Why Did Qing China Fail to Establish Fiscal Federalism Between the Central and Local Governments?

Abstract

In Qing Dynasty China, the inter-government fiscal arrangement was characterized by a “dual-track fiscal system” in which a formal system with a central budget of revenues and spending coexisted with a decentralized and fragmented informal local fiscal system financed by miscellaneous extra-legal taxes. Why did the dual-track fiscal system endure despite its obvious flaws? Why was the Qing state unable to establish a stable and rationalized fiscal federalism? This chapter investigates the causes and consequences of the dual-track fiscal system. Through historical institutional analysis and several empirical studies, we propose a novel explanation based on the opportunistic behavior and credible commitment by the central government. Due to the central government’s inability to credibly commit to not encroaching on the formal fiscal powers of lower-level governments, the decentralized, off-budget, and informal local finances represent an “institutional equilibrium”.