The political origin of differences in long-term economic prosperity: centralization versus decentralization

It is important to understand the political determinants of long-term economic prosperity. In Sichuan Province of China, there historically existed two long-standing political institutions: a centralized system, represented by the prefecture system, and a decentralized system, represented by the Tusi system. This study utilizes a unique historical dataset for 181 counties in Sichuan Province and implements a regression discontinuity design to estimate the impact of different institutions on long-term economic development. The results indicate that the Tusi system significantly suppressed the performance of the local economy and impeded current regional openness and urbanization. By tracing the channels of its persistent effect, we document that the influence of these historical institutions has persisted mainly through the shaping of human capital and state capacity. The Tusi system is not only harmful to cultural communication and local educational progress but also inhibits the government’s capacity and the formation of authoritarianism.