Taxation, fiscal capacity and credible commitment in eighteenth-century China: the effects of the formalization and centralization of informal surtaxes

by Max Hao (Peking University) and Kevin Liu (The Hong Kong University of Science and Technology).

 

In premodern Europe, famine relief was inadequately provided until the late 19th century.  In contrast, in late imperial China, preventing starvation helped legitimate the state and played a key role in reducing internal conflicts. The Qing state operated a network of granaries and developed sophisticated procedures to report famines and supply relief. However, as shown in Figure 1, the frequency of famine relief recorded in the Qingshilu (veritable records of Qing) was much lower than the frequency of disasters under the reigns of Shunzhi (1644-1661) and Kangxi (1661-1722). In contrast, in the reign of Yongzheng (1723-1735) and in the early years of Qianlong (1736-1760), famine relief became more responsive to disasters. Why did the Qing state take on the responsibility for “nourishing the people” only after 1723?

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Figure 1: Province-level frequency of disasters, famine reliefs and tax exemptions, 1645-1722 (Four-year moving average)

To solve this puzzle, we explore the effect of a reform that formalized and centralized part of the fiscal system in premodern China: the ‘huohao turned to public reform instituted in Emperor Yongzheng’s reign (1723-1735).   ‘Huohao’ denotes all the informal surtaxes collected by county governments. Because the bulk of formal tax revenue was remitted directly to the central government, provincial and county governments retained only a limited share of this income with limited discretion over its expenditure.  Consequently,  they imposed huohao or surtaxes to finance their own expenses. However, because these informal revenues were unsanctioned and unmonitored by the central government, they were largely pocketed by officials.

The ‘huohao turned to public’ reform was an endeavor to formalize huohao in order to achieve two interconnected policy goals: to reduce corruption and enhance provincial fiscal capacity by centralizing control. First, huohao was collected at rates designated by the provincial governor and delivered to the provincial treasury. Second, 60% of the remitted funds were allocated to county magistrates and provincial governors as ‘anticorruption salaries’ to finance their regular expenses, reducing their incentive to collect informal surtaxes and seize public revenues. More importantly, 40% of the formalized houhao was assigned as public funds to finance irregular expenses at the governors’ discretion. The total annual revenue from the formalized huohao amounted to 4.5 million taels of silver, of which 1.8 million were reserved as public funds. In sum, by formalizing and centralizing informal surtaxes, the reform enhanced provincial fiscal capacity by giving provincial governors more resources and a greater incentive to spend them on public goods. The design of the reform is illustrated in Figure 2.

 

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Because corruption is extremely difficult to explore empirically, we mainly focus on whether the second goal was achieved. The timing of when the reform was initiated and completed differed between provinces, but the reasons behind these variations  were largely exogenous to provincial characteristics, enabling us to use them to test the effects of reform. We test whether the huohao reform raised the frequency of famine relief in periods of disastrous weather by exploiting the different timing of the reform process across provinces. We restrict our dataset to 1710-1760, when the bulk of famine relief was financed by the provinces.

Using a prefecture-level panel dataset, we find that in times of extreme drought and floods, the frequency of famine relief increased after the reform by 1.05 times per prefecture, which was more than 100% of the standard deviation of the dependent variable relative to that under non-disastrous weather. By exploring the dynamics of the reform’s impact, we find no pre-trend, which supports the exogeneity of the reform’s timing. Our results are robust to controlling for other initiatives by the central government, such as tax exemptions, the allocation of tribute grain and central fiscal revenues, the enforcement of bureaucratic monitoring, and other concurrent fiscal reforms. We also find that famine relief effectively reduced grain prices when disasters occurred, indicating that public funds were spent on famine relief which had a beneficial impact on the population. Further, we find that the reform’s impact was greater when areas faced exceptional flooding compared to exceptional droughts, and greater in prefectures which had difficulties collecting taxes, suggesting that the reform facilitated the intertemporal and spatial redistribution of financial resources.

For this tax reform to have a sustained effect on provincial government capacity,  central government would need to resist the expropriation of these new revenues for its own use.  However, in premodern China, there were no institutional constraints on this dispossession.  After emperor Qianlong (1736-1796) succeeded to the throne, the central government began to make regular checks on the expenditure of provincial public funds, forced the inter-provincial transfers of funds, and expended them on projects previously financed by central revenues. These actions forced provincial governments to reduce their expenditure on famine relief and withhold anticorruption salaries meant for county administrators. This finding highlights that it was the lack of credible commitment that accounted for the short-lived success of this fiscal reform. Viewed from this perspective, the reform provides a valuable lesson about the role of political institutions in the Great Divergence.

 

To contact the authors:

Max Hao (maxhao1003@pku.edu.cn)

Kevin Liu (kevin.liu@connect.ust.hk)

A Silver Transformation: Chinese Monetary Integration in Times of Political Disintegration during 1898–1933

by Debin Ma (London School of Economics and Hitotsubashi University)  and Liuyan Zhao (Peking University)

The full paper is due to be published in The Economic History Review and is currently available on Early View.

 

chinese coins
Two 19th Century Chinese Cash Coins. Available at <https://www.coincommunity.com/forum/topic.asp?TOPIC_ID=70505>

Despite the political turmoil, the early 20th century witnessed  fundamental economic and industrial transformations in China.  Our research documents the most important but neglected aspect of this development:  China remained on the silver standard until 1936 while many countries remained on gold.  Nonetheless, the Chinese silver regime defies easy classification because  its silver basis was traditionally not in coinage, but in the form of privately minted ingots called sycee, denoted by a unit of account called tael.  During our study period, sycee circulated alongside standardized silver coins such as Mexican and later Chinese silver dollars. We know relatively little about the operation of the silver exchange and monetary regime within China, in contrast to the large literature on the gold standard during the same era.

We present an in-depth analysis of China’s unique silver regime by offering a systematic econometric assessment of Chinese silver market integration between 1898 and 1933.  As a result of this integration, the dollar-tael exchange rate, the  yangli, became the most important indicator of the Chinese currency market. We compile a large data set culled from contemporary publications on the yangli across nineteen cities in Northern and Central China, and offer a threshold time series methodology for measuring silver integration comparable to that of gold points.

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Figure 1. Silver point estimates between Shanghai and Tianjin in 10-year moving windows, Jan. 1898–March 1933. Source: Ma and Zhao (per article in the Economic History Review, 2019)

We find that the silver points between Shanghai and Tianjin, the two most important financial centers in Central and Northern China, declined  steadily from the 1910s for the rest of the period (Figure 1).  Our estimates of silver points from the daily rates of nineteen cities during the 1920s and 1930s also reveal that there was no substantial difference in the level of monetary integration between the Warlord Era of the 1920s and the Nanjing decade of the 1930s. Figure 2 provides a simple linear plot of  the distance between Shanghai and the estimated silver points of those cities paired with Shanghai during the 1920s and 1930s. This Figure shows a positive relationship between silver points and the distance from Shanghai, indicating the rise of a monetary system centered on Shanghai.

Our silver point estimates are closely aligned with the actual costs of the silver trade derived from contemporary accounts. Moreover, the silver points help predict corresponding transaction volumes: the majority of large silver exports from Shanghai occurred when the  yangli spread was above the silver export points;  only limited flows occurred when it fell within the bounds of the silver points. The econometric results reveal that monetary integration between Shanghai and Tianjin improved in the 1910s—precisely during the Warlord Era of national disintegration and civil strife—and these improvements spread to other cities in Central and Northern China in the 1920s and 1930s.

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Figure 2. Silver points and distance. Source: Ma and Zhao (per article in the Economic History Review, 2019

Our research provides a historical analysis of the causes of monetary integration, attributing a central role to China’s infrastructure and financial improvements during this period. One plausible driving force was the rise of new transport and information infrastructure, for example, the completion of the Tianjin-Nanjing Railway, and the Shanghai-Nanjing and Shanghai-Hangzhou Railways constructed between 1908 and 1916, which linked the Northern and Southern China. Compared with road or water transport, railroads offered much faster, cheaper and safer delivery, an advantage far more significant for high-value silver shipments than low-value high-bulk commodities.

Another, more important factor was monetary and financial transformation indicated by the rise of a modern banking system from the end of the 19th century. Although it was the government that issued national dollars, banking communities played a key role in defending its reputation and purity. Overtime, the ‘countable’ dollar outperformed the ‘weighable’ sycee as a medium of exchange, gaining an increasing share in China’s monetary system. This eventually paved the way for the currency reform of 1933, which abolished the sycee and the tael, establishing the dollar as the sole standard. A notable monetary transformation was the increasing popularity of banknotes. The system of Chinese bank note issuance was largely run on a model of free banking with multiple public and private banks, Chinese or foreign, issuing silver-convertible banknotes based on reputation mechanism. Thus, the increasing note issue from the 1910s provided a much more elastic currency to smooth seasonality in the money markets and enhance financial integration.

 

To contact the authors:

Debin Ma (D.Ma1@lse.ac.uk)

Liuyan Zhao (zhly@pku.edu.cn)

Business before industrialization: Are there lessons to learn?

by Judy Stephenson (Wadham College, University of Oxford) and Oscar Gelderblom (University of Utrecht)

 

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Bruegel the Elder (1565), Corn Harvest (August)

Business organization is mostly absent from economic history debate about the rise of economic growth, but it was not always so  

As a new protectionist era in political economy dawns, it would be fair to ask what scholarship business and policy can draw on to understand how trade flourished before twentieth century institutions promoted globalization. Yet, pre-industrial business organization, once a central concern in scholarly debates about the rise of capitalism, and the West, currently plays only a marginal role in research on long-run economic development. Once a central pillar of economic history, the subject is almost absent from the recent global meta-narratives of divergence and growth in economic history. Since 2013 Oscar Gelderblom (Utrecht) and Francesca Trivellato (Yale) have been reviving interest, exploring finance and organization in early modern business thanks to a grant from the Netherlands Organization of Scientif Research (NWO).

“our survey suggests that a strong theoretical foundation and rich empirical data exist on the basis of which we can develop a comparative business history of the preindustrial world.”

In May they convened the last in a series of workshops ‘the Funding of Early Modern Business’, in Utrecht, bringing together speakers from around the globe to look specifically at means and methods of funding and finance in a comparative sense.

The old literature on western business focused, for the largest part, on the large chartered and state backed organizations of colonialism, possibly to the detriment of our understanding of domestic and regional business practice. The cases under discussion at the workshop were geographically and methodologically varied – but mostly they stressed the latter. Susanna Martinez Rodriguez (Murcia) examined the cases of Spain’s Sociedad de Responsibiliadad Limitata in the early twentieth century, highlighting the attractiveness of the hybrid legal form for small business. Claire Lemercier (CNRS Paris) showed the use of courts and the legal system by trading businesses in 19th century Paris were a last recourse for the complex credit arrangements of urban trading. A large number of trading women used the courts and this raises the question of whether this represents a larger number of women in business than expected, or whether other means were less accessible to them. Siyuan Zhao (Shanghai) showed the vast records available to the researcher of Chinese business forms in the 19 century. His case showed that production households operated with advanced subcontracting networks of finance. As the first day ended conversation among participants and discussants – including Phillip Hoffman, Craig Muldrew, Heidi Deneweth and Joost Jonker focused on contracts, enforcement, and the varied ways in which early modern businesses responded to costs and risk.

Meng Zhang (UCLA) delighted participants with meticulous research showing that small farmers and plot owners in 18th-century Southwestern China securitised timber production and land shareholdings with complex contracts risk mitigation among small agricultural operators that allocated future output and allowed division of land and produce. Her work challenges current narratives of China in the 18th century. Judy Stephenson described the significant credit networks of seventeenth century building contractors in London. The structure and process of the contract for works enabled the crown and city to finance major infrastructure development after the Great Fire. Pierre Gervaise showed that French merchants in the southwest were opportunist in using their de facto monopolies on supply of goods to Bordeaux to price gouge. His amusing and detailed archival sources give the opportunity for new analysis of French supply chains and transaction costs.

Thomas Safley needed no introduction to this audience. His work on fifteenth and sixteenth century Southern German family networks is well established, but here he demonstrated that norms and collective action institutions in southern Germany were distinctive. Mauro Carboni traced the development of the limited partnership to 15th century Bologna and described the contract stipulations made as the time of partnership formation.

One of the key areas that Gelderblom & Trivellato highlighted as of particular interest was that of women in business in the early modern period. Hannah Barker used her wide research in women and family business to discuss the high number of trading businesses in mid-19th century Manchester run by women, and make the point that existing accounts of welfare and output do not take women’s businesses into account. The area is one with active research.

The overall picture gained from the workshop was of the remarkable organization flexibility of early modern business co-ordination, most particularly y in relation to credit. Almost all cases showed businesses moderating and contracting the rights and involvement of creditors in varied ways non-financial ways. Almost all cases indicated that contracts entered into determined outcomes to the same or greater degree as the structure of the enterprise.

Gelderblom & Trivellato have come to the end of the project but will continue to forge research links and networks on early modern business. Their work so far shows clearly that research into domestic and regional businesses before 1870 will bear fruit for historians, and very probably business leaders too.