State capacity, economic output, and public goods in China

Abstract

We attempt a causal examination of the role of state capacity in driving public goods provision and economic performance across regions in China. To identify the geographical variation of state capacity in modern China, we use historical variation in population losses arising from three concurrent rebellions during 1851–1880 as an instrument. These wars enhance governments’ ability to collect taxes and create institutions upon which the modern state capacity of China’s local governments rests. In counties with one standard deviation stronger state capacity, socio-economic activities are almost 84 percent higher. This increase in economic performance is due to higher government spending, resulting in better provision of public goods and more incentivized private investment.