Why did a government controlled by warlords in political instability successfully float internal loans? Existing literature suggests that a regime without constitutional institution or rule of law usually has little credible commitment towards its debts and thus gets constrained in the capacity of financing by borrowing. Political instability also increases the probability that the ruler takes a short-term horizon and behaves opportunistically. The significant role of domestic borrowing in public finance and the presence of credible commitment of the central government of Republican China before the Sino-Japanese War posed a puzzle. This thesis proposes a non-institutional explanation that the relative power of the state and the society based on their capacity of regulating the financia...[ Read more ]

Why did a government controlled by warlords in political instability successfully float internal loans? Existing literature suggests that a regime without constitutional institution or rule of law usually has little credible commitment towards its debts and thus gets constrained in the capacity of financing by borrowing. Political instability also increases the probability that the ruler takes a short-term horizon and behaves opportunistically. The significant role of domestic borrowing in public finance and the presence of credible commitment of the central government of Republican China before the Sino-Japanese War posed a puzzle. This thesis proposes a non-institutional explanation that the relative power of the state and the society based on their capacity of regulating the financial market determined whether the despotic ruler’s hands were tied. When the financial market was regulated by a strong civil society under the initial economic structure, credibly committing in a cooperative fashion would be a better strategy than expropriation for the state to tap financial resources. A combination of the accumulated capacity of the state in regulating the market and an external shock might alter the equilibrium. The case studies on the government debt of the three sub-periods of Republican China in a comparative perspective analyse the origins and dynamics of commitment institutions in a hostile environment, identifying the underlying state-society interactions that shaped the institutions.