The persistent institutional effect of liberal colonialism: evidence from China’s financial policies

ABSTRACT

The effect of liberal colonialism on the allocation of capital persists to this day. We exploit the colonial history of China during 1896-1911 with qualitative evidence to measure liberal colonialism. We document that liberal colonialism promotes the subsequent efficiency of financial policies on the capital allocation in 2004 through the quality of economic institutions.

KEYWORDS:

• Liberal colonialism
• economic institutions
• allocative efficiency
• China

JEL CLASSIFICATION:

• P34
• N45
• P26

Disclosure statement

No potential conflict of interest is reported by the authors.

Notes

¹ If we assume that the liberal colonialism during 1896–1911 is exogenous for the allocative efficiency of financial policies in 2004, we can expect a causal effect of the former on the latter. In fact, we will theoretically justify the assumption in Section II and empirically confirm it in later instrumental variable estimation. For the cautiousness, we here use ‘ tends to be’ instead of ‘ is.’

² In theory, IV strategy identifies a mediation effect of the variable of interest through the IV on the dependent variable. This explains a number of literature uses IV estimation to show the mediation effect (e.g. Bretschger, Kappel, and Werner 2012). In comparison, it requires the IV has only one channel (mediator) to affect the variable of outcome, so it is more strict than the traditional mediation-effect estimation, but it helps identify the causal effect from the IV on the variable of outcome though the channel.

³ As an exception, Hong Kong is ceded to the Great Britain. The cession is the evidence of settler colonialism, but Hong Kong is a very small island of China. More practically, this article focuses on the mainland China, so it is ignored.

⁴ Opium is not really relevant in trades between the Qing government and the Great Britain. Given that the opium trade cannot be prohibited, the Qing government encouraged the Chinese farmers to grow opium. As a result, the Chinese beat the foreign suppliers for the opium competition (Li 1957).

⁵ In fact, Shanghai and Tianjin are also settlements. We do not include them because they are governed by multiple colonists so that cannot be identified objectively as liberal colonialism or not. Moreover, Japan’s colonialism during 1931–1945 is mercantilist colonialism, but its militarism was still constrained in its early colonialism process in the later Qing dynasty. More practically, we can drop the Japan colonial power in the period and our results are robust.

⁶ In China’s more than 2000 years of feudalism history, a hierarchical regime and the Confucian ideology of ‘ putting agriculture before business culture’ (Brook, 1998) results in the lack of the protection on business. As Landes (2006, 6) says, ‘ China lacked a free market and institutionalized property rights.’

⁷ We can also add the dummy for the Japanese invasion of Manchuris in 1931 and the rest of China from 1937. As a result, the effect of interest is qualified as before. We do not report the results because the invasion is obviously illiberal so that the invasion dummy is not a confounding factor. Results are provided upon request.

Additional information

Funding

Tong Fu acknowledges financial support from the National Natural Science Foundation of China (Project No. 71763009) and financial support from the Education Department of Jiangxi Province (Project No. GJJ190277) and Ze Jian acknowledges financial support from the National Natural Science Foundation of China (Project No. 71563013).