Divergence in Development: China vs. Japan
The Role of State Capacity in Shaping Economic Growth
The word economics comes from the Greek word “oikonomia” which means something along the lines of ‘the proper management of the home.’ Slowly, in the Early Modern period the term evolved and, increasingly thinkers like the physiocrats began to speak of “political economy” or the proper management of the state. Up until the 18th century, those asking questions of political economy were often focused on government and were motivated by the question of how to get ahead. It was Adam Smith who expanded the notion of what economics could mean and what it could do in The Wealth of Nations.
For Smith, political economy was not just about the way the state managed resources, but the actions of each citizen and the basic structures of work and life within a nation. The full title of his book is An Inquiry into the Nature and Causes of the Wealth of Nations, making it not just about the proper management of the state but about the fundamental question of why some nations are rich and others are poor. It is a question that economists still obsess over today and has its own (highly contentious) subfield called ‘development economics.’ By some measures, the most cited economist in the world is Daron Acemoglu, an economics historian, who investigates the historical roots of development.
Dominant in the narratives of Acemoglu and others is the notion of “the great divergence,” which is the split between “the west and the rest” which began around the 17th or 18th century. This has largely been great work which highlights the importance of stable, non-capricious institutions, and acknowledges the major depredations of colonialism. However, there are two problems worth noting:
First, intentionally or not, it has given fuel to the notion of European (and North American) exceptionalism which takes too little account of the incredible developmental successes of places like East Asia.
Second, it has been overly quantitative and treats nations as discrete units, lumping them together in large regression analyses.
This can be useful at a high level but limits the specificity of analysis. What I want to do here is provide an analysis of the “little divergence” between China and Japan which can help to address these two problems, and is intended more as an addendum than a direct challenge to the conventional work of economic historians of development. While many other countries have had developmental paths worth examining, the proximity and similarities between China and Japan make for a uniquely good case study.
![Detailed Map of China and Japan (Interwar) by Cameron-J-Nunley on DeviantArt Detailed Map of China and Japan (Interwar) by Cameron-J-Nunley on DeviantArt](https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fae6c561a-66b9-4a5d-8cb2-aad238885b39_1920x1431.jpeg)
What emerges is the importance of the high capacity but limited intervention state. This is a government which is large and bureaucratic enough to make effective interventions, when necessary, but is also able to credibly commit to allowing individuals and enterprises to ‘do their own thing’ most of the time. In the late 19th century, Japan had such a government, and China did not, and that made all the difference.
We can begin by thinking a bit more about what is meant by “development”. Here, I will follow the lead of sinologist Phillip Richardson in thinking about developmental take off as the period when “an economy in which sustained and sustainable increases in per capita incomes are evident.” This decoupling between population growth and total economic output, which is agreed to have been observed first in Britain, is a genuinely global historic process that makes our period somewhat aberrant and it is closely linked to the idea of modernity. The stories that historians tell about this process, and the very concept of modernity itself, is loaded with implications for how we think about history as well as modern politics and has come to be known as the question of “divergence.” Institutional stories of historical development, often broad and laudatory of the ‘West,’ have been incredibly important in shaping the policy of global actors like the IMF and World Bank.
By shifting the conversation from “What Europe did right” to what distinguished the Chinese and Japanese cases, we might be able to think more carefully about the role of the state. Driven by the classic juxtaposition of China and Western Europe, some historians have proposed that factor endowments (such as availability of coal) explain economic divergence; others are convinced that culture (specifically “Confucian” culture) was the major determinant. A focus on East Asia elides these specific explanations as both shared a deep history of cultural exchange and similarity in values and social life, in addition to close geographic proximity and sharing similar natural resources.
The two cases share many other commonalities. At the outset of the 19th century, they were both stable dictatorships with well-developed bureaucracies (the Tokugawa Shogunate in Japan and the Qing Dynasty in China). They had a long-shared Buddhist and Confucian tradition of religion and legalism. They both faced the issue of Western encroachment despite attempts at isolationist policy (more famously in the case of the Tokugawa but also attempted by the Qing prior to the Opium wars). Both were eventually opened by treaty port systems after wars with Western powers, in 1842 for China and 1854 for Japan. Most interestingly, both nations made substantial attempts to modernize. The Qing had the self-strengthening movement (beginning 1861) and Japan underwent the highly significant Meiji restoration (beginning 1868). Both had a military focus, and both made some attempts at technological change though the Meiji restoration was more fundamental as a political transformation.
The classic explanation for the faster development of Japan has been that the Meiji reformers succeeded where the Self-strengtheners failed because of the extent of their ambition. Indeed, there is evidence to support the notion that–in the wake of the Meiji restoration–the expansion of state capacity (which led to specific interventions including technological diffusion, infrastructural construction, and specific market structures) had a major influence on output.
The strongest argument comes from Debin Ma who focuses on Total Factor Productivity in the Silk sector which accounted for almost half of Japanese economic output in the late 19th century and about 1/3rd of Chinese output. Total Factor Productivity (TFP) is a measure which shows if a nation can produce more stuff with the same amount of inputs or labor and material; consequently, it is a good way to tell if there have been improvements in technology. Ma’s measurements of Total Factor Productivity (Figure 1) show that TFP growth was substantially higher in Japan than in China which indicates that technological adoption led to divergence.
Ma backs up these numbers with a very compelling story about the different approach to technological diffusion taken by the two states. The Japanese “Iwakura mission” in 1873 (post-Meiji) actively searched the world for silk production improvements which were then backed up by a process of ‘induced diffusion’ that encouraged their adoption among the populace. By contrast, the Chinese state invested very little in acquiring technological developments and was hampered by powerful pushback from local interests in the form of guilds when it tried to introduce changes in silk production.
For Ma, as well as Kenichi Ohno (a Japanologist), it was important that this idea of technological induced diffusion was coupled with signals that state intervention would remain circumscribed. They note that one such signal was the Japanese government selling off its state run companies in the 1880s. At the same time, the Chinese state was concentrating its investments in state run groups and increasing the power of state-adjacent guilds. This would change only after the defeat of the Chinese in the first Sino-Japanese war in the 1890s. The classical argument then is that the state needs the capacity to intervene in markets but should do so primarily for purposes of tech diffusion and should otherwise signal its hands off approach to market regulation: This leads to growth.
This story does need some nuancing. First, the methodology employed to support it, such as Ma’s TFP numbers, tends to involve rather abstracted statistical measures. The further these come from the baseline numbers they use the more suspicious we should be. Second, there is good evidence (Figure 2) that the divergence between China and Japan, the moment when output became decoupled from population, began before the Meiji restoration, even if the most dramatic rates of growth came after. This data is the most comprehensive we have and the first to expand the Japanese data set meaningfully into the Tokugawa period. It calls into question the causal story about the importance of the kinds of state intervention mentioned above. While it may still be true that tech diffusion accelerates growth, it may not be the case that it was a precondition of divergence.
For Sng and Moriguchi the administrative capacity of the state and its ability to extend its tendrils into daily life is the explanation for this earlier divergence. They use a model that is focused on taxation efficiency and draw on data represented in Figure 3 to show that the Japanese state was, in some ways, more “burdensome” than the Chinese but that this was correlated with the increasing rates of growth seen in Figure 2.
Given this, the case for a more dramatic role of the state in markets–as represented by the tax burden used for the provision of public goods–comes to look more robust. This is the exact conclusion reached in Carol Shiue and Wolfgang Keller’s comparison of the Chinese and European cases where they claim that “the failure of China to industrialize [was] not so much that the state suppressed private economic activity, but that the state did too little to support it through the provision of public goods.” They use measurements of market integration and state intervention to show that the Qing state was rather strategic in its interventions at the same time as it did a good job facilitating non-state market interactions.
In short, establishing causality in institutional structures is convenient for soundbites, but misleading for rigorous scholarship. While studies containing dozens of countries across large time spans have become common in econometrically driven economic history, the messiness of that data approach becomes clearer under closer inspection. It is worth drilling down into a comparison between a case like China and Japan to highlight that fact. Still, what emerges is a continued emphasis on the importance of the high-capacity state which makes targeted interventions, though it should also be clear that it is easy to overstate the case.
There is not one developmental path for every state and so there is probably not one ideal type of state for development. Therefore, it may be simpler and just as correct to say that a flexible state, willing to change with the times, is the greatest aid to growth. Less important than any one policy prescription is that the state be efficient, forthright, and responsive. Easier said than done.