Wenkai He has written an ambitious and masterful work that is essential reading for those interested in institutionalism, comparative historical analysis, state development, and political economy. The author’s objective is to explain the origins of what He calls the “modern fiscal state,” which, in contrast to the “traditional fiscal state,” is one with two key features: centralized tax collection and the ability to leverage long-term debt financing. Centralized tax collection enables the government to reassure investors, allowing it to tap long-term and stable sources of capital, thereby augmenting the power and autonomy of the state.
Paths Toward the Modern Fiscal State is an exemplar of methodologically rigorous comparative historical research. He’s comparative historical analysis “reconstructs the goals, constraints, and uncertainties that historical actors actually took into account” (p. 45). In doing so, he identifies the conjunction of two specific factors that gave rise to the modern fiscal state: a credit crisis caused by excessive reliance on borrowing and underlying socioeconomic conditions. In the case of England and Japan, the governments came to rely heavily on borrowing, and when both governments were hit with credit crises, they had a strong incentive to centralize tax collection, which in turn enhanced their future capacity to tap markets for long-term borrowing. Socioeconomic conditions also matter. One prerequisite for having a credit crisis is the use of paper notes that serve as the basis for credit. In the case of China, however, social conditions produced a civil war that prevented the government from successfully introducing paper notes. Consequently, China never mobilized long-term credit and avoided a credit shock that helped precipitate the rise of the modern fiscal state in England and Japan.
After laying out the argument and the theoretical framework, the remaining chapters present the case studies in detail. To allow for agency and contingency, He establishes that the government had multiple policy options and that the eventual course that followed was not predetermined. In the cases where fiscal centralization succeeded (England and Japan), however, He shows how a common exogenous shock—a credit crisis—funneled the options of leaders pushing them to build the institutions of the modern fiscal state.
Chapter 2 examines the case of England over the course of 1642 to 1752. In England, centralization of taxes during the Restoration period (1660–88) preceded the credit crises, but centralization was a means to eliminate debt, not leverage long-term credit. The Nine Years War and the War of the Spanish Succession, however, sparked a credit crisis that then pushed the government to convert debt into long-term instruments that it backed with the expansion of centralized taxes, specifically indirect taxes on consumption.
He examines the Japanese case over two chapters. Chapter 4 maps the possible outcomes that might have emerged in the early years of the Meiji Restoration from 1868 to 1880: a quasi-federal system, an incremental centralization of power at the expense of the feudal domains, and rapid centralization. He then shows how the rapid centralization of power produced a credit crisis as the government took over the liabilities of the domains before it had centralized institutions for collecting revenue. Chapter 5, which covers 1880 to 1895, explains how the political pressures to stabilize the value of its paper notes and later to overcome deflation ultimately led the government to rely on long-term debt, which spurred a further centralization of tax collection.
China (1851–64) is a case in which the modern fiscal state failed to develop. Chapter 6 traces how the socioeconomic conditions in China, namely, the Taiping Rebellion, prevented the widespread adoption of paper notes and inhibited fiscal centralization. The government’s failed experiment with paper notes had long-term consequences, outlined in Chapter 7. Not only did the experience make the government wary of utilizing paper notes and relying on credit, but the ongoing use of specie, which was harder to transport, also reinforced decentralized collection and allocation. He also ingeniously uses a counterfactual—the case of indemnities to Japan after its loss during the Sino-Japanese War—to argue that the Chinese decentralization was not merely a function of weak central capacity. The indemnities, which He likens to a credit crisis, led to a partial centralization of indirect taxation on consumption, although it did not lead ultimately to a full modern fiscal state. Finally, Chapter 8 revisits the overarching argument and highlights the book’s theoretical contributions.
Paths Toward the Modern Fiscal State is a pathbreaking piece of scholarship. By shifting the study of the fiscal state not only to the centralization of tax collection but also to the state’s ability to leverage long-term credit, He draws our attention to a critical element of fiscal capacity. Not only did tapping long-term borrowing spur greater fiscal centralization of taxes; it bestowed power and autonomy on the state, helping pave the way for the rise of England and Japan. As the author convincingly argues, the ability to leverage long-term financial resources is a defining aspect of fiscal development.
He also deftly integrates agency, structure, and contingency in his comparative historical analysis overcoming some of the limitations of other institutional approaches. The author pinpoints a specific kind of exogenous event—government credit crisis—that inadvertently pushes countries toward the modern fiscal state. Identifying this causal trigger helps him overcome the problem of infinite regress in his historical analysis. He’s analysis also makes room for underlying socioeconomic conditions, including necessary but not sufficient conditions for the rise of the modern fiscal state, such as a commercial economy with a centralized system of remittances. His analysis, though, which is careful to avoid determinism, is ultimately probabilistic, allowing latitude for the choices of actors with imperfect information.
One can always find points with which a reader might take issue in any book, and there are a few of those here as well. For instance, “socioeconomic conditions” is an overly broad catchall concept that would benefit from more precision. In the Chinese case, for instance, the key socioeconomic condition that alters China’s course is the Taiping Rebellion, which prevented the successful introduction of paper currency and the centralization of taxes. The Taiping Rebellion, though, seems better understood as an event that itself was the result of very complex socioeconomic and other historically specific circumstances. One is also left pondering some of the implications for more recent developments of the fiscal state. While He suggests that the study has relevance for understanding the process of fiscal development for developing countries, he devotes little attention to the topic. What implications, if any, does the theory have for understanding contemporary fiscal development? The question is particularly interesting from today’s vantage point. China is now developing a modern fiscal state, and Japan, the most indebted industrialized country, is suffering the consequences of being able to tap long-term borrowing.
Explaining the rise of the modern fiscal state, however, is an ambitious enough task in itself, and He marries a creative and rigorous methodology with meticulous research to provide a compelling answer. The result is a book that is a tremendous success.
