size and dynastic decline: the principal-agent problem in

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www.elsevier.com/locate/eehExplorations in Economic History 54 (2014) 107–127

Size and dynastic decline: The principal-agent problemin late imperial China, 1700–1850

Tuan-Hwee Sng

Department of Economics, National University of Singapore, AS2 Level 6, 1 Arts Link, 117570, Singapore

Received 26 July 2013Available online 27 May 2014

Abstract

This paper argues that China's size was one reason behind its relative decline in the nineteenth century. A ruler governing a largecountry faces severe agency problems. Given his monitoring difficulties, his agents have strong incentives to extort the taxpayers.This forces him to keep taxes low to prevent revolts. Economic expansion could aggravate corruption and cause further fiscalweakening. To support the model's predictions, I show that the Chinese state taxed and administered sparingly, especially inregions far from Beijing. Furthermore, its fiscal capacity contracted steadily during the prosperous eighteenth century, sowing theseeds for the nineteenth-century crises.© 2014 Elsevier Inc. All rights reserved.

Keywords: Economic history; Political economy; China; Taxation; Public goods; Institutions and growthJEL classification: N15; N45; O43

1 According to the Naito Hypothesis, the Chinese emperor becamemore secure from the Song dynasty (960–1279) onward. Usurpation

1. Introduction

Why was China unable to seize the opportunitiespresented by the Industrial Revolution to modernize itseconomy in the nineteenth century? Traditionally,many blame its autocratic regime. Going back toMontesquieu, prominent scholars have argued thatChina's growth was hampered by an autocratic,managerial, and interventionist state, whose power tocollect taxes, confiscate materials, and conscript laborwas virtually unlimited. The Chinese state's tendencyto suppress private enterprise stifled initiative. Economicstagnation became inevitable thereafter (Wittfogel, 1957;Balazs, 1964).

E-mail address: [email protected].

http://dx.doi.org/10.1016/j.eeh.2014.05.0020014-4983/© 2014 Elsevier Inc. All rights reserved.

This argument, however, faces theoretical challenges,for the Chinese emperor was a stable dictator.1 AsMancur Olson taught us, a stable dictator understands thatexcessive exaction in the short run reduces future taxrevenues and increases political instability (Olson, 1993).Such a dictator will therefore demonstrate self-restraintwhen he expropriates.2

The argument is also inconsistent with the findingsof Chinese historians in recent decades. While KennethPomeranz's claim in The Great Divergence that the

became rare after the introduction of examinations to select officials(Miyakawa, 1955).2 As Rosenthal and Wong (2011) put it, the Chinese rulers “were

well aware that social stability translated into political longevity.”

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108 T.-H. Sng / Explorations in Economic History 54 (2014) 107–127

levels of development in the Lower Yangzi delta andEngland were comparable in the eighteenth century is asubject of debate, his book has fostered an emergingconsensus that the eighteenth-century Chinese economywas more developed than previously thought.3 Com-mercialization, facilitated by the monetization of taxesand the inflow of silver from Japan and the New World,linked the lives of ordinary people to the world outsidetheir villages (Li, 1998; Wu and Xu, 2000). There isstrong evidence suggesting that market integration washigh in China before 1800 (Shiue and Keller, 2007).

Importantly, these empirical findings have created anew set of questions. If all was well and good withChina in the eighteenth century, why did its fortunesreverse in the nineteenth century? Was China's relativeeconomic decline in the nineteenth century a conse-quence of historical contingency, or were structuralfactors at work?

This paper argues that part of the answer can befound in China's size. The vast size of the Chineseempire created a severe principal-agent problem andconstrained how the country was governed. In partic-ular, taxes had to be kept low due to the emperor's weakoversight of his agents and the need to keep corruptionin check.4 The Chinese state's fiscal weaknesses werelong masked by its huge tax base. However, economicand demographic expansion in the eighteenth centuryexacerbated the problems of administrative control.This put a further squeeze on the nation's finances andleft China ill-prepared for the challenges of thenineteenth century.

Reprising the earlier work of Kiser and Tong (1992),I argue that the state in late imperial China (c. 1650–1850) 5

can best be understood in light of a large (and stable)dictatorship where excessive exploitation comes notfrom the ruler, but from his agents who have shorterdecision horizons and less encompassing interests thanthe “benevolent” ruler himself. While the ruler ismotivated not to overtax the population to preempt

3 Pomeranz (2000). See also Wong (1997).4 It is now widely accepted that in early modern Europe, absolutist

states such as France and Spain actually taxed less than England andthe Netherlands due to institutional fragmentation (Hoffman andRosenthal, 1997; Epstein, 2000; Dincecco, 2011). However, thisexplanation does not apply to late imperial China as China hadovercome jurisdictional fragmentation quite early. From the tenthcentury onward, a nonhereditary bureaucracy replaced the aristocracy.Passing civil service examinations became the main avenue to joiningthe political elite. Accordingly, the elite became averse to challengingthe authority of the emperor (Miyakawa, 1955).5 Late imperial China usually refers to China during the Ming

(1368–1644) and Qing (1644–1912) dynasties. This paper focuses onthe Qing dynasty before 1850.

rebellion, his agents have private incentives to expropri-ate rent from the taxpayers. If the ruler is unable to keepcorruption in check, he will have to keep the tax rate lowand his bureaucracy small to mitigate this “tyranny at thebottom” effect.

Size plays a crucial role in the hypothesis as it shapesthe ruler's ability to monitor his agents and the agents'incentives for rent seeking. Specifically, size carries twodimensions in the hypothesis: geographic and economic.Geographic size matters because the costs of transmittinginformation over distance matter, especially in thepremodern world. Moreover, a geographically largepolity usually comes with regional diversity that makescollecting useful information more costly. Regionaldifferences in climate, crops, per capita income, andother socioeconomic conditions often imply that localagents must have some flexibility in implementing centralgovernment decrees. Yet that very flexibility also makesit harder for the ruler to determine whether an agent whopursues a different path is doing so for private gain or inresponse to local conditions. Finally, when politicalpower is highly centralized, monitoring and sanctioningwould inevitably involve the ruler. All else equal, thelarger his domain, the higher the risk that his attentionmay be spread too thin.

The effect of economic size on state finances is moreambiguous. Economic expansion enlarges the tax base,but it also increases the rent-seeking incentives of stateagents. This puts pressure on the ruler to lower his rate ofextraction to ensure that taxpayers are exploited in asustainable manner. This paper constructs a simple modelto show that if the principal-agent problem is sufficientlysevere, the negative effect of economic expansion (a lowertax rate) could eventually overwhelm its positive effect(a bigger tax base) so that economic expansion actuallyhurts the ruler and weakens his ability to maintainstability and order.

The issue of size is particularly relevant to China,given that for the last two millennia, the landmassbetween the Great Wall and the South China Sea wasmore often than not under the rule of a single centralauthority. China's vast size implies that obtainingtimely and accurate information has always been achallenge to its ruler. In 1853, when the Taiping rebelscaptured Wuchang, a major city about 1200 km fromBeijing, the news took eight days to reach the capital(Xie, 2002). Mao highlighted the challenges that sizeposed to centralized control when he told Nixonduring the latter's visit to China, “I have not been ableto change [China]. I have only been able to change afew places in the vicinity of Beijing” (Kissinger,1998, 60).

8 In the long run, political boundaries and the degree of politicalcentralization are not immune to political-economic forces (Alesinaand Spolaore, 1997), and China was no exception. In the conclusion, Idiscuss how the provinces gained power at the expense of the imperial

109T.-H. Sng / Explorations in Economic History 54 (2014) 107–127

Apart from proposing a model that is consistent withthe findings in recent scholarship, this paper alsodevelops novel evidence that can be brought to bearon the hypothesis. First, I examine regional differencesin land tax burdens and the spatial distribution ofadministrative units in China in 1820. These show thatboth land tax per capita and the number of counties perunit area were significantly higher in regions adjacent toBeijing than in regions far away from it. In other words,the Chinese state became progressively weaker andsmaller as one moved farther away from the capital.

Next, using archival and published historical fiscalrecords of the Qing dynasty, I reconstruct the Qing state'sannual tax revenues between 1650 and 1850. The timeseries depict a hump-shaped pattern. In real terms, theregime's tax revenue peaked early in the eighteenthcentury and contracted steadily from then on, even as theeconomy continued to grow through extensive expansion.6

Finally, I present historical evidence indicating that thecontraction of the Qing state's fiscal capacity—i.e., itsability to raise revenue for public spending—led to agradual and sustained decline in state-provided publicgoods from the second half of the eighteenth centuryonward. The decline predated the military and socioeco-nomic troubles of the nineteenth century, suggesting thateven before an expansionist West began taking steps toopen up China by force, the seeds of a turbulentnineteenth century had already been sown.

This paper is related to several strands of the literature.Several important works by Chinese historians discussedat length the existence of agency problems in the Chinesestate from a non theoretical perspective (Zelin, 1984;Kuhn, 1990). Shiue (2004) found evidence from disasterrelief operations that the Qing government did not operateas a unitary and wholly coordinated entity.7 Morerecently, Ma (2011) and Brandt et al. (2014) have appliedthe agency framework to analyze the evolution of China'spolitical economy in the last millennium. This paperprovides a formal model and new data that complementthese studies.

This paper also makes contact with the burgeoningliterature on state capacity (Besley and Persson, 2010;Dincecco, 2011). My hypothesis is based on the viewthat, at the very least, a functioning state must have thecapacity to ensure the security of property andperson (Smith, 1776; North, 1990). However, it is also

6 The Chinese population grew from less than 150 million to morethan 400 million between 1650 and 1850 (Perkins, 1969) with noevidence of a significant drop in living standards (Baten et al., 2010).7 See Markus (2012) for a related study on modern-day Russia and

Ukraine.

compatible with arguments that see a more proactive rolefor the state in economic development—to resolvecoordination failures (Rosenstein-Rodan, 1943; Murphyet al., 1989; Epstein, 2000), to remove inflexibilities in theexisting property rights regime (Rosenthal, 1990; Bogartand Richardson, 2008; Lamoreaux, 2011), or to imple-ment social policies that allow the society to escape fromthe Malthusian trap (Doepke, 2004).

This paper complements two recent works that explorethe effects of territorial size on governance. Stasavage(2010) studies the evolution of representation in earlymodern Europe and argues that representative institutionswere less effective in large territorial states as highcommunication and travel costs prevented representativebodies in these states from convening regularly. Olssonand Hansson (2011) show that territorial size affects therule of law negatively in modern developing countries,and weak rule of law is more commonly observed whenthe capital city is not centrally located.

To keep the discussion focused and its scopemanageable, I take as my point of departure a unifiedand politically centralized Chinese empire. This, I argue,is a reasonable assumption given the time frame that myanalysis covers.8 While this paper focuses singularly onthe inefficiencies of a large state, it is important to notethat political unification also brought significant benefitsto China—above all the peace dividend, as highlightedby Rosenthal and Wong (2011). However, a comprehen-sive cost-benefit analysis on the size of late imperialChina is beyond the scope of this paper.9

2. Historical background

The Qing dynasty ruled China from 1644 to 1912. Itwas founded by the Manchus, an ethnic minority groupfrom Manchuria who conquered China proper after theMing dynasty was toppled by a peasant uprising in1644. Historians usually divide the 267 years of Qingrule into four periods (Table 1). The early Qing focusedon military conquest and political consolidation, whichwere accomplished by the 1680s. With the restoration

court after 1850 when it became clear that the multiple crisesconfronting different parts of China could no longer be effectivelydealt with by a centralized regime.9 The tradeoff is modeled in Ko and Sng (2013) and Ko et al.

(2014), who argue that a large, centralized, and fiscally weak statemay be a constrained optimum for China given the geographicalexternalities between the Chinese regions.

10 Broadly speaking, there were five kinds of taxes in Qing Chinabefore 1850: diding (land tax stipulated in silver), the grain tax (landtax stipulated in grain), the salt tax, customs duties, and miscellaneoustaxes. The two land taxes together accounted for more than 80% of theQing state's tax revenue, and it was the magistrate's responsibility tocollect these taxes and remit the portion owed to the centralgovernment promptly.

Table 1Reigns and major events of the Qing dynasty.

1. Early Qing 1644–1680sReigns of Shunzhi (1644–1661), Kangxi (1662–1722).1644 Peasant rebels topple the Ming dynasty; Qing conquest of China.1673–1681 Revolt of the Three Feudatories.

2. High Qing 1680s–late 1700sReigns of Kangxi (cont.), Yongzheng (1723–1735),Qianlong (1736–1795).1793 Qianlong rejects Macartney's request to ease restrictions on trade

with Britain.

3. Mid-Qing Late 1700s–1850Reigns of Jiaqing (1796–1820), Daoguang (1821–1850).1796–1804 Revolt of the White Lotus Sectarians.1839–1842 Opium War with Britain.

4. Late Qing 1851–1912Reigns of Xianfeng (1851–1861), Tongzhi (1862–1874),Guangxu (1875–1908), Xuantong (1909–1912).1850–1864 Taiping Rebellion; Devolution to provincial elites to deal with crisis.1911–1912 Coup in Wuchang sets off chain of events leading to the fall of Qing.


of peace, interregional trade resumed and flourished,and China entered a golden age known as the HighQing. The third period, the mid-Qing, was characterizedby rising socioeconomic instability and the reemergenceof large-scale social unrest.

Domestic upheavals in the 1850s forced the imperialcourt to cede power to provincial authorities to deal withthe crisis. Consequently, the imperial court's grip onpolitical power was significantly weakened in the lastsixty years of Qing rule. The newfound ability ofprovinces to compete for power with the centralgovernment during the late Qing period implies thatrelations between central and local authorities can nolonger be adequately analyzed using a principal-agentframework. For this reason, I ignore the late Qing periodand focus primarily on the two centuries preceding 1850,when political power was firmly in the hands of theemperor, to study how a severe principal-agent problemshaped imperial rule and socioeconomic outcomes.

2.1. Political structure

Before 1850, all major decisions had to be approvedby the emperor, who was advised by close aides in theGrand Council. Through the Board of Civil Appoint-ments he chose who would be given posts, through theadministrative hierarchy down to county magistrate. HisBoard of Revenue regulated and audited regional andlocal governments, all the way down to stationeryexpenses. Through the Board of Punishments he wouldreview judicial decisions made across the empire. Alldeath sentences required his sanction (Ch'u, 1962).

2.2. Local government

The empire had four main layers of formal govern-ment: center, province, prefecture, and county. The 1500counties at the bottom of the formal hierarchy handledlocal administration. Each county was headed by amagistrate, who served a term of three years and couldnot be native to the area. The magistrate's daily dutiesrevolved around two themes: (1) the collection of land andmiscellaneous taxes, which constituted the bulk of theQing state's revenue10; and (2) the administration ofjustice, which required the magistrate to preside over allcourt hearings, civil or criminal, held in his jurisdiction(Wang, 1890).

While the magistrate was de jure responsible for localgovernment, his power was shared by county clerks andrunners as well as by the local gentry in practice. Thecounty clerks and runners exercised de facto powerbecause the magistrate, as an outsider unfamiliar withlocal conditions, relied heavily on them to govern. Theyperformed mundane but essential duties, such as keepingtax records and sending tax notices to individualhouseholds. Historical accounts suggest that it wascommon for them to exploit their position and extort thecommoners, for example, by manipulating tax documents


(Ch'u, 1962; Rowe, 1983; Zelin, 1984). Some magis-trates used them as proxies to avoid direct engagement inextortion. It was customary for them to share their profitswith the magistrate, who would then forward some ofwhat he received to higher officials as gifts (Ch'u, 1962).

The local gentry was one group of taxpayers protectedfrom such abuses.11 They had good access to the officialchannels of information and their goodwill was essentialfor the magistrate to ensure that no complaints about himwould reach his superiors (Holcombe, 1895). Somemembers of the gentry participated in the exploitation ofsmall farmers by remitting taxes on their behalf andprofiting from tax arbitrage (Zelin, 1984).12

14 Because output is exogenous to the ruler, it makes no difference

2.3. Monitoring system

The Qing state focused its monitoring efforts onranked officials such as the magistrate. Each magistratewas subject to a triennial review, when his superiors in thecentral and provincial administrations would evaluate hisperformance and mete out either reward or punishment.13

Failure to remit the taxes owed to the central governmentin full and on time, a huge backlog of civil cases in court,and any unsolved criminal cases would cost themagistrate dearly during the review (Watt, 1977).

To supplement top-down monitoring, the late imperialChinese state established the Censorate, an agencyparallel to and autonomous of the executive branch ofthe government, to investigate and impeach shirkers andwrongdoers (Feuerwerker, 1976). Finally, commonerscould send petitions complaining of corrupt officials tothe central government. While the petition system did notwork well—the size of the empire and therefore the sheervolume of complaints flowing to the capital made itimpossible for the imperial court to verify the authenticityof every case—it survived as a form of bottom-upmonitoring beyond the Qing dynasty (Fang, 2009).

11 Generally, the Qing society comprised two classes, the gentry andthe commoners. According to Zhang (1955), gentry familiesaccounted for 1.3% of the total population during the first half of thenineteenth century.12 In this paper, I focus on one form of corruption: the extortion ofordinary taxpayers. In reality, corruption can take many forms, forexample, quid pro quo deals between the magistrate and the gentry.However, this (and other forms of corruption) can be treated as aspecial case of extortion—if the magistrate reduced the tax of somegentry, he would have to cover the subsequent shortfall by over-collecting from the commoners.13 Punishments typically included pay forfeiture, fines, demotions,and dismissal. Rewards usually came in the form of awarding meritpoints or promotion (Da Qing huidian, 2006, Qianlong edition, juan6).

3. The model

Based on the sociopolitical structure discussedabove, I develop a simple model to analyze thepolitics of taxation in Qing China. Consider a game oftaxation in a Chinese county involving the ruler, arepresentative tax agent, and a peasant population. LetY denote the aggregate income of the peasants. Tokeep the model simple, assume that the ruler observesY perfectly.

The ruler sets a tax rate τ.14 Because he resides in thecapital, he is unable to collect the taxes personally andhas to delegate the task to the agent. The representativetax agent embodies the magistrate, the local statefunctionaries, and the local gentry, as discussed in theprevious section.15 The agent may abuse his authorityby asking the peasants to pay an additional surcharge ε,which goes in his pocket. Each peasant therefore facesan effective tax rate of τ + ε.

The peasants have only one mechanism to keeptaxes and extortion in check: revolt. If τ + ε exceedssome threshold value r, violence ensues. The rulerwishes to avoid a revolt at all costs. The representativeagent is less worried about the threat of revolt. Thiscould be due to coordination problems,16 or becauseoverexploited peasants may flee their home districtand become outlaws in other counties (which wouldmake them the problem of another agent). Either way,the ruler has an encompassing interest, but the agentdoes not.

To deter abuse against peasants, the ruler audits theagent after tax collection. If the audit detects extortion,the ruler punishes the agent by imposing a fine X on theagent. For simplicity, X is assumed to be exogenous.Alternatively, we can allow the ruler to choose X from arange of possible values. The results will not change.17

whether the ruler sets a tax rate (τ) or a tax quota (τY). I use the tax ratebecause it is commonly used in economic models.15 For simplicity, I ignore the income of the gentry from nonexploitativesources.16 Recall that the representative agent embodies a group ofindividuals (the magistrate, the local state functionaries, and the localgentry). Collectively, it is rational for them to show self-restraint toprevent a revolt, but individually, everyone has a dominant strategy ofexploiting beyond the socially optimal level.17 If the ruler is free to determine the level of the fine from a range ofpossible values, in equilibrium he will always choose the maximumlevel possible (e.g. the death sentence) and this generates X in themodel. In addition, if agents are heterogeneous—there are incorrupt-ible agents among the corruptible ones—and there is a non zeroprobability that an agent may be wrongly punished, the ruler will haveto set X below the maximum level if he wishes to retain theincorruptible agents due to their individual rationality constraint.

18 Similarly, eighteen-century Chinese novels, such as Dream of theRed Chamber and Strange Tales of Liaozhai, portrayed a societywhere honest officials were rare, local state functionaries wererapacious, and elite privileges were entrenched (Park, 1997).19 To be sure, it was customary for the magistrate to collect asurcharge to cover the cost of tax collection. The Kangxi emperorstated that he would consider a magistrate who imposed a surchargerate of no more than 10% on the regular tax an honest official (Wang,1890, 141). Historical accounts suggest that local state agentscommonly took advantage of the blurred boundary betweencustomary fees and corruption to enrich themselves (Zelin, 1984).According to Wang Huizu (1731–1807), a Qing magistrate and theauthor of several popular handbooks for magistrates and clerks,government assignments were customarily labeled “good” or “bad” inofficialdom depending on their potential to collect irregular fees andkickbacks (Wang, 1785).


The success of the audit at finding extortion dependson the ruler's monitoring capacity, which is determinedby factors such as the distance between the capital andthe county, communication technologies, and the ruler'stime constraint. Holding these factors constant, theprobability of the agent getting caught increases withthe level of extortion that he commits. As areduced-form representation, suppose that the agentgets caught with probability mε2 if he collects asurcharge of ε, where m is a positive real number andrepresents the ruler's monitoring capacity. The centralconcern of this model is how corruption, taxation, andbureaucratic size are influenced by the value of m.

In this model, all players are self-interested. Apeasant remains submissive to the regime if theeffective tax rate τ + ε is less than r, but he rebelsotherwise. The agent maximizes his expected returnsfrom extortion VA = εY − mε2X. The ruler maximizeshis tax receipts VR = τY subject to the no-revoltconstraint τ + ε ≤ r.

The sequence of events is as follows: first, the rulersets a non negative τ. Next, the representative agent setsa non negative ε, and proceeds to collect taxes. Ifτ + ε ≤ r, the peasants pay taxes τY and surcharges εY.Upon the completion of tax collection, the ruler auditsthe agent and fines the agent X if the agent is found to becorrupt. If τ + ε N r, the peasants revolt and the regimeis overthrown.

3.1. Equilibrium outcomes

I solve the model by backward induction. First,consider the agent's problem. His first order conditionfor utility maximization is:

ε� ¼ Y= 2mXð Þ ð1ÞHence, the equilibrium extortion rate increases with

the aggregate output and decreases with the efficacy ofthe audit and the severity of punishment.

Next, consider the ruler's problem. Since his objectiveis to maximize his tax receipts without violating theno-revolt constraint, it is in his interest to increase τ untilthe no-revolt constraint binds. Hence, τ ⁎ + ε⁎ = r inequilibrium, and the equilibrium tax rate is given by:

τ� ¼ r−Y= 2mXð Þ ð2Þ

This equilibrium condition implies that if m is small,τ ⁎ will be small too. Hence:

Proposition 1. A severe principal-agent problem leadsto a (fiscally) weak state.

Proposition 1 suggests that even though the ruler isoutwardly a dictator with an unchallenged claim to thestate's tax revenue, in practice the economy's surplus isshared between him and the agent. If the principal-agentproblem is severe (m is small), high corruption ensues(Eq. 1), and the ruler will have to keep taxes low topreempt a revolt ( Eq. 2).

Although the historical evidence is sketchy andfragmented, it suggests that corruption was pervasiveand institutionalized in Qing China. In a collection ofletters published in 1782, the French missionaryJoseph-Marie Amiot noted that corruption was sodeep-rooted in the bureaucracy that “it is rare amongthe Chinese to find anyone in an official post whodoes not enrich himself” (Park, 1997, 999).18 Basedon fragmented evidence, Zhang (1962, 32) estimatedthat a magistrate serving in the early nineteenthcentury would fetch 30,000 silver taels in extralegalincome annually, on top of his salary and salarysupplement of less than 2340 taels.19 Meanwhile, itis commonly observed that official tax revenue inQing China was low considering the taxable capacityof the economy (Wang, 1973). Proposition 1 arguesthat the phenomena of high corruption and lighttaxation were causally linked.

3.2. Size of the bureaucracy

I now extend the model to allow the ruler to selectthe size of his tax bureaucracy. Suppose the ruler'sdomain consists of a large number of natural districtsof equal size. For every district, the ruler decideswhether to set up a county administration (in otherwords, to station an agent in the district) to collecttaxes from the residents. Suppose that this decision ismade at the same time as he decides the tax rate. Let


β represent the number of counties set up. I normalizeβ so that 0 ≤ β ≤ 1.20

Maintaining counties is costly. Let the cost berepresented by the convex function C(β).21 Under thismodified setup, the ruler's problem is to select values ofτ and β that maximize VR = τβY − C(β) subject toτ + ε ≤ r. The problems of the peasants and the agentare unchanged.

It is easy to show that the earlier results remain valid,but there is now an additional condition (derived fromthe ruler's maximization problem) to be satisfied inequilibrium:

τ�Y ¼ C′ β�ð Þ: ð3ÞEssentially, it states that the ruler will set up an

additional county as long as the marginal benefit ofdoing so is greater than the cost of maintaining it.

Consider the case when the ruler has a weakmonitoring capacity (m is small). Since τ⁎ is small(Proposition 1), β ⁎ will be small too (by Eqs. 2 and 3).Hence,

Proposition 2. A severe principal-agent problem leadsto a small bureaucracy.

The proposition is consistent with the now widelyaccepted view that, measurement problems notwith-standing, the Chinese state was small compared to itsWestern counterparts (Vries, 2002). In 1800, therewere only around 20,000 ranked officials governinga population that might have exceeded 300 million,or a ratio of one official per 15,000 people.22

Proposition 2 is also in line with G.William Skinner'sobservation that there were more counties in China duringperiods of disunity than during periods of unification. Inthe sixth century when China was divided into threeempires, the three administrations of Northern Zhou,Northern Qi, and Chen together governed approximately2300 counties. Less than half a century later, when Sui, an

20 Suppose that the total land area of the ruler's domain is Z. Giventechnological limitations, the maximum area that the agent canphysically cover on duty is z, where z ≪ Z. Hence, β = 1 if the rulermaintains Z/z counties.21 The convexity of C(.) comes from the observation that highlycentralized organizations are usually steeply hierarchical. Suppose thatone intermediate supervisor is required for every two officials. To hirefour agents, the ruler will need to hire two supervisors. To hire eightagents, six supervisors will be required. Here, doubling the number ofagents requires a tripling of supervisors.22 As Needham and Huang (1974) put it, “Chinese bureaucraticgovernment always appeared impressive in breadth while remainingshallow in depth.”

offshoot of Northern Zhou, reunified China, the numberof counties, now under a single central authority, shrunkto 1255 (Skinner, 1977, 21).

3.3. Dynamic implications

Finally, consider how this economy would evolveover time. Since the Chinese economy did not experiencea structural change between 1650 and 1850, I focus oneconomic expansion driven by population growth. Forsimplicity, assume that Y = AN, where A representsagricultural output per capita, and N represents the size ofthe peasant population.23

Suppose N expands steadily over time,24 it followsfrom Eqs. 1 and 2 that dε⁎/dN N 0 and dτ ⁎/dN b 0.This implies that population growth has two effects onthe ruler's finances, one positive and the othernegative. On the positive side, it increases theaggregate output (and hence the tax base). On thenegative side, the expansion of the economic outputencourages corruption and depresses the tax rate. It canbe shown by the envelope theorem that if m is large,the positive effect dominates and the ruler's payoff VR

will increase steadily with population growth. However,if the ruler's information about the agents' behavior issufficiently noisy (if m is sufficiently small), therelationship between the ruler's payoff and thepopulation level is no longer monotonic. The negativeeffect of economic expansion (rising corruption) willeventually dominate its positive effect (an enlarging taxbase), causing tax revenue to follow a hump-shapedpattern.

Proposition 3. If the principal-agent problem is severe,economic expansion will initially increase the taxrevenue but eventually depress it.

Historians generally concur that bureaucratic corrup-tion and socioeconomic instability grew over time inQing China (Naquin and Rawski, 1987; Rowe, 2009).Classical Chinese historiography attributes this to thedeclining moral vigor of the ruling class (Qian, 1940).

23 The results are unaffected if I assume that the marginal product oflabor is diminishing.24 N can be endogenized in a dynamic setup by assuming that everypeasant lives only one period and spends his after-tax income onconsumption and reproduction to maximize his utility. If the twogoods are complements and are subject to diminishing marginalutility, the peasant population will expand as long as their net incomeper capita is above some critical level.


However, modern Chinese historians point out thatnineteenth-century emperors faced problems they hadnot caused and could do little about.25 As the analysishere suggests, a sustained deterioration in governanceneed not imply less vigilant rulers. State affairs innineteenth-century China had simply become intracta-ble and would have overwhelmed the ablest and mostdedicated ruler.

4. Empirical evidence: distance and agency costs

The model assumes that the severity of the principal-agent problem in a dictatorship increases with distancefrom the ruler. It predicts, as a consequence, that the taxburden or tax per capita should decline with distancefrom the capital to compensate for the weakeningmonitoring (Proposition 1).26 Likewise, the network oflocal administrative units should be denser near thecapital and lower elsewhere (Proposition 2). Given thatthe county was the lowest level of formal administrationin Qing China, Proposition 2 suggests that all elseequal, the number of counties (per unit area) should behigher near the capital.27

4.1. Data

Due to a lack of data on corruption, I am unable toempirically investigate the relationship between dis-tance and agency costs directly. Instead, I use three setsof information to examine the spatial distribution of theland tax and counties in Qing China. The first is a GISdemarcation of county seats and prefectures in 1820,drawn from the Harvard University China HistoricalGIS Project (CHGIS, 2007). The second data set, basedon the Grand Gazetteer of the Qing during the Reign of

25 Li (2007) portrays a competent Jiaqing emperor who success-fully orchestrated a flood control and famine relief campaign whena massive flood hit northern China in 1801. Leonard (1996) andDodgen (2001) see Jiaqing's successor Daoguang as an earnestleader who worked diligently to stabilize the increasingly fragileYellow River flood control system but was unfortunately thwartedby a depleted state budget. By studying the private testimonieswritten by officials interviewed by the emperor, Will (2008) drawsthe conclusion that Daoguang “demonstrates a rather goodcommand of the issues” and “certainly was a professional anddedicated ruler.”26 Proposition 1 predicts that the tax rate should decline withdistance from the capital. Since output is exogenous to the ruler inthe model, this is equivalent to predicting that tax per capita declineswith distance.27 There were three types of county-level units: zhou, xian, andting. See Skinner (1977, 275–351) for a detailed description of thefield administrative system in late imperial China.

Jiaqing, provides the number of inhabitants as well asthe land tax quota of every prefecture in 1820.28

Finally, I have plotted the imperial postal relay routesaccording to the description in the Collected Statutes ofthe Qing Dynasty (Da Qing huidian, 2006, Yongzhengedition). The imperial court relied upon this network ofroads to maintain communications with the rest of thecountry.

Fig. 1 depicts the spatial distribution of the population,land tax, and counties in China in 1820. One observeseastern China to be more populated than western China(Fig. 1a). Since agriculture in Qing China was laborintensive and since counties were set up to administer thepopulation, it is unsurprising that the concentrations oftaxes and counties were higher in the east than in the west(1b and 1c). However, Fig. 1 also provides suggestiveevidence that distance from Beijing matters—thereappear to be a relatively high concentration of taxes andcounties in North China that cannot be fully explained bythe spatial distribution of the population.

The scatter plots in Fig. 2a and b show thatprefectural land tax and the number of counties ineach prefecture are indeed negatively correlated withdistance from Beijing. Since prefectures differ in size,in Fig. 2c and d I replace land tax and the number ofcounties with land tax per capita and the number ofcounties per 10,000 km2, respectively. The correlationsremain negative.

4.2. Empirical specification and variables

While the negative correlations in Fig. 2 areconsistent with Propositions 1 and 2, they could havebeen driven by factors independent of agency costconsiderations. To investigate further, I estimate thefollowing equation:

yi ¼ δ0 þ δ1 � Distancei þ δ2 � xi þ ei ð4Þ

In Eq. (4), i indexes prefectures, yi is Taxi (land taxper capita in grams of silver) or Admini (the number ofcounties per 10,000 km2) in prefecture i, and ei is theerror term. To deal with potential heteroskedasticity, Icluster the standard errors by province.

The regressor of interest is Distancei, the distance ofprefecture i from Beijing (in 1000 km). It is the sum oftwo components: (a) the distance of the least-cost pathfrom the prefectural seat to the provincial capital, and(b) the distance by imperial postal roads from the

28 Jiaqing Chongxiu Yitong Zhi as reproduced in Liang (2008).

(A) (B) (C)

Fig. 1. China Proper in 1820.Sources: CHGIS (2007), Liang (2008), Da Qing huidian, 2006 (Yongzheng edition).


provincial capital to Beijing.29 xi is a collection ofcontrol variables that is potentially correlated with yi:population density (per square kilometer); prefecture i'saverage elevation (in meters); a dummy to indicate ifthe provincial capital is located in prefecture i. Whenthe dependent variable is Taxi, I also include prefecturei's population as a control variable to account forpossible omitted variable bias, since population size islikely to affect both Taxi and population density inEq. (4). When yi is Admini, I include instead prefecturei's land area as an additional control variable for thesame reason. Table 2 presents the summary statistics ofthe variables that I use.

4.3. Baseline estimates

Importantly, this empirical analysis does not identifycausality, but it still serve as a useful check on thehypothesis. The model predicts that δ1 b 0 when yi isTaxi (Proposition 1) and also when yi is Admini

29 The Collected Statutes of the Qing Dynasty provides informationon the postal roads linking the provincial capitals and Beijing, but itdoes not discuss the postal roads that connect prefectures with theirrespective provincial capitals. To fill in the missing information, I useGIS least-cost path analysis to construct hypothetical intra-provincialroad systems. Each road system is a set of slope-dependent least-costpaths that connect the administrative centers of a province. As arobustness check, in the Appendix A use the sum of (a) the straight-line distance from a prefectural seat to its provincial capital and (b) theimperial postal road distance from the provincial capital to Beijing asan alternative measurement of Distance. The results are effectivelyunchanged.

(Proposition 2). The baseline estimates are reported inTable 3.30 Looking first at column (a), when land taxper capita is regressed on distance from Beijing, onefinds empirical support for Proposition 1. The coeffi-cient estimate of δ1 is negative and statisticallysignificant. In column (b), I add population density asa control variable and interpret it as a proxy measure ofagricultural output per capita (following Acemoglu etal., 2002). In column (c), additional control variablesare included in the regression. In both instances, thecore results are unchanged.

In columns (d) through (f), I replace Taxi withAdmini as the dependent variable and repeat theregressions in columns (a) through (c). The results arein line with Proposition 2. The coefficient estimate of δ1is negative and statistically significant.

4.4. Instrumental evidence and robustness checks

One may worry that the imperial postal relay routesmight have been designed to pass through regions thatwere heavily taxed and administered. As a check, I

30 When the dependent variable is Taxi, I drop seven prefectures inthe immediate vicinity of Beijing (namely, Shuntian, Baoding,Yongping, Xuanhua, Chengde, Tianjin, and Zunhua) from theregression as my data on the land tax does not fully capture theamount of state exaction in these prefectures. The imperial householdowned a significant proportion of cultivated lands in these prefecturesand the cultivators of these lands paid rents instead of taxes to the state(Qingshigao, 1927, juan 120). Imperial landholdings were insignifi-cant outside the greater Beijing area. Nationally, more than 99% of allcultivated lands were private (Da Qing huidian, 2006, Qianlongedition, juan 10).

(A) (B) (C) (D)Land tax # counties Land tax per capita # counties per 10,000 km28

1012

1416

18

Land

tax

(log)

0 .5 1 1.5 2 2.5

Distance from Beijing (1000km)

05

1015

2025

No.

of c

ount

ies

0 .5 1 1.5 2 2.5


-4-2

02

4

Land

tax

per

capi

ta (

log)

0 .5 1 1.5 2 2.5


-2-1

01

23

No.

of c

ount

ies

per

1000

0 sq

. km

(lo

g)

0 .5 1 1.5 2 2.5


Fig. 2. Scatterplots. Unit of observation: prefecture; n = 268.Sources: CHGIS (2007), Liang (2008).

31 These twelve prefectures were from the provinces of Sichuan,Hunan, Hubei, and Shaanxi (Fig. 1b). Each experienced one of thefollowing events: the Jinchuan rebellion (1771–76) in Sichuan, theMiao uprising (1795–97) in Hunan, and the White Lotus revolt(1796–1804) along the Sichuan–Hubei–Shaanxi border.32 Namely: Jiangsu, Zhejiang, Anhui, Jiangxi, Fujian, and Guangdong.


employ GIS analysis to calculate the slope-dependentleast-cost paths that connect the provincial capitals withBeijing. As shown in Appendix A Fig. A1, the resultinghypothetical road network bears a strong resemblance tothe historical imperial road system. This suggests thatthe imperial road system is primarily determined byphysical instead of human geographical features and themagnitude of any endogeneity bias is likely to be small.However, as a precautionary measure, in columns (a)and (d) of Table 4, I use the straight-line distancebetween prefecture i and Beijing as an instrument forDistancei (since there is no reason for straight-linedistance to be correlated with Taxi or Admini other thanthrough Distancei). The IV results remain stable andconsistent with the hypothesis. The estimates suggestthat every 1000 km increase in distance from Beijing isaccompanied by a 25.9% decrease in tax per capita anda 25.7% decrease in the number of counties per10,000 km2 respectively.

In the remaining columns of Table 4, I perform severalrobustness checks. First, according to Wang (1973),China proper in 1800 can be divided into a “developedarea” in the east and a “developing area” in the west(Fig. 1a), with the former having “well-developedagricultural resources.” In column (b) of Table 4, I dropobservations in the developing area to exclude the effectsof this east–west divide. Second, historical researchsuggests that the Qing emperor often used tax reductionto pacify the population after a revolt (Rowe, 1983;McMahon, 2009). In my dataset, there are twelveprefectures with a tax per capita less than 0.5 g of silver(or one-tenth of the average land tax per capita) and alltwelve prefectures had experienced an uprising in the late

eighteenth century.31 To check if these outliers aredriving the estimation results, I exclude them in the taxregression in column (c).

Switching to Admini as the dependent variable, incolumn (e) I drop the prefectures that were more than1500 km from Beijing. This restricts the area underconsideration to the Yellow and Yangzi river basins andexcludes from the regression the southwestern prov-inces of Yunnan, Guizhou, and Guangxi, whereminority ethnic groups constituted a sizable portion ofthe local population, and the southeastern provinces ofFujian and Guangdong, which were on the periphery ofChinese politics throughout history. Finally, one may beconcerned that the need to manage the flood-proneYellow River in the north and the presence ofself-regulating clans in the south could have contributedto the higher concentration of counties in northernChina. In column (f), I introduce two dummy variablesindicating whether a prefecture is along the flood-pronemiddle and lower reaches of the Yellow River andwhether it is located in one of the six provinces in thesouth or southeast.32 As Table 4 shows, on eachoccasion the core result remains robust.

In Appendix A Table A1, I perform additionalrobustness checks, which include replacing the log-linear model with a linear model and using alternative

Table 2Summary statistics of prefectures in China proper.Sources: CHGIS (2007), Liang (2008), Da Qing huidian, 2006 (Yongzheng edition).

Obs. Mean Std. dev. Min. Max.

Road distance from Beijing (km) 268 1632 726 143 2935Straight line distance from Beijing (km) 268 1220 577 25 2370Population ('000) 268 1343 1208 34 6873Area (km2) 268 16,269 20,076 924 198,269Population density 268 124.9 134.6 0.4 991.9No of counties 268 5.840 3.523 1 24No of counties per 10,000 km2 268 5.476 3.821 0.131 21.244Land tax (in kilograms of silver) 268 6782 10,386 4 96,868Land tax per capita (in grams of silver) 268 4.55 3.60 0.05 24.55Elevation (m) 268 727.5 773.9 4 4008.4Provincial capital 268 0.075 0.263 0 1Located along Yellow River 268 0.052 0.223 0 1Located In “Developed” south 268 0.287 0.453 0 1


measures ofDistance, Tax, and Admin. The results remainrobust and consistent with the model's predictions.

5. Empirical evidence: fiscal decline through thegolden age

Proposition 3 suggests that when agency costs aresufficiently high, the aggregate tax revenue will firstincrease but eventually decrease as the populationexpands. Admittedly, my simple model has no predic-tive power as to when the tax revenue will begin tocontract and how strong the contraction will be. Instead,the relevance of Proposition 3 lies in a broader message:

Table 3Effect of distance on the distribution of land tax and counties, circa 1820.

(a) OLS (b) OLS (c) OLS

Dependent variable Tax per capita (log)

Distance from capital['000 km]

−0.503 ⁎⁎⁎(0.150)

−0.383 ⁎⁎(0.155)

−0.349 ⁎⁎(0.148)

Population density['00 persons per km2]

– 0.167 ⁎⁎⁎ (0.041) 0.192 ⁎⁎⁎

Elevation ['00 m] – – −0.021 ⁎ (Prefectural seat – – 0.498 ⁎⁎⁎

Population ['000,000] – – −0.166 ⁎⁎(0.069)

Area ['000 km2] – – –

No. of observations 261 261 261R2 0.14 0.19 0.23

Constant terms are not reported. Standard errors (clustered by province) invariable is tax per capita due to missing tax information (footnote 30).⁎ Significant at 10%.⁎⁎ Significant at 5%.⁎⁎⁎ Significant at 1%.

a regime plagued with a severe principal-agent problemis likely to face significant difficulties expanding itsrevenue over time, even if the economy is growing andtaxes are low to begin with.

To check Proposition 3's relevance to the historicalexperience of Qing China, I have reconstructed theQing state's tax revenues between 1650 and 1850 usingofficial Qing documents. Some of these documents arepublished, for example the Collected Statutes of theQing Dynasty, the Encyclopedia of the HistoricalRecords of the Qing, and the Veritable Records of theQing Dynasty. Others are archival records kept in theNational Library of China Department of Rare Books

(d) OLS (e) OLS (f) OLS

#Counties per 10,000 km2 (log)

−0.562 ⁎⁎⁎(0.097)

−0.383 ⁎⁎⁎(0.075)

−0.310 ⁎⁎⁎(0.056)

(0.051) – 0.281 ⁎⁎⁎ (0.051) 0.169 ⁎⁎⁎ (0.022)

0.021) – – −0.021 ⁎⁎ (0.008)(0.139) – – 0.190 ⁎⁎ (0.088)

– – –

– – −0.017 ⁎⁎⁎(0.003)

268 268 2680.27 0.47 0.72

brackets. The number of observations is smaller when the dependent

Table

4IV

estim

ationandrobu

stness

checks.

(a)IV

(b)IV

;developed

area

only

(c)IV

;om

itiftax

percapita

b0.5g

(d)IV

(e)IV

;om

itifN15

00km

from

Beijin

g(f)IV

;additio

nal

controlvariables

Dependent

variable

Tax

percapita

(log)

#Cou

ntiesper10

,000

km2(log)

Distancefrom

capital['00

0km

]−0.259⁎(0.153

)−0.257⁎⁎

⁎(0.052

)−0.290⁎⁎

⁎(0.099

)−0.279⁎⁎

⁎(0.063

)−0.33

0⁎⁎

⁎(0.048

)−0.270⁎⁎

⁎(0.079

)Pop

ulationdensity

['00

person

sperkm

2]

0.204⁎⁎

⁎(0.045

)0.19

6⁎⁎

⁎(0.025

)0.201⁎⁎

⁎(0.039

)0.17

3⁎⁎

⁎(0.023

)0.140⁎⁎

⁎(0.015

)0.176⁎⁎

⁎(0.030

)Elevatio

n['00

m]

−0.022(0.020

)0.01

4(0.009

)−0.010(0.010

)−0.022⁎⁎

⁎(0.008

)−0.01

7⁎⁎

(0.009

)−0.022⁎⁎

(0.010

)Prefectural

seat

0.504⁎⁎

⁎(0.139

)0.41

0⁎⁎

⁎(0.153

)0.489⁎⁎

⁎(0.116

)0.19

4⁎⁎

(0.083

)0.176⁎⁎

⁎(0.069

)0.194⁎⁎

(0.084

)Pop

ulation['000,00

0]−0.164⁎⁎

(0.067

)−0.128⁎⁎

(0.062

)−0.211⁎⁎

⁎(0.046

)–

––

Area['000km

2]

––

–−0.017⁎⁎

⁎(0.003

)−0.02

5⁎⁎

⁎(0.003

)−0.017⁎⁎

⁎(0.003

)Along

YellowRiver

––

––

–0.047(0.097

)Located

in“D

eveloped”south

––

––

–−0.030(0.144

)No.

ofob

servations

261

135

249

268

175

268

R2

0.23

0.35

0.28

0.72

0.78

0.72

Fon

excluded

instruments

416.1

649.0

420.6

515.8

440.6

629.9

Con

stantterm

sareno

treported.S

tand

arderrors

(clustered

byprovince)in

brackets.

⁎Significant

at10

%.

⁎⁎Significant

at5%

.⁎⁎

⁎Significant

at1%

.


and Special Collections and the Library of Ancient Booksin Beijing.33 Since the Qing dynasty was a unitary state,these records provided national-level fiscal information.My revenue estimates therefore represent national taxrevenues and not just the tax revenues of the centralgovernment.34 For the conversion from silver to riceunits, I use the rice price series reported in Wang (1992,column 5, Table 1.1). To compute tax per capita, I use thepopulation figures reported in Perkins (1969,216).35Fig. 3 presents the estimates.

In line with previous studies (Wang, 1971, 1973), myestimates show that the Qing state taxed lightly. Its annualtax revenue between 1650 and 1850 averaged aroundfour billion liters of rice in real terms. This is equivalent toless than 4% of China's hypothetical output in 1800, if wetake the basic standard of living to represent an annualconsumption of 3.33 shi of grain per capita and assumethat the entire population lived at this level.36

What is new in Fig. 3 is the progressive deteriorationof the Qing fiscal position over time. Although the HighQing did not end until late in the eighteenth century, inreal terms the Qing state's tax revenue had begun to trenddownward in the first half of the 1700s (Fig. 3b).37 In per

33 The published sources are widely used in historical research. Thearchival sources contain information on the destination of the taxescollected (spent locally, sent to other provinces or Beijing), whichallows cross-checking for consistency. With the exception of theVeritable Records, all sources provide provincial-level monetary taxreturns. The Veritable Records publish only aggregated national-leveltax returns. In Fig. 3, I use a different symbol to differentiate theestimates based on the Veritable Records from the other (morereliable) estimates.34 However, my tax revenue estimates do not include the Qing state'srevenue from non-tax sources. Data on the Qing state's non-taxrevenue is somewhat patchy. Sng (2011, Figure 1.7b) estimates thatnon-tax revenues constituted less than 10% of the Qing state's totalrevenue.35 I have also tried using other estimates, such as the Peng priceseries (Global Price and Income History Group, n.d.) and thepopulation estimates in Cao (2000). In each case, the results arecomparable.36 This would cover expenditure on clothing, food, and foodsupplements such as oil and salt (Huang, 2003, 158). I underestimatethe national output intentionally to produce an upper-bound estimateof the tax-to-GDP ratio.37 In practice, the Qing state did not adjust tax rates regularly. Wherethe land tax is concerned, the tax liability of a household wasexpressed as a fixed amount of silver per plot of land. This stipulatednominal sum hardly changed over time. During the early and mid-eighteenth century when inflation was positive, the decline in the realtax rate was automatically achieved through rising prices. It was onlywhen the long-term price trend reversed itself during the earlynineteenth century that the Qing court had to grant tax waivers orpostponements to relieve the tax burden on the peasants. In 1812,1824, and 1848, respectively, 14.1%, 6.2%, and 14.2% of the land taxwas waived or exempted on a national level based on my calculation.


capita terms, the deterioration is even more striking. In1685 the Qing state's tax revenue was sufficient to feedand clothe 9.6% of the Chinese population. This fell to7.7% in 1724, 5.4% in 1753, and 2.3% in 1848 (Fig. 3c).

In the historical literature, the White Lotus Rebellionin 1796 is often viewed as the landmark event thattriggered a sharp and irreversible deterioration of theQing fiscal position (Mann and Kuhn, 1978; Rowe,2009). The cost of putting down the rebellion wiped outthree quarters of the Qing state's fiscal reserves (seeFigure 5 in Ma, 2011).38 Fig. 3 suggests that the fiscalproblems of the Qing dynasty can be traced back stillfurther. One reason why the tax revenue contraction inthe decades before the White Lotus Rebellion receivedlittle notice is that state expenditures were also fallingduring this period. This spared the Qing state fromincurring a structural deficit until the late 1700s.39

However, as discussed in the next section, the decline inspending in the second half of the eighteenth centurywas costly in the long run as it weakened the Qingstate's ability to resist external threats and maintaindomestic order and contributed to the White LotusRebellion and the problems of the nineteenth century.

Low taxation in Qing China is often seen as a directconsequence of its adherence to the Confucian ideal ofbenevolent rule. However, the Qing state's tax revenuewas too small to be explained by ideological beliefs,since Confucianism promoted a tax rate of 10%.40

Furthermore, although the Qing emperors' decision tokeep taxes low and fair was couched in ideologicalterms, it was very much motivated by pragmatism. TheQing emperors were keen to avoid repeating themistakes of their Ming predecessors, who were toppledby a peasant uprising after raising the nominal land taxthree times in under thirty years.41 In the language of

38 The Qing state's fiscal reserves stood at around 75 million silvertaels before the rebellion, which is equivalent to 3.5% of China'shypothetical output or slightly less than the Qing state's annual taxrevenue in 1800.39 See Sng (2011, Figure 1.14) for a reconstructed annualexpenditure series based on the Qing Board of Revenue's dajin(major receipts) and dachu (major expenses) records kept in theChinese Academy of Social Sciences.40 Mencius (372–289 BC), the “sage” who first proposed the conceptof benevolent rule, recommended a tax rate of one-ninth foragriculture and one-tenth for commerce. He warned that anythingmore would put an unbearable burden on the people, and anything lesswould lead to an underfunded government (Mencius, 2009, 3A3,6B10).41 Imperial statements collected in the Veritable Records of the QingDynasty suggest that Qing emperors such as Shunzhi, Kangxi, andQianlong viewed these tax hikes and bureaucratic malfeasance as themain cause of the late Ming peasant rebellions. Ironically, these hikeswere imposed to shore up border defenses against the Qing empire.

the model, they were keen to avoid violating theno-revolt constraint.

It should be noted that the decline of real tax revenuein Fig. 3b began some time after Emperor Kangxi's1712 decision to freeze the aggregate nominal head taxpermanently. One influential view attributes the Qingnineteenth-century fiscal problems to Kangxi'swell-intentioned but ill-conceived head tax freeze(Rowe, 2009). However, the head tax made up onlyabout 5% of the national tax revenue before its freeze.42

An often overlooked but perhaps more important policychange is the Qing state's decision in the 1730s to stopoffering incentives to local officials for reporting newlyreclaimed lands in their jurisdictions. The change wentinto effect after the imperial court discovered that theseincentives had encouraged false reporting by officialseager for promotions and taxpayers were made toshoulder taxes on lands that never existed (Rowe,2009). Consequently, despite the continued growth ofthe cultivated acreage, the registered acreage stoppedexpanding (Wang, 1973, Tables 1.1 and 2.1), which inturn capped the growth of the land tax.

As Rosenthal and Wong (2011) reminded us, Chinawas blessed with a peaceful external environment in theeighteenth century and there was no pressing need forthe Qing state to tax its population heavily. This factorcertainly contributed to the small size of the Qing state'scoffers. However, if modest spending needs were theonly reason behind low taxation in Qing China, the stateshould have been able to expand its fiscal andadministrative capacity had such needs arisen. Thenext section shows that this was not the case.

6. Reduction in public goods provision

An implication of Proposition 3 is what the historianIan Morris calls the “paradox of development”: socialdevelopment creates the very forces that undermine it(Morris, 2010). If the underlying principal-agentproblem is severe, a regime that successfully maintainsstability and fosters economic expansion may become avictim of its own success as slow or negative revenuegrowth could severely constrain its ability to deal withproblems that accompanied the economic expansion.This section provides a historical narrative to argue that

42 A close look at historical evidence also suggests that Kangxi'shead tax freeze was not based purely on altruism. Shi (1999) providesa detailed discussion of how abuses and disputes in the collection ofthe head tax helped fuel social instability and contributed to Kangxi'sannouncement of a permanent freeze.

(A) Nominal (B) Real (C) Per Capita

-

10

20

30

40

50

60

70

80

90

1650 1700 1750 1800 1850

Various official sources Source: Qingshilu

-

10

20

30

40

50

60

1650 1700 1750 1800 1850


-

3

6

9

0.0

0.1

0.2

0.3

1700 1750 1800 1850


Silv

er (

Mill

ions

Tae

ls)

Ric

e (M

illio

ns s

hi)

Ric

e (s

hi)

Hyp

othe

tical

Tax

-to-

GD

P R

atio

(%

)

Fig. 3. Estimates of the Late Imperial Chinese state's tax revenue. Notes and sources: (1) Author's calculation. Tax revenue includes taxescollected in silver (the diding [land tax stipulated in silver], the salt tax, customs duty, and miscellaneous taxes) as well as the grain tax (land taxstipulated in grain). It refers to the actual amount of these taxes that entered state coffers, plus estimated cost of collection. It covers the taxrevenues of all levels of government (central, provincial, local), but excludes illegitimate collection by tax middlemen. Following Wang (1971)I assume that for every tael of silver collected, tax collectors could legitimately collect 0.25 tael of silver to write off their costs (1 tael = 37.3 gof silver). Since grain is more expensive to transport and store, the costs of grain tax collection are set at a higher rate of 37.5%; (2) Base numbersfor the monetary taxes are drawn from published and archival official records (Qingshilu, 1986; Qingshigao, 1927; Da Qinghuidian, 2006; Qingchao wenxian tongkao, 1787; BLP, 2008; NLCDRB, n.d., and NLCLAB, n.d.). Grain tax revenue estimates arebased on Li and Jiang (2008); (3) For data points based on “Various official sources,” disaggregated provincial-level informationon the monetary taxes is available. For “Qingshilu” data points, only aggregated national-level tax returns are available; (4) Silver-to-grain conversion ibased on the rice price series in column 5, Table 1.1 ofWang (1992). Since a significant portion of the grain tax was denominated in cheaper grains suchas beans, this overestimates the value of the grain tax and hence the aggregate tax revenue; (5) Population estimates are drawn from Perkins(1969, 216). Missing values are filled in by interpolation; (6) Tax-to-GDP ratios are calculated under the assumption that GDP per capita was 3.33shi of grain and remained unchanged over time (1 shi = 103.5 l). Since this is likely to result in an underestimation of GDP, the tax-to-GDP ratios shouldbe interpreted as upper-bound estimates.


events had unfolded in pre-1850 China in accordancewith this proposition.

Table 5 provides a glimpse of the Qing state's rolein the Chinese economy. It suggests that the regimecontributed to the economy's well-being mostly in anindirect manner, as a “night watchman state.”43 Thecomposition of the Qing state's silver expenditure washeavily tilted toward the military and civilian admin-istrations. The army provided peace, which wascrucial for economic exchange to take place. Thecivilian administration, which administered justiceand maintained social order, also supported economicactivity. Since the two items together accounted formore than 80% of the government's silver expendi-ture, they were bound to be affected by the sustainedrevenue decline that began in the first half of theeighteenth century.

43 As Chinese historians have long observed, the Qing state adopteda minimalist and largely hands-off approach in the provision of localpublic goods (Perkins, 1967).

,

s

6.1. Defense

Let us consider the military first. The defense of theempire depended on two military systems: the EightBanners and the Green Standard Army. The EightBanners garrisoned Beijing as well as the strategicapproaches to the capital, while the Green Standardtroops were deployed to defend the provinces againstexternal and internal threats. There were about 200,000banner soldiers in the mid-eighteenth century(Feuerwerker, 1976). To cut state payroll, measureswere taken during the reign of Qianlong, for example,to decommission Han Chinese bannermen. Meanwhile,the size of the Green Standard Army stood at around600,000 (Wang, 1890). Table 6 illustrates the size of theGreen Standard troops deployed in four provinces inSouth China. These provinces are of particular interestbecause the main battles of the Opium War (1839–42)were fought along the coastal provinces of Guangdong,Fujian, and Zhejiang, while the Taiping Rebellion(1850–64) originated in Guangxi. In each of the four

45 Sociological theories and the experience of the United Statessuggest that as the population expands from the core to the periphery,to maintain the effectiveness of the state new counties must becreated unless there are improvements in transportation that allow thestate to effectively administer the new settlements from existing

Table 5Estimates of the Qing state's silver expenditure (1766).Sources: Qingchao wenxian tongkao, 1787 (juan 40), Qingshigao,1927 (juan 125).

Item Amount (1000 taels) Share (%)

Military (Peace time) 24,880 60.6Civilian administration 9620 23.4Yellow River conservancy 3850 9.4Imperial post stations 1950 4.8Palace expenses 270 0.7Others 490 1.2Total 41,060 100.0


provinces, the size of its military was on the declinebefore disaster struck.44

The military cuts were implemented not because ofcomplacency. The imperial court was aware of itsmilitary weaknesses, especially at sea. Much has beenmade of Emperor Qianlong's snubbing of the MacartneyMission in 1793. However, as Waley-Cohen (1993)points out, Qianlong's behavior had more to do withdiplomatic posturing than a lack of awareness of Westerntechnological superiority. Immediately uponMacartney'sdeparture, the emperor instructed coastal provinces tobolster their defenses (Qingshilu, 1986, QL juan 1436):

That they [Britain] made such outrageous demandsshows that we must make preparations in case theyharbor evil intentions. The defense of our coast ismost critical. In recent years, our coastal patrol andsurveillance have been lax. Fighting ability hasdeteriorated. We must do something about it.

In 1834, five years before the Opium War, Qianlong'sgrandson, Emperor Daoguang, made remarks in the samevein after two British warships intruded into Chinese watersand sailed up the Pearl River with ease (BLP, 2008, v. 3):

It seems that our cannon platforms are as good asuseless. How laughable and deplorable it is that wecannot even repel two barbarian ships. Our militaryhave decayed so much. No wonder the barbarians arelooking down on us.

44 The decline in fighting capability was likely to be worse than whatTable 6 suggests for two reasons. First, Table 6 reports the statutorynumber instead of the actual number of troops. It was observed thatthe gap between the two grew over time as many military officialskept positions vacant so as to pocket the stipends of the unfilledpositions (Feuerwerker, 1976). Second, the Qing army suffered notonly a loss in quantity, but a fall in quality as well. As militaryexpenditure contracted in real terms, it became increasingly commonfor soldiers to take up second jobs as street peddlers or craftsmen tosupplement their low and falling wages. Consequently, militarypreparedness suffered (Luo, 1945).

Yet no action was taken as Daoguang's main concernwas to restore his regime's fiscal viability. He did notwelcome a new expenditure commitment. The pressureon state finances was so severe that during the OpiumWar, Daoguang ordered troops along the coast to begindemobilization before the peace treaty had been conclud-ed “to cut costly outlays” (yi jie mi fei) (Wenqing et al.,1836–1874, 473, 491, 512). In short, it was structural,fiscal, and administrative weaknesses, not ignorance andhubris, that resulted in China's inability to respond moreresolutely to the rise of the West.

6.2. Local administration

Consider now local administration. In 1724, therewere 1360 counties, or one county for approximatelyevery 150,000 Chinese (Ch'u, 1962). Although thepopulation more than doubled between 1700 and 1850,the number of counties barely increased. Relatively fewcounties were created to administer the burgeoningsettlements in previously sparsely populated regions.Meanwhile, existing counties were occasionally con-solidated to keep the already meager growth of countiesin check.45

Since the imperial court entrusted all administrativeaffairs of the county to the magistrate, as the averagepopulation in each county increased, so did themagistrate's workload.46 In particular, because he wasthe only imperial officer in the county authorized topreside over court proceeding, available court resourcesper person fell over time. To stem the ever-growing tideof civil cases flowing into local courts, the state had toresort to measures such as outlawing litigation masters,the Chinese equivalent of lawyers (Macauley, 1998).47

Eastman (1991, 127) observed that the increasinglyoverworked magistrates paid less and less attention to

county seats (Stephan, 1971). Since there was no transportationrevolution in pre-1850 Qing China, these theories would predict thatstate effectiveness declined over time. See Skinner (1977, 17–23) fora detailed discussion.46 Only about one in every three counties was assigned an assistantmagistrate, who had no rights in terms of hearing court cases orauthorizing arrests (Ch'u, 1962, 11–12).47 Because of data constraints, it is not possible to prove statisticallythat litigation rates went up over time. According to Macauley (1998,62, 332), the annual number of lawsuits per county could have reachedeight hundred by the late eighteenth and early nineteenth centuries,and only about one-third of these cases were resolved in formal courtsessions.

Table 6Troop deployment in four southern provinces.

Year Guangdong Fujian Zhejiang Guangxi

1689 73,100 69,726 43,450 20,0001764 72,565 66,566 41,529 24,1661812 69,007 63,324 39,009 23,4081821 69,181 63,096 36,830 23,1011849 68,322 61,675 37,565 22,472Population (1766) 6,938,855 8,094,294 16,523,736 4,706,176Population (1820) 21,558,239 18,546,446 26,422,380 7,416,287Population-soldier ratio (1766) 96 122 398 195Population-soldier ratio (1820) 312 294 717 321

Source: Wang (1890).


bandit activities in their jurisdictions, thereby allowingsocial unrest to brew.

The undergovernment of volatile frontier societies,in particular, put social stability under increasing threat.In eighteenth-century China, demographic pressure andthe introduction of new crops from the Americas led toa wave of immigration from the plains to the highlands.Communal violence was relatively common in thesefrontier societies due to a weak state presence and theabsence of an established elite. Consequently, some ofthese societies became highly militarized (Naquin andRawski, 1987). The revolt of Lin Shuangwen, the firstmajor commoner rebellion after Qing pacification ofChina, took place in the fast growing but weaklyadministered frontier island of Taiwan in 1786(Appendix A Fig. A1). The revolt of the White Lotussect (1796–1804), another major uprising, erupted inthe highlands of central China. There, a steady influx ofpopulation took place over the course of the eighteenthcentury, but strong political institutions were neverestablished.48 In a strikingly similar fashion, theTaiping Heavenly Kingdom movement (1850–64),which almost overthrew the Qing dynasty, originatedin the highlands surrounding the Pearl River Basin inSouth China.

As Fig. 4 illustrates, social order was graduallyrestored in China during the second half of theseventeenth century with the consolidation of Qingrule. However, large-scale social unrest reappeared inthe 1770s and gradually picked up momentum thereaf-ter. It was fiscal decline that preceded social andpolitical instability, not the other way around.

48 McCaffrey (2003) describes the region as being plagued byincreasingly fragile ecological conditions, as population growth led toexcessive land reclamation that narrowed the water channels andincreased the risk of flooding. The Qing state understood the risk, butwas unable to enforce its decision to ban reclamation activities.

7. Conclusion

At first glance, the late imperial Chinese state is apuzzle. It was absolutist, yet weak. It taxed lightly, yetthe effective tax burden on the peasant was relativelyheavy. It seemed inefficient, yet it was able to survivefor more than two centuries. It was able to support rapidSmithian growth, without which the more than doublingof the Chinese population during the eighteenth centurywould have been impossible, yet it imploded when theopportunities and challenges of industrializationknocked on its door. This paper argues that thesecontradictions can be understood if we fully appreciatehow size shaped China's fiscal and organizationalpossibilities. While my framework is too simple toanalyze many aspects of late imperial China, it doescapture some salient features of the Chinese politicaleconomy that may appear puzzling in light of theexperience of the West.

I have assumed that the Qing emperor's ability tomonitor his agents did not improve over time. This, Iargue, is a reasonable assumption given the lack ofsignificant improvement in information technologyduring the late imperial period. However, it was notfor the want of trying, as the Qing state did put in placemultiple mechanisms to mitigate the principal-agentproblem embedded in its system. The Censorate inparticular impressed foreign observers such as thenineteenth-century American diplomat Chester Holcombe(Holcombe, 1895). Likewise, the idea of allowingcommoners to petition against corrupt officials is funda-mentally sound and worked well when it was introduced inJapan (Roberts, 1994).

Furthermore, during the reign of Yongzheng, fiscalreforms were carried out to rationalize the financing oflocal government and combat corruption (Zelin, 1984).Among the initiatives implemented was an increase ofbureaucratic compensation by as much as thirty-fold.However, the reforms of the 1720s did not yield

49 Theoretically, agency problems could be resolved through atransfer of ownership rights from the principal to the agent inexchange, for example, for a stream of fixed payments. However, thispresupposes that the contract is enforceable. In the world of politics, ifthe provincial leaders renege on payment after assuming control of thedevolved province, the emperor will not be able to seek redressthrough supranational courts. From this perspective, it is easy tounderstand why the Qing monarchs saw devolution as a measure oflast resort.50 Duara (1988) provides an in-depth study on local state building inthe late Qing and the Republican era. See Aoki (2012) for acomparative analysis with Japan.

0

20

40

60

0

25

50

75

1640

1650

1660

1670

1680

1690

1700

1710

1720

1730

1740

1750

1760

1770

1780

1790

1800

1810

1820

1830

1840

1850

1860

1870

1880

1890

1900

Agg

rega

teTa

xR

even

ue(m

illio

nsh

i)

Fre

quen

cyof

Upr

isin

gs(b

yD

ecad

e)

No. of Uprisings (Province-Year) Aggregate Tax Revenue (million shi of Rice)

Fig. 4. Frequency of uprisings in the Qing dynasty (1644–1911). Does not include minority uprisings.Source: Chen (1939).


long-lasting results. This, perhaps, should not besurprising. Besley and McLaren (1993) have shownthat when the principal's monitoring capacity is low,efficiency wages are effective only if they are set atexorbitantly high levels. According to Ni and Van(2006), the Qing state would have needed to institute a250-fold increase in salary to eradicate bureaucraticcorruption in 1750.

Another institutional change that could have loweredagency costs was decentralization. This was the paththat China took after 1850, when the Taiping Rebellionswept the southern half of the empire and forced theQing court to cede decision-making power to theprovincial governors. Fiscally, decentralization meantthat provincial governments replaced the imperial courtas the residual claimant on the taxes collected withineach province. In return, the central governmentreceived a fixed amount of silver annually from everyprovince to finance its expenditures. In the language ofcontract theory, the emperor sold the “firm” to theprovincial governor, the principal-agent problem wasmitigated, and state finances should improve.

Indeed, decentralization allowed the Qing state tomount a more effective response to the social andmilitary crises of the mid-nineteenth century. Followingthe suppression of the Taiping Rebellion, a group ofprovincial governors led a successful campaign toreduce the effective fiscal burden of the peasantswithout a fall in tax revenue (Rowe, 1983). Halsey(2007) showed that as provincial leaders took over fromthe central government in initiating major reformefforts, the Qing state's extractive capacity expandedsignificantly after 1850.

Yet decentralization also created free-rider problemsin the provision of public goods at the national level(Deng, 2011). When the Sino-Japanese war broke out in1894, only Manchuria and the province of Zhilimobilized. In 1911, Beijing's attempts to nationalizethe railway system intensified the political tensionbetween central and provincial authorities and led to thecollapse of the Qing dynasty.49

From then on, China oscillated between fragmenta-tion (1912–1925), unification (1925–1940), centraliza-tion (1945–1979), and decentralization (1979–), in itssearch for the right balance between having the centermaintain vertical control, and allowing some degree oflocal state building.50 The details of the causes andlegacies of these historical developments are beyond thescope of this paper. However, the role that size playedin shaping China's institutions and hence the path of itsrecent history should be clear.


Acknowledgments

This paper is a revised version of Chapter 2 of mydissertation, written under the supervision of JoelMokyr, David Austen-Smith, Matthias Doepke, andMelissa Macauley. I am indebted to them for theirguidance and encouragement. I also received manyhelpful comments from Chiaki Moriguchi, CostelAndonie, Loren Brandt, Kenneth Chan, Joseph Ferrie,Avner Greif, Robert Keohane, Mark Koyama, DebinMa, Riccardo Masolo, Deirdre McCloskey, Helen

(A)

Fig. A1. Road systems; origins of major rebellions. Remarks: (i) *Basedeasternmost road, the hypothetical road system and the historical imperial roaof the mid-Qing began in the empire's inner frontiers where state power wa

Table A1Further robustness checks.

(a)IV; Linearmodel

(b)IV; Linearmodel

(c)IV; Alternativmeasure of D

Dependent variable Tax percapita

#Counties per10,000 km2

Tax percapita (log)

Distance from capital['000 km]

−1.10 ⁎⁎(0.48)

−1.31 ⁎⁎⁎(0.41)

–

Alternative distance measure['000 km]

– – −0.260 ⁎(0.154)

Population density['00 persons per km2]

1.66 ⁎⁎⁎

(0.33)1.67 ⁎⁎⁎

(0.14)0.206 ⁎⁎⁎

(0.044)Elevation['00 m]

−0.022(0.046)

0.003(0.031)

−0.022(0.019)

Appendix A

Milner, Thomas Rawski, Gary Richardson,Jean-Laurent Rosenthal, Jared Rubin, Carol Shiue,Yannay Spitzer, John Wallis, Se Yan, Yang Zhang,Madeleine Zelin, the editor William Collins, twoanonymous referees, as well as participants at manyseminars and conferences. Pei Zhi Chia, RaymondHuang, Chieko Maene, and Wangyal Shawa providedGIS support. Financial support from the UniversityResearch Grants Committee at Northwestern Univer-sity and the Economic History Association SokoloffFellowship is gratefully acknowledged.

(B)

on slope-adjusted least cost analysis; (ii) With the exception of thed system share strong similarities; (iii) Almost all the major rebellionss particularly weak.

eistance

(d)IV; Alternativemeasure of Distance

(e)IV; Alternativemeasure of Tax

(f)IV; Alternativemeasure of Admin

#Counties per10,000 km2 (log)

Total land tax(log)

#Counties (log)

– −0.411 ⁎⁎⁎(0.149)

−0.231 ⁎⁎⁎(0.049)

−0.281 ⁎⁎⁎(0.064)

– –

0.175 ⁎⁎⁎

(0.024)0.180 ⁎⁎⁎

(0.055)0.061 ⁎⁎

(0.027)−0.022 ⁎⁎⁎(0.008)

−0.038(0.025)

−0.025 ⁎⁎⁎(0.010)

Table A1 (continued)

(a)IV; Linearmodel

(b)IV; Linearmodel

(c)IV; Alternativemeasure of Distance

(d)IV; Alternativemeasure of Distance

(e)IV; Alternativemeasure of Tax

(f)IV; Alternativemeasure of Admin

Dependent variable Tax percapita

#Counties per10,000 km2

Tax percapita (log)

#Counties per10,000 km2 (log)

Total land tax(log)

#Counties (log)

Prefectural seat 2.35 ⁎⁎⁎

(0.71)0.393(0.492)

0.505 ⁎⁎⁎

(0.135)0.197 ⁎⁎

(0.085)0.208(0.251)

0.614 ⁎⁎⁎

(0.078)Population

['000,000]−1.18 ⁎⁎⁎(0.24)

– −0.163 ⁎⁎(0.067)

– 0.583 ⁎⁎⁎

(0.113)–

Area['000 km2]

– −0.042 ⁎⁎⁎(0.014)

– −0.017 ⁎⁎⁎(0.003)

– 0.012 ⁎⁎⁎

(0.003)No. of observations 261 268 261 268 261 268R2 0.39 0.65 0.23 0.72 0.56 0.37F on excluded instruments 416.1 515.8 448.1 530.9 416.1 515.8

Constant terms are not reported. Standard errors (clustered by province) in brackets.⁎ Significant at 10%.⁎⁎ Significant at 5%.⁎⁎⁎ Significant at 1%.


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