by the ruler and elites, held overwhelming political and economic strength that no other social groups could ever match. The state institution of the simultaneous holding of state offices and land ownership formalized the union between the ruler and the propertied class, and rendered the “for-​keep” actors the unmatchable coercive power backed by the state organization. On the other hand, the commoners or non-​state social members who might initiate institutional changes mostly operated on family or kin basis and relied on relationship-​building with the officialdom for property protection. Thus, the potential for-​ change actors lacked the organizational capability to fight against the interests of the ruler-​ elite union, except in the extreme case of violent rebellions. Besides, the state institutions of patrimonial-​feudal autocracy left little room for the development of contract-​based solutions for social conflicts, particularly conflicts between the ruler and his subjects. In addition to the lock-​in effects, the state institutions also produced the “trophy effects” that helped preserve the core institutions. While the lock-​ in effects explain the persistence of the core institutions during the run of a dynasty, the trophy effects explains why the core institutions were not changed at the alteration of dynasties. By the “trophy effects,” the regime changers, such as usurpers, revolting military officials or the leaders of peasant rebellions, invariably aimed at seizing the emperorship as the trophy instead of changing the absolutist institutions. The attraction of the emperorship lay in the ruler’s total power over his subjects and the wealth in the society.Yet what empowered the emperor to “have it all” were the state institutions that combined bureaucracy and patrimonial autocracy. The well-​developed state system not only equipped the ruler with the bureaucratic capability of controlling society effectively, in terms of collecting taxes, conscripting solders, administrating justice, drafting

The Chinese and Japanese states  97 labor and craftsmen, managing trade and production, and so on, but also ensured the emperor the willing support of the propertied class. Therefore, those who intended to overthrow the old regimes were strongly motivated to replace the ruler but keep the state institutions that were actually part of the trophy. To some extent, the trophy effects explained the particular cause for the general phenomenon of “old tyranny replaced by new tyranny”3 in the case of China. In brief, the Chinese state institutions played a key role in preserving the core institutions of absolutism and relation-​based coordination in imperial China. Of course, the other factor accounting for the tenacity of the Chinese core institutions in the imperial era is that the regime changers in China had little knowledge of alternative social systems in the rather compartmentalized world before the 19th century. Finally, with the state institutions being both resilient and intrinsically weak, the quality of the Chinese imperial state was highly variable as evidenced by the dynastic cycles. Given the variable quality of the state, whether China could succeed in state-​led industrialization depended on the conditions of the state organization. By the mid-​19th century, the Qing state was already in the downswing of a typical dynastic cycle. With rapid deterioration of internal cohesion, the Qing state was in no shape to lead a successful industrialization.

The development of the Japanese state institutions China and Japan in the 19th century were both absolutist states, yet the Japanese imperial state came much closer to a full bureaucracy or the ideal type of state bureaucracy described by Max Weber (see section 1.2). The Japanese state in the 19th century differed from the Chinese state in two major aspects: first, the Japanese state was fully autonomous. As suggested by Skocpol (1979), the state bureaucracy in Japan was completely insulated from the propertied class, with the government officials cut off from direct ownership of land and commercial assets. Second, the Japanese state was “pseudo” autocratic. The emperor was the supreme authority of the land, but he held only nominal power. The shogunate4 as the centrally-​controlled government had the actual power in ruling the country through group leadership. Group leadership made the Japanese state much more reliant on written laws and regulations in the administrative process than the Chinese state. Japan’s state institutions in the 19th century were the outcome of the long evolution underlined by both the early influence of China and Japan’s own feudal traditions. Originally an integral part of the Chinese zone of civilization (Hall 1955, 169), Japan had been under the strong influence of China till the tenth century, and its government followed the centralized administrative system of the Chinese state in those early centuries. Particularly during the period from the sixth to ninth century, Japan emulated intensively the Chinese model of central government, from the official-​rank system to the state law codes. Thus, the Japanese imperial state acquired many bureaucratic attributes of centralized hierarchy in this period. The Chinese influence on Japan

98  The Chinese and Japanese states receded at the end of the ninth century. Around the 12th century the Japanese institutions began to diverge from the Chinese norm with the emergence of the feudal system. Nevertheless, the kind of feudal system developed in Japan from the 12th to mid-​19th century was not an abrupt break from the legacy of centralization in the earlier period, as suggested by the theory on path-​ dependence of institutional changes. The Japanese feudalism “seemed almost the antithesis of the decentralized feudalism in Medieval Europe” (Reischauer 1977, 64). The developments of the centralized feudalism eventually led to the fully bureaucratized state of Japan in the 19th century. “Pseudo autocracy” and reliance on written rules The Japanese imperial state could be described as a nominal or pseudo autocracy, in contrast to the Chinese state’s true autocracy. With the abandonment of the emperor’s actual power in the feudal period, group leadership has become a key feature of the Japanese state institutions. Group leadership led to greater reliance on written rules, namely, written regulations and laws, in state administration. Even in the pre-​feudal period, Japan’s emulation of China was somehow modified by its own tradition and mixed with Japanese elements. For example, the Japanese emperor was viewed more like the embodiment of “divine force” than a secular ruler. The other difference was in the “absentee ownership” of the central nobles or major nobles at the Japanese imperial court. As the owners of the large provincial estates the central nobles lived in the capital city and left the actual control of their land to local minor nobles as estate-​mangers. These differences planted the seeds for the deviation of the Japanese state institutions from the Chinese ones. Two major developments in the tenth and 11th centuries led to the emergence of a feudal system in Japan. One was the rise of local nobles. The central government, made up by the emperor and central nobles, was weakened fiscally with the termination of the public land allotment in the tenth century, as the central government revenues were based on the taxation of the public land while private land was mostly exempted from taxation. On the other hand, the increase of private land, which could be acquired through purchase or cultivating virgin land, greatly expanded the provincial estates and enriched the local minor nobles under the absentee ownership. The local nobles’ power was also boosted by official permission to maintain armed guards. The other major development during this period was that, in the central government, the emperor’s personal power declined over time due to the practices of regency and “cloister government” (Henshall 2004). Both the rise of local nobles and the decline in the actual power of the emperor prepared the ground for the emergence of the feudal system, which was marked by the establishment of the shogunate in the 12th century. The Japanese feudal system, often described as “centralized feudalism” or “national feudalism,” had the feature of not only centralization but also the separation of nominal from actual power in state governance. Under the arrangements of

The Chinese and Japanese states  99 shogunate, the emperor conferred legitimacy on the shogun to rule the country with actual power, and the emperor himself remained the ultimate authority of the land as the divine descendent, but retained only nominal power. The separation of nominal from actual power reflected the traditional tendency to allow the supreme authority to become symbolic in Japan. The abandonment of actual power by the emperor was significant in the development of Japan’s state institutions because it greatly reduced, if not sealed, the chances for the emperor to become a true autocrat and open the door to shared authority in state governance in downstream developments. The system of shogunate lasted throughout the feudal period till the Meiji Reforms in the 19th century. By then, the institutions of group leadership were well established for the Japanese state. The Japanese feudalism had the attribute of centralization basically because it arose from a centralized imperial administrative system that had developed long before the 12th century. The old imperial system was left largely intact when the military band set up the shogunate in Kamakura in 1192. The shogunate, legitimized by the emperor, operated initially through the old, centralized administration. The shogun5 appointed his followers or vassals as subordinate officials, jito (stewards), who managed tax collection in local areas, and shugo (military governors or protector), who controlled the military and police affairs at the provincial level.The shugo-​jito system provided the shogun with a network of provincial connections that spread rather thinly over the country. In the 12th century the shogunal network was more supplementary to the old centralized administrative system rather than replacing it, and the bulk of the people and land continued to be governed through the non-​feudal apparatus (Reischauer 1977; Henshall 2004). The shugo-​jito system encroached upon the imperial civil administration gradually in the 13th and 14th centuries. While the shugo assumed more administrative power, many of the jito expanded their tax-​collection rights into proprietary rights over the land under their charge at localities. As the proprietors they began to grant land to their followers/​vassals who further divided their landholdings to retainers or family members. It was only then that the military bonds between proprietary joto and vassal families and those between shugo and jito became truly feudal. The shogunate finally absorbed most functions of imperial civil government in the late 14th century (Hall 1962). Thus, the feudalization of Japan proceeded in the “shell” of the centralized imperial system and hollowed it out eventually. The constant civil wars in the 15th century to the end of the 16th century wiped out the last remnants of the imperial law and civil land management and saw the rise of daimyo, the new military families as local feudal lords.The daimyo held real regional power, like the feudal lords in Medieval Europe. “A daimyo held his land through his own capacity to fight for it and could dispose of as he pleased” (Hall 1962, 44). Within his domain all warriors were granted fief as his vassals and rear-​vassals. The reunification of Japan was achieved by the attempts of three successive leaders as the overlords who controlled the regional coalition of daimyo. The overlord Tokugawa Ieyasu finally reunited Japan and set up the

100  The Chinese and Japanese states new shogunate in Edo in 1603. It was in the Tokugawa period that the shogunate took over the entire operation of the government. With the reunification, the Tokugawa shogunate returned to the tradition of centralized government. The next question is: with the emperor being the mere symbol of the sovereign, why didn’t the shogun, who possessed the actual power of ruling the country, turn into the Chinese-​style autocrats? One explanation is that shogun did not have the “celestial personal supremacy” that only an emperor could claim. Japan’s long tradition of viewing the emperor as the embodiment of the divine force prevented the shoguns from enjoying the supremacy of an emperor. The other, perhaps more important, reason is that the shogun’s power was somewhat checked by the daimyo at the time of the reunification, after further feudalization of Japan in the 16th century. In order to form and hold a regional coalition of daimyo for the unification, the Tokugawa shogun, as the overlord, had to rely on the contractual rules agreed upon by the daimyo, who possessed regional power. In this sense, the shogun-​daimyo relationship came close to that of the king-​lord in medieval England. This feudal foundation of the Takugawa government kept the shogun’s personal power in check in the “re-​centralization” process and allowed the development of group leadership in state governance. The centralized feudal system in the Tokugawa period (1600–​1868A D ) was a blend of the central control of the shogun at the top and local feudal authority. Initially, as the supreme overlord, the shogun owned one quarter of the farm land along major cities, ports and mines, and divided the remaining land among daimyo as their domains.The shogun directly controlled some 245–​295 daimyo as vassal lords, with the number fluctuating over time. In turn the daimyo in each domain ruled their own vassals, samurai retainers6. Over the years, the shogun administration in Edo developed into a large bureaucracy and significantly increased the control over the daimyo and domestic policies (Reischauer 1977). With the set-​up of the “alternate attendance” scheme, each daimyo had to spend a year in Edo and a year in his domain or han, while his family had to reside in Edo as a permanent hostage of the shogun. The daimyo were obliged to travel to and from Edo, not only by specified dates but also along specified routes guarded by shogun troops (Henshall 2004). However, the daimyo were not entirely passive. “Up to the very end of the Takugawa period the larger daimyo retained an independence in policy and military affaires unthinkable in a fully centralized state” (Hall 1962, 46). The power balancing or the “give-​ and-​ take” relations between the shogun and daimyo prevented the shogun from exerting absolute personal power, despite the centralization, and made possible the development of shared authority in the government of a centralized administrative system. Consequently, the governance structure of the Japanese state at the end of the Takugawa period was characterized by group leadership underlined by the separation of nominal and actual power. At the top of the shogunal government were two councils under which paired officials or groups of four officials administrated the branches of the central government and supervised the

The Chinese and Japanese states  101 whole country. In due course the shoguns became figureheads, like the emperors (Reischauer 1977). As a result of group leadership, the administrative process of the Japanese government became increasingly subject to written laws and regulations, and the internal management of the bureaucracy became increasingly impersonal. In other words, shared authority in governance greatly augmented the role of written rules in state administration. This is in contrast to the Chinese imperial state where the emperor’s personal power led to heavy reliance on personal relations in state administration, especially in the downswings of the dynastic cycles. Complete autonomy The other key aspect of the Japanese state institutions in the 19th century is that the state organization was fully autonomous, as suggested by Skocpol (1979). The state bureaucracy was completely insulated from the propertied class, with government officials cut off from direct ownership of land.The autonomy of the state was achieved in the bureaucratization of the government in the Tokugawa period. The trends of centralization and bureaucratization in the period were essentially the two sides of the same process, which were complimentary to one another. The process brought about a highly centralized administrative system at the expense of independent samurai. In the early years of the Tokugawa period, the upper strata of samurai, as the retainers of daimyo, were mostly enfeoffed, although some were merely stipended.Yet, over time, the number of landed retainers was constantly reduced and, finally, even the enfeoffed samurai retainers received only rice stipends. By the beginning of the 18th century, nearly 90 percent of the daimyo had forced their entire retinues to draw their subsistence from the domain granaries in the form of rice stipends (Hall 1962). Driving this trend was the erection of  the castle towns as the military and administrative headquarters of daimyo in the late 16th century and early 17th century. As the castle towns were built at the strategic center of their domain, daimyo steadily moved their vassals and retainers from the countryside to the residences within the confines of the central fortress of these towns. In the castle towns, samurai were grouped by rank, placed under appointed leaders and assigned to civil and military duties. Cut off from their fief land, the samurai lost the power of interfering in the affairs of villages that once comprised their fiefs. The process was not sudden but continuous over several decades. The result was the nearly complete withdrawal of the feudal aristocracy from their land. The daimyo governed the countryside through his corps of samurai retainers living in the castle towns and the daimyo’s feudal ownership turned into the authority to collect incomes in the form of rice tax or tax in kind from the land in their domains. Over time, the daimyo headquarters became the centers of local administration and samurai, stripped off their land, gradually turned into salaried bureaucrats

102  The Chinese and Japanese states of public administration. The Tokugawa government turned fully autonomous in the 17th century. The autonomy of the government reinforced the group leadership in state governance. At the domains, the samurai bureaucrats administrated the domain affairs through councils, with the daimyo gradually withdrawing from the daily running of the government (Reischauer 1977). Group leadership was established at all levels of government. At both central and local levels, government officials increasingly relied on bureaucratic procedures and techniques in administrating the taxation and judicature affairs. The other source for the full autonomy of the state bureaucracy was the complete and permanent separation of social classes or “class freezing” in the Tokugawa period. The general population was divided into three social classes7: samurai, peasants, and merchants, including artisans. The three classes were residentially segregated, occupationally distinct and hereditary in status. Furthermore, the relative position of each class was permanently fixed, and mobility among classes, strictly forbidden.The classes of peasants and merchants and artisans were excluded from political affairs (Reischauer 1977; Henshall 2004; Rozman 1989). Samurai, who took up permanent residence in the castle towns in attendance to daimyo, was the most prestigious social class. Removed from direct jurisdiction over their fief, samurai turned from feudal warriors into civil administrators in time. Peasants, as cultivators of land, were confined to the villages, and denied all access to the symbols and training of the samurai way of life. The shogun-​ daimyo government ruled the villages through state regulations and laws that mainly dealt with fiscal matters and status relations of other classes. The villages ran their internal affairs with self-​developed village codes as semi-​autonomous communities that were collectively responsible for the rice taxes (Befu 1965). A sharp line was also drawn between peasants in the rural areas and merchants as town residents. Commerce was limited strictly to the towns. Merchants and artisans resided in specified quarters of the castle towns.As the commercial agents of the daimyo, merchants initially supplied warfare material and daily necessities for the daimyo, and later functioned as the middlemen between countryside and castle towns, as well as the link between the domain economy and the national markets. Although permitted to organize new guilds and associations after the mid-​17th century, merchants and artisans depended very much on the protection and patronage of their daimyo throughout the Tokugawa period. And they had been under the close scrutiny and regulation of the centralized government (Crawcour, 1963). The segmentation of classes in Tokugawa society further insulated the state bureaucracy from the private ownership of production assets. Samurai, as the incumbents of the state bureaucracy, owned neither land nor commercial properties. Peasants and merchants as owners of land and commercial properties were completely kept out from the state administrative process and political affairs. The total separation of state office from the private ownership of production properties gave the Japanese state the character of complete autonomy.

The Chinese and Japanese states  103 The incentive mechanism embedded in the state institutions From the above, the Japanese state as it stood in the mid-​19th century was fully bureaucratized or a full bureaucracy.With the state institutions characterized by complete autonomy and group leadership, the bureaucrats of the Japanese state developed a high propensity to obey written regulations and a low propensity to capture the state for private gains. As a result, the Japanese state possessed a much stronger developmental capability, compared with the Chinese state that had variable quality. The complete autonomy of the state ensured the internal coherence of the state organization by removing the institutional source for office-​abuse. With complete insulation from private properties and wealth, state officials took career success in the bureaucracy as the only way to advance their self-​interests. In other words, the separation of the office from private landownership made the interests of imperial officials in full conformity with the state interests. Consequently, the bureaucrats were much less motivated to use their offices for private matters. Their commitment to office responsibilities and the state-​ set goals stayed more stable than variable over time. Moreover, with complete autonomy the state could formulate government policies or set collective goals, independent of the interests of the propertied class. The state officials who had neither private landownership nor kinship ties with the landed class were much less interfered with by society in implementing the state policies. The group leadership of the state government led to an emphasis on written rules, as well as effective enforcement of written rules. The bureaucracy’s reliance on written regulations and guidelines in internal management further strengthened the internal cohesion of the state organization. As they were rewarded, promoted, demoted or punished mainly by impersonal rules, without much particularistic interference from the emperor or higher-​ranking officials, the bureaucrats were motivated to follow the regulations in performing their office duties rather than relying on the personal patronage of some superiors. The strong disciplines of state bureaucrats enabled the state organization to act effectively as a well-​integrated whole. Society-​wise, the emphasis on written rules in state administration encouraged social members in the private sector to operate in accordance with laws, ordinances and governmental guidance instead of seeking for personal connections with state officials at individual levels. Of course, personal relations also mattered in the Japanese society. But the degree of reliance on personal relations in state administration was much lower in Japan than in China. The separation of classes in the Tokugawa society also served to limit the arbitrary exercise of state power by individual bureaucrats upon society members. In comparison with the rather fluid Chinese society where people could move across social classes relatively freely, the class freezing in Tokugawa Japan confined social members to their own “box” of class, and individuals enjoyed no social upward mobility. However, the separation of classes under a fully bureaucratized government also meant that individuals were treated

104  The Chinese and Japanese states strictly according to their class status under the shogunate laws and edicts. In other words, individuals in Tokugawa Japan enjoyed little mobility but more security from the arbitrary exercise of the state power. More often than not, they could get impartial treatment from the government in terms of their rights within their own class and in relation with other social classes. Generally speaking, as an absolutist monarchy, Japan in the mid-​19th century was more like China than England. Similar to China, there was neither pluralistic political institutions nor “rule of law” in Japan, despite the feudal history. No social groups, neither the samurai class nor merchants, developed independent coercive power against the ruler or state through formal institutions in feudal Japan. “There was thus no room for the development of the concept of political rights, as happened in the West” (Reischauer 1977, 58). All these explained why Japan did not experience any internally-​originated industrial revolution prior to the 19th century. As said earlier in this chapter, Japan’s industrialization in the late 19th century was externally induced, just like the case of China. That is to say, Japan’s feudalism brought about consequences in the downstream developments of institutions different from that of England. In England, the decentralized feudalism and the feudal relations based on contractual mutual exchanges led to the establishment of pluralistic institutions (see Chapter 2). Comparatively, in Japan the legacy of centralization and the absolute loyalty on the part of samurai in the feudal relations led to full bureaucratization of the Japanese state. However, the development of feudalism did make Japan a rule-​ based society. That is, the Japanese state governed the society by law. There was no independent legal system and government administrators performed judicial functions in Tokugawa Japan, but the state bureaucracy was able to enforce laws and regulations effectively without the personal and particularistic interferences from the emperor. The effective enforcement of laws and regulations led to rule-​based coordination society-​wise. In this aspect, Japan was similar to Britain, although the law-​making processes differed vastly between the two societies at that time. In comparison to the “rule of law” in Britain, the case of Japan could be described as “rule by law” or “administration through law” (Johnson 1982, 39). Note that Japan’s “rule by law” differed from China’s “rule of person” in the effectiveness of written laws in state governance, although both were absolutist states. The full bureaucratization of the Japanese state was favorable not only for state-​led industrialization but also for top-​down social reforms for introducing pluralistic institutions, as will be discussed in the next chapter.

Notes 1 The Han Dynasty (206B C –​220A D ) partially restored enfeoffment in parallel to the state bureaucracy. 2 The “office land” was also called caitian, lutian, zhiwentian or zhigongtian in different dynasties.

The Chinese and Japanese states  105 3 The German sociologist Robert Michels called the vicious cycle of new tyranny replacing old tyranny the “iron law of oligarchy” (see Acemoglu and Robinson, 2012, pp. 358–​363). 4 Shogunate refers to the government headed by Shogun during the feudal period from 1185 to 1868. Shogun was the title of the military general or commander of Japan, granted by the Emperor, and was the actual ruler of the country in the feudal period. 5 See endnote 4. 6 Samurai were warriors under the feudal lords (usually daimyo), and the highest social class of the general population in the Tokugawa period. 7 General population excluded court nobles, priests and nuns. By some other authors, the Tokugawa society was divided into four classes, with merchants separated from artisans as two classes. For our analytical purpose here, the four-​way division makes no difference from the three-​way division.

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5  Externally-​induced industrial developments in Qing China and Meiji Japan

The Chinese and Japanese states both responded to the external threats in the latter part of the 19th century with industrialization endeavors aiming for a “rich nation, strong army” or “enriching the country and strengthening the military.”1 Yet, the state endeavors ended in vastly different results in the two countries. This chapter compares the state-​led industrial developments in late Qing China and Meiji Japan, and investigates how the differences in the state institutions between the two countries led to the divergent results. The period under investigation runs from the late 1860s to 1912. Both the Chinese and Japanese governments began to implement industrial programs rather intensively in the late 1860s,2 and both the Qing Dynasty of China3 and the Meiji era of Japan ended in the year of 1912. During this period, the dominant technologies introduced by the radical innovations in the second Kondratiev wave (railways, machine tools, steam engines and steamships) were spreading worldwide. The challenge facing the Chinese and Japanese states was how to adopt the new technologies innovated in the first two industrial revolutions to achieve the goal of a “rich nation, strong army.” The comparative analysis will focus on three aspects of the state-​ led industrial developments in the two countries. The first aspect is how the governments raised capital for industrial programs. The industrial projects, such as construction of railways, required large scale of investment, yet private producers in both societies were reluctant and incapable of supplying capital for industrial ventures. Thus, the state-​led industrial developments had to start with the formation of industrial capital.The second aspect, closely related to the first one, is about how the governments conducted industrial projects for the state-​set goals.The state’s ability to create a domestic source of capital formation determined whether it could carry out nationally-​integrated industrial programs without foreign dependency. The third aspect is the state’s interaction with the private sector, including how the government ran the state-​owned enterprises and how the government engaged private producers.The government-​business relationship was important not only for the success of industrialization but also for the institutional changes associated with the industrialization. DOI: 10.4324/9781003202042-5

108  Externally-induced industrial developments The choices made by the Chinese and Japanese states in these key aspects of industrial development eventually led to the divergent results in the two economies by the end of the period. As denoted earlier, the choice-​making by the state governments were fundamentally constrained by the state institutions via the incentive mechanism in each society. In the final analysis, accountable for the failure of state-​led industrial developments in Qing China was the weakness of the Chinese state institutions.

The success of industrialization in Meiji Japan As known, Japan had turned from an agricultural society into an industrial power by the end of Meiji period. The economy experienced significant structural change during the period. Real GDP increased at an average rate of nearly 3 percent per year from 1885 to the end of the Meiji period, and manufacturing grew at an average annual rate of 6 percent in real term during the same period. The share of the primary sector (agriculture, forestry and fishery) in GDP fell to 30 percent, and industry and commerce rose to 70 percent of GDP in 1912.The structural change was also profound in the foreign trade sector. Japan turned from a sheer importer to a large exporter of manufactured goods, with the share of manufactures in imports falling from 91.2 percent in the period of 1874–​ 1883 to 47.4 percent in 1912–​1921.The share of manufactured goods in Japan’s exports increased to 91 percent in the period of 1912–​1921.4 It was based on this stronger economy that Japan managed to build a strong military force, and joined the rank of industrial powers in a relatively short period of time. In brief, the Japanese imperial state largely achieved its goal of “rich nation, strong army” by the end of the Meiji period. A state with developmental capability The Japanese state, after the Meiji Restoration,5 was a new government determined to make Japan a strong nation through industrialization. Equally important, the new government inherited the state institutions characterized by full bureaucratization from the Tokugawa period, given the path-​dependent nature or the continuity of institutional developments in a society. Thus, the Meiji state possessed the quality needed for a successful state-​led industrialization. The full bureaucratization of the state enabled the Meiji government to function as an internally coherent organization in pursuit of its own goals. Internal coherence means that the incentive mechanism embedded in the state institutions provides the consistency between state officials’ self-​interests and the state objectives.With complete autonomy of the state, the Meiji bureaucrats were motivated to achieve the state-​set goal of national industrialization rather than building up their personal industrial assets. The autonomy of the state also allowed the Meiji government to formulate centrally coordinated policies for industrialization, independent of the landed interests, and to carry out state industrial policies with much less interference from society compared with the case of the late Qing China.

Externally-induced industrial developments  109 It is necessary to point out that state autonomy does not guarantee “constant consensus” among state leaders, the so-​called “Meiji Oligarchy.” As evidenced by history, the Meiji leaders were not always in solidarity, and there was no shortage of conflicts and discords within the state leadership group. For the well-​known examples, Saigo Takamori, a principle Meiji leader, led the armed samurai rebellions in the 1870s as a result of sharp conflicts over major policy issues such as foreign policy on Korea. Another major leader, Itagaki Taisuke, left the government in the same period to organize the first political party in Japan. Okuma Shigenobu, the finance minister in the 1870s, was forced out of the government in 1881, and went on to set up the second political party, as his views over inflation and other issues differed sharply from Matsukata Masayoshi, who replaced him as finance minister.The enactment of Matsukata’s own policy package, the so called “Matsukata Deflation,” was not free of contests either (Jansen 2002; Sagers 2006). Nevertheless, these conflicts or discords did not contradict the independent nature of the state’s policy-​making. On the other hand, contests and debates over the key economic issues might be the necessary steps for the formulation of effective industrial policies under the group leadership of the state. Disagreements over policy options arose because the state leaders did not have the “super wisdom” to foresee the best strategies at the onset of the industrialization. Except for the general objective of “rich nation, strong army” through industrial developments, the Meiji leaders had no concrete roadmaps in hand when stepping into the unknown territory of industrialization. Also, the debates and discords, mostly about overall policy-​making, occurred among the leading officials at the top levels. Once consensus was reached at the central leadership, the state bureaucracy was able to implement state policies without circumvention from its own incumbents. As said, the bureaucrats of the Japanese state tended to be well-​disciplined and committed to their office duties in general due to the traditional emphasis on written rules and pre-​ set procedures in the administration process in addition to the autonomy of the state. The actions of the Japanese state in the three aspects of state-​led industrial developments can be summarized as the following: first, the Meiji government secured domestic sources for industrial capital at an early stage of the industrialization. Second, with the control of capital formation, the state was able to conduct nationally integrated industrial programs, free of foreign dependency. Third, the Meiji government engaged the private companies mainly through regularized channels, as an autonomous entity insulated from the private wealth. The state was capable of steering the cooperation with private businesses towards the achievement of the state goals. Domestic source for capital formation The Japanese state was able to secure a stable source for the domestic formation of industrial capital at an early stage of industrialization thanks to its full autonomy. Scholars generally agreed that the Meiji government’s industrial

110  Externally-induced industrial developments programs were mainly financed by the tax revenues from the agricultural sector until around the turn of the century (Smith 1965; Francks 1992). The Meiji government faced the same precarious fiscal conditions as the Chinese Qing government in the early years of industrial development. Armed samurai rebellions were endemic for years after the Restoration. The military expanse on suppressing the Satsuma Uprising of 1877, the obligation for paying the old domain debts, plus the financial compensation for daimyo and samurai had quickly drained the government’s fiscal resources and incurred large fiscal deficits in the 1870s. Yet, despite the tremendous fiscal difficulties, the government went ahead with the industrial programs without delay (Smith 1965; Francks 1992; Jansen 2002). Key to the formation of industrial capital was the land-​tax reform from 1873 to 1879. With the removal of the old “rice tax,” for which the villages were collectively assessed in the Tokugawa period, the Meiji government instituted a land tax on individual landowners who were given the legal titles to their land in the reform. The land tax, payable in cash, was set at a predetermined rate of the assessed value of the land held by the household. The landholdings of households in villages were determined by a nation-​wide production survey conducted by the government, which left the majority of the cultivable land in the hands of small-​scale landowners.The new tax system created a stable source for government revenues, given that peasants constituted around 80 percent of the total population at the time. With the effective operation of the new tax system, the Meiji government transferred a sizable proportion of savings from the agricultural to the new industrial sector. By some estimation, around 30–​50 percent of agricultural income was collected for fiscal revenues in the early stage of industrialization (Crawcour 1989; Francks 1992; Henshall 2004). The government was able to extract a steady flow of tax revenues from the rural sector without increasing the tax rate6 because the agricultural production increased gradually as the result of the land-​tax reform and the abolition of the class restrictions in 1873. The establishment of full ownership rights for landholders and free access to markets provided the incentives for farmers to engage in new technologies to improve the productivities of their land. As studies showed, the ingenuity of tezukuri jinushi (cultivating landlords) and the government guidance were mainly responsible for the spread of so-​called Meiji Noho technologies that raised the agricultural income in the nineteenth century and early 20th century (Rozman 1989; Francks 1992).The increases in agricultural incomes strengthened the tax base. The success of the land-​tax reform was attributable to the full bureaucratization of the Japanese state, to a great extent. The state’s complete autonomy achieved in the Tokugawa period separated political power from direct landownership. As a result, there was an absence of super-​large landowners7 backed by political power in Japanese society at the time of the reform, nor were there close family/​ kinship ties between imperial bureaucrats and landowning class, in contrast to the Chinese case. The autonomy of the state allowed the Meiji government to push through the land-​tax reforms without much resistance

Externally-induced industrial developments  111 from the “landed interests” from both inside and outside of the bureaucracy. Furthermore, the Japanese state’s traditional emphasis on written laws ensured the effective operation of the new tax system.The state bureaucracy was able to implement the new tax laws and regulations rather strictly at all administrative levels. The strong discipline of the state officials reduced the chances of tax evasion, tax-​revenue embezzlement and arbitrary extraction of extralegal fees by local officials. In short, the Meiji state, as a full bureaucracy, had achieved its objective of securing industrial capital by creating the new tax system and by making the agricultural sector productive enough to support the tax collection. In addition to the new tax system, the Meiji government also managed to have established a modern financial system at an early stage. In order to control the serious inflation caused by the large fiscal deficits in the 1870s, the Meiji government introduced the Matsukata package in the first half of the 1880s8 (Smith 1965; Crawcour 1989). The package introduced not merely macroeconomics policies but also measures of creating key modern financial organizations. The Bank of Japan, the central bank, was set up in 1882 to organize the orderly withdrawal of excessive paper money in circulation and stabilize the note issue. The government also established the Yokohama Specie Bank, the specialized bank in foreign exchange dealings,9 as well as a number of national banks and local banks to make long-​term loans to industry and agriculture. By 1886, Japan had a stable financial system, with low interest rates, a sound currency, modern banking, an organized scheme of borrowing and national debt creation (Henshall 2004; Francks 1992). The national banking system, centered on the Bank of Japan, played a critical role in providing loans and subsidies for industrial development in the Meiji period. The timely creation of the modern banking system by the Meiji government was in contrast to the delayed actions of the Qing government in China.The Chinese government’s bank or the quasi-​central bank, the Da Qing Bank, was established as late as in 1905, some 40 years after the first group of industrial projects was launched. Central coordination and self-​reliance With the central control over capital provision from domestic sources, the Meiji state was able to conduct nationally-​integrated industrial programs with self-​reliance. The two features of the state-​led industrial programs, central coordination and self-​reliance, can be observed in the state-​sponsored railway construction in 1870s. The Meiji government started railway construction right after the Restoration. One third of the state’s investment went to railway construction between 1870 and 1874 (Henshall 2004, 80). The railway projects were conducted clearly for the larger goal of national industrial developments, with the first group of railways constructed across the most important cities in Japan. The first railway, the 18-​mile Tokyo-​Yokohama line, was built in 1872. By 1881 the government succeeded in constructing some 76 miles

112  Externally-induced industrial developments of railway lines, despite the high costs and technical difficulties. It was more their strategic locations than their total mileage that gave these railways a real impact on the national economy. These railway lines connected the country’s administrative, financial and commercial centers, including Tokyo, Kyoto, Osaka, Otsu and Kobe, and extended to the rich agricultural district around Tsuruga. They were put into operation right way and their operation greatly reduced the costs of transporting both people and goods among these centers, and facilitated the trade flows and economic activities in the entire region. Japan’s railways, as they stood in 1880, were already an important asset to the country10 (Smith 1965). The other feature of the railway projects was the adherence to the principle of self-​reliance. Actually, the Meiji state’s urgent start of the railway projects, despite its fiscal difficulties, was motivated to forestall foreign investors keen on building railways in Japan in the first place.The railway projects in the pre-​1880 period were all funded by the state money from domestic sources, except for one foreign loan, the one made for the first railway (Crawcour 1989; Jansen 2002). Moreover, the government also adhered to the principle of self-​reliance in the technology, operation and management of the railways. Although foreign personnel were employed in the construction of the first couple of railway lines, Japan was able to adopt foreign technologies in a fairly short period of time. The Kyoto-​Otsu line, finished in 1880, was built entirely by Japanese engineers (Smith 1965). By 1880, Japan was almost wholly independent of foreign technical assistance, operations and management of railways. With the model set and experiences gained by the state-​run railways, the private sector became willing to raise funds for railway investment. The late 1880s and 1890s saw a boom in private railway construction. The government licensed, regulated and subsidized the private rail sector through the Railway Bureau of the Public Works Ministry. By 1887, 1,000 miles of track had been laid, and by the end of 1899, 5,000 miles, all operated by Japanese companies (Henshall 2004). In the same fashion, the Meiji government developed sea transportation, telegraph and postal services. The state-​owned telegraph system covered the entire country by 1880 (Smith 1965). A modern style postal service between Tokyo and Osaka was inaugurated as early as in 1871.The number of post offices in Japan increased from 21 in 1872 to 3,224 in 1874 (Crawcour 1989, 610). Besides the infrastructure, another example showing the central coordination of state programs as well as the government’s determination to reduce foreign dependency was the mechanization of the cotton industry. By estimation, cotton yarns and fabrics accounted for 23.67 percent of Japan’s total imports in the period 1878–​1882, and some 90.1 percent of all cotton yarn consumed in Japan was imported in 1884. Imported cotton yarns dominated Japan’s markets, as domestic yarns made by small hand-​spinning producers could hardly compete with the foreign imports in quality and price. Rising cotton-​yarn imports significantly enlarged Japan’s trade deficit and drained its foreign exchanges. As the Meiji government was forbidden by the treaties to raise tariffs, the only way

Externally-induced industrial developments  113 out was to develop domestic machine spinning to compete with the cotton-​ yarn imports (Smith 1965). In order to promote machine spinning in the cotton industry, the Meiji government launched intensive programs between 1879 and 1885 to assist domestic producers in mechanizing cotton-​spinning. In 1879 the government purchased spinning machines totaling 20,000 spindles from England and sold them to private producers on easy terms (15 years for payments and no interests).The buyers of the government-​purchased machines set up ten private mills by 1885. Two state-​owned mills were set up in 1881 and 1882 as model factories for private producers. The programs were centrally coordinated and supported by state-​led actions in other sectors of the economy. The national banking system, centered on the Bank of Japan, provided loans as working capital to the newly-​established private spinning mills, as well as long-​term loans for those who planned to set up new spinning factories with imported machines. Mitsui, the trading company with privileged access to the Bank of Japan, kept down the costs of foreign machines to its Japanese customers. Mitsui was the sole supplier of the ring-​spinning machines for Japanese cotton mills and the exclusive agent in Japan for Platt Brothers of Manchester (British). The expansion of machine-​spinning in domestic cotton textile further benefited from the establishment of Japan’s first shipping line to Bombay in 1893, which supplied high-​quality raw cotton to the Japanese spinners at discounted freight rates (Francks 1992). The government measures marked the beginning of significant expansion of machine spinning in Japan. The total number of mechanized spinning factories increased to 23 mills with 89,520 spindles in 1886 from three mills with 6,224 spindles in 1877. From 1886 onwards, the country’s mechanized spinning mills began to expand rapidly. By 1890, the total number of spindles had reached 277,895, an increase of 200 percent in four years. By 1897, the value of cotton yarn exports exceeded that of imports. That is, with the concerted efforts, the Meiji government succeeded in turning the trade deficits into surplus in cotton-​products. From around the turn of the century, the major cotton-​ spinning factories began to develop their weaving operations as an outlet for their yarn production (Smith 1965; Francks 1992). Government-​business relationship: separable entities In Meiji Japan, the interactions between the state and private businesses went through two stages. Before 1880, the Meiji government used the state enterprises to break the ice for industrial development. After the sale of state enterprises in the early 1880s, the government led the industrial developments mainly by providing guidance and assistance for private companies. Underlined by the autonomy of the state, the Meiji government and private companies functioned as separable entities, with each side following their own objectives in the cooperation. The state bureaucracy pursued the goal of “rich nation and strong army,” while private companies sought for their

114  Externally-induced industrial developments own interests in terms of revenues, profits and operational scales. The Meiji government was able to steer the cooperation towards the achievement of the state-​set objectives. The separable functions of the government and businesses can be seen firstly by the clarity of the ownership of companies. The state enterprises built in the 1870s were totally funded by the state. The direct control over these mills enabled the government to pursue the state objective of mechanizing the industries. The sale of the state enterprises in the early 1880s was a one-​time, complete transfer of ownership from the government to private buyers, although the payments were made in installment plans (Smith 1965). Once sold, these enterprises were put entirely under the management of the private owners.This is in contrast to the case of late Qing China where the entanglement of state sponsorship with private ownership of companies seriously compromised the government’s developmental capability. Second, the Meiji government reached private companies mainly through formal institutions or regularized channels. New state agencies were created at the early time, mostly in the 1870s–​1880s, to direct the industrial programs. Comparatively, in late Qing China the leading state officials sponsored industrial programs mainly through their networks of personal protégés, namely, individualized channels. The role of state enterprises In the first period, the Meiji government set up state-​owned enterprises directly in a set of industries, including textile, mining, shipbuilding, machinery and metals.These state-​owned enterprises were mostly sold in early 1880s, and most of them were not making profits at the time of sale. As Thomas Smith described, these state-​owned enterprises were sold at bargaining prices and easy terms because the government could not get more than it did. The government had difficulty in disposing them even at the prices asked (Smith 1965). A couple of points need to be made in evaluating these state enterprises. To begin with, the accomplishments of the state enterprises in this period should be judged not by their own profitability but by their roles in jump-​starting the modernization process in the respected sectors, given the goals set by the Meiji state. As the government publicly announced at the founding of the first state textile mill in June 1872, the primary purpose of the mill was not to profit the government but to encourage the use of mechanical reeling by private producers (Smith 1965). Moreover, there was little time for these enterprises to grow profitable, since the government sold them relatively soon after they were founded. These enterprises were sold as part of the Matsukata package when the government was desperately trying to raise revenues. For the state, the urgency of deficit reduction overwhelmed the future profitability of the state enterprises at the time. Thus, this case showed the “trial-​and-​error” nature of the state’s policy-​making rather than the failure of these state enterprises. As said, the state’s developmental capability is not equivalent to the state leaders’ ability to foretell the concrete road-​map.

Externally-induced industrial developments  115 The textile industry exemplified the roles played by the state enterprises. Textile was the largest indigenous industry in Meiji Japan, as in Qing China. Traditional silk textile was dominated by small producers with hand-​reeling, and cotton spinning was carried out by rural households.The state’s objective was to mechanize the entire industry, an industry made up of numerous private producers who had no knowledge about machine production. With limited funding, the government could set up only a few state-​run enterprises. Given the situation, the few state-​owned enterprises could not possibly achieve the objective even if they were profitable. On the other hand, the state enterprises could serve as models for private producers in adopting the new technologies of machine reeling and spinning. It is precisely in this sense that these state enterprises played a critical role in accomplishing the state objective. Three state-​run modern silk-​reeling mills were set up, respectively, in 1872, 1873 and 1877.The government used these mills as model factories to introduce and demonstrate the imported equipment to private producers. The famous Tomioka mill, the first silk reeling mill, was equipped with the most advanced French machinery at the time. It was initially run by foreign managers and technicians, but with the rapid adoption of the technologies, the mill was placed under an entirely Japanese managerial and technical staff in 1875. Meanwhile, the Tomioka mill trained machine operators for private companies. Some 400 women operators selected from skillful handicraft reelers were trained by European technicians in the mill. Once they learnt how to operate the reeling machines, these operators were transferred to private mills as instructors. The other two state-​run silk mills were used in the same way: to serve as model mills to introduce the imported equipment and production methods to private producers, to provide assistance to private producers in adopting new technologies and to train engineers and technical workers for private companies. With the leading role played by the state mills, machine-​reeled silk increased from 7 percent of the total production in 1875 to 32.4 percent in 1880 (Smith 1965; Sagers 2006). For cotton textile, the state made concerted investments in the period from 1879 to 1885, after the sale of state enterprises, as discussed earlier. The government led the mechanization of cotton industry mainly by assisting private producers, yet state enterprises were also part of the drive. Two new state-​owned mills were completed in 1881 and 1882.They also served as model mills to introduce imported equipment and to provide technical support for private machine-​spinning mills. Woolen manufacturing was a brand new sector, started from scratch, entirely by the government. Japan’s woolen consumption, insignificant in the Tokugawa period, began to rise quickly in the 1870s. To meet the rising demand and curtail woolen imports, the government founded the modern woolen mill, the Senju woolen mill, in 1878 after setting up a large sheep ranch in 1875. The woolen mill remained the most important element of Japan’s woolen industry until the early 20th century (Smith 1965).

116  Externally-induced industrial developments In brief, state-​run mills played a key role in jump-​starting the mechanization of the textile industry. Textile was the first industry to be mechanized under the modern factory system in Meiji Japan. The modernization of the textile industry also contributed significantly to the structural change of Japan’s foreign trade. The share of textiles in Japan’s total imports declined from 54 percent in 1874–​1883 to 3.3 percent in 1912–​1921. The share of textiles in export increased from 42.4 percent to 56.4 percent during the same period.11 Government assistance for private companies After the sale of state enterprises in the early 1880s, the government led industrial developments mainly by fostering the growth of private companies. In this period, private enterprises began to expand rapidly, and the cooperation between the government and private companies ensured the continual adoption of new technologies and development of new industries. Basically, the state set the objectives in cooperation with private companies. To achieve the objectives, the government provided private producers with loans, subsidies, technological assistance and other forms of support. In this way, the interests of private producers were made in conformity with the state-​set objectives such that both sides in the cooperative relationship could get what they wanted. As scholars described, in such cooperation, “the leader-​follower relations developed smoothly between public officials and private businessmen” (Horie 1965, 206). The Meiji state reached private companies mainly through regularized channels. It created new government departments at an early stage to direct the industrial programs. For example, the Ministry of Agriculture and Commerce (MAC) was created in 1881 to coordinate programs in promoting industrial and agricultural developments. It is through MAC that the private companies obtained a range of subsidies, loans credit and technical support under the state guidance (Francks 1992; Sagers 2006). The Department of Ships was set up under the Bureau of Posts and Communication as early as in 1871, to promote Japan’s shipping industry through the sponsorship of Japanese companies. The Bank of Japan, the central bank, was established in 1882, to provide funding for industrial projects and private companies through the banking system in coordination with MAC and other departments. The timely creation of the new government departments and semi-​governmental agencies “regularized” or “institutionalized” the state’s relationship with the private sector. The state-​ business relations could be illustrated by the example of the cooperation between the government and Mitsubishi in developing Japan’s shipping industry. In the 1870s Japan’s coastal trade was controlled by foreign shipping companies such as the British Peninsular & Oriental (P&O) and American Pacific Mail Line. The Meiji government’s objective was to develop Japan’s shipping industry. In the projects steered by the Department of Ships, the government provided subsides to Mitsubishi in return for the company’s commitment to opening new shipping lines. In 1875, the government

Externally-induced industrial developments  117 transferred the ownership of 13 ships purchased abroad to Mitsubishi, along with an operating subsidy of over 200,000 yen per year. Equipped with the new ships and managed by modern organizational techniques, Mitsubishi eventually won the battle with Pacific Mail and P&O over the Yokohama-​ Shanghai line, and came to dominate Japan’s coastal shipping in the 1880s. The Meiji government continued this pattern of exchange with Nippon Yūsen Kabushiki Kaisha line (NYK) after the merger. NYK received state subsidies for opening new transoceanic routes. In 1893, NYK established its first transoceanic line, the Bombay-​Kobe line, and inaugurated its European line in 1896. Shipping and shipbuilding together received around 75 percent of all government subsidies in the 1897–​1913 period (Francks 1992). With the state subsidies, the company kept extending its shipping lines throughout the world. In this example, the government and the private company functioned as separable entities. The cooperation under the state direction enabled both sides to have attained their objectives: the state succeeded in establishing Japan’s shipping industry, and Mitsubishi and NYK became world-​class companies. With the government’s assistance, private companies expanded rapidly in the Meiji period, and industrial entrepreneurs who founded and expanded the private companies emerged in all industries and sectors.The Meiji entrepreneurs such as Shibusawa Eiichi, Ito Denshichi, Okada Ryoichiro, IwasakiYataro, Okura Kihachiro, Masuda Takashi, Yasuda Zenjiro, Morimura Ichizaemon and others were known for their business acumen and the great companies they built (Horie 1965). An important point here is that these entrepreneurs, regardless of their backgrounds, functioned utterly in the capacity of private businessmen and held no state offices at the time of building or running their enterprises. In the case of Shibusawa, he became an industrial entrepreneur after he resigned from the state office and remained a private businessman ever since. He held a firm conviction that the government must not interfere in the management of private companies (Hirschmeier 1965). Thus, the Meiji entrepreneurs differed from the “official entrepreneurs” in late Qing China who had mixed identities, as will be discussed next. Admittedly, due to the state’s leading role in industrial developments, the Meiji businessmen had a tendency to rely on state subsidies and to vie for government commissions and contracts. But they had relatively “pure” identities of private businessmen. Basically, private companies served as the “agents of the state” (Hirschmeier 1965, 216–​217), as shown in the example of government-​Mitsubishi cooperation. On the other hand, the Meiji bureaucrats were dedicated to the implementation of the state policies in general, as the incumbents of a full bureaucracy. The dedication to the state-​set goals was not confined to the well-​ known Meiji leaders and the top-​level bureaucrats. The mid-​and low-​level bureaucrats also took career success in the bureaucracy as the best rewards to life, in the tradition of samurai administrators. They carried on the “code of ethics and elite consciousness” from samurai in performing their office duties (Johnson 1982, 39). Some of them might be engaged in private projects, but it appeared that Meiji bureaucrats usually put their office responsibilities first,

118  Externally-induced industrial developments and the scale of using state offices to accrue personal assets was rather limited. To a large extent, “[t]‌he Japanese government was able to push forward with these modernization schemes because of these energetic officials of vision and administrative talent” (Horie 1965, 205). In brief, state officials and private business played rather distinctive roles as separable entities in the state-​led industrialization in Meiji Japan. Surely, favoritism and bribes would sometimes be involved in the interaction between the government and private companies, but the distinction in role-​play kept office abuse at low levels, and enabled the state to pursue its independent goal as a coherent corporate body. On the business side, private companies grew strong over time as the industrialization proceeded.With government aids and guidance, they continued to invest in new technologies, absorb modern managerial methods and expand business in scale and scope. Some of them grew into large conglomerates or zaibatsu that gained considerable economic clouts vis-​à-​vis the government in the inter-​war period. These large conglomerates, such as Mitsui, Mitsubishi, Sumitomo and Yasuda, not only dominated the major industries domestically but also became formidable competitors for Western companies in the international arena (Jansen 2002; Francks 1992).

The failure of industrialization in late Qing China China largely remained a traditional agricultural economy by the end of the Qing Dynasty in 1912, despite the government’s efforts in industrial development. By 1912, China had several modern industries and some modern enterprises, but they were widely scattered and functionally uncoordinated (Chan, 1980, 416). Even worse, the country fell to the semi-​colonial status, and foreign companies dominated the modern sector of the economy. The state-​led promotion of modern enterprises and industries did not bring about a structural change of the economy.The Chinese economy remained predominantly traditional as late as in the 1930s. Agriculture still accounted for 62 percent of NNP (net national product) and the modern sector in mining, manufacturing, transportation and banking amounted to only 6.6 percent of NNP in 1933.12 Real GDP grew 0.6 percent per year on average from 1870 to 1913, by the estimation of Angus Maddison.13 The technology and organization of Chinese agriculture differed little in 1911 from what it had been in 1870, and into the 1930s remained largely unchanged (Feuerwerker 1969, 3). In brief, the Qing state did not achieve the goal of “rich nation, strong army”. The sweeping political reforms taken by the Qing government from 1901 to 1911 only accelerated the demise of the Qing Empire. Some people may argue that China’s large geographical size made it harder for the state to lead nationwide industrialization, compared with the case of Japan. But the Chinese Miracle in our day has proven that it is rather the quality of the state than the geographical size of a country that determined the fate of the state-​led industrialization.

Externally-induced industrial developments  119 A state in frailty The Qing state failed to achieve the goal of “rich nation, strong army” because it no longer possessed the quality needed for a successful state-​led industrialization. As denoted in the previously chapter, the quality of the Chinese state varied with the movements of the dynastic circles. By the mid-​19th century, the Qing state was already in a typical downswing of the dynastic cycles. The intrinsic weakness of the state institutions had become dominant, with the state deeply entrenched in the landed wealth and its internal structure deteriorating rapidly. As a result, the Qing state could hardly function as an autonomous and coherent organization to lead the country’s industrial developments. To start with, the Qing state could not formulate nationally-​integrated policies for industrialization due to its deep entrenchment in the propertied class. As landowners themselves, a large number of state officials, from the central to local levels, considered industrialization as a threat to their basic interests that were rooted in the traditional economic order and they were resistant to industrial initiatives. At the central level, there was the strong camp of conservative officials in opposition to the pro-​industrialization proposals. The Emperor and Empress Dowager wanted a “rich nation, strong army,” particularly modern military weaponry, but doubted the effects of industrializing the civil sectors.Thus, the throne or central leadership could not come up with nationwide plans for industrial developments. A new central-​government office, Zongli Yamen (Office in Charge Affairs of All Nations), was set up in 1861 to deal with foreign affairs in the face of external threats, but no new government branches had been created to coordinate industrial programs until the 1900s. The hesitance at the center was sustained by local opposition to machinery and modern transportation. In the early years of industrial developments, local state officials such as county magistrates frequently joined the local elites to lead popular demonstrations against modern projects, as exemplified by the protests against the opening of the Kaiping Mines in 1878 (Bruguiere 1980; Xia 2010). The industrial developments in late Qing China were actually led by the yang-​wu (Western affairs) officials, namely, the group of high-​ranking officials who recognized the importance of industrialization, with half-​ hearted support of the Empress Dowager. The leading pro-​industrialization officials included Manchu-​noble-​officials at the central level such as Yixin (Prince Gong), Wenxiang and Guiliang, as well as prominent Han officials such as Zeng Guofan, Li Hongzhang, Zuo Zongtang and Zhang Zhidong, who were provincial governors or governors-​general but also held important central-​ government offices at different times. As the Qing state could hardly function as an integrated organization with deteriorating internal coherence, the leading yang-​wu officials sponsored industrial programs mainly through individualized channels by resorting to their own networks of protégés inside and outside of the bureaucracy. Furthermore, in the industrial developments, those state officials in charge of specific modern projects became increasingly prone to employing the

120  Externally-induced industrial developments office power for building their own wealth rather than committing themselves to the state goals. As discussed in Chapter 4, the Chinese state officials had a high propensity to capture the state for private interests, due to the lack of state-​autonomy. This tendency was usually contained in the upswings of the dynastic cycles, but invariably turned dominant in the downswings. The Qing state, being in a typical dynastic downswing, suffered from the same syndrome, except that the Qing officials now used their office power to accrue industrial assets instead of farmland. As a result, many state-​sponsored modern enterprises ended up as the private assets of the state officials who supervised or managed them. In comparison with the Meiji state, the Chinese state in the late Qing period showed fatal weaknesses in all three aspects of the state-​led industrial development: first, the Qing government had lost central control over the country’s fiscal and financial system at the onset of the industrial developments and failed to regain it thereafter. Second, the state-​led industrial programs were regionally based, functionally uncoordinated and dependent on foreign financing.Third, the Qing state reached the private sector through individualized channels. While the “official entrepreneurs” built up their own industrial assets, the state-​sponsored enterprises made very limited impact on the modernization of the economy. Loss of central control over capital supply The late Qing government encountered severe fiscal difficulties at the onset of the industrial development, just as the Meiji government did in Japan. The repression of the Taiping Uprising (1850–​1864) and the Nien Uprising (1853–​ 1868) had seriously drained the government revenues. The difference is that the Meiji state came out of the fiscal predicament by carrying out tax reforms and creating modern banking system, whereas for the late Qing state, the fiscal predicaments set in motion a gradual yet irreversible disintegration of the centralized fiscal system. Compared with the case of Japan, the Qing state’s fiscal predicament was more deadly. Different from the Satsuma Uprising in Meiji Japan, the Taiping Uprising and the Nien Uprising were large-​ scale peasant rebellions that usually took place towards the end of a dynasty throughout China’s imperial history. Historically, massive peasant rebellions took place in the downswings of dynasties as the entrenchment of the state led to the concentration of farmland in large landowners and the government’s extravagant spending significantly increased the taxation burden on peasants (see Chapter 4). It is the same set of state institutions that caused the Taiping Uprising and the Nien Uprising in the late Qing period. With deep social roots, these peasant rebellions were persistent and massive, and it was much more costly for the government to put them down. The battle to repress the Taiping Uprising lasted 14 years and engulfed half of China.The state coffer was dwindling steadily. Also, the corrupt imperial standing army no longer had the combat capability to win.

Externally-induced industrial developments  121 As a result, the Qing state had to rely on the local armed forces organized by provincial officials and local gentry to suppress the rebellion. Moreover, in order to finance the regionally organized armies, the government decentralized the tax system. Under the Qing state’s centralized tax system before the uprising, Hubu (the Ministry of Finance) controlled the spending of tax revenues. Local governments collected taxes set by Hubu but had no authority to dispose them. The disposal of tax revenues was administrated by Buzhengshisi, the locally situated offices of the Ministry of Finance, except for the part retained by local governments for their own use, such as salaries and other office expanse. Buzhengshisi even controlled liuzhi, revenues used by the Ministry of Finance for local-​expense items, such as soldiers’ pay of the imperial army at localities, and liuchu, revenues (grains) stored at warehouses at localities, in addition to Jingxiang-​Xiexiang, revenues delivered to the central government and other provinces (Wei 1986, 207–​210). To finance the battle against the Taiping Uprising, the Qing state modified the centralized tax system in several ways: (1) provincial governments were permitted to dispose of liuzhi and liuchu; (2) provincial governments were granted the authority to stipulate the collection and expense of taxes and fees in their jurisdictions beyond the scope set by the Ministry of Finance; (3) provincial governors were put in charge of the tax-​delivery to the central government, in place of Buzhengshisi (Wei 1986, 212). These measures were meant to ensure the central-​government revenues as well as the military supply in the warring regions, but they critically weakened the central control of the Qing state over taxation and other financial sources. On the surface, the Qing state merely shifted some tax responsibilities from the central to local echelons in administration.Yet, in reality, the state’s centralized fiscal system was fundamentally shaken. The Qing central government was unable to take back the fiscal authority from the local offices after the Taiping Uprising. In the post-​Taiping-​Uprising period, the provinces further developed their own fiscal and financial sources. With tax authority, the provincial governments had a free rein to collect all kinds of taxes and fees, formal and informal, old and new,14 from the people in their jurisdictions. And they retained most of tax revenues for local use and delivered only a small part to the central government. Consequently, the central government’s revenues continued to dwindle. Moreover, the provincial governments also gained full control of local finance. Almost all provinces set up their own financial bureaus and mints to issue paper money, copper coins and notes. In addition to domestic borrowing, they also had the permission to borrow from foreign banks and companies. Provincial governments’ borrowings made up a large part of the total foreign debt incurred by the Qing state (Xu 1956). In brief, the Qing government succeeded in repressing the Taiping and Nien Uprisings but lost the central control over the tax and financial system. Furthermore, the dependence on locally organized military forces and the crumbling of the centralized fiscal system gave rise to regional powers based on the alliance between local officials and elites. As said in Chapter 4, in dynastic

122  Externally-induced industrial developments China the rise of regional powers led by revolting state officials had the potential to topple the existing imperial regime. Thus, to ward off the immediate threats of the Taiping and Nien Uprisings, the Qing government, in effect, accepted an apparently lesser yet equally fatal danger in the years to come. Uncoordinated programs and foreign dependency The state-​led industrial developments in late Qing China were often described as regionally scattered, functionally uncoordinated and dependent on foreign countries, in contrast to the centrally-​ coordinated industrialization with national independence in Meiji Japan. With the loss of central control over the fiscal and financial system, the Qing state could not conduct nationally integrated industrial programs through a centralized budgetary process and overall financing plans. Moreover, it was difficult to coordinate industrial projects across localities and sectors without the creation of new branches of the central government as organizational vehicles. The Qing state began to set up new government departments in charge of industrial projects as late as in the 1900s, after its defeat in the Sino-​Japanese War. The Hubu Bank (renamed as Daqing Bank in 1908), the quasi-​central bank, was established in 1905, six years before the demise of the Qing state. It never got much chance to play the role in financing industrial programs. The Ministry of Commerce,15 the super agency coordinating all industrial and commercial programs, was set up in 1903, 31 years after the first state-​sponsored modern enterprise in civil industries was established in 1872. The industrial projects in late Qing China were initiated by some prominent provincial officials, such as Zeng Guofan, Li Hongzhang and Zuo Zongtang, who had first-​hand experience of using foreign-​made weapons in the war of repressing the Taiping Uprising and saw the necessity for China to develop its own modern industries. These yang-​wu officials first set up some modern arsenal factories and shipyards for military production in the early 1860s. Then they extended the modern projects to the civil industries. They had the support of the central government in theory, but in practice could not get much financial backing from the center with the problems motioned above. As provincial leaders they launched industrial programs, mostly in their own jurisdictions, through their personal networks in and out of the government. Due to the lack of central coordination in capital provision, program-​designs, banks loans, taxes and subsidies, the industrial projects were rather disconnected in function and made little impact on the overall economy. Furthermore, without a stable domestic source of capital supply, the Qing state could not adhere to the principle of self-​reliance in industrial developments and had to resort to foreign funding as a major source for modern projects. As a result, the state-​sponsored industrial programs increased, instead of reduced, the country’s dependence on foreign capital and management. These problems could be further illustrated by the railway projects, for the convenience of comparison with Japan. By 1895, about 364 kilometers or

Externally-induced industrial developments  123 226 miles of railways had been laid in China (Qi, Guo and Dai 2008, 84), in comparison with Japan where 1,000 miles of railways had been built by 1887 (Henshall 2004, 80). However, the real difference was not about the total length but about the effects of the railways on the overall economy. The first few railways built in Japan before 1880 already connected the country’s administrative, financial and commercial centers, as well as the rich agricultural district, and greatly facilitated the nation-​wide industrial development. Also, these railways, operated entirely by Japanese personnel, set examples for private entrepreneurs and laid the groundwork for the railway construction boom in the private sector in the late 1880s and 1890s. Comparatively, in China the few railways built before the Sino-​Japanese War16 in 1895 made little impact on the national economy. The first railway, the Woosong Railroad, connecting Shanghai and Woosong Port, was built by a British trading company in 1876. It was purchased by the Qing government but was dismantled soon after it opened for commercial operation. Thus, the first railway in the true sense was the Tang-​Xu Railway built in 1881 in Northern China, in the jurisdiction under Li Hongzhang, the governor-​ general (or viceroy) of Zhi Li region.The 10 kilometer railway was constructed to transport the coal produced by Kaiping Coal Mine in Tangshan, a state-​ sponsored enterprise under Li’s patronage, to Xugezhuang. In 1886 another construction-​project was started to extend the Tang-​Xu Railway to Yianzhuang and then further to the Dagu port and Tianjin. It was completed in 1888. To finance the construction of the Tang-​Xu Railway and the extension to Tianjin city, Li Hongzhang tapped into the capital of Kaiping Coal Mine, invited private investment from local merchants and transferred some state funds under his jurisdiction. The major funding for the extension projects came from two foreign loans made by British and German banks, with the personal arrangement of Li Hongzhang as the Beiyang Minister (Xia 2010). The Jin-​Tang railway played a limited regional role at best. The construction to further extend it began in 1891, but the project was delayed, due to lack of funding, and finally reached Shanghaiguan in 1894. The Qing state realized the importance of railways only after China’s defeat in the Sino-​ Japanese War in 1895, and actively promoted railway constructions since then. In the post-​1895 period, China’s railways underwent rapid development. However, the Qing state mainly relied on foreign capital and the provincial or local financing for railway projects, as it was in an even worse fiscal condition with the war indemnities and had even weaker control over domestic source of financing. By the end of the Qing dynasty, a total of 9,618 kilometers of railways were built in China. Foreign-​controlled railways amounted to 8,951 kilometers, or 93.1 percent, of the total. Chinese-​owned railways were only 665 kilometers, accounting for 6.9 percent of the total (Qi, Guo and Dai 2008, 150). Of the foreign-​controlled railways, 3,759 kilometers were built and owned directly by foreign companies as a result of outright concessions, including the Jiaoji Railway (Germany), Sino-​ Vietnamese Railway (France), China

124  Externally-induced industrial developments Eastern Railway (Russia), and so on. For these railways, the Qing government granted foreign companies not only the concessions to build the railways but also the settlement and mineral rights along the railways. The rest of the 5,192 kilometers of foreign-​controlled railways were built through taking out foreign loans, such as Beijing-​Hankou Railway and Tianjin-​Pukou Railway. As these foreign loans were conditioned upon conferring the construction and financing rights to foreign companies, the Qing state in effect had little control over the management of these railways, although maintained nominal sovereignty over them. The foreign-​controlled railways greatly improved the transportation in the areas “under foreign influence” in China. But, these railways contributed little to the Qing state’s goal of “rich nation, strong army” because they were functionally disconnected, being built by different foreign companies and countries. The foreign companies operated these railroads to serve their own interests in their “sphere of influence.” The Qing government could not co-​ordinate the use of these railways to facilitate the nation’s industrial developments. With the loss of the control over the major railways, late Qing China began to slip into a semi-​ colonial economy. The Qing government started the railway projects for the purpose of strengthening the country yet ended up with putting most of the nation’s railways under foreign control as it had to rely on foreign sources for financing through concessions and loans. This is in sharp contrast to the case of Meiji Japan where the state-​sponsored railway and other projects served as key steps in reducing foreign dependency and building up independent national industries. The 665 kilometers of Chinese-​owned railways built during this period were mainly sponsored and funded by the provincial governments in association with local gentry and merchants. In the early 1900s, the Qing government permitted the provinces to set up their own railway companies and to raise funds for railway projects by selling shares to the public and by levying taxes. Under the policy, several important local railways were built under the sponsorship of the provincial governments, including the Beijing-​Zhangjiakou Railway, the Shanghai-​ Hangzhou Railway and the Shijiazhuang-​ Taiyuan Railway. Among them, the Beijing-​Zhangjiakou Railway, finished in 1909, was the first railway built by Chinese engineers. However, the policy of giving provincial governments the authority over railway construction further weakened the central control as the railway interests helped strengthen the regional powers based on the alliance of local officials and merchants, especially in the southern provinces. As mentioned earlier, the rise of regional powers in the Taiping Uprising potentially threatened to break down the Qing state. The potential threat had turned real over the years. The early sign of the disintegration of the Qing state was the declaration of neutrality by the provincial governments in East and South China in the Boxer War, waged by the Qing state against the Eight-​ Nation Alliance in 1900. It shows clearly that the provincial governments no longer stood by the central government. Late in the 1900s, the provincial gentry

Externally-induced industrial developments  125 and merchants who invested in Chinese-​owned railways became increasingly hostile to the Qing state, viewing the foreign concessions and loans made in the state-​sponsored railway projects as collusion with foreign interests. In the southern provinces, local merchants organized rallies to recover their rights in railway finance and construction from foreign companies. It is ironic that the state-​sponsored railway programs that meant to strengthen the state turned into a trigger for the downfall of the Qing state. In 1911, the Qing state decided to nationalize all provincially based railways, on the excuse that some local railway-​ventures were engrossed in scandals and bankruptcy. The central government’s decision brought about fierce public opposition in the southern provinces. The Railway Protection Movement helped set off the Wuchang Uprising, the prelude of the 1911 Revolution. The government–​business relationship: fusion of roles There were two major differences in the government–​business relationship in industrial developments between late Qing China and Meiji Japan. The first one was about how the government reached the private sector for industrial projects. The leading yang-​wu officials of the Qing government sponsored modern enterprises mainly through their patronage networks based on personal connections, in comparison to Meiji state that assisted private businesses mainly through regularized channels provided by the state bureaucracy as an integrated body. The second difference was the roles the Qing state officials played in managing industrial projects. Due to its fiscal predicament, the Qing government had to draw on private funds for industrial projects. The modern enterprises introduced by the Qing government in the civil industries were predominantly guandu shangban (government supervision and merchant management) and guanshang heban (government and merchant joint management) enterprises. These state-​sponsored enterprises were partially or mostly funded by private capital but managed by state officials. The ambiguity in ownership and management led to the emergence of “official entrepreneurs” who fused the roles of state officials and private businessmen, in contrast to the distinctive roles played by the state and private enterprises in the case of Meiji Japan. Personalized channels for sponsoring modern enterprises The first group of modern textile factories in late Qing China was initiated by three leading yang-​wu officials: the Lanzhou Woolen Mill was sponsored by Zuo Zongtang in 1880; the Shanghai Cotton Cloth Mill was sponsored by Li Hongzhang in 1889 and it became the Huasheng Spinning and Weaving Mill in 1894; and the Hubei Cotton Cloth Mill and Hubei Cotton-​spinning Mill were sponsored by Zhang Zhidong in 1892 and 1897 respectively (Xia 2010). That is, these modern textile ventures were set up by individual state officials, who raised funds and purchased machines through personal connections inside and outside of the bureaucracy and put their protégés officials in charge of the mills.

126  Externally-induced industrial developments As they were not coordinated by the state organization as an integrated whole, these projects barely served the purpose of mechanizing the textile industry. To start with, some modern mills could not even survive without the personal protection of their official patrons. For instance, Zuo Zongtang set up the Lanzhou Woolen Mill in the northwest region in 1880, when he was governor-​ general of Shanxi-​Gansu region. By conservative estimation, some 600,000 taels of silver of state funds were invested in the construction and operation of the factory. It took a year for the last set of machines to be transported from Germany to Lanzhou, but the woolen mill closed down in only three years as Zuo Zongtang was reassigned to an office post in another region, and the new governor considered the mill wasteful and useless (Xia 2010). Thus, the Lanzhou Woolen Mill was short-​lived, because it owed its existence entirely to Zuo’s patronage. Zuo obtained the state funds through his personal influence in the government, appointed his subordinate official Lai Chang as the manager of the mill and arranged for his long-​time protégé, merchant Hu Xueyan, to purchase the machines. All these supports for the Lanzhou Mill were gone with Zuo when he left Lanzhou. In this case, the mill depended on an individual official instead of the state as an organization. Its fate was in sharp contrast to Japan’s Senju Woolen Mill that marked the establishment of the modern woolen industry in the country. Zhang Zhidong’s Hubei Cotton Cloth Mill also depended on his personal protection. Zhang planned to set up a modern cotton-​cloth mill in Canton, Guangdong province, as a government-​merchant joint venture while he was the governor-​ general of Guangdong-​ Guangxi Region. In 1889 he raised the initial capital for the mill by levying an extra tax on lottery merchants in Canton,17 and informed the central government of these extra levies about a year later when he was appointed the governor-​general of Hubei-​Hunan region with his new office located in Wuchang, Hubei province. Zhang then moved the factory site, along with part of the Canton fund, to Wuchang (Chan 1980, 430–​432). Zhang’s method of raising and using funds for the cotton-​ cloth mill showed the irregularity in capital financing for industrial projects under the Qing government.The fact that the factory site followed Zhang from Canton in the south to Wuchang in the mid-​Yangtze basin again displayed how dependent the industrial ventures were on the patronage of individual officials. Zhang Zhidong, who had little trust in merchants, kept his factories near his yamen (office) and supervised these enterprises closely, with his personal staff assigned as the managers. The Shanghai Cotton Cloth Mill (SCCM), sponsored by Li Hongzhang, showed the inconsistency in state policies over modern-​mill projects, due to the “personalized” nature of state sponsorship. The purpose of setting up the SCCM was to replace the imports of cotton products in China, as stated by Li in his proposal for the project. During the 1880s and 1890s, imported cotton yarns and fabrics dominated the Chinese market, and foreign-​made cotton fabrics accounted for 80–​90 percent of the total consumption of cotton cloth in China. Cotton products became the second largest item in China’s total imports

Externally-induced industrial developments  127 and caused a rapid deterioration of the country’s trade deficits. The value of cotton-​product imports from Britain alone rose from 20 million taels in the 1850s to 52.7 million taels of silver in the early 1890s (Xia 2010, 246–​247). The SCCM was a guandu shangban (government supervision and merchant management) enterprise. In order to attract private capital, Li Hongzhang approved a ten-​year monopoly right for the SCCM along with other preferential treatments.The SCCM monopoly forbade merchants to set up other machine-​ spinning cotton textile mills in Shanghai, except investing in the SCCM (Xia 2010).The ten-​year monopoly certainly benefited the SCCM in capital-​raising and business competition, but it conflicted with the state objective of replacing cotton-​product imports with the ban on the Chinese producers from setting up more modern cotton mills. Given the size of the imports, the state objective could hardly be achieved by one or two state-​sponsored mills. Although the SCCM increased its production and sales every year before it was burned down in 1893, its annual production of cotton fabrics was less than 2 percent of total imports of cotton fabrics. In protecting the SCCM, the monopoly right actually hindered the promotion of industry-​wide machinery production, in contrast to the Meiji government’s policy of assisting all private producers who were willing to use machines. As the Qing state could not act as an integrated whole, the yang-​wu officials tended to dwell on the business success of their “pet projects.” Even Li Hongzhang, the most influential yang-​wu official who had the national objective in mind, was no exception. In brief, the state-​sponsored textile mills did break the ice for using machines for textile production, yet the achievement was limited to the enterprises themselves.These modern mills did not lead to the mechanization of the textile industry. The Chinese textile remained a handcraft industry at the end of Qing dynasty in 1912. Nor did they bring about changes in the trade structure of textile products. By estimation, handcraft still accounted for 62.9 percent of China’s textile industry as late as 1933 (Hou 1963, 280). The share of cotton products in total imports rose from 31 percent in 1870 to 35.8 percent in 1900, then declined to 28.3 percent in 1910. Silk products, China’s major foreign-​currency earner, declined from 38.8 percent of total exports in 1870 to 25.4 percent in 1910.18 The emergence of official entrepreneurs The other issue with the government-​business relationship was the ambiguous roles played by the state officials in managing state-​sponsored enterprises. Due to the lack of state funds, Li Hongzhang proposed the principle of guandu shangban when the first state-​sponsored enterprises in civil industries, China Merchant’s Steam Navigation Company, was launched in 1872. Under guandu shangban, private investors put up their money for the shares of state-​sponsored enterprises, and the state appointed supervisors and provided supports such as official loans, tax exemption and certain preferential treatments.19 Around the mid-​1890s, Zhang Zhidong proposed guanshang heban (government and

128  Externally-induced industrial developments merchant joint management). These enterprises were similar to the guandu shangban ones, except that Zhang proposed to put in the state funds first then invite the investment of merchants in the state-​sponsored enterprises. He also put more emphasis on the state control through the appointment of state officials as duban (general-​director) or zongban (chief manager) of these enterprises (Luo 2004). The ambiguity of these state-​ sponsored yet private-​ funded enterprises led to the emergence of “official entrepreneurs” in late Qing China. Official entrepreneurs referred to the state officials running state-​sponsored enterprises. These officials were supposed to just supervise the operations of the companies at first, but they soon took on the managerial functions, invested their own money in the enterprise and operated in the capacity of private businessmen (Chan 1980). That is, the official entrepreneurs fused the roles of state officials and private businessmen, in comparison to the case of Meiji Japan where the state bureaucrats and private entrepreneurs played separate or distinctive roles. With an increasingly weakened internal structure, the late Qing state in effect gave free rein to state officials’ propensity to use offices for building private wealth. The official entrepreneurs were in the right position to accrue private industrial assets in managing the state-​sponsored enterprises. In due course the capable ones turned the state-​sponsored enterprises under their supervision into their own companies. The most famous official entrepreneur was Sheng Xuanhuai. Sheng was a career state official and held various government positions until the very end of the Qing regime. He was a middle-​rank official and a protégé of Li Hongzhang in the early 1870s, and rose to the position of the Minister of Posts and Communications in 1911, at the fall of the Qing state. In the 1880s and 1890s, Sheng supervised and managed a series of state-​sponsored enterprises, including the China Merchant’s Steam Navigation Company, the Imperial Telegraph Administration, the Huasheng Spinning and Weaving Mill, the Hanyang Ironworks and the Imperial bank of China. He managed these enterprises with relative success, and gradually increased his shareholdings in these enterprises. In the end Sheng turned most of them into his own companies (Luo 2004). Key to Sheng’s business success was his ability in acquiring capital for the enterprises he managed. He employed multiple channels to raise funds: first, as a state official, Sheng was good at tapping into government resources and arranging official loans for the enterprises he managed, with the backing of Li Hongzhang at first and then Zhang Zhidong as his patrons. For instance, in financing the project of the Imperial Telegraph Administration, Sheng mainly drew on provincial government’s treasuries and official loans that used the existing telegraph lines as collateral. Second, Sheng also had source of private capital, with a small group of colleagues, friends and relatives who invested their own money in the companies. Finally, he developed a method of transferring funds from older, stronger companies to the new ones.20 Sheng might have been a successful businessman, but he owed the business success to his office-​ posts in the government, his connections within the

Externally-induced industrial developments  129 bureaucracy and favors of the leading yang-​wu officials.The Huasheng Spinning and Weaving Mill (Huasheng Mill) is an example. In 1894 Sheng Xuanhai was appointed as the general manager of the Huasheng Mill, the successor of the SCCM that burned down in 1893. With the approval of Li Hongzhang, Sheng held back the government claims on the official loans for the SCCM, and paid the merchants in cash from the mill’s remaining assets and in stock shares. Sheng himself, as well as his friends and relatives, also purchased shares of the Huasheng Mill. As a state-​sponsored enterprise, the Huasheng Mill enjoyed all the preferential treatments from the state including the ten-​year monopoly passed on from the SCCM. With the access to governmental resources, Sheng expanded the Huasheng Mill by setting up several subsidiary mills in Shanghai and the neighboring areas. In the meantime, he became the largest shareholder of the company. In 1901, Sheng turned the Huasheng Mill into a private company of his own under the new name of Jicheng Company (Luo 2004, 129). In other words, Sheng was a state official who utilized his office-​holding to run a private business. Moreover, he built up his industrial fortune oftentimes at the expense of the state interests. For instance, Sheng got hold of the Hanyang Ironworks at little cost of his own money. The Hanyang Ironworks, founded by Zhang Zhidong, was a state-​sponsored enterprise in which the government had invested a staggering 5.6 million taels of silver. Sheng took over the management of the company in 1896 through his connection with Zhang Zhidong, when the factory ran into financial difficulties. He avoided the commitment of replacing the state funds with private capital and instead, he offered to repay the government by means of a levy of one tael per ton of pig iron produced in the future. He also arranged a payment of one million taels from a government fund earmarked for the Beijing-​Hankou railway project for the purchase of steel, through his connection with Li Hongzhang. The Hanyang Ironworks turned profitable under Sheng’s management. In the late 1900s Sheng consolidated Hanyang Ironworks and Pingxiang Mine into the Hanyeping Mine and Irion Company Ltd, a private company of his own (Chan 1980, 428–​29; Luo 2004, 131). Another known official entrepreneur was Zhou Xuexi, whose father, Zhou Fu, was a high-​ranking official and close associate of Li Hongzhang. Zhou himself held a range of state offices, including substantive daotai, salt commissioner and the judicial commissioner of the Zhili region in the Qing government. He also served as the finance minister of the Beiyang government in the 1910s. Like Sheng, Zhou was assigned to supervise and manage a series of state-​sponsored enterprises and was good at utilizing the state resources to run businesses. Also like Sheng, Zhou succeeded in building his own industrial empire consisting of enterprises in a variety of sectors, including Luanzhou Mining Company, Qixin Cement Company and Peking Water Company. By the 1900s, state officials began to invest in or set up private companies without being appointed as the supervisors of state-​sponsored enterprises.21 These private companies no longer needed the shelter of state-​sponsorship. With state officials as their shareholders or owners, the companies already had

130  Externally-induced industrial developments adequate protections for business operations (Chan 1980, 454–​456). On the other hand, non-​official entrepreneurs, who usually ran smaller companies, relied on their personal ties with state officials as the “official umbrella,” just as the merchants in the old days (see Chapter 3). The practice of the simultaneous holding of state office and private companies was carried on by the “bureaucratic capitalists” in the Beiyang and KMT (Kuomintang) periods. In essence, the emergence of official entrepreneurs in the late Qing China revealed the intrinsic weakness of the Chinese state institutions that always prevailed in the downswings of the dynastic cycles. And these institutions continued in modern times. As the first generation of industrialists, the official entrepreneurs certainly contributed to the introduction of modern enterprise in China. However, these modern enterprises were too limited in number and the modern sector was too small in scope to produce meaningful changes in the structure of the economy. The private sector was far from being mobilized to adopt machine production in the respective industries. In short, with the fusion of roles between state officials and businessmen, the Qing state failed to achieve the state goal of “rich nation, strong army.” Instead, the state officials who supervised the state-​ sponsored projects managed to build up their own industrial wealth.

Institutional changes in Meiji Japan and late Qing China Meiji Japan: moving towards pluralistic institutions With the rise of large private companies, the industrialization in the Meiji period began to change the core institution of absolutism in Japanese society, albeit the changes being marginal, contingent and reversible at the time. These marginal changes opened up the avenues for Japan to evolve into a pluralistic society, although the evolution took a long, twisted process. The changes in the power structure in Japanese society started with a dispersion of the coercive power from the ruler/​state to private companies through formal institutions. At the onset of industrialization, the state held absolute coercive power over all social groups in the society. Private producers were too weak to initiate industrial ventures and none of the social groups could match the state power. In the industrialization process, the growth of private industrial companies in economic strength altered the power balance between the state and the private businesses, in favor of the latter. More importantly, the redistribution of economic power between the state and private businesses was institutionalized by the social reforms associated with the industrialization in the Meiji period. For the same goal of “rich nation, strong army,” the Meiji government carried out a series of social and political reforms to introduce a Western political system, while pushing through the industrialization programs. Following the Charter Oath announced in 1868, the government abolished the restrictive class system. Classes were reconstructed into nobles, samurai, and commoners in

Externally-induced industrial developments  131 1869, and the samurai class was phased out with the introduction of conscription in 1873. Universal education was proclaimed as an aim in 1872.The democratic movements brought about some 150 local popular rights societies by 1880. A year later, Japan’s first major political party, the Liberty Party, was formed. In 1882, a second major party, the Constitutional Reform Party, was founded. In 1885, the state cabinet, consisting of ministry heads, was established. The new constitution, “the first ever full and formal constitution adopted outside of the Western world,” was promulgated in 1889 (Henshall 2004, 89). In 1890, the first elections of Diet (the Japanese parliament, consisting of House of Peers and House of Representatives) were held and the Diet convened in the same year. These reforms, particularly the establishment of the Diet, cabinet and political parties, provided the large industrial companies with institutional access to the state power. As a new social force, the industrial businesses now could advance their interests through these formalized channels. A political system based on the “power-​sharing relationship” between the state and private businesses began to develop in Japan. In this relationship, the big industrial business provided funding for politicians, and in return the politicians provided pro-​ business policies through their influence in the cabinet. Note that the relationship was “power-​ sharing” rather than sheer collusion, as the government always tried to control the big businesses, concerned with their “bad” influence, and the big businesses sparred with the government over policies (Kang 2002; Henshall 2004). The power-​sharing relationship broke up the state’s monopoly over coercive power in society through formal institutions, namely, the constitution and laws governing the political parties, the Diet, the cabinet, as well as the policy-​ making process. The influence of the big businesses in politics can be seen from the labels used by the opposition parties in the government, such as “Mitsui cabinet” (1927–​1929) and “Mitsubishi cabinet” (1929–​1930) in the inter-​war period. However, the changes in the core institutions brought by the Meiji reforms were only marginal at the time, as the power-​sharing with the state was limited to the big industrial businesses. Qualified voters accounted for merely 5.5 percent of Japan’s total population in 1920 (Johnson 1982, 39). What the reforms had achieved was some sort of “authoritarian democracy” (Henshall 2004, 88). Even the authoritarian democracy went through extremely testing times. In interwar period, there were widespread dissatisfaction of the government and frequent changes of the cabinet and top government officials. Western influence and parliamentary institutions were blamed for corruption in politics. The authoritarian democracy, as the result of the Meiji social and political reforms, again showed that institutional changes are path-​ dependent. As denoted in Chapter 1, institutions in a society are not freely moldable because the choices facing the actors are limited by the existing institutions. Given the absolutist institutions the Meiji state inherited, Western-​style democracy may not be in the choice-​set for the society at the time, yet “authoritarian democracy” was attainable. Even after the intensive reforms under the US occupation in the post-​ World-​ War-​ II period, Japan’s political system still

132  Externally-induced industrial developments differed considerably from the Anglo-​American model. In postwar Japan, the state bureaucracy ruled on behalf of the whole society, and the political parties were seen to represent various, particular interests. The Diet largely served as a safety valve between society and the state. The state bureaucracy originated 90 percent of the legislative bills through numerous deliberation councils in Japan (Johnson 1982), compared with the Anglo-​American system where parliament or congress generated bills. On the other hand, the core institution of absolutism was indeed changed in Meiji Japan, and the changes could be made because the existing state institutions contained elements supportive for the changes. The autonomy of state was critical, firstly. The insulation of the state from private properties prevented the state bureaucracy from getting entrenched in the newly developed industrial wealth in the industrialization. As a result, the industrial companies grew into an economic force independent from, instead of being attached to, the state power. The rise of big industrial businesses prepared the socio-​economic ground for the formal institutions of “power-​sharing” in the political reforms. The other favorable element in Japan’s state institutions is the effectiveness of written rules in state governance or the tradition of “rule by law.” With that tradition, the constitution and new laws were enforced more effectively, rather than just staying “on paper.” Of course, the new laws need be “feasible,” that is, within the choice set of society at the time. The drafting of the Meiji Constitution that adapted the Western system to the Japanese institutions took ten years. In general, the state’s impartial treatment of social members by explicit rules was somewhat congruent to the rule-​based coordination in a pluralistic society. Japan’s “rule by law” made it relatively easier for society to move to the institutions of “rule of law,” compared with “rule of person” in the case of China. Basically, the case of Meiji Japan suggested that the reforms of dispersing the state power required a strong state, paradoxically and “strong” in the sense of having high degree of bureaucratization. For externally-​induced and top-​down social reforms such as those in the Meiji period, the leadership of an autonomous, internally coherent state was needed. A strong state could implement radical reform measures while holding society together in the face of the turbulence caused by the reforms, such as the emergence of political parties and popular rights organizations. Late Qing China: persistence of absolutism The industrial developments in the late Qing period brought about some institutional changes but did not alter the core institutions of absolutism in the Chinese society. The coercive power remained concentrated in the hands of the ruler and state long after the demise of the Qing Empire. A modern industrial sector had developed since then, but the new class of industrialists was dependent on and attached to the state power just as the landed and mercantile wealth in the past.

Externally-induced industrial developments  133 It is not that the Qing state did not carry out social and political reforms. In fact, the Qing government took sweeping social and political reforms, no less extensive than the Meiji reforms. The Qing state’s social and political reforms between 1901 and 1911 intended to set up Western-​style institutions and organizations in an orderly way. Known as Late Qing “New Policies,” the reform measures were far-​reaching, including introducing Western laws and legal practices, drafting a constitution, restructuring the government, creating representative assemblies, abolishing the Keju imperial examination system, setting up modern schools, training new armies with Western military technologies, and so on. However, the Qing state launched these reforms more than 30 years later than the Meiji state. The Qing government decided to reform the social and political system as Japan did because it was shocked by the military strength of Japan after the defeat in the Sino-​Japanese War in 1895. Yet, by the time the new policies were introduced, the Qing state was already too weak to lead the reforms. The reliance on personalized channels in sponsoring industrial projects had further fractured the state organization and intensified the clique-​ struggles inside the state bureaucracy, especially at local levels. The activities of the official entrepreneurs had further broken the internal cohesion of the Qing state organization and crippled its capability to lead the reforms. The social and political reforms from 1900 to 1911, in effect, put the last straw on the falling state. As mentioned earlier, the Qing state started to fall apart before the new policies reforms. The regional powers that arose in the war against the Taiping-​Uprising were fortified by the alliances among local officials, official entrepreneurs and merchant-​investors in the following decades. The declaration of neutrality by the governors in the 1900 Boxer War clearly demonstrated that the Qing central authority could no longer control its lower-​ level governments. A state organization in disintegration was in no condition to lead top-​down social and political reforms towards pluralism. The emergence of political parties, the mushrooming of modern associations, the establishment of local representative assemblies and the social turmoil associated with the reforms dealt the final blow to the shaky Qing state. Just as in the previous dynastic cycles, the Qing regime was overthrown or the Qing state organization replaced, yet the Chinese core institutions survived. The way the Qing state led the industrial developments prepared no socioeconomic foundation for the reforms of introducing pluralistic institutions. In the case of Meiji Japan, the state interacted with private companies as two separable sides through regularized channels. The distinctive role-​ play and the regularized interaction allowed the industrial companies to develop into relatively independent social force vis-​à-​vis the state.The relative independence of industrial companies supported the development of the “power-​sharing” institutions through political reforms. Comparatively, in late Qing China, the reliance on officials’ personal patronage offered little ground for industrial companies to develop any economic clout vis-​à-​vis the state. The development of official entrepreneurs reinforced the traditional institutions of simultaneously

134  Externally-induced industrial developments holding state offices and private properties. The official entrepreneurs, as the owners of large companies, were appendages of the state as they relied on the state power to build up their industrial assets. And the smaller companies invariably depended on the “official umbrellas” for business protection. That is, the industrial developments in late Qing China preserved instead of altered the power structure of society. The new regimes, though under the name of the republic, retained the absolute coercive power of ruler/​state (see Chapters 6 and 7). In particular, the state institutions of combining office-​ holding and private-​company ownership continued in the Beiyang and KMT (Kuomintang) periods, as evidenced by the ascendancy of the “bureaucratic capitalists” in the modern sector. In short, the industrial developments in the late Qing period brought no change in the core institutions in society, not because the Qing state did not carry out radical social and political reforms, but because it carried them out at the worst time, when it had totally lost the capability of leading these top-​ down reforms. Fundamentally, the Chinese state institutions, with the lack of autonomy and heavy reliance on personal relations in administration, contained fewer elements supportive of the transition to pluralism, in comparison to the case of Meiji Japan.With that said, contingencies could play a role in broader historical setting. If the Western industrial countries “provoked” China earlier, or if the external shocks occurred during an upswing of the dynastic cycles, the Chinese state may have had a better chance of succeeding in industrialization. Nonetheless, given the intrinsic weakness of the Chinese state institutions, it would have taken a much longer time for China to establish pluralistic institutions, even with good luck.

Notes 1 These are straight translations from the well-​ known slogan of fukoku kyohei in Japanese, and fuguo qiangbing in Chinese in that period. 2 Before the mid-​1860s, there were only a couple of small modern arsenal factories in China and limited number of small modern projects in Japan. 3 The revolution, marked by the Wuchang Uprising, started in 1911. The last Qing emperor, Emperor Xuantong (Fu Yi) abdicated in February, 1912. 4 Source: Ohkawa and Shinohara (1979), table A.12, pp. 278–​279, and table 7.1, p. 135. The growth rates of GDP, the growth rates of manufacturing and the GDP shares are based on values at constant 1934–​6 prices; trade shares are based on values of ten-​year moving averages in current prices. 5 The Meiji Restoration, also known as the Meiji Renovation or Renewal, was a political event that restored direct imperial rule in 1868. The event was very much a response to foreign threats with which the Tokugawa government did not cope well. In a military coup, a coalition of the samurai leaders from Satsuma, Chōshū and some other “outer” domains and a few court nobles seized the control of the imperial court in the name of the Emperor. The restored emperor, Emperor Meiji, was 15 years old at the time. The Meiji Restoration ended the Tokugawa Shogunate, established a new government and marked the beginning of the Meiji era.

Externally-induced industrial developments  135 6 The pre-​determined tax rate was set at 3% initially, and was reduced to 2.5% in 1877 (Francks, 1992, pp. 29–​30; Henshall, 2004, p. 77). 7 A large holding in Japanese terms was rarely more than 2–​3 hectares, and most of these owners cultivated at least some of their land themselves (Francks, 1992, p. 125). 8 There was fierce debate over how to finance the government debt. Okuma Shigenobu, the Finance Minister in the 1870s, proposed to borrow funds from abroad and then repay the loans with the “expected” revenues from Japanese exports (Francks, 1992, p. 31, Sagers, 2006, p. 118–​119). 9 The bank was enacted in 1879, opened officially in 1880 and began foreign exchange business in 1882. 10 In 1880, the Tokyo-​Yokohama line had 12 engines, 56 passenger cars and 158 freight cars, alone carrying 2,000,000 passengers. The Kobe-​Otsu line had 26 engines, 110 passenger cars and 255 freight cars, carrying 3,000,000 passengers in the same year (Smith, 1965, p. 43). 11 Trade shares are based on values of ten-​year moving averages in current prices. Source: Ohkawa and Shinohara (1979), table 7.1, p. 135. 12 Source: Hou, 1963, pp. 278 and 281 13 Source: Angus Maddison, Statistics on World Population, GDP and Per Capita GDP, 1-​2008 AD (www.ggdc.net/​maddison/​oriindex.htm). Estimation for China’s GDP between 1850 and 1928 is only available for certain years. Other estimations were even lower. 14 Examples are lijin, yongxiang, juanshu and yiangwujingfei. 15 This new ministry was placed above the six traditional ministries, given a broad jurisdiction and authorized to take over the major commercial and industrial programs (see Chan, 1980, pp. 448–​450). 16 The Sino-​ Japanese War started in July 1894 and ended in April 1895. The “Shimonoseki Treaty” was signed in April 1895 as the result of the War. 17 The lottery merchants in Canton were forced to contribute 400,000 taels in 1889 and another 560,000 taels in 1890, in addition to their regular taxes (see Chan 1980, p. 430). 18 Source: Feuerwerker, 1969, table 17, 18, pp. 52–​53. 19 At the beginning, government-​related merchants were appointed to manage these enterprises, yet after experiencing management problems, Li Hongzhang began to assign state officials directly as supervisors and/​or managers of state-​sponsored enterprises. 20 For instance, in 1896, he transferred 800,000 taels from China Merchants and 200,000 taels from the Imperial Telegraph Administration to his new venture, the Imperial Bank of China. Both transfers were massive, accounting for 30–​40% of each company’s total capital at the time (Chan, 1980, p. 429) 21 The practice was started by two middle-​rank officials, both taotai of Shanghai, Yen Xinhou and Nie Zhikuei. They invested in the Huaxin Spinning and Weaving Mill in Shanghai around 1890, with Li Hongzhang’s tacit consent, despite the monopoly right of the SCCM. In the 1900s, Nie bought out the mill with state funds and gave it to his two sons to run. See Chan, 1980, p. 455.

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6  The Chinese Miracle Economic growth in contemporary China

China made a miracle catch-​up in economic development around the turn of the 21st century, more than two centuries after the first Industrial Revolution, and a hundred years after the initiation of industrial developments in the Qing dynasty. From 1978 to 2012 the Chinese real GDP grew at a rate of nearly 10 percent per annum. During that period, the Chinese economy experienced rapid structural changes, with industrial expansion contributing 50 percent–​ 60 percent of GDP growth during the period.The country became “the world’s factory” in the early 21st century.The share of primary sector fell to 7.9 percent of the country’s GDP and 27 percent of its total employment in 2017. For the first time in history, China’s urban population exceeded its rural population as a result of the structural changes. In 2017 the country’s urban residents accounted for 58.5 percent of the total population, compared with 17.9 percent in 1978. China became a major exporter of industrial products, with industrial goods accounting for 95 percent of its exports in 2017. Most impressive, of course, was the rise of people’s income as the result of high GDP growth. China’s GNI (gross national income) per capita increased from US$190 in 1978 to US$8,805 in 2017, which made China an upper-​middle-​income country.1 This chapter explores why and how China succeeded this time around. Briefly, three major reasons stand out: first, the contemporary Chinese state possessed a strong developmental capability when it started the Four-​Modernization drive in 1978. Second, the Chinese government had re-​introduced markets and private ownership of production assets in the economic reforms since 1978. Thus, unlike the Soviet growth, the contemporary Chinese growth was supported by improvements in economic liberty and rights for the people. Third, the super-​ rapid growth of the Chinese GDP could not be fully explained by domestic institutions.The unprecedentedly favorable external conditions played a critical role in China’s achieving of the super-​rapid GDP growth.

Strong state leadership for economic modernization The first major reason for China’s economic success is strong state leadership. The Chinese Miracle is a distinctly state-​led growth or so-​called “authoritarian DOI: 10.4324/9781003202042-6

The Chinese Miracle  139 growth.” The Chinese state, with Deng Xiaoping as the new leader, launched the economic reforms in 1978 and set the clear goal for the nation’s economic developments, the Four Modernizations, namely, the modernization of agriculture, industry, science and technology and national defense. China’s four-​ modernization drive exhibited some similarities to the industrialization in Meiji Japan. In sharp contrast to the fragmented industrial development under the Qing government in the late 19th century, the industrialization in contemporary China was centrally coordinated, nationally integrated, strategically executed and independent of foreign control. Like the Meiji state, the contemporary Chinese state has largely achieved its state-​set goal of Four Modernizations. A state in a cyclical upswing Key to the success of state-​led economic development for latecomers is the quality of the state or its developmental capability. Why did the contemporary Chinese state possess a much stronger developmental capability than the late Qing state? As discussed in Chapter 4, the quality of the Chinese state, underlined by the set of state institutions, was highly variable in history. In the upswings of dynastic cycles, the Chinese state usually possessed fairly strong bureaucratic capability, as the state organization was relatively autonomous and had better internal coherence. However, the quality of the Chinese state invariably deteriorated in the later period of a dynasty, for the reason that the intrinsic weakness of the state institutions always prevailed in the end. The Qing state failed to achieve successful industrialization basically because it turned predatory and lost the bureaucratic capability in a downswing of dynastic cycles. Unlike the late Qing Empire, the contemporary Chinese state has demonstrated the resilient side of the state institutions in a cyclical upswing. The proposal that contemporary China is in a cyclical upswing is based on the observation that the modern Chinese polity was still driven by the dynastic cycles, with the core institutions barely changed from the imperial past, despite the end of the imperial era. Between 1912 and 1949, Chinese society became modernized in many aspects and new institutions were introduced. With the founding of the Republic of China, the state government was reorganized in modern forms with the government departments put under new names. Western-​ style constitutions, civil laws and commercial codes were promulgated. Modern business and social organizations, such as industrial companies, banks, law firms, universities, merchant associations and trade unions, began to spread in the big cities. The city people were also influenced by Western culture, including school education, movies, music, media, fashion, and so on. However, the new institutions were basically dominated by the existing core institutions, as will be discussed in Chapter 7. That is, the core institutions in the Chinese society, namely, the rules governing the power relations between the ruler/​

140  The Chinese Miracle state and social members, remained unchanged in essence. During the period, the warlords of the Beiyang regimes as well as the KMT (Kuomintang) state remained absolutist and autocratic under the modern façade. Mainland China was unified again under a strong central government in 1949. Just like the dynastic changes in the imperial history, the replacement of the KMT regime by the communist state in 1949 did not change the core institutions in the Chinese society.Also like the old imperial state in the upswing of a new dynasty, the new communist state had a relatively higher degree of autonomy and better internal coherence. Furthermore, the communist state possessed even stronger bureaucratic capability, because of two “modern ingredients” introduced in the post-​1949 period. First, the new communist state instituted the economic system of central planning based on public ownership, or de facto state ownership, as a member country of the Soviet Camp. The communist state abolished the private ownership of production properties after the 1949 liberalization. The new state not only stripped the assets of the existing propertied class, but also removed the legality for individuals to own production properties. Thus, there was practically no property-​owning class between 1949 and 1978. That is to say, the communist state was fully autonomous, given the absence of the propertied class. The autonomy of the new state greatly enhanced its internal coherence. As all individuals, including state officials, were forbidden to own production assets, the material benefits of state officials were determined entirely by their positions in the state hierarchy. As a result, the administrative promotions in the state bureaucracy became the only way for the Chinese state officials to advance their self-​interests. Thus, state officials were motivated to identify their own interests with the state-​set goals and committed to office responsibilities. The second “modern ingredient” was the placing of the communist party at the core of the state organization, which made the new Chinese state a one-​ party-​state or simply, a party-​state. By the constitution of the People’s Republic, and in practice, the communist party held absolute leadership over the state organization. The party leadership was exerted top-​down, from the Political Bureau, to the party’s central committee, then through the committees at provincial, municipal, prefecture, county and township levels, all the way to the small party branches at village level. Party members held important administrative positions at all government levels and in all entities. Consequently, the party-​ state was more capable of managing society than the old imperial state. During the period from 1949 to 1978, the Chinese state greatly expanded its control over the population through the party organization. In the imperial era and under the KMT regime, the state administration mostly stayed at the county or township levels in rural areas and relied on the landed gentry, mostly the lineage heads of the villagers, to run village affairs. After 1949, the state administration reached villages, while the kin-​based organizations retreated with the elimination of private landownership. Villagers were organized into production teams and brigades in the People’s Commune. In the cities, the state owned and managed all entities, including factories, transportation, banks,

The Chinese Miracle  141 schools, hospitals, entertainment and the media, and so on. Civil organizations such as labor unions, writers associations and women’s federations were all state agencies with party members in the head offices. In that period, there was no independent civil organization in a Western sense, and the party-​state embraced all aspects of the society. The party organization not only strengthened the state’s control over society but also fortified the state’s internal cohesion through the double disciplines of the party and state. Having learnt lessons from the defeat of the KMT, the communist-​ party leadership had set strict disciplines and regulations against bribes and grafts for state officials in the early decades after the 1949 liberalization. There were severe punishments of high-​ranking officials in the corruption cases in the newly founded party-​state.Thus, corruption and office-​ abuse was well contained in the period. In brief, with the two modern ingredients added by the central planning system from 1949 to 1978, the party state, more autonomous and internally coherent than the imperial state in dynastic upswings, possessed a strong bureaucratic capability at the onset of the reforms in 1978. However, the autonomy of the Chinese state organization was conditioned on the absence of private production properties. Once private ownership was re-​introduced in the economic reforms, the Chinese state organization began to lose its autonomy and internal cohesion, as will be discussed in the next chapter. In 1978, China started to reform the central planning system because the economy had performed poorly with the total suppression of the markets and people’s initiatives for production. In the period from 1949 to 1978 China lagged further behind its neighboring economies. For instance, the per capita GDP of Taiwan and South Korea was 4.8 and 4.2 times that of China in 1978.2 Moreover, the destructive Cultural Revolution, launched with Mao’s personal will in the mid-​1960s, pushed the national economy onto the brink of collapse by the time of his death. The contrast between the low development level of the Chinese economy and the miracle growth of the East Asian economies in the pre-​1978 period prompted the new Chinese leadership to shift away from central planning and to adopt the East Asian development model in the post-​Mao era.Yet it should be noted that the Chinese reforms since 1978 were guided by pragmatic thinking rather than the true belief in the capitalist system. The Chinese government was willing to introduce market competition and private ownership and to open up the country to the world markets because these things “worked” for the East Asian economies that had achieved rapid income growth since the 1960s (Tan 2005). This pragmatic principle led to the ability of reforming the economic system gradually while leaving the political system intact. The party retained its control over the state organization as well as society. Therefore, the Chinese government was even more capable of mobilizing society’s resources for catch-​up industrialization than the East Asian governments. Also favorable to China’s state-​led industrialization in the post-​1978 period was the support of the people from all social groups. In contrast to the state-​led industrialization

142  The Chinese Miracle in the late Qing period that was resisted by the landed wealth, the state-​led modernization in contemporary China was welcomed by the entire populace, stuck in low living standards in the pre-​1978 period and with a strong desire to get better lives. Central coordination The main challenge facing the Chinese state was to liberalize the centrally planned economy while maintaining strong state leadership over the economy. The post-​1978 government had no concrete roadmaps in hand when stepping into the unknown territory of the economic reforms, except the general goal of Four Modernizations and the pragmatic principle for reforms. Nor could we say that the state leaders were always in solidarity. There were discords and debates at each step of the reforms. However, once the consensus was reached at the central leadership, the state organization was able to implement state policies effectively through the administrative hierarchy as an integrated organization. One of the initial tasks was to “loosen up,” but without losing the central control over the fiscal and banking system that had severely repressed the initiatives of enterprises and local governments. For the party-​state, the local governments needed to be given more liberty in decision-​making, yet the central control over domestic sources of financing was critical not only for conducting nationally integrated industrial programs but also for political stability. As discussed in Chapter 5, the Qing government’s loss of central control over taxation not only jeopardized the national coordination for industrial developments but also allowed the rise of regional powers, endangering the very existence of regime.Thus, the contemporary Chinese government treaded carefully between providing incentives for localities and upholding central control in the economic reforms. In the central planning days, the main function of the fiscal and banking system was to facilitate the operation of the production plans made by the Central Planning Commission that covered the production for all state owned enterprises (SOEs) at all localities. The central government collected all profits and taxes from the local governments and SOEs, and then transferred the funds back to the provinces according to the overall plans. The Ministry of Finance (MOF) administrated the fiscal scheme. The People’s Bank of China (PBC), as a bureau under the MOF, provided accounting and cashier services for the SOEs. The PBC was the only bank under the central planning system, with branches in all provinces, cities and counties. Synchronizing with the production (or physical) plan, the MOF made the fiscal budget plans, credit plans, cash plans and foreign exchange plans that made up the financing side of the overall plan. In initial reforms in the 1980s and early 1990s, the Chinese government tried to decentralize the old fiscal and banking system to motivate the local governments and SOEs to be more productive. On the fiscal side, the Fiscal Contract System was introduced, under which the provinces each signed

The Chinese Miracle  143 revenue-​sharing contracts with the central government that specified the amount or rate of tax revenues to be remitted to the center.The Fiscal Contract System spurred enormous productive initiatives from the provincial governments as it allowed the provinces to retain more fiscal revenues if they could produce more. On the banking side, the People’s Bank of China spun off four state-​ owned banks to specialize in different areas: the Industrial and Commercial Bank, Construction Bank, Agricultural Bank and Bank of China. A number of other national or regional banks, either funded by local governments or SOEs, were also established later on. Meanwhile, the provincial governments gained substantial control over the bank credits through their administrative authority over the local banks or the local branches of the national banks. The decentralization of fiscal and banking system from the 1980s to 1993 greatly stimulated local production and brought about a rapid growth of GDP and tax revenues. However, it also undermined the fiscal control of the central government. The central government’s share of total revenues declined from 41 percent in 1984 to 22 percent in 1993. Local governments went into frenzy, launching industrial projects with newly gained fiscal and financial liberty. The economy experienced run-​away inflation, and annual inflation rates rose above 20 percent in the early 1990s, fueled by the feverish investment at the localities. The turning point was the comprehensive tax reform in 1994, which enabled the central government to regain fiscal control over the provinces. The new tax-​sharing system simplified the tax structure, consolidated the tax types and placed the tax-​revenue assignment between the central and local governments on a transparent formula.3 Most importantly, under the new tax system the central government was able to collect a larger proportion of taxes and then transfer some revenues to the provinces according to the state’s developmental needs. As a result, the central government’s share in total tax revenues increased to 56 percent in 1994 from 22 percent in 1993 and remained at around 50 percent since then. The central government’s fiscal balance turned into a surplus of RMB115 billion in 1994 from a deficit of RMB35 billion in 1993. Since 1994 the central government has maintained ever-​increasing budget surplus and the fiscal surplus reached RMB5.1 trillion in 2017.4 With the fiscal strength, the central government was able to transfer more funds to the provincial governments. Over the years since 1994, the central government made some adjustments of the tax-​sharing schemes, mostly in favor of the center, but kept the basic structure of the tax system established in 1994. In the meantime, the Chinese state deepened the banking reform, introduced non-​bank financial companies and opened the capital markets. In 1994, three “policy banks,” State Development Banks, Agricultural Development Banks and Export and Import Bank of China, were set up to take over policy-​oriented lending from the four big state-​owned banks so that the latter could turn into “commercial banks.”The “big four” and other national and regional banks were restructured into share-​holding corporations and then listed on the Hong Kong and Shanghai stock exchanges in the late1990s and early 2000s. The purpose

144  The Chinese Miracle of the restructure was to make the Chinese banks operate efficiently, more like the commercial banks in the Western countries that evaluate projects and loans on commercial standards. Nonetheless, the Chinese government retained its control over the banking system through state ownership, and the banks remain state-​owned or state-​ held after being restructured into share-​holding corporations. For the state-​ held banks, the central or local government departments and SOEs hold the majority shares of the banks. Consequently, the Chinese government could implement state policies by issuing administrative directives to these banks. The top priority of these banks is to provide loans for SOEs in various industries and to facilitate their expansion and technological transformation. The state also keeps administrative control over the entry to the banking sector. However, the PBC (People’s Bank of China) also increasingly assumed the function of a central bank, as in market economies.5 All provincial and local branches of the PBC were abolished in 1998 and it opened nine regional offices in the fashion of the Federal Reserve banks in the United States. The central control over fiscal and financial system enabled the Chinese government to coordinate industrial developments across regions and sectors, and carry out consistent policies in terms of budgetary funding, bank credits, taxation, subsidies and the provision of foreign exchanges to serve the general goal of the Four Modernizations. A strong central leadership also enabled China to utilize foreign capital effectively for the goal of domestic economic development. Unlike the latecomers in the 19th century that had to rely on mainly the domestic source of financing for industrialization, China started its catch-​up modernization in the last decades of the 20th century when the global liberalization of capital flows and international financial integration made foreign capital available for latecomers. With the central control, the Chinese government was able to formulate the national strategies on foreign investment and to integrate the mobilization of domestic capital with the usage of foreign capital for the developmental goals. The control over capital formation for industrial developments also ensured the adherence of national independence in the process of adopting foreign technologies. Again, infrastructure projects could best tell the degree of central coordination and national independence in state-​led industrial developments. It is widely acknowledged that China developed infrastructure at much faster pace than other large emerging economies, such as India, Brazil and Russia. China’s total length of highways rose from 888,300km in 1980 to 4,773,500km in 2017, an increase of more than five folds.6 The national network of highways covered almost all the townships in the rural areas. The construction of highways was carried out mainly by the local SOEs under the local governments, but the central government formulated policies and regulations that guided and coordinated the highway projects nationwide. The central government’s policymaking was crucial for the development of the highway networks in the country. To begin with, the strategic decision of

The Chinese Miracle  145 developing national highways was made at the center. In terms of policymaking, the national policies on highway tolls provided strong incentives for local governments and local SOEs in highway construction.The national regulations set the principle that the toll collection should recover the investment cost and guarantee a reasonable rate of return.With the highway revenues ensured by the state regulations, local governments and SOEs were greatly motivated to carry out highway projects. Moreover, the development of highways was not entirely left in the hands of the local government. For instance, important local policies on highway projects were subject to the approval of the central government, although local governments were granted authority in setting toll rates and toll periods within the legal maximum set by the center. The Ministry of Transport at the central government oversaw the transfer of rights for toll collection in the provinces, as well as the establishment of toll gates for highways across provincial boundaries. Highway laws were introduced in 1997 and revised in 1999 and 2004 (Bai and Qian 2010). For some sectors, the central government organized infrastructure projects directly, and the central government’s abundant fiscal revenues and solid control over the state-​owned banking system enabled the success of those national projects. The development of high-​speed railways is an example. The project of high-​speed-​rail was launched by State Council in 2004 and carried out by the Ministry of Railways, in conjunction with local governments. While the Ministry of Railways, which was later restructured into a national SOE, undertook the construction of high-​speed railways, local governments provided land, complementary materials and equipment, as well as local tax and fees concessions. Since 2005, China has invested several hundred-​billion RMB in the construction of high-​speed railways each year, with the funding from the central and local government budgets and state-​bank loans. With the concerted efforts, the country absorbed foreign technologies and developed an indigenous capability of building and operating high-​speed railways in less than a decade. China’s first high-​speed passenger line opened in 2008, and in 2015 the network of high-​speed rails had connected the cities with populations above 500,000 across country. By the end of 2017 the total length of high-​speed railways in operation reached 25,000km, accounting for two thirds of world’s high-​speed railways in commercial service.7 In addition, the country’s total length of railways in operation increased from 53,300km in 1980 to 127,000km in 2017, ranking second place in the world. Besides land-​transport, sea and air transport infrastructure also expanded rapidly during the period.The number of berths (above 10,000 ton) at coastal and inland ports grew from 148 in 1980 to 2,331 in 2017, an increase of almost 16 times. In 1985 there were 82 civil airports, but only ten of them could accommodate the Boeing 737. The number of civil airports increased to 228 in 2017.8 Note that the rapid development of the transport infrastructure since 1978 was financed mainly by domestic capital, in contrast to the situation of foreign dependence in late Qing China.

146  The Chinese Miracle The open-​door policy The most important decision made by the new leaders of the Chinese state in the post-​1978 period was to connect the Chinese economy with the world markets.To a great extent, it is through the opening up of the economy that the Chinese state best realized the potentials of the “advantage of backwardness.” Different from the “forced” opening-​ up in the mid-​ 19th century, China’s opening up in the late 20th century, initiated by Chinese state itself, has been well-​organized, strategically executed and steered by the strong hand of the central government, with a clear goal. At the center of China’s opening-​up strategy is the active promotion of exports, selective utilization of foreign capital and adoption of foreign technologies for the purpose of self-​reliance in technological developments. China’s opening up can be put into two periods: the period from 1980 to 2001, before China’ entry to the WTO, and the period from 2002 to the present. The Chinese state’s decision to open up the economy was inspired by the successful experiences of the Four Asian Tigers. The Chinese leaders intended to emulate the East Asian export-​oriented model to jump-​start the country’s economic growth, but they also remembered the bitter lessons of the Qing state’s succumbing to the Western powers in recent history. Thus, China’s opening-​up process was prudent, gradual and guided by the principle of national independence. In terms of utilizing foreign capital, the state policies focused on the introduction of FDI (foreign direct investment), namely, foreign companies’ investment in plant building, machinery and equipment in China, as against “portfolio investment,” namely, investment in stocks, bonds and other financial instruments. FDI was initially restricted to certain industries in certain geographic areas. The restrictions were then lifted over time. In the first period, FDI in China mainly came from the Asian Tigers (Hong Kong,Taiwan, Singapore and South Korea) and Japan.The FDI was concentrated in the Eastern regions of China and the FDI from these economies brought about labor-​intensive manufacturing technologies and generated export booms in mainland China. As an initial step, the Chinese government set up four special economic zones (SEZs) in Shenzhen, Zhuhai, Shantou and Xiaman in the Fujian and Guangdong Provinces in 1980, as pilot projects for utilizing foreign investment and promoting exports. Based on their experiences, an additional 14 cities9 along the east coast were opened to foreign investment in 1984, and the open areas in southeastern China were extended to the Pearl, Yangzi and Southern Fujian deltas in 1985. In 1988, the fifth and largest SEZ, Hainan Island, was set up, and the open areas in the northeast were further extended to the Liaoning and Jiaodong peninsulas. In 1990, the Pudong New Areas was set up in Shanghai. All the open areas, like the four SEZs, were given special policy treatments. Fujian and Guangdong provinces were chosen for the location of the first four SEZs as the initial focus of the state’s opening-​up policy was to attract FDI from the East Asian economies. The two provinces were adjacent or close

The Chinese Miracle  147 to Hong Kong, Taiwan and Singapore, and there were extensive kinship ties between the overseas Chinese businessmen and the populace in these two provinces.The policy choice of attracting FDI in labor-​intensive manufacturing from the East Asian economies and emulating their export-​oriented model was pragmatic and wise. The labor-​intensive manufacturing technologies from East Asia, though not the most advanced, were new to China and suitable for the labor-​abundant Chinese economy. The local governments in the SEZs and open areas were granted great flexibility in operations, but the central government formulated uniform policy guidelines for all local governments to follow in dealing with foreign investment. The guidelines covered such matters as equity ratios of foreign investors, the length of contract periods, employment and wages, land use, individual income taxes, business registration, entry and exit procedures, foreign exchange transactions, technology transfers, patent rights, and so on. For foreign investors, the central government introduced incentive packages including preferential tax rates, concessions and exemptions for their investment in the SEZs and open areas.The corporate income tax on foreign-​invested firms was set at a flat rate of 15 percent. Tax holidays of varying length were provided according to the type of investment projects (Ge 1999, 51). The central government also allocated special funds to assist the development of infrastructure in these areas. The geographical focus allowed the central government to support this development in these open areas with adequate budgetary funds and bank loans. That is to say, the Chinese state pooled the country’s scarce resource, capital, to facilitate the absorption of FDI in the targeted industries in limited geographical regions. The timing was good. China’s opening-​ up in the 1980s matched the needs of the Asian Tigers for technological upgrading at that time. The Tiger economies shed labor-​intensive productions to China immediately after the opening-​up policies were initiated. Hong Kong took the lead in shifting the labor-​intensive export-​manufacturing into the adjacent Guangdong province. “Throughout the 1980s, more than US$20 billion foreign investment moved into Guangdong. A total of 95,000 projects and thousands of small and medium-​sized manufacturers shifted production operations from Hong Kong to Guangdong” (Abegglen 1994, 86). Hong Kong’s cross-​border investment was soon joined by companies from Taiwan, Singapore, South Korea, Japan and other East Asian economies. Hundreds of economic and technological development zones of various sizes were set up in the SEZs and open areas in the 1980s and 1990s. The foreign investment boom led to an export boom, as well as export-​ driven GDP growth in the southeastern regions.While the East Asian companies shifted their labor-​intensive manufacturing to China, the provinces along the east coast of China quickly turned into the new production platforms for the low-​end manufactured exports, such as garments, toys, footwear and simple electronic and electrical appliances. In the beginning the Chinese manufacturers depended on the East Asian investors’ existing distribution channels to sell their

148  The Chinese Miracle products in Western markets, using Hong Kong as the major entrepôt. Later on, the mainlanders developed their own trading facilities and overseas distribution channels. As a result, the eastern part of the country, especially southeast China, was industrialized rapidly in the 1980s and 1990s. Real GDP in Guangdong, Fujian, Zhejiang, Jiangsu and Shandong provinces grew at double-​digit rates throughout the period. China’s merchandise exports increased from US$18 billion in 1980 by about 15 times, to US$266 billion in 2001.10 The impact of the FDI from East Asia on the Chinese economy went beyond the growth of exports and GDP. In addition to manufacturing technologies, the FDI inflow also brought about managerial expertise, business models, standard practices and organizational methods of “capitalist” firms. In particular, the state’s FDI policy initially set joint ventures (JV) as the major form of foreign-​ invested undertakings. The restrictions on wholly foreign-​ owned firms were relaxed only gradually. In the JV arrangements, foreign investors usually provided machinery and equipment, technical assistance, materials and components and, in some cases, product patents.The Chinese partners provided land, factory space and labor. The close interaction between foreign investors and Chinese partners allowed the Chinese side to learn from their foreign partners through institutionalized relationships like joint boards of directors, joint decision-​ making processes, and through the process of negotiating a complex JV deal or even a licensing agreement (Guthrie 2009). The Chinese state’s policy preference for JV made best use of the FDI from more advanced economies. Briefly, in the first period of opening-​up, China succeeded in emulating the East Asian model on a much larger scale. The utilization of foreign capital in 1980s and 1990s also helped build up strong “soft” infrastructures, such as labor skills and management competence, as well as “hard” infrastructures, such as roads and electricity-​generation, in mainland China. The positive externality of FDI boosted the productivities of the Chinese economy and prepared better conditions for continuous inflow of FDI. The second period began with China’s entry to the World Trade Organization (WTO). In this period, the Chinese government opened up more economic sectors and geographic areas, and shifted the policy focus to attracting FDI with high-​tech content. China’s entry to the WTO not only sustained but also accelerated the country’s export growth, as well as the FDI inflows. Accession to the WTO gave China better market access to all its member countries and the most favored nation (MFN) status of the WTO greatly reduced trade barriers facing China in foreign markets, with the discriminatory measures taken by other countries against China phased out within a scheduled period. Greater access to foreign markets brought about an even faster growth of exports. China’s merchandise exports increased at an average rate of 13.6 percent per year during the period from 1980 to 2001, and the export growth accelerated to an average rate of 18.2 percent per year during the period from 2001 to 2014.11 Furthermore, China’s merchandise exports grew not only in volume but also in “high-​tech” content as a result of the increases

The Chinese Miracle  149 in FDI from the Organisation for Economic Co-​operation and Development (OECD) countries since China’s accession to the WTO. The Chinese government significantly reduced the restrictions on FDI upon entry to the WTO. The policy relaxation on FDI further increased the inflows of FDI in the second period. In the new “Catalogue for Guidance for Foreign Investment” issued in early 2002, the number of industries under “encouraged FDI industries” was increased from 186 to 262. Wholly foreign-​ owned enterprises and majority foreign ownership were also permitted in a broader range of industries. In 2003, the government began to encourage foreign companies to shift their high-​tech and high-​value-​added businesses and relevant research facilities to China, while continued to remove restrictions on FDI through adjusting the “Catalogue for Guidance for Foreign Investment.” For instance, in the “Catalogue 2007 Amendment” and “Catalogue 2011 Amendment,” the “encouraged FDI industries” was further increased to 351 and 354 respectively, and the “prohibited FDI industries” was further decreased to 40 and 39 respectively (Xu and Lu 2009, 430; Ohashi 2015, 152). The growth of FDI, particularly, the growth of FDI from the OECD countries, facilitated the technological upgrading of the Chinese economy. The MNCs (multinational corporations) from Japan, Europe and the United States increasingly moved their capital-​intensive high-​value-​added production into China. All top 500 fortune companies, such as Boeing, GM, Apples and Microsoft, had established operations in China. The diffusion of more sophisticated technologies further raised the factor productivities of the Chinese economy. Compared with the East Asian investors in the first period, major MNCs were attracted not only by the country’s low labor and land costs and the government’s preferential treatments but also by the relative skill levels of the Chinese labor force and the country’s well-​developed infrastructure.Thanks to the state-​led opening-​up in the first period since 1980, China had developed a large pool of skilled workers, engineers and a young generation of managers knowledgeable in modern business practices. The country also had built well-​ integrated infrastructure networks unmatched by other large emerging-​market economies, as mentioned above. The increased operation of MNCs in China facilitated the shift from labor-​ intensive to skill-​intensive products in Chinese exports, as those MNCs mostly used China as part of their global production networks or supply chain. It was a global trend that the offshore operations of large MNCs have increased intra-​firm trade or the international trade within the same MNC. The high-​ tech products exported by China were mostly assembled by the MNCs operations in China and the making of these products needed the imports of high value-​added parts. As researchers suggested, a Chinese industry’s level of export sophistication was positively related to the share of processing exports of foreign-​invested enterprises and the share of the wholly-​owned MNCs from OECD countries in the industry (Xu and Lu 2009). In addition to attracting high-​tech FDIs, the Chinese state also took direct measures to promote exports. Particularly, upon the eruption of the global

150  The Chinese Miracle financial crisis and recession in 2009, the Chinese government raised the tax refund rate for “export-​related” value-​added tax seven times by mid-​2009 and launched the policy package of six measures to support export industries. In the post-​crisis years, “improving export brands/​quality” and “upgrading processing trade” remained a key part of China’s trade development strategy, as specified by the Ministry of Commerce in the 12th Five-​Year Plan in Foreign Trade Development (2011–​2015). It appears that the state objective was well achieved. According to the Ministry, the share of labor-​intensive products in China’s total exports declined to 22 percent and the share of electric and electronic products increased to 57 percent in 2015. It is not exaggerating to say that China could not have achieved the spectacular growth in the past 40 years without opening up to the world markets. The external sectors served as the engine for the overall growth and for the structural change of the economy.The rapid growth of exports and FDI inflows continuously shifted employment from agriculture to the industrial and service sector and from labor-​ intensive to capital-​and skill-​ intensive productions. This process continuously propelled the technological upgrading of the economy as well as the growth in real wages and household incomes. In brief, the Chinese state’s open-​door policy allowed China to fully utilize the favorable international conditions around the turn of the 21st century. State enterprises and local governments as major players As denoted in Chapter 4, for the state-​led industrialization in history, the government took on the additional role of coordinating the nation’s industrial transformation, but the major players were still private companies, as shown in the case of Meiji Japan. The same was the case of Asian Tigers where the state led the industrial developments mainly through cooperating with private companies. It means that the state’s regulatory function was separable from the players’ function of the private firms in these economies. Comparatively, in the case of contemporary China, the major players have been the state enterprises and local governments (Tan 2005). That is, with the legacy of the central planning system, the contemporary Chinese state has combined the regulatory and the players’ functions through its control over the state enterprises and the local governments in the industrial developments since 1978. This feature, which distinguished China from the older state-​led developers in East Asia, rendered the Chinese state extra advantages in promoting GDP growth, in the first few decades, at least. Private companies did not exist in China in 1978. Private ownership over production assets were gradually legitimized in the 1980s and 1990s. Since 2000 private enterprises played an increasingly important role in the economy, and contributed about 33.8 percent of total industrial revenues12 in 2019.They were treated better but still not as equals of the state enterprises, especially in terms of bank access, as will be discussed later. The largest Chinese companies remain the state enterprises today, measured by either revenues or assets. Thus, even

The Chinese Miracle  151 with the growing importance of private companies fully counted, the key role played by the state enterprise in the past 40 years should not be underestimated. The SOE (state-​owned enterprises) reforms in the 1990s renovated rather than dismantled the central planning system. The reforms separated the government’s administrative function from enterprises’ production role, and relieved the SOEs from the “cradle-​to-​tomb” social duties they carried in the central planning era. Under the policy of zhuada fangxiao (retain the large, release the small), the large SOEs were consolidated and restructured into state-​owned corporations, limited liability corporations or share-​ holding corporations limited in which the state owned the whole stake.The small and medium-​sized SOEs, as well as most collective enterprises (local-​government-​owned), were sold to private hands. There also developed state-​holding enterprises (SHEs), namely corporations in which the central government, local governments or SOEs either held majority stakes or had actual control over the companies by agreements among the shareholders. Through the restructure, the SOEs and SHEs adopted the standard practices of corporate governance in the Western capitalist economies, and were listed on the stock exchanges of Shanghai, Shenzheng and Hong Kong over time. Both the SOEs and SHEs are classified as state enterprises in China. The reforms and restructures enabled the state enterprises to operate more efficiently, with the CEOs and corporate boards given more authority in making major corporate decisions, including production and operation, employment/​layoffs, wages/​compensation, fund raising and profit distribution. Nevertheless, the Chinese state retained some “essential control” over the state enterprises through the state ownership over production assets and the personnel management system of the party-​state. As the owner of the state enterprises, the state controlled the industrial or non-​financial state enterprises through the State-​owned Assets Supervision and Administration Commission (SASAC) and the financial state enterprises through the Ministry of Finance. The industrial enterprises included national and provincial state enterprises. While the former were supervised by the SASAC of the State Council, the latter were supervised by the provincial government via the local SASACs. The financial state enterprises, namely the large state banks and financial companies, were under the control of the Ministry of Finance. The state control over the state enterprises was also ensured by the personnel management system of the party-​state. The executives of the state enterprises were state officials. The central government, via the SASAC, held the full authority over the appointment of the top cooperate officials, including the party secretaries, chairmen and CEOs of the national state enterprises and financial state enterprises. The provincial governments, via the local SASAC, had the authority to appoint the top officials of the provincial state enterprises. The central government could also transfer the top officials between the provincial governments and the national state enterprises or rotate them across provinces. At the core of the personnel management system is the communist party’s leadership.The party leadership is excised through the party organization

152  The Chinese Miracle within the state enterprises and at all levels of the state administrations (county, prefecture, municipal, provincial and national levels). For the state enterprises, the position of party secretary is superior to that of CEO. For the provincial governments, the provincial party secretary is superior to provincial governors. Almost all top officials of the state enterprises and local governments are party members. As party members they are subject to the supervision of the party’s Discipline Inspection Committee, in addition to that of the state’s Ministry of Supervision. The state enterprises played a key role in China’s industrial developments in the past 40 years. Almost all industries, except some new sectors such as e-​ commerce and internet media, have been dominated by the state enterprises and companies in which the state held some shares.13 The national state enterprises dominated the strategic industries such as aviation, ocean shipping, shipbuilding, petroleum, petrochemical, telecommunication, railways, steel and energy, including nuclear power-​generation. In order to develop those strategic industries, the central government fostered the growth of the national state enterprises through central budgets, state bank loans, tax concession and subsidies, technological assistance and other preferential policies. In comparison to the government–​business relationship in the East Asian case, the Chinese government had much more direct control over the state enterprises. In particular, the personnel management system allowed the Chinese government to evaluate, promote or dismiss the top executives of the state enterprises according to the state-​set standards. Through the state ownership and the organizational channels, the government could also issue administrative directives to state enterprises for the implementation of specific policies. As a result, the Chinese state was able to push forward industrialization more forcefully than the East Asian governments that did not have an organizational grip over the private companies. For example, in the project of developing high-​ speed rails, the participating national state enterprises including CRC (China Railway Corp, formally the Ministry of Railway), CSR (China South Railway), CNR (China North Railway) and CRCC (China Railway Construction Corp) were all subject to the control of the State Council. For the objective of building high-​speed rail networks in a short period of time, the State Council pushed for large-​ scale investment in the project. To further speed up the project, the State Council issued the administrative directive “The Opinions on Reforming the Railway Investment-​Finance System and Accelerating Railway Construction” in 2013 and urged the CRC to start constructing more new routes than originally planned. The CRC followed the directive, although it was experiencing financial and technique difficulties.When the state enterprises suffered from insolvency, the central government could inject funds into them through the state-​owned banking system, such as the State Development Bank. Consequently, the start of new high-​speed railway routes increased from the initially planned 38 to 66 in 2014 (Xu 2019). With organizational control, the Chinese government was also able to consolidate the national state enterprises into large conglomerates in a relatively

The Chinese Miracle  153 short period, in order for them to compete in the international arena. For instance, the aforementioned CSR and CNR were merged into the CRRC Corporation in 2014, for the purpose of expanding the country’s high-​ speed rail business abroad more effectively. In general, as a result of the state’s consolidation efforts, the number of national state enterprises was reduced from 196 in 2003 to 96 in 2018. Local governments also acted as economic players in industrial developments, after being liberalized in the decentralization reforms. The Chinese state promoted nationwide economic growth through cross-​region competition among local governments that functioned as the managers of local economies (Tan 2005). In the pre-​1978 period, local governments were merely middle echelons in the planning hierarchy that carried out the central plans passively. Since the economic reforms in 1978, local governments have been given much more independence in formulating local strategies for developing the regional economies, such as allocating local budgetary and extra-​budgetary expenditures, setting local taxes for local firms, devising incentive packages for attracting foreign investors, issuing business licenses, distributing land-​ usage rights, and so on. In the regional “tournament-​like” competition, as described by scholars, local governments, namely, governments at province, prefecture, county, township and village levels, were made responsible for local economic developments. The provinces are the largest unit in the competition. The central authority held provincial governments accountable for the provincial GDP growth. In turn, the provincial governments held lower-​level governments accountable for production growth at the localities. Local officials were assessed and promoted or demoted by their superiors based on the performances of the local economies, mainly, GDP growth in their jurisdictions. Local governments could execute pro-​ growth policies directly through the provincial state enterprises. Like the central government over the national state enterprises, local governments held organizational control over provincial state enterprises and could issue administrative directives to them. More importantly, local governments possessed ownership rights of the land within their administrative regions. The Chinese state owns not only the assets of the state enterprises but also all the land in the country.The lands in the urban areas are directly state-​owned, and the lands in rural areas are collectively owned or de facto owned by local governments. In 1988 the revised constitution and land laws stipulated that the government could transfer the “usage rights” of state-​ owned or collectively-​owned lands for commercial projects. Since then, land has become an increasingly valuable asset as industrialization and urbanization proceeded in China, especially after the housing markets were opened in the late 1990s. In 2004, local governments were given exclusive authority over the transfer of land-​use rights within their jurisdictions through tenders and auctions (Hua 2013).This means that local governments, as the de facto owners, held the formal rights to “sell” or dispose of all the land in the region under their administration in the housing markets.

154  The Chinese Miracle The combination of regulatory authority and players’ rights gave local governments great advantages in developing regional economies. In particular, with the owners’ right over land, they could set up industrial zones and expand local infrastructures, free of the hassles and costs of negotiating with private landowners. Moreover, as they were held accountable only to the central government instead of the people under their administration, local governments could act quickly and forcefully to push through industrial projects, despite the protests made by the people whose interests were impaired by the projects in question. The rapid expansion of highway networks in China fully demonstrated local governments’ advantages of acting as both the regulator and player in the highway projects. The lion’s share (above 90 percent) of investment in highways was made by provincial state enterprises and companies in which the local government had some shares. The most important source of highway investment was state-​bank loans backed by government guarantees and toll revenues (Bai and Qian 2010). On one hand, the “regulatory” government held the authority to launch and approve highway projects, reward construction-​ contracts and determine tax and land concessions, as well as setting local toll-​ collection policies. On the other, the “player” government held the ownership right to dispose local lands for highway projects, without being hampered by conflicts with the current users of the farmlands, mostly peasants, and related litigations or lawsuits. In addition, the local government directly controlled the state enterprises that received contracts in highway projects, and could provide them with a “government guaranty” for securing loans from state banks. As a result, local governments were able to develop local highways at a rapid pace. In similar ways, local governments organized the developments of other sectors and industries in conjunction with local state enterprises. With the support of local governments, some provincial state enterprises grew into prominent producers of brand-​name consumer goods, such as TV sets, household electric appliances and motorcycles, in the national markets. Generally speaking, regional competition had been successful in promoting economic growth in the earlier decades of the reforms. Some provinces in south and eastern China delivered and maintained double-​digit GDP growth for decades. Local officials were motivated to perform in the regional competition, as GDP growth rate is a clearly defined, measurable criterion for the central government to use in evaluating subordinate-​ level officials. Yet, the tournament-​ like regional competition had become less and less effective in promoting growth, as the Chinese economy grew more complex (Maskin, Qian and Xu 2000). In short, the combination of the regulatory and players’ functions enabled the Chinese state to have further exploited the advantages of the state leadership in latecomer’s catch-​up industrialization. As discussed in Chapters 2 and 3, the Chinese state had a long tradition of organizing economic activities directly, in imperial history. Whether this tradition helped or harmed the economy or society, to a great extent, depended on the conditions of the state organization. Generally, in the dynastic upswings, when the state was in a better condition,

The Chinese Miracle  155 with stronger internal coherence, the tradition could be beneficial to productions and trade (Chapter 4).Yet when the intrinsic weakness of the state institutions prevailed in the downswings, individual state officials usually benefitted most from the state’s direct economic activities by capturing the state power for private gains, as shown in the case of official entrepreneurs in late Qing China. From historical experiences, the excessive roles played by the contemporary Chinese state had benefitted the economy thus far, but are turning harmful to the long-​term growth, as will be discussed in the next chapter.

Improvements in economic liberty The second major reason accounting for the Chinese Miracle is the improvements in economic liberty and rights of social members since 1978. A popular view attributed the Chinese high growth to the introduction of free markets since 1978. No doubt, the economic reforms from 1978 ended the Soviet-​ style central planning system and introduced private-​ property ownership and market competition. However, free markets had long existed in Chinese society in history and private properties were nothing new to China. As recent as in the first half of the 20th century, there was no lack of large private companies and wealthy tycoons under the KMT regime. The complete elimination of private ownership under the period of central planning was more a deviation from the Chinese norm, and the restoration of private ownership since 1978 was only a return to the historical norm. Thus, it is problematic to explain the Chinese Miracle merely by free markets, given that the country failed to industrialize when it had free markets in the 18th and 19th century. As denoted in Chapter 2, what matters is the set of institutions supporting the markets rather than the markets per se in a society.Thus, to be exact, accounting for the Chinese Miracle, in addition to the state’s strong developmental capability, is the improvements in economic liberty for the Chinese individuals through the re-​establishment of private-​property ownership in the economic reforms. The improvements in economic liberty and rights served as a strong stimulus for the generations of Chinese who were stripped of the ownership rights over properties under central planning, although the property rights they had gained from the economic reforms are far from complete and secure. Re-​establishment of private ownership Since 1978 the Chinese government has carried out a series of reforms on the economic system with regard to property-​ownership and rights for citizens. As a result of these reforms, individual Chinese could legally own cars, financial assets, houses, apartments, industrial and commercial properties, and could sell or transfer them as they wished. They had the freedom to choose workplaces, to set up businesses and accumulate personal wealth. These newly granted liberties and rights provided strong incentives for individual Chinese to engage in production and wealth creation in a scale unseen in the central planning era.

156  The Chinese Miracle Major reform programs included the agriculture reforms, the legitimization of private enterprises, the SOE reforms and related market-​ liberalization reforms, opening of financial markets and the admission of foreign companies, as well as the opening of housing markets. These reform programs, designed for the purpose of inducing more production, were implemented gradually and cautiously. When the improvements in incentives brought by the earlier programs raised production, the government was encouraged to introduce another round of reforms to further enhance the incentives for even greater increases.These reform programs yielded accumulative results on the institutions of economic rights in China and unleashed tremendous productive energies from the Chinese people, whose initiatives had been suppressed under the central planning system. The agricultural reforms in the early 1980s freed up the Chinese peasants, who constituted over 70 percent of the country’s labor force then, from the shackles of collective farming under central planning. The reforms introduced the “household responsibility system” that granted peasant-​households their own pieces of land for a definite period of time, with the prospects of further extension of the land contracts. The government also permitted peasants to sell their own farm produce extra to the state quotas in the newly developed markets of agricultural products (Tan 2005). Although they were given only some sort of “usage rights” for land, the peasants became strongly motivated in production. The reform measures greatly increased the agricultural outputs. Moreover, the government relaxed the restrictions on rural migration in mid 1980s. The Chinese peasants, for the first time in decades, got the rights to choose the places to sell their labor services or the liberty to enter labor contracts of their own desire. With the economic liberty, millions of peasants began to work in the nearby township and village enterprises (TVEs) or went to the large cities to earn cash incomes. The rural-​urban migration in China that started in the mid-​1980s has turned into tidal waves over the years. Migrant workers have become a vital force in the development of the Chinese cities and urbanization in the past four decades. The legitimization of private enterprises has been tentative, gradual and the word “privatization” was not used officially. Government permissions were initially given to the operation of getihu (self-​employed individuals) in the 1980s. In the 1990s, collective enterprises, enterprises run by local governments in rural areas, were allowed to be acquired by the managers or former employees as private enterprises. Meanwhile, in the SOE reforms, small and medium-​ size SOEs were sold to private hands under government stipulations, while the large ones were restructured into state-​owned shareholding companies. The private sector was formally legitimized in 1999. The revised constitution in 1999 proclaimed that the non-​state sector made up by private enterprises was an important part of the “socialist market economy.” Since then, private enterprises expanded rapidly from labor-​intensive manufacturing industries to embrace a broad range of industries such as real estate, retail, wholesale, mining, transportation, computer, internet and smart phone businesses.

The Chinese Miracle  157 The SOE reforms in the 1990s and the reforms in related areas not only restructured the large SOEs but also relieved them from the social functions they used to undertake in the central planning era, so that the SOEs could operate more like modern enterprises. Under the central planning system, the SOEs provided the housing as well as a range of services for their employees, including nurseries, schools, dining halls, hospitals, retirement and other welfare benefits. The SOE-​ related reforms removed these “cradle-​ to-​ tomb” responsibilities from the SOEs, with the simultaneous introduction of markets, such as job markets, stock markets, residential housing markets, the commercialization of education and medical services, as well as developments of social security and retirement pension schemes. Related business organizations, such as real estate agencies, car-​dealers, stock brokerage, insurance companies, law firms, and so on, were developed in the process. As a consequence of the SOE reforms and market-​liberalization reforms, Chinese citizens now could own houses and apartments legally, invest in financial markets and find or switch jobs as they liked. Finally, the entry of foreign companies has produced strong externalities on institutional developments related to property rights in China. In order to attract and keep foreign investment, the Chinese government needed to bridge the gaps in business practices between China and the world, and assured foreign companies that they would be protected by law in China. For that purpose, the Chinese government has introduced a large amount of new laws and regulations regarding business contracts, joint ventures, company operations, financial markets, and so on, since 1978. In the first two decades of reforms, the government has set in place about 400 new national laws, administrative laws, 10,000 local regulations and over 30,000 administrative procedures (Guthrie 2009, 64). China’s entry in the WTO in 2001 further integrated China with international business communities in terms of laws and regulations governing foreign trade and investments. The economic reforms also brought about some changes in the constitution with regard to citizen’s property rights.The country’s constitutions were revised several times since 1978, in 1982, 1988, 1993, 1999, 2004 and 2018.The revisions granted legitimacy to private ownership and related rights over time. The 1982 revision provided a basis for foreign investments and its protection. The 1988 revision allowed the operation of private businesses as a supplement to the “socialist state-​ownership economy.” It also allowed for the transfer of usage-​ rights of state lands for industrial or commercial projects. The 1993 revision replaced “planned economy based on socialist state-​ownership” with “socialist market economy” as the description of the Chinese economic system. The 1999 revision recognized that “the non-​state sector including self-​employed individuals and private enterprises is an important part of the socialist market economy.” The 2004 revision substituted “citizens’ private property rights” for “citizens’ ownership of legal incomes, savings, houses and other properties,” as a way of recognizing individuals’ property rights in the “socialist market economy.”

158  The Chinese Miracle Short falls in property-​rights development The re-​establishment of private ownership and related rights for citizens since 1978, although a huge improvement from the central planning period, has not gone beyond the progress made in the development of property rights in China before 1949. As discussed in Chapter 2, private ownership has been long established in traditional Chinese society. However, individuals’ property rights were incomplete and circumstantial. Under the core institution of entrenched absolutism and in the absence of an independent judiciary system and civil laws, social members could get certain protections for their properties through personal connections with state officials, yet such relation-​based protections were highly unequal across social classes. The elites, with family members holding state offices, were much better protected in properties and wealth than the common people, although they themselves were vulnerable to the ruler’s expropriation. There were some great accomplishments in written laws on property rights in the first half of the 20th century. Western-​style civil laws and constitutions were introduced into China towards the end of the Qing dynasty. In 1910 the Qing government adopted a civil code (based on the German and Japanese codes) in separation from the criminal code, for the first time in Chinese history (Fu 1993, 114).Yet the Qing civil code still treated individual Chinese citizens as the subjects of the imperial state and individuals’ rights over properties were still entangled with lineage or kinship relations. The KMT government revised the Qing civil code in 1929–​1930.The KMT civil code regarded individual Chinese as independent legal actors who could own properties that were freely alienable (Fukuyama 2014). In the meantime, the KMT government also codified all the major commercial laws of China including insurance law, company law, maritime law, negotiable instruments law, bankruptcy law and trademark law. As for the constitutions, the Provisional Constitution of the Republic of China, promulgated in 1912, recognized all the political and economic rights of the people. Based on the Provisional Constitution, the constitution ratified by the KMT government in 1946 also recognized fully the political and civil rights including rights over private properties of social members, although the “Temporary Provisions against the Communist Rebellion” in 1948 granted the KMT government extra-​constitutional power. Comparatively, the legislations on property rights in contemporary China made no further progress, if not regressed, from those in the pre-​1949 period. The Constitution of the People’s Republic of China was based on the principle of the communist party’s leadership and the dominance of public ownership, de facto state ownership. This principle has hardly changed in the revisions of the constitution and adoption of civil law since 1978. As said earlier, the economic reforms since 1978 were guided by pragmatism rather than belief in the capitalist system. The government wanted to provide better incentives for social members in production but had no intention of relinquishing the

The Chinese Miracle  159 party-​state’s control over society. To maintain dominance of state ownership, particularly state ownership on land, the government created a set of “usage” rights, instead of owner rights, over residential and commercial land for individuals and private companies. By law, the government could auction off state-​owned or collectively owned land, for commercial and industrial use, to private companies that had usage rights of up to 50 years over the land. For residential housing, individual citizens had the usage rights of up to 70 years over their apartments or houses. It is the usage rights that could be bought, sold, mortgaged or transferred during the stipulated period. Thus, the current PRC Constitution and law falls short of recognizing the full property rights conceded by the 1946 KMT constitution. Similarly, the general principle of civil law and the commercial laws re-​introduced into China since 1978 compromised individual rights with the ultimate state power, a step back from the KMT civil code and commercial laws ratified in the 1929–​1930 period. Without the constitutional recognition of the full property rights of individuals, social members, especially those at the lower social stratus, were frequently violated in their rights over private assets. The most glaring example is the frequent happenings of “forced evacuation or demolition” in the rapid expansion of real estate in China. Local governments frequently resorted to force to obtain land from peasants and urban residents for commercial projects, acting as de facto owner of the land. The other example is the transferring of personal wealth to foreign countries by the rich Chinese, recorded or hidden. Private assets were transferred abroad in large amounts as the owners were concerned with the long-​term security of their properties. Furthermore, the issue with property rights in China is not merely about the writing of laws or laws on paper. The deeper trouble is with the enforcement of the written laws, given the nature of “rule of person” of the Chinese state institutions. As described in Chapter 4, the written laws were never applicable to the rulers and were constantly circumvented by those elites who had personal protections from the high offices or the ruler in history. The nature of “rule of person” did not disappear with the ending of the imperial era. Western-​ style laws on property rights could be introduced on paper, but they were never effectively enforced in practice. For instance, even though the KMT constitutions and civil codes recognized the full property rights of citizens on paper, the written laws neither stopped the KMT officials from expropriating the weaker social members nor prevented the politically powerful families from accumulating private wealth at the expense of the common people. Similarly, the contemporary Chinese state had a hard time even in enforcing the written laws that only partially acknowledge the property rights of citizens. The lower-​ stratum social members remain subject to the predation of the state officials and the elites. In brief, the economic liberties and rights granted to Chinese individuals since 1978, though incomplete, were a huge improvement from the central planning era.The improvement greatly motivated social members in production and wealth creation. Meanwhile, the shortfalls in property-​r ight developments

160  The Chinese Miracle had been more or less remedied by the strong state leadership in promoting GDP growth in the past few decades.

Favorable external conditions The third reason for the Chinese success is the favorable external conditions. The success of latecomers’ catch-up industrialization is not new. What is new in the Chinese Miracle was the country’s unprecedented rate of GDP growth. China’s real GDP grew at an annual rate of nearly 10 percent from 1978 to 2012. Comparatively, Japan’s GDP grew at an average rate of about 3 percent per annum in the Meiji period.The Four Asian Tigers, namely, South Korea,Taiwan, Hong Kong and Singapore, industrialized much more rapidly than Meiji Japan, with average annual growths of 8–​9 percent in their catch-​up periods, roughly from the 1960s to 1990s.14 The Chinese growth has broken historical records. China’s super-​ rapid GDP growth since 1978 not only surpassed the world’s anticipation but “has also far surpassed the Chinese government’s own expectations” (Hu 2015, 4). The surprise, or at least part of the surprise, came from the effects of external or international conditions that were not anticipated by the Chinese government when it decided to open up the country to the world at the onset of the economic reforms. Two external factors: technologies and globalization In the modern era the industrialization of latecomers has become part of the dissemination process of new technologies originated from the advanced countries (Chapter 4). Consequently, the continuous progress of modern technologies in advanced countries and deepening of globalization had strong effects on the pace of industrialization or the rate of GDP growth of latecomers in their catch-​up periods. As Gerschenkron (1962, 8) pointed out, the backlog of technological innovations that the backward country could take from the advanced country was one of the primary factors assuring a high speed of development in the backward country entering the stage of industrialization. Based on observations, two external factors stand out in affecting the growth rates of latecomers in their catch-​up industrialization: first, the level and the stock of the world’s technologies at the time of a latecomer’s catch-​up or take-​ off period; and second, the degree of integration of the latecomer with the advanced economies during its catch-​up period.Thus, it could be hypothesized that, for latecomers, the higher the levels of technological developments in the world, the larger the stock of the world’s technologies, the closer the ties with the advanced economies at the time of their industrialization, the faster GDP growth they could achieve potentially in the catch-​up industrialization. As elaborated in Chapter 1, the levels of the world’s technological development were marked by the progression of techno-​economic paradigms. The world has experienced five techno-​economic paradigms since the first Industrial Revolution: the “age of textile and iron” (1780s–​1848), the “age

The Chinese Miracle  161 of steam and railways” (1848–​1895), the “age of electricity and steel” (1895–​ 1940), the “age of automobile and aviation” (1941–​mid-​1990s) and the current “age of information and communication” (Freeman and Louca 2001). Each Kondratiev wave created a new paradigm and pushed the world’s technologies to a higher level. For the leading economies, the new technologies continued to raise the total factor productivity and sustained the GDP growth in these countries. For latecomers that had just begun to industrialize, the jump to the latest technologies innovated in the latest paradigm allowed them to establish the “newest” industries that helped generate more income growth. Also, a larger technological gap means a larger income gap or lower income base for the latecomer. GDP growth starting from a lower income base would show higher rates of increase (annual percentage increase) for the given amount of increase in GDP. Thus, the larger the technological gap between the leader and the latecomer at the starting point of the latter’s industrialization, the faster growth the latecomer could potentially achieve in its catch-​up industrialization. The stock of technologies in the world refers to the accumulation of modern technologies innovated since the first Industrial Revolution. Each new paradigm increased the available stock in the world because older technologies and industries did not totally disappear in paradigm-​shifting. Older industries were usually moved from the center to a peripheral sphere of the leading economies and then to less developed economies through technological diffusion.Technologies innovated in earlier paradigms might be obsolete for the advanced economies but productivity-​enhancing for latecomers that had never used them before. For latecomers, a larger technological stock in the world means a wider spectrum of technologies available for them to choose from.The adoption of a broader span of new technologies certainly helped boost GDP growth. Thus, the larger the size of world’s technological stock at the time of its industrialization, the faster GDP growth the latecomer could potentially achieve in its catch-​up period. The degree of integration with the advanced economies affects a latecomer’s speed of industrialization because closer ties with advanced economies provide more channels for latecomers to adopt new technologies, which could accelerate their acquisition of new technologies or shorten the learning time. New technologies are disseminated mainly through direct technology transfer via licensing and consultants, foreign trade and foreign direct investment (FDI) from more advanced economies. In addition, closer trade and investment links with the advanced countries allowed better access to these countries’ consumer markets and their capital supply for latecomers’ industrialization. All these led to faster output growth of the latecomers. Thus, the closer the ties with the advanced economies at the time of their industrialization, the faster GDP growth a latecomer could potentially achieve in the catch-​up industrializations. Latecomers’ integration with the advanced economies was correlated with the intensity of globalization. As described in Chapter 1, the world experienced three periods of rapid increase in international flows of trade and investments: 1887–​1914, 1945–​1980

162  The Chinese Miracle and 1980 to present, and globalization deepened in each period. In the first period (1987–​1914), foreign trade and investment flows surged but were limited to those between Europe and their colonies. The second period (1945–​1980) saw great liberalization of international trade, with the founding of the GATT (later, the WTO). The third period (1980 to present) was characterized by the liberalization of international capital flows, while free trade continued to expand (Salvatori 2010). In the third period, the FDI of multinational corporations in the industrial economies reached all regions of the world (Held et al. 1999). Through off-​ shoring and outsourcing, the MNCs developed their global production networks, namely, integrated their operations for their entire system of manufacturing around the world. The trend of intensifying globalization allowed latecomers to speed up their catch-​up industrialization through closer integration with the advanced economies in the world. Meiji Japan, the Asian Tigers and contemporary China To a great extent, the differentials in GDP growth rates between Meiji Japan, the Four Asian Tigers and contemporary China in their catch-​up industrialization could be explained by the two external factors. As income can be measured relatively easily and accurately, income gaps will be used as a proxy for the technological gaps between these latecomers and the leading economies at the beginning of their catch-​up industrialization. As a latecomer in the late 19th century, Meiji Japan was not that far behind the technological leader, Britain. The per capita GDP of Britain was 4.3 times that of Japan in 1870,15 at the beginning of the Meiji industrialization. Japan was industrialized by adopting technologies accumulated from the first and second paradigms, with the Meiji period overlapping the technology diffusion of the second paradigm, the “age of steam and railway.” At that time modern technologies were at an early stage of development and had relatively shallow stock. Moreover, Japan’s industrial growth was constrained by a relatively low degree of integration with the advanced economies.The Meiji period coincided with the first period of globalization (1987–​1914). Due to the geographical limitations, Asia had a negligible share in the increases of the world’s trade and capital flow (Held et al. 1999). Japan chiefly relied on domestic capital and domestic demands for its industrial developments in the Meiji period. The country adopted foreign technologies mainly through imports of equipment and employment of foreign technicians. Total trade (exports plus imports) accounted for only 20 percent of Japan’s GDP at the end of Meiji period. Consequently, Japan’s real GDP grew at an average annual rate of less than 3 percent in the Meiji period. It was unimpressive by today’s standards but had far exceeded Britain’s 1–​2 percent annual growth in and immediately after the first Industrial Revolution. The Four Asian Tigers delivered much faster GDP growth, with annual rates of 8–​9 percent in their catch-​up industrialization in the second half of the 20th century. They had far better external conditions than Japan in the late

The Chinese Miracle  163 19th century. The Tiger economies began to industrialize in the 1960s amid the technological diffusion of the fourth paradigm, the “age of automobile and aviation.” Compared with a hundred years ago, the world’s technologies were much more advanced and much larger in stock and the global economy was much more integrated. The gaps between the technological leader, the United States, and the Tiger economies were much larger. For example, the per capita GDP of the United States was 9.3 times that of South Korea, 7.4 times that of Taiwan and 5.3 times that of Singapore in 1965. Higher levels and a larger stock of technologies in the world offered the Tiger economies a wider spectrum of technologies, from the first to the fourth paradigm technologies, to adopt in their industrialization. As known, the Tigers started with labor-​intensive manufacturing of simple consumer products, such as textile, apparels, footwear and toys, and later on, radios, cassette recorders, hand-​held calculators, and so on, in the 1960s and 1970s, then kept moving up the technological ladders to make more sophisticated products, such as TV sets, semiconductors, automobiles and computers in the 1980s and early 1990s. The incessant absorption of newer technologies served as the very source of rapid GDP growth as it led to continual increases in capital and productivity, the two major drivers for GDP growth. Between 1966 and 1990, excluding the agriculture sector, the total factor productivities increased at 2.4 percent and 1.6 percent per year respectively, in Taiwan and South Korea. And capital increased at 11.8 percent and 12.9 percent per year respectively, in the two economies (Yong 1994). The other favorable condition for the Tigers’ industrialization is the liberalization of foreign trade in the second period of globalization (1945–​ 1980). During this period, the worldwide markets for free trade emerged, with the removal of trade protections in industrial countries through the GATT and WTO. The aggressive reduction of tariffs on industrial goods by the Western countries made it possible for the Tiger economies to industrialize through the export-​orientation strategies. The Western consumer markets provided strong demands for the manufactured exports from the Tigers, whose production was restricted by shallow domestic markets. Moreover, manufactured exports served as a powerful device for domestic firms to acquire and master foreign technologies. Besides the new technologies, the exporting firms also attained the information on Western business practices and technical assistances from the buyers. All these helped foster the growth of globally competitive exporting firms in the Tiger economies. The expansion of exporting industries in turn benefited the rest of the economies via the “forward and backward linkages” with other domestic sectors or simply, the spillover effects. In addition to foreign trade, though to a lesser extent, Taiwan and South Korea also benefited from foreign investment, mainly the direct investment from Japan. In the 1970s, Japan started to shed labor-​intensive industries to Taiwan and South Korea. Associated with the FDI from Japan was the dissemination of manufacturing technologies for simple consumer electronics in the Tiger economies. Although these were low-​end manufacturing FDI, they

164  The Chinese Miracle provided the capital for industrialization in these economies and laid down the foundations for the technological upgrading of Korean and Taiwanese firms in the 1980s and early 1990s. In the late 1980s South Korea became the third largest fabricator of large-​capacity memory chips, after Japan and the US. Taiwan became the maker of its own brand-​name computer, Mitac and Acer (Wade 1990). In the late 1990s, the Asian Tigers all joined the group of high-​ income economies in the world. China’s GDP growth of nearly 10 percent per annum from 1978 to 2012 broke the records of the Asian Tigers. But again, if taking the two external factors into account, the super-​rapid growth of the Chinese economy was not that much of a mystery anymore. Compared with the Asian Tigers, China had an even larger gap with the United States, the technology leader, at the starting point of its recent economic catch-​up. In 1978, the per capita GDP of the United States was about 19 times that of China. As a latecomer that started industrialization in the latest paradigm, the “age of information and communication” and the third period of rapid globalization, China benefited from the even higher level and larger stock of the technologies in the world and even closer integration with the leading economy, compared with the Asian tigers. Table 6.1 summarizes the comparative statistics for China and the earlier state-​led developers. The innovations in the fifth techno-​economic paradigm took the world’s technological development to a new high level, and the rates of innovations and technological dissemination has accelerated from the past centuries. The adoption of the newest innovations or the most advanced technologies in the world made it possible for China to make the leap in many fields, especially in communication.The best example is that China had bypassed the development of land-​ phone and computer networks and jumped directly to wireless and smart phone technologies. By applying the newest technologies to the communication services of its huge population, China now has the largest number of smart phone users, internet subscribers and online customers in

Table 6.1 Income Gaps and Real GDP growth Japan Gap with the leader, measured by the ratio of real GDP per capita at the beginning of “take-​off ” periods

Britain over Japan in 1870: 4.3 times Average annual growth of real GDP 2.5% in “take-​off ” periods 1870–​1912

South Korea

China

The US over S. Korea in 1965: 9.3 times 8.3% 1965–​1999

The US over China in 1978: 18.8 times 9.9% 1978–​2012

Source: Angus Maddison, Statistics on World Population, GDP and Per Capita GDP, 1-​2008 AD; www.ggdc.net/​maddison/​oriindex.htm; China’s GDP growth is based on data from China Statistical Yearbook. Note: South Korea is used as an example of the Asian Tigers, for simplicity.

The Chinese Miracle  165 the world. The rapid expansion of internet, e-​commerce and related industries certainly contributed to the country’s GDP growth. Meanwhile, the world’s larger stock of technologies, accumulated from the previous paradigms, offered China an even broader range of know-​how to choose from at the different stages of its modernization drive. The country’s super-​rapid growth in the past 40 years came from the absorption not only the newest but also of newer technologies. In addition to the manufacturing of labor-​ intensive consumer products, China has adopted newer foreign technologies in a wide range of industries, such as steel-​making, automobiles, ocean shipping, oil drilling, nuclear-​power generation, aviation, petrochemical and high-​speed trains since the 1980s. Most of those technologies might be old in the advanced economies but new and productivity-​enhancing to China as they were not used in the country in the pre-​1978 period. As in the case of the East Asian Tigers, the incessant adoption of newer technologies led to rapid GDP growth through continual increases in capital and productivity in China. The larger stock of technologies available in today’s world enabled China to maintain even faster output growth for an even longer period, compared with the Tigers. Furthermore, the Chinese miracle growth started in the third period of rapid globalization, which enabled closer integration with the advanced economies through deeper and broader investment and trade links. Some studies in the 1980s observed that the Four Asian Tigers’ success could hardly be emulated by other latecomers because the international environment had become more hostile to developing countries since the 1980s, with falling demands for unskilled labor, deteriorating terms of trade for non-​fuel exports from developing countries, rising protection in developed countries and higher volatility of the international economy (Wade 1990, 345–​347). Nonetheless, contrary to these researchers’ predictions, the trends of globalization intensified since the 1980s and provided even better external conditions for China than the Tigers in catch-​up industrialization. It is perhaps the new waves of radical innovations in the Western countries in the new millennia that led to the intensification of globalization. Foreign investments played a bigger role in the Chinese growth than in the Tigers’ economic catch-​up. In the third period of globalization, the elimination of most restrictions on capital flow across borders brought about global financial integration and a surge in foreign investment on a scale unprecedented in history. In addition, the high rates of innovations in the new paradigm led to rapid restructuring of the advanced economies that increasingly shifted older industries and technologies to less developed economies. The multinational corporations (MNCs) in the advanced economies expanded their businesses in all regions of the world, and moved into the emerging-​market economies in a big way in the early 1990s. As mentioned above, China received a huge amount of FDI inflow, initially from East Asia, then from the Western OECD countries. Especially since the WTO entry, China’s low labor costs, good infrastructure, large domestic markets and the government’s preferential policies on FDI made

166  The Chinese Miracle the country a favorite destination for the FDI. As a result of the huge capital inflow, China has quickly become an important part of the global production networks of all the major MNCs. In the past decade or so, foreign investment also facilitated the rapid rise of new companies in the new sectors, such as smart phones, e-​commerce, internet media, internet search and man-​made intelligence in China, in the global diffusion of new innovations in communication. With intensified financial globalization, the Chinese start-​ups in the frontier technologies could directly tap into international financial markets for funding. For instance, the Chinese e-​commerce giant Alibaba was financed by the largest shareholders, Japan’s SoftBank and Yahoo (USA). The largest investor in Tencent, another star internet company in China, was Naspers (South Africa). Moreover, hundreds of Chinese companies were listed in the stock markets of the United States and Western Europe. Foreign investment helped power the Chinese growth in several ways. First, it provided capital, the scarcest resource for economic growth in a low-​income economy like China. Unlike Meiji Japan and the East Asian Tigers that had either little or limited foreign capital to tap into at the time of their catch-​up industrialization, China benefited from large FDI inflow, as well as the access to the world’s financial markets, thanks to the liberalization of capital movements in the third period of globalization. Second, the FDI facilitated the diffusion of advanced technologies in the Chinese economy because embodied in the machines, equipment and factories, were new foreign technologies. Third, the FDI inflow brought about managerial expertise, business models, standard practices and organizational methods of modern corporations, in addition to the training of workforces. The managerial knowledge and enhancement in labor skills had strong, positive effect on the overall economy. Further liberalization of international trade in the third period of globalization also helped sustained the Chinese growth via rapid increases in merchandise exports. Contrary to the earlier prediction that the consumer markets of the developed or OECD countries became satiated and relatively closed with higher protections, the Western markets have become more open since the 1980s. The GATT and WTO continued to tear down the tariff and no-​tariff barriers for international trade. The rapid restructuring of the advanced economies, amid the internet revolution, increased the demands of Western households for the exports of low-​tech and mid-​tech consumer goods from less developed economies, as the Western companies increasingly shed the manufacturing of these products abroad. The intensified globalization allowed China to replicate the East Asia’s export-​oriented growth strategy on a much larger scale. The entry into WTO in December 2001 further opened the world markets to China. As well known, the country turned into the world’s manufacturing factory around the turn of the century. Finally, MNCs’ operations in China also helped sustain China’s export growth because part of the increases in Chinese exports (and imports as well) came from the growth of the intra-​firm trade of

The Chinese Miracle  167 the MNCs, namely, the across-​board trade within the same MNC. This part of Chinese exports went up as the MNCs moved more of their production overseas to China. To sum up, China’s higher growth rates than those of Meiji Japan and the East Asian Tigers in their respective catch-​up industrialization were attributable to more favorable external conditions, while all three cases were successful examples of state-​led industrialization. In addition, with the central planning legacy, the contemporary Chinese state possessed an even stronger capability of managing society’s resources than Meiji Japan and the Tigers. The excessive state power enabled China to take fuller advantage of the favorable external conditions in obtaining GDP growth. Nevertheless, the excessive power of the state has left China’s state-​led developments some distinct negative attributes that could sabotage the country’s growth in the future.

Notes 1 Source: China Statistical Yearbook, 2018 and the World Bank database, 2019. 2 Source: Angus Maddison, Statistics on World Population, GDP and Per Capita GDP, 1-​2008 AD, (www.ggdc.net/​maddison/​oriindex.htm). 3 The new tax-​share system specified three categories of taxes: (1) central taxes or taxes accrued to the central government, including tariff, income tax of national SOEs, consumption taxes, taxes on banks and other financial institutions; (2) local taxes or taxes accrued to the provincial governments, including sales taxes, income taxes from local SOEs and personal income taxes; and (3) shared taxes or taxes shared between the central and local governments, including the value added taxes at the fixed rate of 75% for the center and 25% for the local, stamp duties on securities transactions and other taxes. 4 Source: China Statistical Yearbook, 2018. 5 In 2003, the Standing Committee of the Tenth National People’s Congress approved an amendment law for strengthening the role of PBC in the making and implementation of monetary policy for safeguarding the overall financial stability and provision of financial services. 6 Source: China Statistical Yearbook, 2018. 7 Source: http://​news.gaotie.cn/​tielu/​ June 14, 2018. 8 Source: China Statistical Yearbook, various years. 9 They are Dalian, Qingdao, Qinhuangdao, Tianjin, Yantai, Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang and Beihai. 10 Source: China statistical Yearbook, 2018. 11 Source: China statistical Yearbook, 2018. 12 China Statistical Yearbook, 2020. 13 The companies in which the state held minority shares are not under the control of the SASAC, but are part of the state segment of the business sector. 14 Source: Angus Maddison, Statistics on World Population, GDP and Per Capita GDP, 1-​2008 A D , www.ggdc.net/​maddison/​oriindex.htm. Based on Maddison’s data, real GDP grew at the average annual rate of 9%, 8.9% and 8.7 %, respectively, in Singapore, South Korea and Taiwan between 1965 and 1995. Hong Kong took off a bit earlier, with its real GDP increasing at an average rate of 8.1% from 1960 to 1990.

168  The Chinese Miracle 15 Source: Angus Maddison, Statistics on World Population, GDP and Per Capita GDP, 1-​2008 AD, (www.ggdc.net/​maddison/​oriindex.htm). Per capita GDP data for Britain, Japan, United States, South Korea Taiwan and China used in this section are all from the same source.

Bibliography Abegglen, J.C. 1994. Sea Change, Pacific Asia as the New World Industrial Center. New York: the Free Press. Bai, C. and Y. Qian. 2010. Infrastructure Development in China:The Cases of electricity, Highways and Railways. Journal of Comparative Economics 38 1, 34–​51. China Statistical Yearbook, National Bureau of Statistics of China. www.stats.gov.cn/​ tjsj/​ndsj/​. Freeman, C. and F. Louca. 2001. As Time Goes by: from the Industrial Revolutions to the Information Revolution. Oxford: Oxford University Press. Fu, Z. 1993. Autocratic Tradition and Chinese Polities. Cambridge: Cambridge University Press. Fukuyama, F. 2011. The Origins of Political Order: From Prehuman Times to the French Revolution. New York: Farrar, Straus and Giroux. Fukuyama, F. 2014. Political Order and Political Decay: From the Industrial Revolution to the Globalization of Democracy. New York: Farrar, Straus and Giroux. Ge,W. 1999. Special Economic Zones and the Economic Transition in China. Singapore:World Scientific Publishing. Gerschenkron, A. 1962. Economic Backwardness in Historical Perspective. Cambridge: Belknap. Guthrie, D. 2009. China and Globalization, the Social, Economic and Political Transformation of Chinese Society. Revised edn. New York: Routledge. Held, D., A. McGrew, D. Goldblatt and J. Perraton. 1999. Global Transformations, Politics, Economics and Culture. Stanford: Stanford University Press. Hu, A. 2015. Embracing China’s “New Normal,” Why the Economy is Still on Track. Foreign Affair, May/​June. Hua, S. 2013. The Transition of Cities and the Land Pitfalls. Beijing: the Eastern Publishing. Johnson, C. 1982. MITI and the Japanese miracle: the growth of industrial policy, 1925–​1975. Stanford: Stanford University Press. Maskin, E.,Y. Qian and C. Xu. 2000. Incentives, Information, and Organizational Form. Review of Economic Studies (April) 672: 359–​378. Ohashi, Hideo 2015 China’s External Economic Policy in Shifting Development Pattern. Public Policy Review 11 1. Policy Research Institute, Ministry of Finance, Japan. Salvatorie, D. 2010. International Economics. 10th edn. Hoboken, NJ: John Wiley. Tan, L. 2005. The Paradox of Catching up: Rethinking State-​led Economic Development. Hampshire and New York: Palgrave Macmilan. Wade, R.H. 1990. Governing the Market: Economic Theory and the Role of Government in East Asia’s Industrialization. Princeton: Princeton University Press. World Bank Database. World Bank https://​datacatalog.worldbank.org/​. Xu, B. and J. Lu. 2009. Foreign Direct Investment, Processing Trade, and the Sophistication of China’s Exports, China Economic Review, 202009: 425–​439. Xu, C. 2015. China’s Political-​Economic Institutions and Development. Cato Journal 35 3 (Fall): 525–​548.

The Chinese Miracle  169 Xu, C. 2016. “The Pitfalls of a Centralized Bureaucracy”. Acceptance speech for China’s Economics Prize in 2016, Cheung Kong Graduate School of Business, China. Xu, C. 2019. The New SBC Syndromes: Proud High-​speed Railway. Feb. 19, 2019, FTchinese. Com. Young, A.1994. The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience, NBER Working Paper Series, 4680 (March).

7  Prospects of the Chinese economic development

Finally, we are ready to assess China’s economic prospects and explore whether the country could sustain the rapid GDP growth and turn into a high-​income economy in the near future. By historical evidence, the older state-​led developers in East Asia, namely, Japan and the Asian Tigers such as South Korea, Taiwan and Singapore1 did succeed in moving onto high-​income levels. As an emulator of the Asian Tigers’ developmental model, the Chinese growth exhibited similarities with the “East Asian Miracle,” such as export orientation, initial specialization in labor-​ intensive manufacturing, high investment rates, high savings rates, and so on. If the Asian Tigers could reach high-​income levels, why wouldn’t China? However, what should not be neglected is that the Asian Tigers also succeeded in developing pluralistic institutions while becoming industrialized. The industrialization in these societies distributed the coercive power away from the authoritarian state over time. The transition to democracy and high-​ income levels proceeded concurrently. But, in the case of China, the rapid industrialization in the past 40 years has not been associated with changes in the power structure of the society. The preservation of the core institutions of absolutism would certainly have consequences on the Chinese growth in the future. To explore the growth prospects of the Chinese economy, this chapter will compare the state-​led development of contemporary China with that of the two Asian Tigers, South Korea and Taiwan,2 as well as Japan. The sustainability of China’s economic growth will also be examined against the background of the dynastic cycles in its own history.

The differences in the state-​led developments Although all are described as “authoritarian growth,” China’ state-​led economic development since 1978 exhibited some different features from that of the Asian Tigers. A major difference between the two cases is the pattern of income distribution associated with the rapid industrialization. By the World Bank and other studies, improving income equity, along with rapid GDP growth, was DOI: 10.4324/9781003202042-7

Prospects of the Chinese economic development  171 the defining characteristics of the Tiger economies during their high-​growth period from 1965 to 1990 (World Bank 1993). Statistics showed that both Taiwan and South Korea maintained a stable and low Gini index during the 25-​ years of high growth period. Taiwan’s Gini index fell from 32.5 in 1964 to 30.3 in 1989, and South Korea’s fell from 34.4 in 1965 to 33.6 in 1988. In Taiwan the income-​share ratio (the ratio of the highest to the lowest income brackets) increased only slightly from 4.37 in 1974 to 5.38 in 1996.3 The relatively equitable income distribution during the high-​growth period contributed to their eventual success in moving up to high-​income levels. In comparison, China’s high GDP growth has been associated with rising income inequality so far. For mainland China, the comparable high-​growth period started around 1980. During the period from 1980 to 2004 there had been a trend of widening income distribution in Chinese society. China’s Gini index increased from 32 in 1980 to 46.9 in 2004. The income-​share ratio increased from 4.6 in 1980 to 12.2 in 2004.4 Since then, the large income disparity has persisted in the country. The surveys from the Southwestern University of Finance and Economics (China) showed that China’s Gini index on household income rose to 61 in 2010 and stayed around that level in 2015.5 As for the gap in wealth, a report from Peking University revealed that China’s Gini index on household net wealth increased from 45 in 1995 to 55 in 2002 and 73 in 2012. The report also showed that the top 1 percent of the surveyed families held a third of the total household wealth in China, while the bottom 25 percent held only 1 percent of the total in 2012. In 2014 the bottom 25 percent held less than 1 percent of the total household wealth, while the top 10 percent families held 57.7 percent of the total.6 Briefly, the overall income and wealth disparity in the Chinese economy has worsened significantly in the industrialization process. Contributing to the larger income and wealth disparity was, first, the emergence of the power-​based wealthy class in the high-​g rowth period, as will be detailed later. Also accounting for the larger income disparity was the formation of the “urban and rural poor.”The urban poor were made up mainly by the migrant workers from the rural areas since peasants were allowed to work in the cities from the 1980s. By the reports of the CLB (China Labour Bulletin),7 the number of migrant workers totaled 288.4 million, accounting for 36 percent of the country’s workforce in 2018.Yet, under the current hukou system (household registration system) inherited from the central planning era, the migrant workers could not get urban hukou in the cities where they worked. Without hukou they had little access to the healthcare services, public education system, social insurance and welfare benefits in the cities. Most of them were employed in low-​paid jobs with long working hours, little job security and poor living conditions. These migrant workers became the “low-​ end” population in the cities. The majority of the migrant workers left their children and elderly family members in the countryside. According to the estimation of the CLB, there were about 103 million children of migrant workers in 2015. Of the total, around 67 percent, or 68.8 million, were left

172  Prospects of the Chinese economic development behind in their home villages or towns, separated from their parents.While the low earnings of migrant workers widened the income and wealth disparity in the urban areas, the status of their left-​behind families helped deepen the urban-​r ural gap in income and wealth. In comparison, the relatively equal pattern of income distribution in Taiwan and South Korea was based on rather small urban-​rural income gaps and a more equal distribution of rural income in the high growth period, as suggested by the studies on the subject (e.g. Fei and Ranis 1975; Fei, Ranis and Kuo 1978; World Bank 1993). Unlike mainland China, where the state owns all the land, in South Korea and Taiwan farmland was mostly owned by peasants who had full rights over the benefits of land ownership. The land reforms in the late 1940s and early 1950s in the two economies established equitable landholdings in the rural sectors. In Taiwan, the government exchanged state-​company shares for large landlords’ farmlands and redistributed the land to peasants at low prices. In South Korea, the government acquired land from large landlords and resold it at subsidized prices to tenants. The equitable landholdings led to a relatively equal distribution of rural income, which served as an equalizer for the overall income distribution. Furthermore, the equitable landholdings and secure land rights provided incentives for peasants to invest in new farming technologies, to improve agricultural productivities and develop small industries or off-​farm activities in villages. Consequently, the increase in rural incomes largely kept pace with the rapid growth of urban incomes during the industrialization. Also, spatially dispersed small industries in rural areas created employment for peasants and helped contain the rise of “urban poor” made up by rural migrants. The other major difference in state-​led developments between China and the two Asian Tigers is the type and extent of corruption that occurred in the industrialization process. It is acknowledged that corruption existed alongside rapid economic growth in both cases, yet the nature of the corruption differed. The type of corruption in South Korea and Taiwan was often described as “structural corruption,” as it is a semi-​regularized and organized part of the political system. Comparatively, the type of corruption in contemporary China was described as “predatory or degenerative corruption.” It occurred at individual levels and was anarchic (Wedeman 2012). The structural corruption in South Korea and Taiwan was directly related to the ruling party’s needs for election funds. Some of the business donations and contributions to the ruling party were corrupt or grey, as they were collected illicitly. Yet, the grey money was collected mainly through organizational channels, and mainly used to fund local political activities for the purpose of winning elections, instead of going into the pockets of individual officials. The structural corruption was considered developmental, as it provided a mechanism through which some of the income made by the private business could be channeled to the ruling-​ party for supporting a pro-​ growth government. Comparatively, corruption in contemporary China took place mostly in the form of bribery, graft, misappropriation and embezzlement of individual state

Prospects of the Chinese economic development  173 officials, with the party-​state in no need for election funds at all. Unlike structural corruption in which “grey money” is channeled through the political machine for collective use, corrupt state officials in mainland China siphoned money mostly for personal use and the accumulation of personal wealth. Of course, in South Korea and Taiwan corruption also occurred at individual levels and some politicians did pocket some of the “business donations” for themselves. But on balance, the grey money was used for funding election activities for the ruling party. The predatory corruption in China has been rising steadily since the economic reforms in 1978. Andrew Wedeman collected data on the amount of funds recovered per case of economic crime during the period from 1979 to 2007 and the number of officials (at county level and above) indicted for economic crimes per year between 1988 and 2008. His study showed that the amount of money recovered per case increased from RMB1,200 in 1979 to RMB273,000 in 2007. The amount in 2007 was 228 times larger than that in 1979. After adjusting for inflation, the amount of money recovered per case in 2007 was still 50 times over that in 1979. The number of state officials indicted for economic crimes increased from 190 in 1988 to 2,687 in 2008 (Wedeman 2012, 97–​102). Note that this data only covered the cases prosecuted by the judicial system. Most corruption cases were not remanded to the judiciary system. From more recent figures released by the DIS (Discipline Inspection Commission) of the Chinese government, a total of 330,000 cases of corruption were investigated in 2015. As a result of the investigation, about 336,000 individual officials were given the disciplinary punishment of the party and state, such as being expelled from the party, dismissed from office and administrative demotion. Of the total, 14,000 were remanded to judicial system.8 The ongoing corruption involved state officials at all levels of the government, in all provinces, from townships all the way up to the central ministries and politburo of the party, as well as state officials working at state enterprises.While lower-​level state officials made up the bulk of the corruption, the number of high-​profile cases was on the rise. According to the DIC, in the three years from November 2012 to November 2015, 139 high-​ranking officials (above deputy-​ provincial level) were caught committing corruptive crimes, including 11 top executive officials at the national state enterprises.The number of high-​ranking officials caught in the three years equaled to the total number of high-​ranking officials caught in the previous 30 years.9 Also, the amount of money involved in corruption cases steadily increased. Among the high-​ ranking officials prosecuted for corruptive crimes in the court in 2019, some case involved monetary values close to one hundred-​billion RMB.10 Briefly, the degenerative corruption of state officials became increasingly pervasive and systematic as the industrialization proceeded in China. The third different feature of China’s state-​led developments is the decreasing effectiveness of written rules, although this is hard to quantify. Since the re-​ introduction of the markets in 1978, the Chinese government issued large amounts of laws and regulations to keep market orders, and was able to enforce

174  Prospects of the Chinese economic development them effectively in the earlier decades. However, as industrialization proceeded and market activities expanded, the written laws and regulations became less and less effective in governing the behaviors of individuals and businesses. Just as the state’s internal disciplines could no longer stop state officials from corruption, the government laws and regulations were circumvented by social members constantly. For instance, the business of fake and pirated products continued to thrive, despite harsh legal penalties. The most serious has been the proliferation of food scandals in recent years. The government issued numerous regulations to stop the production of fake products and strengthened food safety standards. Yet, incidents such as poisoned baby formula, fake bottled water, fake eggs, contaminated meats and even fake immunization vaccines became practically unstoppable. Also, in widespread fashion, the peasants knowingly applied unsafe chemicals to soil and sold contaminated produce for profits. Certainly, there was also the production of fake and pirated goods in South Korea and Taiwan, but fake product and piracy scandals there seemed less pervasive, less frequent and on a lesser scale compared with those in mainland China. Meanwhile, social members remained reliant on personal relations in market exchanges in China today to get reliable goods and services for consumption or to get better deals in doing business. Tuoren (seeking for acquaintances) or guanxi (personal ties) are extremely important in economic activities such as job-​ hunting, hospital cares, pre-​ school admission, apartment-​ renting, legal disputes and law suits, and so on. In theory, the expansion of modern markets should have impersonalized economic exchanges among individuals and businesses and increased the role of written contracts, regulations and laws. Nevertheless, contemporary China stayed as an “acquaintance society,” despite the modernization of the economy. It appears that relation-​based coordination has penetrated more deeply in mainland China than in the case of Taiwan and South Korea. To a large extent, the reliance on personal relations in economic and social activities in mainland China reflected social members’ distrust in the government as an impartial enforcer of written contracts and regulations.

State institutions at the root of the differences The attributes of state-​led economic developments were basically shaped by the state institutions in the respected society, by our analytical framework. The differences in the pattern of income distribution, type and extent of corruption and the effectiveness of written laws between the Chinese and Tiger economies came from the state institutions, in particular, the degree of the autonomy of the state. At the onset of their catch-​up industrialization, South Korea, Taiwan and China were all authoritarian societies based on the core institution of absolutism. Nonetheless, the authoritarian governments of South Korea and Taiwan, in the period between the 1960s and 1980s, were much more autonomous or insulated from private properties in society, compared with the party-​state in post-​1978 China. The higher degree of autonomy of the South Korean and Taiwanese

Prospects of the Chinese economic development  175 governments might have something to do with the Japanese influence on their state institutions during the colonial period from the 1890s to the mid-​1940s. More important, the two Tigers had different social and political systems from mainland China in the Cold War period. South Korea and Taiwan belonged to the “capitalist camp” led by the United States, whereas China came under the communist rule in 1949 and joined the Soviet bloc of centrally-​planned economies. It was in the 1980s that China began to return to its historical norm of private ownership. Due to the choices made on political and economic systems in the immediate post-​war period, the institutional arrangements in South Korea and Taiwan varied from contemporary China in two key aspects. First, the dominant form of ownership over production assets is private in South Korea and Taiwan, unlike the Chinese economy that was dominated by state ownership.The enterprises in South Korea and Taiwan were mainly private companies, although state-​owned companies also existed.Thus, the South Korean and Taiwanese governments did not have direct control over the major economic players in the industrialization. Comparatively, in mainland China the state enterprises had been the major players in industrialization and the Chinese government had direct control over the state enterprises via the state ownership and personnel management system. Second, unlike China, which started the Four-​Modernization drive in the 1980s under the one-​party political system, both South Korea and Taiwan had the electoral democratic system during their high growth periods. Although it was superficial and incomplete, the electoral system in South Korea and Taiwan at least forced the ruling party to turn to the private sector for election funds in order to stay in the government, which made it possible for private businesses to develop economic leverage in the industrialization process. As a consequence of the choices made in the immediate post-​war period and thereafter, the South Korean and Taiwanese governments functioned relatively autonomously in their catch-​up industrialization, yet the Chinese state became increasingly entrenched in the new propertied class in the modernization drives since the 1980s. South Korea and Taiwan South Korea came closer to the Japanese prototype of a developmental state. The country had the tradition of a bureaucratic state in history, under the influence first from China and then from Japan. Similar to the case of Meiji Japan, the South Korean state held absolute coercive power at the beginning of industrialization, yet was rather insulated from the propertied class. The country’s industrialization drive began in the 1960s under the Park Chung-​ hee regime (1961–​1979). The Park government made overall development strategies and fostered the growth of large industrial companies in strategic industries selected by the government. The Economic Planning Board of the South Korean government functioned as the super agency coordinating economic policies in the same way as Japan’s MITI.

176  Prospects of the Chinese economic development The relative autonomy of the South Korean state was reinforced by the dominance of private ownership in production and the adoption of the Western electoral system in the Cold War period. Without direct control over industrial assets, the South Korean government had to count on private companies to achieve the state goal of industrialization. It could support or punish private companies only indirectly, through control over taxes, export subsidies, tariffs, bank credits and foreign exchanges, as well as assistance on technological transfers and upgrading. Moreover, the Park Chung-​hee regime was forced by the United States to return to the electoral democratic system in 1963 after the military coup in 1961. In order to stay in the government, the ruling party needed to cobble together factitious voters across the country and build a political coalition to win the elections. Political activities necessitated the flow of money. Without direct access to wealth-​creating properties, the government had to go to private businesses for political funds. Consequently, an exchange relationship developed between the state and private businesses in the process of industrialization.The ruling party extracted funds from the chaebol for achieving political and economic goals. In return, the chaebol received government support for business expansions. The government initially was the dominant side in the state-​ business relationship. Compared with the Japanese state, the South Korean government was much more heavy-​handed in dealing with private businesses. In 1961 the newly established Park regime arrested the heads of many large companies for “illicit accumulation of wealth,” and dropped the charges on the condition that they made contributions to the government. In Park’s centralized system of fund-​raising, private companies were often coerced to donate money to the ruling party, and they could get discounted loans only if they agreed to invest the capital in accordance with the state-​set priorities. In order to achieve the goal of rapid industrialization, the government imposed the sternest disciplines on the chaebol related to export targets and entry to new industries. The good performers were rewarded with discounted loans, export subsidies and further licenses to expand. The poor ones were penalized with denial of subsidy applications and a refusal to bail them out (Amsden 1989). There were also observations that those companies that failed to make donations to the ruling party were retaliated against by the government (Kang 2002). As said, political donations were a source of structural corruption. However, the balance of power shifted in favor of private companies as they grew stronger and wealthier in the industrialization. By the late 1970s, the power of the chaebol had begun to rival that of the government. The government could no longer force the private companies to comply with its policies if those policies were perceived to contradict the interests of the industries or companies. There were open conflicts between the government and chaebols (Wedeman 2012). Similar to the big companies in Meiji Japan, the chaebol eventually turned into an economic force that could effectively check the power of the state. Consequently, the government-​business relations evolved into a “mutual hostage” situation in which the two sides were equally

Prospects of the Chinese economic development  177 strong and could hold each other hostage, as suggested by David Kang (Kang 2002). The “mutual hostage” relationship tends to contain levels of corruption in the economy because both the government and businesses were deterred from actions of excessive rent-​exploitation for fear of the damage that could be inflicted by the other side as a result of such actions. The case of Taiwan is more complicated. The KMT regime that led Taiwan’s successful industrialization used to be a predatory state, deeply entrenched in the propertied class in mainland China before 1949. During its rule on the mainland, the KMT state was riddled with particularistic rent-​seeking and degenerative corruption. The KMT top officials and their families owned large amounts of property, including factories, banks, commercial businesses and land. As most frequently cited, the Kong, Song and Chiang families that controlled KMT state were among the wealthiest clans in the country. In the tradition of “official entrepreneurs” in the late Qing period, the so-​called “bureaucratic capitalists,” namely those who had family connections in the KMT government, controlled major businesses. It also became prevalent that state officials at middle and lower levels used their offices to amass private assets towards the end of the KMT rule. The KMT state’s corruption and inability to stop the runaway inflation finally led to its defeat in the civil war on the mainland in 1949. Thus, it is puzzling how the KMT regime was transformed into an autonomous state in the matter of a decade after its arrival in Taiwan. Some observers attributed the revitalization of the KMT state to its organizational shake-​up after its arrival in 1949 (e.g. Evans 1995). Indeed, the KMT party toughened its internal disciplines, applied strict sanctions against corruption and purged crooked officials in the early years of the Taiwan occupation. However, the same KMT party conducted similar shake-​ ups and anti-​ corruption campaigns on the mainland before and during the civil war in the 1940s, but failed to stop the rampaging corruption then. Why would it succeed in Taiwan in the 1950s? In essence, the autonomy was forced upon the KMT state by its own migration into a rather alien society, the indigenous Taiwanese society. The organizational shake-​up played a role, but it was the alienation from Taiwanese society that made the shake-​up effective in post-​1949 period. After the defeat in mainland China, the web of the industrial wealth in which the KMT state had been entrenched on the mainland had broken up. Some of the industrial businessmen moved to America, some went to Hong Kong and some stayed on the mainland. Only a small part of the old propertied class followed the Chiang regime to Taiwan. That is, the KMT state was practically uprooted from the kin-​based webs on the mainland when it left for Taiwan. Upon its arrival on the island, the KMT state had a hard time connecting with the native Taiwanese due to the ethnic division. (In Taiwan) most businesspeople are native Taiwanese, facing a government that they still tend to identify as mainlander-​dominated and therefore different, if not still alien. And many senior industrial policy-​makers have

178  Prospects of the Chinese economic development not altogether concealed their distaste for private businesspeople, in deeds if not in words. (Wade 1990, 305) This mutual antipathy somewhat insulated the KMT state from the Taiwanese propertied class. As an outsider government without family roots in society, the KMT state officials had to access the Taiwanese business sector through some non-​state organizations rather than the “relatives-​and-​friends” networks. For instance, the KMT government reached private companies through semi-​independent organizations such as the National Federations of Industry, National Federations of Commerce and other trade associations. In the rural areas, the government assisted the farmers through the system of farmers, fishermen and water conservancy associations, many of which dated from the Japanese colonial era (Burmeister, Ranis and Wang 2001). These associations served as organizational vehicles for the government to provide the farmers with technological services and marketing supports. The organizational channels reduced the chances for the KMT officials to develop individualistic ties with private businessmen for personal gains. The “imposed” autonomy of the KMT state was sustained by the democratic electoral system. There was no national election in Taiwan with the KMT government’s declaration of an Emergency Decree (martial law) in 1949. But, at a sub-​national level, popular elections were introduced at county and township levels in 1950 and extended to provincial levels in 1957. Supplementary elections for “additional seats” in the Legislative Yuan and National Assembly were held in 1972 (Ger 1998).The democratic elections, though partial and local, gave the native Taiwanese some leverage in dealing with the government and allowed them to grow independent political clout over the years. The growth of the independent political force somewhat deterred the KMT officials from abusing the state power in building their private wealth. The politicians outside of the KMT party, mainly native Taiwanese, developed the coalition against the KMT party through these elections.The coalition turned into the opposition party in 1987 when the Emergency Decree was lifted. In general, the KMT government developed an exchange-​ cooperative relationship with the Taiwanese business community, similar to that between the government and chaebol in South Korea. To maintain its political control and achieve national industrialization, the KMT party needed the political support from the Taiwanese voters, especially the business people that had the money to fund the election. In return, the Taiwanese companies needed the government’s assistance in developing their businesses. As well known, the KMT government actively promoted the developments of small and medium-​ sized enterprises (SMEs), mostly owned by native Taiwanese, in labor-​intensive export industries.Taiwan’s rapid economic growth from the 1960s to 1990s was propelled mainly by SMEs rather than large companies, unlike South Korea. To support SMEs, the KMT government set up the SME office as a specialized

Prospects of the Chinese economic development  179 office under the Economic Ministry. The office provided the SMEs with bank credits, access to foreign exchange, guidance on marketing and management, as well as technological assistance, in coordination with universities and research institutes, trade associations and other government agencies.The SMEs played a vital role in the island’s export drives, acting as the subcontractors for Japanese manufacturers. By the end of the 1970s, the SMEs accounted for more than 98 percent of Taiwan’s total number of companies and produced 75.1 percent of its total exports (Yu 1999, 37). Of course, the KMT state was not entirely insulated from the propertied class. The businessmen who fled the mainland to Taiwan in 1949 did enjoy some personal connections with the KMT government and grabbed some “oligopoly rents” through these connections, especially in the 1950s. But these so-​called “émigré industrialists” concentrated mainly on the textile sector and constituted a small fraction of the private business sector. Their existence could not change the nature of the overall relations between the KMT state and private business in Taiwan. In addition, the KMT-​controlled state sector, based upon the confiscation of Japanese companies, shrank steadily with the rapid expansion of the private businesses and concurrent privatization of the state enterprises since the 1960s. The output share of the state-​run enterprises in industrial production declined from 57 percent in 1952 to 20.9 percent in 1980 and further to 18 percent in 1990 (Yu 1999, 42). Briefly, in both South Korea and Taiwan, the relative autonomy of the state allowed the development of the “mutual hostage” relationship between the government and business sector, although the power balance in Taiwan was mediated mainly through ethnic divisions. Contemporary China In comparison, the Chinese state became increasingly entrenched in the newly-​ developed private wealth as industrialization proceeded. Different from South Korea and Taiwan, China started its high-​growth period in the 1980s with the socialist legacy of a centrally planned economy and one-​party political system. The Chinese state started the Four Modernization drive and the reforms of the central planning system at the same time. The economic reforms restored the legitimacy of private properties and liberalized the economy to a certain extent, but retained the state-​ownership over land and major industrial assets. Meanwhile, the one-​party political system remained intact, with no institutions introduced to restrict the party-​ state’s power. Consequently, the Chinese state gradually lost the “conditional autonomy” it once held at the beginning of the reforms with the formation of the new propertied class in the industrialization. Per the discussion in Chapter 6, the autonomy of the Chinese state at the beginning of the high-​growth period was largely conditioned on the absence of private ownership under the central planning system. In the central planning era, the party-​state officials did have political and consumption privileges, but

180  Prospects of the Chinese economic development there was no social class that owned production assets. In the absence of private companies at the beginning of the Four Modernization drive, the Chinese state organized industrial developments through its direct control over the state enterprises and local governments.The conditional autonomy, plus the excessive power rendered the Chinese state even stronger developmental capability than the case of the Asian Tigers. Nevertheless, the party-​state began to lose its autonomy as the restoration of private ownership in the reforms removed the condition of absence of the propertied class. With private properties legitimized yet no institutional insulation installed on the party-​state, those in possession of state power began to use the power to build private assets, and a power-​based propertied class began to develop. At the center of the new wealthy class were the circle of family members, relatives and friends of state officials. Note that the state officials themselves did not directly own or run private companies, but their office positions or ranks in the government are even more critical for their families or friends to build private wealth today than in the imperial era due to the stronger control of the state over the economy with the central planning legacy. The private entrepreneurs who had no family background of state offices invariably resorted to the “official umbrellas” from the central or local governments for starting and expanding their businesses. With the economic system reformed yet the political system intact, those who were closest to the state power benefited most from the reform measures, including the policy loopholes in the making of private wealth, at each stage of the gradualist reforms. In the price reforms in the 1980s, the families and friends of some state officials made their “first bucket of gold” by taking advantage of the two-​track price system. With ready access to the production of the state enterprises, those insiders reaped quick profits by arbitraging between low in-​plan prices and high market prices for products such as steel, cement and fertilizers.The easy profits were later used as the seed money for setting up their own companies or invested in various financial and real assets. The legitimization of private companies and the SOE reforms in the 1990s provided opportunities for larger-​ stake or larger-​ scale wealth creation for Chinese individuals. By some estimation, close to 100,000 state enterprises and collectively-​owned enterprises (COEs) with RMB11.4 trillion in assets were privatized between 1995 and 2005 (Guo, Gan and Xu 2008).The earlier private companies were founded through the acquirement of collective enterprises (de facto, local government-​owned enterprises) by the former managers or individuals who had connections with local governments. Then, in the SOE reforms, all the small and medium-​sized state enterprises were transferred to private hands through management buy-​outs and sales to outsiders. Yet the transfers of ownership for SOEs were not properly structured and monitored. In many cases, the terms for the transfer of state assets were manipulated and the SOEs were sold undervalued. As a result, the state officials as former managers and other “relationship” buyers of these SOEs turned into the owners of private companies overnight, at very low costs and often with the assistance of state

Prospects of the Chinese economic development  181 bank loans. In addition, the restructuring of the large SOEs also produced opportunities for the making of personal fortunes. In the Initial Public Offering (IPO) of the large SOEs in the stock markets, the insiders of the SOEs and their families or friends snatched huge profits by attaining the “primary shares” at negligible prices and reselling them later at exorbitant prices on the stock market. The state ownership of land was another source for the formation of power-​ based private wealth. Since the transfer of land-​usage rights were permitted in the late 1980s, those who had the connections with the relevant government offices made vast windfall profits through the transactions of the usage rights over state-​ owned lands. They either obtained land at low prices through connections in the government and resold the land to developers or merely obtained the official approval of land-​ usage rights for the developers and received a kick-​back from the latter. Land-​related windfall profits rocked, as the land value surged with the rapid development of commercial and residential real estates, particularly after the opening of residential housing markets in 1998. In order to stop the disorder in land-​transfer and related corruptive activities, the central government designated local governments exclusive authority over the transfer of land-​usage rights within their jurisdiction in 2004 (Hua, 2013, pp. 72–​93). By then, hundreds of thousands of insiders had already made themselves millionaires from transactions of land usage rights. Since 2004, sales of land became a major source for local governments’ fiscal revenues as well as the source for continual corruption of local officials. The formation of private wealth was associated with rapid GDP growth in the past few decades because the wealth was mostly channeled into production. There had been squandering on lavish consumptions, especially in the cases of outright corruption. But a considerable part of the private wealth was invested in companies that continued to create wealth through productive activities in manufacturing, real estate, commerce and other sectors. As said, Chinese citizens could set up private companies or fund shareholding companies including state-​held enterprises directly, or purchase company stocks through the stock markets. The expansion of these companies in various sectors greatly contributed to the rapid growth of the Chinese economy. We certainly cannot say that all private wealth came from the circle of state-​office holders. Some private enterprises started as getihu (self-​employed individuals) that drew on family savings as initial capital in the 1980s and early 1990s. They usually started with services or production that required less start-​ up capital, such as small retail stores, restaurants, lodges or simple manufacturing, and they were not treated equally with the state enterprises in terms of obtaining bank credits, provisions of utility, material-​input supplies and other supports. Thus, to survive and expand, these private enterprises always needed guanxi (personal connections) in the local governments or relevant state offices for protections. In addition, some private companies in the new sectors, such as smart phones, e-​commerce and internet media, were funded by foreign investors or foreign capital (see Chapter 6). In the past two decades, private enterprises

182  Prospects of the Chinese economic development played an increasingly important role in the economy. They were treated better yet still not as equals of the state enterprises, especially in terms of bank access. To get the same treatment as the state enterprises, private companies had strong incentives to “pay out” state officials on an individual basis in exchange for bank credits, user rights over land, project contracts, and so on. Some private companies have succeeded in growing large, yet critical to their successes was the personal connections to the governments at either central or local levels. Therefore, compared with the Taiwan and South Korean governments that maintained a relatively high degree of autonomy in the catch-​up industrialization, the party-​ state in mainland China became increasingly entrenched in the propertied class in the industrialization process. That is, the newly developed propertied class in contemporary China was entirely attached to the state power, similar to the landed wealth in imperial China. Consequently, business companies in contemporary China have not been able to develop the “mutual hostage” relations with the state government, unlike their counterparts in South Korean and Taiwan. Dominant in China’s business sector are still the state enterprises or the state segment of the business sector. Despite the rapid expansion in the past decades, private companies remained much weaker than the state enterprises. By the ranking of the 500 largest Chinese companies in 2018, private companies accounted for 12.6 percent of the total assets and 28.5 percent of the total revenues, and state enterprises accounted for 87.4 percent of the total assets and 71.5 percent of the total revenues.11 More important, the issue is not merely about the size or financial strength of the private companies. Private companies in contemporary China have little potential to develop counteracting power against the state, even with larger assets or revenues, as they are born dependent on the state power and rely on the connections with the officialdom for business protection.The party-​state, directly holding wealth-​creating assets, need neither money nor votes from the private business community. The private companies have no bargaining chips vis-​à-​vis the state to begin with. Furthermore, there are no institution channels for the private companies to access or to share the state power as a group force. The state enterprises or the state segment of the business sector are even less likely to grow into a rival force against the state in coercive power. The state enterprises could not possibly become an independent force simply because the state owns their assets. The top executives of the state enterprises are state officials appointed and dismissed by the governments at corresponding levels. Their salaries and compensations were set by the State-​owned Assets Supervision and Administration Commission (SASAC). As party members they are also subject to the party’s disciplines. Thus, unlike the Korean chaebol or the zaibatsu in post-​Meiji Japan, the large Chinese state enterprises hold no leverage against the government, no matter how large they grow in assets or revenues. In short, the Chinese state lost its conditional autonomy in the state-​led industrialization. The loss of autonomy bore consequences on the state-​led developments.

Prospects of the Chinese economic development  183 State autonomy matters For state-​led development or authoritarian growth, the degree of state autonomy is essential in determining the pattern of income distribution and the extent or type of degenerative corruption, which in turn affect the sustainability of the latecomer’s economic growth. In South Korea and Taiwan, the higher degree of state autonomy produced relatively equal patterns of income distribution because the insulation of the state from the propertied class reduced the incentives for state officials to capture the state for personal gains. As denoted earlier, with the state insulated from the propertied class, state officials generally take career success within the bureaucracy as the best way to pursue self-​interests rather than using their office to build private wealth. In authoritarian societies where the state holds absolute power, the power-​based wealth, namely the wealth made by those in possession of the state power, is a key source for large income disparity. The autonomy of state served to remove this source of large income gaps. Additionally, an egalitarian pattern of income distribution developed because autonomous governments tend to make policies on behalf of the whole society, independent from the narrow interests of the privileged class. As mentioned above, the state’s land policies in South Korea and Taiwan protected the interests of peasants, the weakest social members in the developing economies, characterized by large urban-​rural gaps. The policy brought about rapid growth of the rural income and improved the overall income distribution in the catch-​up period. By comparison, the pattern of income and wealth distribution deteriorated quickly in contemporary China, with the party-​state increasingly entrenched in the new wealth. To a great extent, the entrenchment of the Chinese state is a continuation of the traditional bonds between state power and the propertied class in imperial China. As shown in previous chapters, historically, the state institutions of combining office-holding and production-property ownership provided incentives for office abuse and led to massive annexation of farmland by powerful office-​connected landowners repeatedly in the imperial dynasties, the rise of “official entrepreneurs” in the late Qing period and the “bureaucratic capitalists” in the KMT period.The officials of the contemporary Chinese state were motivated by the same incentive mechanism embedded in the same set of state institutions. Moreover, the Chinese state today possesses even more power than in the imperial era with the central planning legacy. The excessive state power, once captured by officials for personal use, could produce an even more glaring disparity in wealth between those who have power and those who have not. As for policy making, the party-​ state, though pro-​ growth, tended to neglect the justice in the principles of income distribution. For instance, the aforementioned land policy allowed the “insiders” of the government to grab all the benefits of landowners and deprived the peasants of opportunities for wealth-​creation with secure landownership. This type of policy could speed up GDP growth for some time but also enable the rise of the power-​based

184  Prospects of the Chinese economic development wealth at the expense of the peasants. Another example is the preservation of the Huko policy after 40 years of reforms. The Huko policy also had adverse effects on the pattern of income distribution as it discriminated against the peasants and migrant workers and produced the “low-​ end” population in both urban and rural areas. With the entrenchment, the state’s policy making became increasingly tilted towards the new wealthy elites.The tendency can be exemplified by the prolonged delay in implementing the property tax policy. The imposition of property tax on residential houses would harm the interests of those wealthy households that owned multiple houses and apartments. The degree of state autonomy also matters in terms of the extent of degenerative corruption, for the same reason. A higher degree of state autonomy led to lower degenerative corruption in South Korea and Taiwan via the incentive mechanism as the insulation of the state from the propertied class reduced the incentives of state officials to abuse offices and increased their propensity to abide by the disciplines of the state bureaucracy. Thus, corruption in South Korea and Taiwan was better contained, as observed by researchers.12 Furthermore, the corruption in the government was increasingly restricted by the private sector and the opposition party. The autonomy of the state allowed private businesses to gain coercive power vis-​à-​vis the state and develop the “mutual hostage” relationship with the government. The rise of independent economic and political forces imposed the restriction on the behaviors of state officials from outside of the state. Such “outside” restrictions on the state power further reduced the chances for state bureaucrats to engage in corruptive activities. Comparatively, the Chinese state’s loss of conditional autonomy led to widespread degenerative corruption in mainland China as the entrenchment of the party-​state provided strong incentives for state officials to abuse offices for private gains in the industrialization process. State officials could hardly refuse the temptations when staggering amounts of family fortunes could be made by using their office power, even though there were risks of being caught. Corruption would occur whenever the chances of getting caught were perceived small or the gains from abusing offices overwhelmed the risks. Equally important, the Chinese state officials had a low propensity to adhere to internal disciplines because there was no effective restriction on the party-​ state from the outside. As discussed previously, the Chinese business sector has developed no capability to restrict the state power, despite their growth in size in the past few decades. Without “outside” restrictions, the government could hardly stop the degenerative corruption through self-​managed anti-​ corruption campaigns. The party-​ state relied entirely on internal managements to curb the corruption of its incumbents. The anticorruption drive ran vertically from the central to lower-​level governments, through the state and party organizational channels. The investigation of corruption was led by the party’s Discipline Inspection Commission (DIC) and the state’s Ministry of Supervision (MS). The DIC and MS punished the offending officials by taking disciplinary action,

Prospects of the Chinese economic development  185 such as administrative demotion, expulsion from the party and dismissal from office. The serious cases were remanded to the judicial system for prosecution. Regular citizens could report corruptive activities of state officials, but the decisions on investigation and penalties were made entirely by the DIC, MS and the judiciary under the party’s control. Despite the government’s anticorruption campaigns, disciplines and laws were still circumvented by officials in various ways. A major problem was that anticorruption waged by the top leaders often turned into inter-​clique power struggles within the organization of the party-​ state. In many cases, who got caught depended on which clique they belonged to and whether they had the backing of the “right” persons from higher-​level offices. Basically, an entrenched state with absolute power could hardly discipline itself in the absence of checks from other social groups through formal institutions.

Sustainable growth in doubt Given the differences in state-​led developments between China and the two Asian Tigers, it might be overly optimistic to infer that the Chinese high growth will continue in the future merely from the fact that these older state-​ led developers achieved sustainable growth and moved on to high-​income levels.The differences should not be ignored in examining the growth prospects of the Chinese economy because the negative attributes of China’s state-​ led development are highly disruptive to its economic growth in the future. Moreover, those attributes, being rooted in institutions that tend to persist, would continue to hold back the growth. From past experiences, a testing stage for latecomers in their economic catch-​ up is the middle-​income stage. Latecomers could get stuck in the “middle-​ income trap” as the rapid economic growth they had achieved raised national income on one hand but worsened the socioeconomic environment on the other. The widening income disparity and rising corruption ruptured the social base needed for sustainable growth in the long term. Some developing countries, such as Argentina and Brazil in the 1950s and 1960s and Indonesia and Thailand in the 1980s and 1990s, all reached middle-​income level via rapid economic growth and yet had a hard time moving onto high-​income levels. Note that the minimal per capita Gross National Income (GNI) for high-​ income economies set by the World Bank in income-​group classification is a statistical reference instead of a “golden threshold” that guarantees continual growth once being reached. In the past, some economies such as Brazil and Russia reached the minimal GNI of high-​income levels for a couple of years then slipped back to “upper-​middle-​income” levels again.Yet other economies such as South Korea and Taiwan continued to grow after reaching the minimal GNI of high-​income and got closer to the income levels of the world’s rich countries. Therefore, the issue here is to achieve sustainable growth rather than a statistical target.

186  Prospects of the Chinese economic development As widely acknowledged, South Korea and Taiwan escaped the middle-​ income trap because the relative equitable income distribution and low levels of corruption during their high-​growth period assured basic social justice, reliable contract enforcement and better property rights for individuals and companies, which appear to be the necessary conditions for sustaining economic growth at higher developmental levels. In the case of China, large income disparity, prevalent degenerative corruption and ineffective enforcement of laws were highly disruptive for long-​ term growth, mainly because they could erode the social cohesion to such an extent that society falls into turmoil when the economy goes into recession or downturns. Social turmoil could wipe out years, even decades of GDP growth for a latecomer like China. Recessions are unavoidable for market economies, middle-​income or high-​ income. And financial and economic crises could also occur, such as those in the United States in 2008–​09, Japan in 1989–​1990 and the East Asian economies in 1998–​1999. The key to sustainable growth is the tolerance of society for economic recessions and crises. In contemporary “capitalist economies,” the institutions of pluralism and rule of law ensure basic social justice and sufficient cohesion of society. The social-​welfare system developed in the post-​World-​ War II period provided the safety net as the additional defense against social upheavals. Finally, the government’s macroeconomic policies could help ease the severity of economic and financial crises. As a result, these economies were able to resume economic growth right after the recession or financial crisis. Developing countries, including the middle-​ income ones, are more vulnerable to economic downturns due to the lack of socioeconomic buffers. They installed some social-​welfare programs, yet the safety nets were oftentimes too thin to cushion the fall of the economy in large shocks. The governments of developing countries also had the tools of macroeconomic policies, yet their policies were far less effective without sufficiently developed market institutions. The most difficult for these economies was to ensure the social cohesion needed to tide over the economic crisis. The example in East Asia is Indonesia. The country fell into turmoil in the 1998 Asian economic crisis, after 20-​years rapid growth under the Suharto government. Social upheaval erupted in the economic downturn, due to the huge disparity and injustice in income distribution –​the politically powerful families gathered overwhelming wealth at the cost of the poor in the high growth years. The social upheaval jeopardized the promising growth prospects of Indonesia as a successful newly industrialized economy (NIE). In the case of China, underlying the growth-​ disrupting socioeconomic problems were the set of institutions that have robust historical roots. Historically, the intrinsic weakness in the state institutions invariably caused the concentration of wealth in the elites and deterioration of the internal coherence of the state itself, which in turn led to peasant rebellions and/​or military revolts of imperial officials. The income disparity and degenerative corruption in contemporary China have similar destructive effects. The problems with the income disparity are not just about its statistical magnitude but also about the underlying

Prospects of the Chinese economic development  187 principle of income/​wealth distribution. Social members’ wealth is very much determined by the amount of state power they possessed or their proximity to the power. And those who have power could amass enormous wealth at the expense of those who had not.This type of income disparity, different from that in the capitalist economies where economic players as resource owners (land, labor, capital and entrepreneurship) are paid by the values of their resources determined in impersonal markets, motivated economic players to seek for or get close to the state power instead of trying to increase their factor values through market competition and innovations. Therefore, the large income disparity in China, due to the income-​ distribution principle, tended to discourage innovative and productive activities in the private sectors.The lack of technological innovations and low productivity was a major drag on GDP growth at higher developmental levels beyond the middle-​income stage. Second, the injustice in income and wealth distribution tended to generate deep resentment toward the wealthy class in society and that resentment was a potential cause for social upheaval in economic downturns. As said, social upheavals could wipe out years of GDP growth. The widespread degenerative corruption helped worsen the income and wealth disparity on one hand and corroded the internal coherence of the party-​ state on the other, as it did in the imperial history. The collusion of corrupt officials with local businessmen and even gangsters is slowly tearing down the fabric of the state organization and wearing away its capability of acting as an integrated whole at difficult times. Moreover, the degenerative corruption has diminished people’s trust in the government as an impartial law-​enforcer and reduced the effectiveness of written laws and regulations, which also increased the difficulty for the state in keeping society in order at economic downturns. Some scholars hold that the Chinese economy is void of economic downturns and crisis, given the dominant state ownership in the economy. Indeed, China has a much larger state sector than the capitalist economies and successfully avoided the Asian Crisis in 1998–​1999 and the global financial and economic crisis in 2008–​ 2009. However, the Chinese economy also has substantial market-​driven contents, with the re-​introduction of private ownership and opening up to the world markets. A large part of the economic activities was no longer directly controllable by the state. Thus, the Chinese economy was not exactly “crisis free.” What has kept the half-​liberalized Chinese economy away from economic crisis so far iss the Chinese state’s strong capability of managing the economy through administrative and/​or “mixed” measures. As discussed, the Chinese state has mainly relied on the state enterprises and local governments as major players in industrialization and developed measures to control them through various channels. The private companies, which hold no leverage against the state, also need to follow the relevant state policies to survive and expand. The efficiency of the state’s management was enhanced by the latest technologies, such as internet and wireless communication. The basic idea is that the Chinese government possesses much more administrative means to fend off crises than their counterparts in capitalist economies, and these

188  Prospects of the Chinese economic development administrative measures played a key role in avoiding the potential crisis that has developed since the mid-​2000s in the domestic economy. A well-​reported “red flag” or “crisis-​trigger” is the real estate bubble and overcapacity of a wide range of industries. The expansion of real estate markets in China has accelerated since 2004 when local governments were granted the exclusive authority over the transfer of land-​usage rights (Hua 2013). Local governments were motivated in promoting real estate developments, not only because the real estate sector greatly contributed to local economic growth but also because land sales yielded large fiscal revenues for funding local projects. Under the state policy, farmlands were acquired by local governments from peasants with compensation priced at the land’s value for crop production, yet the governments received the market prices of these lands when selling them (the usage rights) to developers. The price differentials generated huge “land revenues” that have become the largest part of local governments’ fiscal income since then. In other words, the state-​ownership of land linked local government fiscal revenues directly to the market prices of land. Real estate prices surged quickly, with strong demand for residential houses, commercial buildings and related infrastructure in the urbanization process. So did the market values of land.The surge of housing prices brought an investment frenzy in real estates, with increasing number of companies, including the state enterprises, pouring funds into the real estate markets for fast profits. From 2000 to 2018, the housing prices in China’s large cities surged by 15 to 20 times.The dwellings in the top Chinese cities, such as Beijing and Shanghai, became the most expensive in the world. The feverish expansion of real estate, spurred by the soaring housing prices, led to the well-​observed housing bubbles, namely, the build-​up of surplus housing stocks in the Chinese cities. According to the report by Southwestern University of Finance and Economics, the vacancy rate in China’s urban areas increased from 18.4 percent in 2011 to 21.4 percent in 2017 (versus a natural vacancy rate of 9.8 percent), and the number of vacant houses and apartments in the urban areas totaled more than 65 million units in 2017. The vacant houses and apartments included unsold properties and properties purchased but left empty. In 2017 the vacancy rate in the second and third-​tier cities reached 22.2 percent and 21.8 percent, respectively. As for the commercially-​built houses in urban areas, the vacancy rate reached 26.6 percent.13 Other surveys reported even higher vacancy rates. In addition to the large surplus in the housing sector, the investment frenzy also led to overcapacity in the related industries, including iron and steel, cement and building materials, as widely reported. Moreover, excess capacity was not limited to the housing-​related industries. It also took place in the newly developed sectors such as high-​speed railways. After years of expansion, an extensive network of high-​ speed railways was built across the country. However, except the Beijing-​Shanghai Line and the Beijing-​Guangzhou Line that could be self-​supporting in operation costs, all other lines in the network had been operating under capacity and on subsidy since they were built, due to low density of transportation (Xu 2019).

Prospects of the Chinese economic development  189 The other potential “crisis trigger,” related to the housing bubbles, is the soaring indebtedness of local governments and state enterprises that borrowed heavily from the banking system. To exploit the advantage of their de facto land ownership in the real estate boom, local governments invented the Urban Development Investment Corporations (UDICs), companies held by local governments. The UDICs used the land in their jurisdiction as collateral to borrow from the state banks, and then acted on behalf of the local governments to invest in real estate and infrastructure. By 2009, UDICs became phenomenal in almost all regions and played a key role in the local governments’ feverish investment in local projects, such as construction of luxury office buildings, airports and subways. Local governments’ borrowing from banks via the UDICs grew extremely fast. For the period between 2010 and 2013, the outstanding debt of local governments increased from RMB15 trillion to RMB30 trillion. That is, the local government debt amounted to 60 percent of GDP in 2013 (Xu 2015, 543–​544). Corporate debt grew rapidly from 96 percent of GDP in 2007 to 160 percent of GDP in 2016 (Huang 2017, 70). Most of the corporate debt came from the state enterprises. A great number of state enterprises borrowed from the banks to invest in real estates for easy profits. Also, the state enterprises in the housing-​related industries borrowed massively from the banks to expand their production capacity in the go-​go years. Unlike private companies that are constrained by hard budgets, state enterprises tend to invest and expand without much concern for insolvency as the government always bails them out. This syndrome, known as “soft budget constraints,” mitigated yet unfixed in China’s SOE reforms, came back in recent years (Xu 2016). As a result of reckless borrowing, many state enterprises, especially those in the overcapacity industries, were stuck with large amounts of debt. The outstanding debt of the state enterprises amounted to RMB106.7 trillion at the end of 2017 and RMB115.6 trillion at the end of 2018.14 An additional concern is the rapid monetary growth associated with the investment frenzy in the real estates. China’s money supply, measured by M2, increased at the annual rate of 14.4 percent on average from 2008 to 2018. The stock of M2 was more than two times the country’s nominal GDP by the end of 2018.15 Comparatively, M2 in the United State increased at the average rate of 5.9 percent per year during the same period, even with three “quantitative easing” between 2008 and 2012. And the M2-​GDP ratio in the US stood at the regular 0.7 by end of 2018.16 The rapid growth of money supply in China put downward pressures on the value of the Chinese currency. Also, further increase in monetary growth could cause inflation or stagflation, given that the real estate market has reached its limits as the “money-​absorbing reservoir.” These red flags could trigger severe downturns in the Chinese economy.The burst of the housing bubble or a sharp fall in the housing prices would bankrupt not only the mortgage-​holding households but also the deeply indebted local governments. Since local governments’ bank borrowings were mostly backed by land, the value of the collateral would diminish quickly if housing and land

190  Prospects of the Chinese economic development prices collapse.The default of local governments could have catastrophic effects on the country’s banking and financial system. Similarly, the failure of insolvent state enterprises in large numbers would also devastate the banking system, worsen unemployment and cause an economic downturn. So far, the Chinese government has managed to avert the economic crisis mainly through sets of administrative measures. For the real estate bubbles, the government approach is to slow the surge in housing prices without pricking the bubbles.Various administrative measures were taken to stabilize the housing markets, from restrictions on house purchases of residents and non-​residents in large cities to an outright freeze of market transactions of houses in the “hot” cities for specified periods. Consequently, the real-​estate prices in the major cities remained high, moving in a “stop-​and-​go” fashion. At the same time, the government contained the negative effects of the housing bubble on the Chinese currency also through administrative measures. Under China’s half-​ open balance of payments (BOP) account, the domestic real estate bubble put great downward pressure on the exchange rate of the RMB as the persistently high prices of domestic houses have driven companies and individuals to buy cheaper and higher-​quality real estate abroad by converting RMB into foreign currencies. In order to prevent sharp falls in the RMB value and safeguard the domestic financial system, the Chinese government imposed administrative control over capital outflow. The administrative order, effective in July 2017, set the yearly maximum of US$10,000 per person under which Chinese citizens could exchange RMB for US dollars. Of course, the imposing of an administrative control means a step backward in the convertibility of the Chinese currency. Administrative or mixed measures were also taken to deleverage the debt of the local governments and state enterprises. To reduce the local governments’ bank debts, the central government permitted the provincial governments to issue their own bonds subject to an annual cap. In 2014–​2015, the bond-​ swap program was launched for the local governments to gradually replace their bank debts with local-​government bonds. The central government also recognized a part of UDIC debt as general government debt. Meanwhile, to restrict local governments’ borrowings, the central authority incorporated “local debt level” as an assessment criterion for local officials’ performance. As for the state enterprises, the government launched deleveraging drives for the state enterprises and bond-​swap programs, while continued to inject funds in the insolvent state enterprises to shore them up. The State Council directly set the targets for slashing the average debt-​asset ratio of the state enterprises by two percentage points by 2020.17 These measures have prevented an immediate economic crisis yet could not remove the inefficiency existing in the economy. From microeconomics, the huge surplus in real estate and related industries suggested misallocation or inefficient allocation of resources in production. The operations of insolvent state enterprises resulting from soft-​budget constraints indicated inefficiency at firms’ level.These losses of efficiency are bound to slow down GDP growth in the

Prospects of the Chinese economic development  191 long term. In the capitalist economies, the inefficiencies in resource allocation and firms’ operations are usually corrected through recessions. In recessions, the downward adjustment in asset and product prices would eliminate the surplus in the glut sectors and root out inefficient firms. Economic growth would resume afterwards. The government can ease the pain of recessions through policies but cannot eliminate recessions. Yet in the case of China, with the aforementioned administrative measures, the inefficiency in resource allocation and firms’ operations largely stayed uncorrected.The accumulation of efficiency losses is certainly harmful to long-​term growth. In addition to the efficiency losses on the production side, insufficient domestic consumption, as shown by the low consumption-​GDP ratio, is also dragging down the Chinese growth from the demand side. Having reached the middle-​income levels, the Chinese economy needs to shift from investment-​ push to consumption-​pull growth in order to move onto high-​income levels. Yet, the frugal spending of ordinary households, resulting from the large income and wealth disparity, is holding back the structural adjustment in domestic demand. Nor can the problem of insufficient consumption be solved by administrative measures. Externally, the Chinese growth is susceptible to adverse developments in international environments. As described in Chapter 6, China has been the biggest beneficiary of the intensified globalization in the past few decades. The Chinese super-​rapid growth was made possible by the rapid diffusion of new technologies from the originating countries and the close trade and investment links with the world’s developed economies. Thus, if there is any change in the international environment that cut off or weakened these links, the Chinese growth would slow down inevitably. Not only the hundreds of thousands of small manufacturers of exports would suffer –​the large manufacturers including high-​ tech companies would also face the dire situation of lower foreign demands and imported inputs. As part of the global supply chain, the Chinese manufacturing companies depended on the imports of critical components or inputs as well as foreign destinations for their intermediate and final products. China maintained strong growth in the global financial and economic crisis in 2008–​2009 because its close trade and investment links with the world’s economies remained intact, even though the developed economies underwent recessions at the time. In addition, the sluggish demand for China’s exports in that period was compensated by the domestic investment in real estate.Yet large investment stimulus as a policy measure for the government has been exhausted now that the domestic housing markets have reached the limits after ten years of feverish investment. In short, the government’s administrative measures could forestall economic crisis, at least in the near term, but they could hardly remove the inefficiency in the economy. The deepening of efficiency loss will result in stagnant growth in the longer term. Super-​ rapid growth was achieved in the past because the state-​ led industrialization in a low-​income economy produced huge dynamic gains in

192  Prospects of the Chinese economic development GDP that had more than offset the efficiency loss from the partial suppression of the markets. As noted in Chapter 4, the governments of latecomers have the advantage of identifying newer technologies and key industries for catch-​ up industrialization by utilizing the economic information. The government could achieve rapid industrialization through systematic adoption of newer technologies and focused investment in the right industries such as labor-​ intensive manufacturing, infrastructure and certain high-​tech sectors. However, after decades of rapid industrial developments, the developmental gaps between China and the advanced economies have narrowed considerably. Smaller technology gaps reduced the informational advantage of the state in allocating resources. Smaller income gaps increased the domestic labor costs. Consequently, the dynamic gains in outputs are diminishing quickly. With diminishing output gains, the efficiency losses resulting from the large state sector and the excessive state power could not be easily offset anymore. Furthermore, sustainable growth at and beyond the middle-​income stage requires continual upgrading of technologies and innovative capabilities. The state intelligence may work well in selecting winner industries when the technological gaps are large. Yet with shrinking gaps, it becomes increasingly harder for the state to identify the strategic industries and coordinate the adoption of new technologies through incremental innovations. For innovations at technological frontiers, the state-​directed research and development programs could not compete with the “ex-​post selection mechanism” of the markets (Maskin, Qian and Xu 2000). With the dominance of the state sector and inadequate development of property-​rights, the Chinese private companies lack the incentives and capacity to carry out radical innovations. Stagnant growth is perhaps a lesser foe than outright economic crisis but equally damaging for China’s economic prospects. Even if barring economic crisis, another 2–​3 percentage drop from the “new normal” rate of 6–​7 percent a year would keep China at the middle-​income level for much longer time than optimistically expected.

Institutional changes and the dynastic cycles From the above, the existing state institutions in China exhibited the same resilience and weakness as those in the imperial era. While the resilience enabled the country to have attained rapid GDP growth in the past few decades, the intrinsic weakness of these institutions produced the aforementioned socioeconomic problems that are destined to jeopardize the growth. It appears that with the existing state institutions, China will have a hard time moving onto high-​income levels in the near future, despite its recent economic success. State-​led developers could move onto high-​income levels, as shown by the cases of Japan, South Korea and Taiwan, but what sustained their economic growth at and beyond the middle-​income levels was the transition to pluralistic institutions or simply, democracy. The pluralistic institutions ensured the basic justice in income distribution, contained degenerative corruption of the state

Prospects of the Chinese economic development  193 and increased the role of written laws and regulations in the society. All these are necessary conditions for enhancing the efficiency, productivity and innovative capability of the economy. Strong state leadership could produce rapid GDP growth and offset the counter-​productive effects of the absolutist institutions for latecomers’ catch-​up industrialization. However, once the “advantage of backwardness” is exhausted, what really account for continual GDP growth are the efficiency, productivity and innovative capability of an economy. The tenacity of the Chinese core institution So far, little changes have been made to the Chinese core institutions in terms of moving towards democracy. Looking back, it is perhaps easier for the Chinese state to introduce the pluralistic institutions needed for sustainable growth at the beginning of the economic reforms in 1978. Back then, the government, with the conditional autonomy, could have chosen to privatize the state-​owned production assets on a full scale and to start political reforms towards pluralistic institutions. Yet, by that choice, China may not have achieved the super-​rapid GDP growth because large-​scale privatization would have greatly reduced the state control over the economy and political reforms may have caused some disruptions of production. As mentioned earlier, the excessive state power, with the combination of the regulatory and players’ functions, enabled the Chinese state to exploit the advantage of backwardness more thoroughly. Nonetheless, the dominance of state ownership over major production assets and the one-​party system prevented the possible separation of industrial wealth from the state power in the industrialization, in contrast to the cases of Japan, South Korea and Taiwan. In this sense, China’s super-​rapid growth came at a high cost. Today, it has become much harder to reform the social and political system with the state organization increasingly entrenched in the new propertied class. The tight bond between the state power and the new wealth has fostered strong vested interests with unmatchable capability of blocking the attempts to move to pluralism. And the economic achievements so far have buttressed the legitimacy of the absolute rule of the state. China’s experiences since 1978 again demonstrate the tenacity of the Chinese core institutions. As discussed in previous chapters, the Chinese core institutions of entrenched absolutism remained largely unchanged in the two millennia of the imperial era, despite the changes of dynasties. Moreover, the dynastic cycles, the phenomenon in imperial China, persisted in modern times.The core institutions of absolutism even survived the revolutions inspired by Western ideologies when Chinese society was much better informed about the alternative social and political systems in the 20th century. The Chinese Revolution in 1911 ended the imperial era but failed to establish a democratic system. The Republic founded by the KMT party that overthrew the Qing empire turned into an authoritarian state under Chiang Kai-​sheck. The communist party that defeated Chiang’s KMT regime founded a state of “proletarian dictatorship” in

194  Prospects of the Chinese economic development 1949. Despite the radical overhaul of the KMT regime, the abolition of private ownership and the elimination of the propertied class, the new communist state turned out even more dictatorial than the KMT regime. What accounted for the persistence of the Chinese core institutions in modern times? Both the 1911 Revolution and the 1949 Revolution aimed at terminating the tyrannical polity and building a new social system better for all the people. However, despite the idealistic inspirations or “illusions” of the revolutionaries, the set of core institutions, namely, the set of major rules governing the power relations between the state and social members remained basically the same. To some extent, the tenacity of the Chinese core institutions in modern times could also be explained by the “trophy effects” accounting for the dynastic cycles in the imperial era (see Chapter 4). Like the regime changers in the imperial era, the revolutionaries in modern times also tended to keep the existing state institutions as the trophy after overthrowing the old regimes. It is true that the revolutionaries intended to establish new social systems, but they were motivated to use the absolute power of the state to achieve their political goals or ideals and to safeguard the new regime as well. To them, the absolute state seemed the most effective apparatus to implement the new rules once the state organization was staffed with revolutionary members. As the absolute state power was supported by the existing state institutions, the revolutionary regimes actually maintained these old institutions in the process of introducing the pluralistic institutions such as constitutions and representative assemblies. As a result, the new institutions could work only “outside” of the existing institutions in state administration and ended up as the façade of the old institutions. Under the new revolutionary regimes, constitutions and new laws were written, yet the part of the constitutions that meant to restrict the ruler’s power stayed on paper. Representative assemblies were set up but held no real legislative power as the representatives sitting in these assemblies were selected by and were subservient to the new government. Political parties and organizations were allowed exist but not to hold any independent coercive power against the ruler or state. The state organization expanded to include new departments and agencies under modern names, but the set of rules governing the internal management of the state, as well as the state-​society relationship, remained unchanged. In brief, just as in the dynastic changes in the imperial days, the modern revolutions had overthrown only the old regimes but not the old state institutions. And old state institutions kept the old core institutions intact in Chinese society. The choices of not reforming the political system made by the Chinese state leaders since 1978 were driven by the incentive mechanism embedded in the same state institutions as in the old days.The party-​state leaders were motivated to keep the absolute power of the state as the state machinery enabled by the existing state institutions was the most effective and reliable instrument to achieve the goal of the “Four Modernizations.” Of course, the choice-​making of the Chinese leaders was further constrained by the political developments

Prospects of the Chinese economic development  195 in China between 1949 and 1978, in addition to China’s long tradition of entrenched absolutism. As denoted in previous chapters, societies are not freely moldable at each juncture in institutional developments as the upstream developments placed constraints on subsequent developments via the incentive mechanism and limited the choices facing the actors, including the revolutionaries. The revolutionaries were constrained in changing the old social systems because they somehow needed rely on the existing institutions to introduce the new institutions. Thus, the result of a revolution depends very much on the existing institutions at the time of revolution. The French Revolution in the late 18th century led to the termination of the so-​called weak absolutism and establishment of a democracy based on the principle of “liberty and equality” because the existing institutions at the time of revolution already contained the elements that allowed these changes to be made. The institutions of rule of law and the “contractual” feudal system had long developed in French society, just as in medieval England. Under the feudal system the coercive power of the French monarchy had been somewhat checked by the Assembly of Nobles and Estates-​General, although the French King possessed more power than the English crown. With the elements of pluralism in the existing institutions, the French Revolution was able to further disperse the power distribution in the society. In other words, the revolution did not entirely remove the core institutions –​it only altered the institutions further toward a greater and more “formal” pluralism. Of course, it was also possible that institutional changes were made in the opposite direction at the time. But, in the case of the French Revolution the elimination of absolutism was within the choice set of the revolutionaries and thus was attainable. In the case of China, Western-​style democracy may not have been within in the choice set of the Chinese revolutionaries. The Chinese revolutions in the first half of the 20th century took place in a society dominated by the core institutions of entrenched absolutism over the time span of 2,000 years. As said, the Chinese institutions have evolved along a path with the construction of the state at the center since an early time in history.The fully-​fledged developments of the centralized absolutist state that integrated the administrative, legislative and judiciary functions left few footholds for power-​sharing institutions to develop and for the reliable enforcement of political contracts under a coalition government. That explains why the revolutionary regimes would not let go of the absolute state power, especially the power to suppress political oppositions. Thus, the existing institutions at the time of these Chinese revolutions contained few components supportive for the revolutionaries to establish a Western-​style democracy at one stroke. Nevertheless, it does not mean that societies with the tradition of “oriental despotism” could not move to pluralistic system. East Asian societies, such as Japan in the 19th century and South Korea and Taiwan in the 20th century, were all governed by an absolutist or authoritarian state at the beginning of their catch-​up industrialization. Yet they all managed to have introduced

196  Prospects of the Chinese economic development pluralistic institutions in the industrialization. Their experiences show that transition to a pluralistic system could be made through top-​down political reforms under the leadership of the state in authoritarian societies, and the state institutions were crucial for the success of such a transition. China has developed a more sophisticated state system than its East Asian neighbors in history, but the Chinese state institutions contained more elements resistant to pluralism than theirs. As discussed previously, China’s state institutions differed from Japan’s, and to a lesser extent, from those of South Korea and Taiwan in two major aspects: the degree of state autonomy and the degree of reliance on written rules in state administration. A high degree of state autonomy and a high degree of reliance on written rules are the elements in state institutions that tend to support the transition to pluralism in authoritarian societies. In the case of Japan, South Korea and Taiwan, higher degree of state autonomy allowed the industrial wealth as a new social force to develop independent power vis-​à-​vis the state, which provided the socioeconomic foundation for political reforms. As described previously, in these societies the transition to pluralistic institutions began with the check of the ruler/​state power by the industrial elites.This observation coincides with that of medieval England where the upper nobility was the first social group to have restricted the king’s power through formal institutions.The underlying logic is perhaps that the propertied elites possessed greater economic leverage and organizational convenience in settling the conflicts with the ruler on a contractual basis. Once the ruler/​ state power can be restricted by the elites through formal institutions, other social groups were able to make use of these institutions to defend their own interests and to further disperse the power distribution in society. In this sense, the autonomy of the state allowed some room for power-​sharing institutions to develop. Also, an autonomous state is more likely to launch political reforms, unfettered by the vested interests, and is more capable of leading these reforms with strong internal coherence. A high degree of reliance on written rules in state administration is equally important for the transition to pluralism. As shown in the case of Meiji Japan, the tradition of “rule by law” enabled the state to enforce the new laws and regulations relatively effectively in the political reforms. The strong internal discipline of the state organization reduced the arbitrary exercise of the state power by individual officials and increased the credibility of the reforming government in establishing the new laws. Furthermore, a high degree of reliance on written rules also means that the government was able to treat social members impartially by explicit rules, regardless of their social stratum, income levels and personal relations to state officials. The impartial treatment prevented the circumvention of the new laws by those who had stakes in the old institutions. Briefly, the element of “rule by law” in the Japanese state institutions was more supportive for the transition to democracy, compared with the element of “rule of person” in the Chinese state institutions.

Prospects of the Chinese economic development  197 In short, the introduction of a pluralistic system in the case of China may need to start with efforts to increase the “supportive elements” in the existing state institutions. Reforming the state institutions From the above, a key step for introducing pluralism or breaking the dynastic cycles in China is to reform the existing state institutions. The tenacity of the core institutions in China came from the historical tight bond between the state power and economic wealth, validated by the state institutions. In Chinese society, state office means wealth and wealth depends on office power. Without breaking the bond, any attempt to introduce pluralism is likely to fail. To reform the state institutions is to increase the autonomy of the state and the effectiveness of written rules in state administration. Increasing the autonomy of the state in today’s China necessitates a separation of the state’s regulatory function from the producers’ role, further expansion of private companies or the private sector and a retreat of the state enterprises. The hardest question is whether the party-​state is willing to relinquish the state ownership over major production assets, including land. It is one thing to let go some of the state’s production assets to jump-​start the growth of a low-​income economy, but another to relinquish the control over the economic wealth when the state officials have already developed heavy stake in the existing system of income distribution. Enhancing the state autonomy also requires the creation of explicit laws and regulations to insulate those holding state-​office from private ownership of production-​assets as well as the creation of regulations on the transparency of the wealth of state officials. Rather different from the “official entrepreneurs” in the late Qing period and the “bureaucratic capitalists” in the KMT periods, state officials in today’s China do not own private companies directly –​it is their family members who own private companies or hold stakes in various shareholding companies. This should be favorable for enhancing the state autonomy. However, the officials’ positions in the government today are equally or even more important for their family wealth than in history.That is to say, the traditional ties between state-​office holding and private wealth are hidden but robust. Specific formal institutions are needed to sever these ties. The components of the state institutions are interlocked with one another. The laws on state autonomy could hardly produce desirable results without raising the effectiveness of the written rules in the society. As discussed in Chapter 4, the lower degree of reliance on written rules in state administration came from the true autocracy of the Chinese imperial state. The personal rule of the emperor reduced the effectiveness of laws and regulations in both the internal management of the state and the state governance of society. Indeed, although the emperor is gone in modern China, the “rule of person” continues. Thus, to increase the roles of written rules in state administration, autocracy

198  Prospects of the Chinese economic development must be ended not just in name but in practice. The party-​state has made some progress in establishing group leadership since 1978. State laws were laid down to set the office terms for the top state officials, including the chairman of the state, the premier and the members of party’s politburo standing committee. The real challenge is to ensure that these new laws are not reversed. A rule-​bound state organization is a necessary condition for enhancing the effectiveness of laws society-​wise. As described earlier, despite the government’s intention and rhetoric of turning China into a law-​governed society, laws and regulations are evaded by social members pervasively nowadays. An important reason is that the state cannot enforce written rules effectively in its own organization. State officials and those who have connections in the government always evade punishment when breaking the laws. The inability of the government to act as an impartial enforcer greatly diminishes the public trust in laws and encourages social members to protect their interests through relationship-​ building. Indeed, the modernization of the economy has dismantled part of the foundation for relation-​based coordination in the Chinese society. Since the early 20th century, Chinese society has largely moved out of kin-​based organizations and introduced Western-​style commercial codes. Yet, society has not yet moved to “rule by law.” The crux of the difficulty now lies in the existing state-​institutions with t autocratic tradition. Briefly, the reform of the state institutions should prepare a stronger state, namely, a state better disciplined and better insulated from the propertied class. The downfall of the Qing empire provided a historical lesson, that the transition to democracy is likely to fail when it is led by a weak state. The Qing state was actually at its weakest point when, under pressure, it launched the New Policy Reforms.That is, at the time of launching the political reforms the Qing state organization was already severely fractured, with the collapse of internal disciplines and deep entanglement with local propertied elites.The New Policy Reforms, with the emergence of political parties, the mushrooming of modern associations, the establishment of representative assemblies and the resultant social turmoil, put the final nail in the coffin of the falling state. Overall, the contemporary Chinese Miracle demonstrated the efficacy of the state-​led approach to the catch-​up industrialization of some latecomers, but not the superiority of the Chinese model over the capitalist system, given that the Chinese growth is based on the successful adoption of technologies originated in the capitalist countries. Compared with the Soviet high growth in the Cold War period, the Chinese growth is more enduring due to China’s close integration with the world’s capitalist economies. However, even with favorable external conditions, the sustainability of Chinese growth at and beyond the middle-​income stage principally depends on the country’s domestic institutions or the transition to the pluralistic institutions. The essence of the pluralistic institutions is the spread of coercive power among social groups on a contractual basis. Rule-​based power sharing, even when limited, benefits the common people, betters their economic rights and ultimately enhances the innovative capability and productivity of a society.

Prospects of the Chinese economic development  199 China may have carried more historical burdens than its neighbors in accepting pluralistic institutions, with the long tradition of the absolutist state. The long tradition also means that even if the transition is made, the specific arrangements of the political system in China may not be the same as those of the Western countries. Democracy comes in many forms. As mentioned in Chapter 5, after a hundred-​plus years’ development since the Meiji Reforms, Japan’s political system still differed considerably from the American model. But what really matters is that the core institutions underpinning the political system should be pluralistic in nature. So far in history, only the institutions of pluralism and rule of law have produced long-​term economic prosperity. There appears no exception for China.

Notes 1 All the Asian Tigers (South Korea, Taiwan, Hong Kong and Singapore) except Hong Kong, resorted to the state leadership in their catch-​up industrialization.They were often described as “developmental state” and “country Inc”. Hong Kong, on the other hand, was a model of laisser-​faire economy. 2 Singapore is not included in the comparison as it is a city state. Singapore is not quite challenged by the developmental issues associated with a dominant rural population, such as the persistent urban–​rural gap in income, in the catch-​up industrialization, unlike South Korea and Taiwan. 3 Source: the UNU-​ WIDER World Income Inequality Database (WIID); Ger, Y. (1998) The Story of Taiwan: Politics, Table V, P.40. 4 Source: the UNU-​WIDER World Income Inequality Database (WIID). 5 Report on Chinese Household Income Disparity 2013, 2015, China Household Finance Survey and Study Center, Southwestern University of Finance and Economics. 6 China People’s Living Development Report 2015, 2016, China Family Panel Studies, Institute of Social Science Survey, Peking University. 7 Migrant Workers and Their Children. China Labour Bulletin, https://​clb.org.hk/​ content/​migrant-​workers-​and-​their-​children. 8 Source: www.chinanews.com/​gn/​2016/​01-​15/​7718309.shtml. China News, 01/​ 25/​2016. 9 Source: www.rmlt.com.cn/​2015/​1127/​409951.shtml People’s Tribune, 11/​ 27/​ 2015. 10 Source: www.ccdi.gov.cn/​, Zhongguo Jijian Jiancha News, 04/​18/​2019. 11 Source: Chinese Enterprise News, 09/​02, 2018, www.qudong.com. 12 See studies by Chalmers Johnson, Ezra Vogel, Richard Mitchell, Robert Wade, Jeffery Sachs and Steve Radelet, for example. “Double Paradox”, pp. 15–​ 16, Wedeman, 2012. 13 Source: Analysis on Housing Vacancy in China Urban Areas in 2017, China Household Finance Survey and Study Center, Southwestern University of Finance and Economics. Commercially built houses are the houses constructed by real estate developers, as against the houses constructed by the SOEs or various levels of governments for their employees. 14 Source: Ministry of Finance, the P.R.C., www.mof.gov.cn/​zhengwuxinxi/​ caizhengshuju/​.

200  Prospects of the Chinese economic development 15 Source: China Statistical Yearbook, 2019. 16 Source: The U.S. Federal Reserve Bank and Bureau of Economic Analysis, the U.S. Department of Commerce. 17 Source: State Council, P.R.C., www.gov.cn/​zhengce/​2018-​09/​13/​content_​ 5321717.htm.

Bibliography Amsden, A.H. 1989. Asia’s Next Giant: South Korea and Late Industrialization. Oxford: Oxford University Press. Burmeister, L., G. Ranis and M. Wang. 2001. Group Behavior and Development: A Comparison of Farmers’ Organizations in South Korea and Taiwan.Yale University Economic Growth Centre Discussion Paper No. 828. China Statistical Yearbook, National Bureau of Statistics of China.www.stats.gov.cn/​ tjsj/​ndsj/​. Evans, P. 1995. Embedded Autonomy, States & Industrial Transformation. Princeton: Princeton University Press. Fei, J.C. and G. Ranis. 1975 A model of growth and employment in the open dualistic economy: The cases of Korea and Taiwan. Journal of Development Studies 11 2: 32–​63. Fei, J.C., G. Ranis and S.W.Y. Kuo. 1978. Growth and the Family Distribution of Income by Factor Components. The Quarterly Journal of Economics 92 1: 17–​53. Freeman, C. and F. Louca. 2001. As Time Goes by: from the Industrial Revolutions to the Information Revolution. Oxford: Oxford University Press. Fukuyama, F. 2011. The Origins of Political Order: From Prehuman Times to the French Revolution. New York: Farrar, Straus and Giroux. Fukuyama, F. 2014. Political Order and Political Decay: From the Industrial Revolution to the Globalization of Democracy. New York: Farrar, Straus and Giroux. Ger, Y. 1998. The Story of Taiwan, Politics. Taipei, Taiwan: Government Information Office. Guo,Y., J. Gan and C. Xu. 2008. A Nationwide Survey of Privatized Firms in China. The Seoul Journal of Economics 21 2: 311–​331 Hua, S. 2013. The Transition of Cities and the Land Pitfalls [Title translated by author]. Beijing, China: the Eastern Publishing. Huang, Y. 2017. Cracking the China Conundrum: Why Conventional Economic Wisdom Is Wrong. Oxford: Oxford University Press. Johnson, C. 1982. MITI and the Japanese miracle: the growth of industrial policy, 1925–​1975. Stanford: Stanford University Press. Kang, D.C. 2002. Crony Capitalism, Corruption and Development in South Korea and the Philippines. Cambridge: Cambridge University Press. Maskin, E.,Y. Qian and C. Xu. 2000. Incentives, Information, and Organizational Form. The Review of Economic Studies (April) 67 2: 359–​378. Wade, R.H. 1990. Governing the Market: Economic Theory and the Role of Government in East Asia’s Industrialization. Princeton: Princeton University Press. Wedeman, A. 2012. Double Paradox, Rapid Growth and Rising Corruption in China. Ithaca: Cornel University Press. World Bank Database. World Bank https://​datacatalog.worldbank.org/​. World Bank, 1993. The East Asian Miracle: Economic Growth and Public Policy (World Bank Policy Research Report). Oxford: Oxford University Press.

Prospects of the Chinese economic development  201 Xu, C. 2015. China’s Political-​Economic Institutions and Development. Cato Journal 35 3 (Fall): 525–​548. Xu, C. 2016. The Pitfalls of a Centralized Bureaucracy. Acceptance speech for China’s Economics Prize, Cheung Kong Graduate School of Business, China. Xu, C. 2019. The New SBC Syndromes: Proud High-​speed Railway. Feb. 19, 2019, FTchinese. Com. Yu, T. 1999. The Story of Taiwan, Economics. Taipei, Taiwan: Government Information Office.

Index

Note: Page numbers in italics indicate figures and in bold indicate tables on the corresponding pages. Acemoglu, D. 3, 7 Arkwright, R. 54–​55, 60 autonomy 85–​88, 183–​185, 196 Bacon, F. 52 Bentham, S. 60 Bill of Rights 21 Boulton, M. 54 Bramah, J. 60 Britain see England British Royal Society 52 Buddhism 36 bureaucracy, state 82–​83, 88–​91 Chiang Kai-​shek 193–​194 China 1–​2; 18th century 22–​24; 19th century 83–​85; analytical framework for understanding 5–​14; artisans and craftsmen in 67–​69, 74; Chinese model 2; comparison of institutional paths in 9–​11; dynastic cycles of 93–​97; economic success in contemporary 162–​167, 164, 179–​182; evolution of core institutions in pre-​1750 32–​45; failure of industrialization in late Qing 118–​130; focus on the core institutions in 8–​9; foreign direct investment (FDI) in 147–​150, 162, 165–​166; Four Modernizations 139, 142; GDP growth in 2–​3, 138, 160, 189; guild organizations 43; history as absolutist state 83, 140; Hundred Schools of Thought 35; importance of international settings for 11–​14; incentive mechanism embedded in state institutions of 91–​93; Keju system 41–​42, 44, 63, 71, 87, 89–​90;

kinship-​based feudalism in 23, 32–​35; KMT (Kuomintang) state 140, 141, 155, 159, 193–​194; lack of autonomy in 85–​88; lack of techno-​economic breakthrough in pre-​1750 61–​75; as latecomer to industrialization 12–​13; missing “New Men” in 65–​70; narrow knowledge base in 62–​65; office-​holding combined with land ownership in 86–​88; property rights in 70–​73, 155–​160; Qin-​ Han era development 38–​41, 86; railways in 122–​125, 152–​153; re-​establishment of private ownership in 155–​157; secret-​ keeping in 74–​75; shangbang system in 43–​44, 71–​72; short falls in property-​ rights development in 158–​160; silk-​making industry in 67–​69, 73; Sino-​Japanese War and 123; special economic zones (SEZs) in 146–​147; state institutions and dynastic cycles in 85–​97; state-​owned enterprises (SOEs) in 142–​145, 151, 156–​157; sustainable growth in doubt in 185–​192; technologies and globalization in 160–​162; theoretical ground and related literature on 6–​8; true autocracy and emperor’s personal rule in 88–​91; upward mobility versus legal rights in 70–​75; written language of 65; see also Chinese Miracle; future prospects for China; individual dynasties Chinese Miracle 2–​5, 10, 81, 138; central coordination of 142–​145; favorable external conditions and 160–​167, 164; improvements in economic liberty and 155–​160; open-​door policy and 146–​150;

Index  203 state enterprises and local governments as major players in 150–​155; state in cyclical upswing and 139–​142; strong state leadership for economic modernization in 138–​155 Christianity 24–​26 coercion-​constraining institutions (CCI) 7, 23 Cold War period 1 commercialization 4 Confucianism 22, 35, 36, 39–​40; dominance of 63–​64; emperor’s power and 89 Confucius 35 core institutions 8–​9; evolution in pre-​ 1750 China 32–​45; evolution in pre-​ 1750 England 24–​32; pluralism 20–​22, 26–​27, 31, 55; rule-​based coordination 20–​22, 26–​27, 31, 55; as ultimate cause of divergence after the Industrial Revolution 18–​24, 19 Cort, H. 54, 60 creative destruction 55 Crompton, S. 54 daimyo 84, 99–​100, 101–​102 Daoism 36 Darby, A. 54 Denshichi, I. 117 Dong Zhongshu 39 dynastic cycles 93–​97, 192–​199 East Asian Miracle 81 economic liberty in China 155–​160 efficiency losses 81 Eiichi, S. 117 Elisabeth I 59 England: 18th century 20–​22, 49–​61; agents of the Industrial Revolution in 53–​57; artisans and craftsmen of 55–​56; Christianity in 24–​26; Crown patent system in 56–​57; economic rights in 18th century 50, 55; evolution of core institutions in pre-​1750 24–​32; expansion of useful knowledge in 50–​53; Glorious Revolution in 21, 31, 52; Greek-​Roman heritage of 24; group mobility in 29–​ 30; Industrial Revolution origins in 18; lock-​in effects of institutions in 30; merchant guilds in 28, 58–​59; patent rights for individuals in 57–​61; property rights in 59–​60; royal charters in 27–​28; Statute of Monopolies 59 English Individualism 60

Fairbank, J. K. 65, 88 feudalism: in China 32–​36, 86; in England 19, 24–​26; in Japan 98–​101 First Opium War 83 Four Asian Tigers 2, 3, 10, 147, 160, 170; contemporary China among 162–​167, 164, 179–​182; differences in state-​led developments in 170–​174; economic success in 162–​167, 164; institutional changes and dynastic cycles and 192–​199; state institutions at root of differences between 174–​185; sustainable growth in doubt for 185–​192 Four Modernizations 139, 142 Freeman, C. 12 Fukuyama, F. 25, 36, 40 future prospects for China 170; contemporary conditions and 179–​182; differences in state-​led developments and 170–​174; institutional changes and the dynastic cycles and 192–​199; reforming state institutions for 197–​199; state autonomy and 183–​185; state institutions at root of differences and 174–​185; sustainable growth in doubt and 185–​192 General Agreement on Trade and Tariffs (GATT) 162, 163, 166 Gerschenkron, A. 7, 78–​79, 160 globalization 160–​162 Glorious Revolution 21, 31, 52 Greek-​Roman heritage 24 Greif, A. 7 Han Dynasty 35–​41, 63 Han Fei 35 Hargreaves, J. 54 Hayek, F. 80 He Shen 91, 92 Hong Kong 160 Hundred Schools of Thought 35 Ichizaemon, M. 117 Industrial Revolution 4–​5, 9, 11, 18; agents of 53–​57; China and England as mature agrarian-​commercial economies at onset of 20; China in the 18th century and 22–​24; core institutions as ultimate cause of divergence after 18–​24, 19; in England 20–​22, 49–​61; English Individualism and 60; increase in useful knowledge during 50–​53; leading entrepreneurs of 54, 60; Malthusian trap broken by 18, 61; New

204 Index Men of 54, 55, 65–​70; role of the state and (see state, the); second 5; sources of economic information during 80–​81; textile industry and 54–​55 information, sources of economic 80–​81 Innocent III, Pope 25 Japan 78, 80; 19th century state in 83–​85; complete autonomy in 101–​102, 196; development of state institutions in 97–​104; feudalism in 98–​101; history as absolutist state 83; incentive mechanism embedded in state institutions of 103–​104; pseudo autocracy and reliance on written rules in 98–​101; shogunate of 97, 98–​100; silk industry in 115; Sino-​ Japanese War and 123; see also Meiji Japan Jing Junjian 23 Jiupin Zhongzheng zhi 86 John, King 25 Johnson, C. 80 Jun-​Xian Zhi 36 Kay, J. 54 keju system 41–​42, 44, 63, 71, 87, 89–​90 Kihachiro, O. 117 kinship-​dominated society, China as 23, 32–​35 KMT (Kuomintang) state 140, 141, 155, 159, 193–​194; Taiwan and 177–​179 Kondratiev waves 12, 32, 79–​80 Korea 109, 160, 164 Langton, S. 25 Laozi 35 latecomers, economic catch-​up by 78–​85; quality of the state and 82–​83; state’s additional role in new international settings and 79–​82 Legalism 35, 36, 39 Li Hongzhang 119, 122 Lopez, R. 33 Louca, F. 12 Macfarlane, A. 60 Magna Carta 21, 25, 27, 29 Malthusian trap 18, 61 Marxism 18–​19 Masayoshi, M. 109 Maudslay, H. 60 Meiji Japan 107–​108, 160; central coordination and self-​reliance in 111–​113; domestic source for capital

formation in 109–​111; government assistance for private companies in 116–​118; government-​business relationship in 113–​118, 125–​130; institutional changes in 130–​132; rice tax 110; role of state enterprises in 114–​116; as state with developmental capability 108–​109; success of industrialization in 108–​118, 162–​167, 164 Mengzi 64 merchant guilds 28, 58–​59 Ming Dynasty 43, 61–​62, 91; commercial prosperity in 65–​69; expansion of state-​ run operations in the arts during 73; shipbuilding and sea navigation during 74 Mitsubishi 116–​117 Mokyr, J. 18, 50, 51, 63 Mozism 35 Muzong, Emperor 73 Needham, J. 63–​64 Newcomen, T. 54 New Culture Movement 64, 65 “New Men”: in England 54, 55; missing in China 65–​70 Newton, I. 52 Nien Uprising 120–​122 Nippon Yusen Kabushiki (NYK) 117 North, D. 1, 6, 8 Opium Wars 83 Organization for Economic Co-​operation and Development (OECD) 165 Park Chung-​hee 175–​176 patent system 56–​57; individual rights 57–​61 pluralism 20–​22, 25, 26–​27, 31, 55 Pomeranz, K. 4 property rights: in China 70–​73, 155–​160; in England 59–​60 Qin Dynasty 22, 33, 35–​41, 70; Chinese feudalism ended with 86 Qing Dynasty 91; emergence of official entrepreneurs in 127–​130; failure of industrialization under 118–​130; government-​business relationship in 125–​130; institutional changes in 132–​134; loss of central control over capital supply in 120–​122; state in frailty in 119–​120; textile industry in 125–​127,

Index  205 129; uncoordinated programs and foreign dependency in 122–​125 reform, state institutional 197–​199 Renaissance era 52 Robinson, J. A. 3, 7 Roman Catholic Church 25 rule-​based coordination 20–​22, 26–​27, 31, 55 Russia 78, 80 Ryoichiro, O. 117 samurai 84, 101–​102, 117 Schumpeter, J. A. 12, 55 Scientific Revolution, 17th century 51–​52 Second Opium War 83 shangbang 43–​44, 71–​72 Shang Yang 35, 36–​37 Sheng Xuanhuai 128–​129 shugo-​jito system 99 Singapore 160, 170 Sino-​Japanese War 123 Skocpol, T. 8, 84, 97, 101 Smeaton, J. 54 Smith, A. 28 Song Dynasty 61; Confucianism in 63, 65 South Korea 160, 164, 170; differences in state-​led developments in 170–​174; state autonomy in 183–​185, 196; state institutions of 174–​185; sustainable growth in doubt in 185–​192 Soviet Union, the 1, 3 stage theory 18–​19 state, the: in 19th century China and Japan 83–​85; additional role in new international settings 79–​82; authoritarian economic growth led by 81; Chinese institutions and dynastic cycles 85–​97; development in Japan 97–​104; incentive mechanism embedded in institutions of 91–​93; lock-​in effects of 96–​97; quality of 82–​83; role for latecomers’ economic catch-​up 78–​85; sources of economic information and 80–​81; trophy effects of 96–​97 state-​led industrialization 107–​108; differences among Asian Tigers in 170–​174; emergence of official entrepreneurs in 127–​130; failure in late Qing China 118–​130; success in Meiji Japan 108–​118, 162–​167, 164; textile industries and 125–​127; see also Chinese Miracle

Sui-​Tang Dynasties period 87 Taiping Uprising 120–​122 Taisuke, I. 109 Taiwan 160, 164, 170; differences in state-​led developments in 170–​174; state autonomy in 183–​185, 196; state institutions of 174–​185; sustainable growth in doubt in 185–​192 Takamori, S. 109 Takashi, M. 117 Tang Dynasty 42–​43, 74, 91 Taoism 35 technological development and China 160–​162 textile industries 54–​55, 73, 113, 115, 125–​127, 129 Tokugawa period 84, 103–​104, 110 Unwin, G. 57 urbanization 4 useful knowledge 50–​53 Wang, L. 63–​64 Watt, J. 54, 60 Weber, M. 82, 85, 97 Wedgwood, J. 54, 60 Wei-​Jin period 86 Wilkinson, J. 54, 60 World Bank 170 World Trade Organization (WTO) 146, 148–​149, 157, 163, 165–​166 Wu, King 33 Xuanzong, Emperor 91 Yan Song 91, 92 Yataro, I. 117 Yuan Dynasty 66 Zeng Guofan 119, 122 Zenjiro,Y. 117 Zhang Zhidong 119, 127–​128 Zhengyuan Fu 88–​89 Zhou Fu 129 Zhou period 32; core institutions initial setups and early developments during 32–​36; Hundred Schools of Thought 35; kinship-​base feudalism in 32–​35; Shang Yang reforms 36–​37 Zhou Xuexi 129 Zhuangzi 35 Zuo Zongtang 119, 122