The Allocation of Talent and Financial Development, 1897 to 1936

Abstract

We examine how the supply of talent affected financial development, based on a historical experiment that abruptly changed the allocation of talent in early 20th- century China. A millennium-long meritocratic institution, the imperial civil examination system had firmly linked Chinese intellectual and educational ambitions to government service. The abolition of this system in 1905, however, released the learned elites from the scholar-official system and they looked to modern industries for new opportunities of wealth and status. By analyzing the data of 281 prefectures between 1897 and 1936, we find that regions where there were more candidates for the civil examination produced more bankers and students of finance after 1905; this translated to a greater development of modern banks. From the aspect of the early development of modern finance, our findings coincide with Murphy, Shleifer and Vishny’s (1991) view on the growth implications of the allocation of talent to innovative industries.