State Capacity and Leadership: Why Did China Take off?

Abstract

For a large economy trying to achieve industrialization, it needs to develop indigenous technological capacities to make growth sustainable. Industrialization can be challenging to achieve because it might be difficult to develop technologies without changing culture and political institutions which are useful to maintain ruling. Rulers in ancient China choose institutions to prevent internal rebellions. Industrialization was a new goal for the Qing government in the 19^th century, and previous institutions were not designed to handle this issue. China’s high growth rates after 1978 resulted from internal reforms to increase efficiency and external openness to absorb foreign capital, knowledge, and technologies. China’s state capacity and leadership supported developing technological capacities in the catch-up process.

Keywords:

• China;
• economic development;
• technological capacity;
• political economy;
• state capacity

JEL CLASSIFICATION:

• O14
• O53
• N95

Acknowledgments

The author thanks Hung-Gay Fung for valuable suggestions.

Notes

1 The usage of state capacity in this paper follows Besley and Persson (2010, p. 1) who state that “a good part of investing in state effectiveness comes from improving the state’s ability to implement a range of policies, something which we refer to as state capacity” and “state capacity originally referred to the power of the state to raise revenue. Here we broaden it to capture the wider range of competencies that the state acquires in the development process, which includes the power to enforce contracts and support markets through regulation or otherwise.”

2 In a traditional society, tax is mainly land tax. With the development of industries and the broadening of the tax base such as the introduction of income tax, tax revenue as a percent of GDP can increase with the process of industrialization (Besley & Persson, 2014).

3 The practice of sharing property among all sons in ancient China decreased the possibility of the concentration of land ownership and thus the possibility of relying on land property as an independent source of political power.

4 In China’s history, the actual tax rate (including land tax, poll tax, and corvee) in a time period could be significantly higher than the tax rate claimed by the government. Also, tax rates fluctuated over time (Deng, 1999).

5 Ma and Rubin (2019) argue that absolutist regimes may choose not to invest in administrative capacity to commit to a low level of tax extraction.

6 This is clear if compared with Japan with a long history of learning from other countries. When Japan faced foreign threats in the 19^th century, the country reformed swiftly.

7 Kwong (1984) argues that collective leadership existed after the death of Emperor Xianfeng. This political system could only follow, rather than lead events.

8 Some scholars think that the Self-Strengthening Movement was successful. For example, Xia (1992) thinks that it was successful in putting down internal rebellions and partially successful in handling external threats.

9 The Qing government officially stopped using the imperial examination system to select government officials in 1905. This cut off an important connection between government and society and the government lost the support of more than one million intellectuals. To handle the Taiping Heaven Movement (1851-1864), the Qing government gave local officials such as Zeng Guofan more autonomy, and the division of power among officials eroded. With increased power accumulated from past, various provincial governments declared independence in 1911.

10 Yan Fu, a scholar classified as a new Legalist, pioneered in introducing western knowledge into China in the 19^th century. Yan did not think that Japan’s victory was a result of local government autonomy (Schwartz, 1964).

11 With the death of Empress Dowager Cixi, the new leader (father of the emperor) of the Qing government was not politically experienced. With the newly formed cabinet composing mainly members from Manchu and the royal family in May 1911, the government alienated citizens, especially Han Chinese. When the Qing government tried to nationalize railways, citizens in Sichuan province became upset and the new army supposed to suppress citizens revolted in Wuchang, Hubei. Yuan Shikai, a leader of the new army previously forced to retire, was asked to put down the rebellion. Yuan was not loyal to the Qing government anymore and the Qing government fell down.

12 Some dams built became hazards after rain and had to be destroyed later (Zhang, 2006).

13 For example, while the home of Confucius in Quhu, Shandong province was maintained for more than two thousand years during which many wars happened, it was heavily damaged during the Cultural Revolution when the tomb of Confucius was excavated.

14 Source: Chronicle of Mao Zedong (vol. 6, p. 510) published by the Central Party Literature Press in 2013.

15 Hu Yaobang was also eager to industrialize China after 1978. His push for a higher growth rate rather than focusing on economic efficiencies contributed to his conflict with Zhao Ziyang (Zhao, 2009).

16 Chen Yun had a good reputation in managing the economy (Li, 1994). Chen did not think that a planned economy would not work by nature. Chen had doubts on attracting foreign capital and he never visited the Special Economic Zones (Zhao, 2009).

17 Tombe and Zhu (2019) show that reductions in internal trade and migration costs account for about one quarter of aggregate labor productivity growth in China between 2000 and 2005.

18 See Li (1994) and Zhang (2006) for China’s import of agricultural goods in the early 1960s.

19 In year 2015, China used 135.577 billion dollars of FDI. For year 2014, it is estimated that FDI firms provide employment to about 10% of urban employment (Source: Statistics on FDI in China, 2016).

20 For example, in year 2001, China signed 3,900 contracts and paid 4.395 billion dollars for importing technologies. In year 2013, China signed 12,448 contracts and paid 41.09 billion dollars for importing technologies (Source: Report on FDI in China 2016, p. 46, Ministry of Commerce of PRC).

21 While China’s government revenue as a percentage of GDP may be consistent with other countries, there is claim that China’s effective tax rates are higher if government revenue from land sales and state-owned enterprises are included.

22 Higher level of the party can appoint and change lower level party leaders, ensuring centralization of power. Naughton (2016) argues that CCP has internal accountability, but CCP refuses external accountability.

23 China has election at local level such as villages, but the national leader is not elected by citizens. China’s political representation is internal through selection, rather than external through election.

24 Many officials were reluctant to retire since some just came back to work after being pushed aside during the Cultural Revolution. A temporary institution, the Central Advisory Committee, was established for this purpose. Old officials became members of this institution and some of their privileges were kept. This institutional innovation made the transition smooth (Vogel, 2011).

25 Source: http://history.people.com.cn/n/2014/1021/c372327-25876475.html

26 By comparing China with Russia, Blanchard and Shleifer (2001) have argued that political concentration is important in affecting incentives of local officials such as in preventing corruption. Naughton (2009) has argued that China’s political hierarchy played a key role in the implementation of dual track reform. Naughton (2016) has emphasized the strengthening of China’s political hierarchy as a coherent system. Wen (2016) believes that western democracy did not work in China, as demonstrated after the Xinhai Revolution which led to the fall of the Qing government.

27 This example of import substitution shows that the local content requirement may help economic development. The rent from the automobile industry was envied by other provinces and they also developed their automobile industries. Competition among local governments reduced firm sizes in the automobile sector. This is an example that competition among local governments may not always be healthy.

28 Policies used by Britain include ensuring markets through erecting tariffs and the prohibition of exporting raw materials. For a country in late development, governments or banks could play active roles in consolidating resources for economic development.

29 Dahl (1989) does not think democracy is an end itself and he believes that democracy will be helpful for freedom and self-development. However, democracy could not determine its boundary.

30 Even in a democratic country, government agencies differ in their style of decision making. Federal Reserve has independence, while Internal Revenue Service does not. Blinder (1997) argues that time horizon is one of the three factors determining whether politicians or technocrats should be chosen for decision-making.

31 Xu (2015) states the lack of independent judiciary system in China and proposes constitutional democracy as the only choice for China’s future.

32 It is claimed that economic reform and political reform are complementary because political reform will help to fight corruption. However, fighting corruption may not be a sufficient reason to engage in political reform because there is no monotonic relationship between democracy and corruption: democratic countries such as India do not lack corruption while nondemocratic countries such as Singapore control corruption well.