The Dragon and the Iron Horse: The Economics of Railroads in China, 1876-1937 0674215354, 9780674215351

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H A R V A R D EA ST A SIA N M O N O G RA PH S

i0 9

The Dragon and the Iron Horse The Economics o f Railroads in China Î8 7 6 -Î9 3 7

The Dragon and the Iron Horse The Economics o f Railroads in China Î8 7 6 -Î9 3 7

RALPH W ILLIAM HUENEMANN

PUBLISHED BY THE COUNCIL ON EAST ASIAN STUDIES HARVARD UNIVERSITY

D istributed b y The Harvard U niversity Press Cambridge, M assachusetts, and London, England

1984

Q Copyright 1984 by The President and Fellows of Harvard College

The Council on East Asian Studies at Harvard University publishes a monograph series and, through the Fairbank Center for East Asian Research, and the Japan Institute, administers research projects designed to further scholarly understanding o f China, Japan, Korea, Vietnam, Inner Asia, and adjacent areas. Publication o f this volume has been assisted by a grant from the Shell Companies Foundation. Library of Congress Cataloging in Publication Data Huenemann, Ralph William, 1939The dragon and the iron horse. (Harvard East Asian monographs; 109) Bibliography: p. Includes index. 1. Railroads—China—History. 1. Title. II. Series. HE3288.H79 1983 385’.0951 83-12818 ISBN 0-674-21535-4

Acknowledgments

I am deeply grateful to Dwight Perkins for the guiding role that he has played in the writing o f this monograph. There must have been moments when he doubted the viability o f the pro­ ject, but his encouragement and support have never faltered. During the course o f my research, I have been extremely well served by the librarians at Harvard, Stanford, the Library o f Congress, and elsewhere, but I must voice a vote o f special thanks to Tung-king Ng and her fine staff at the Asian Studies Library o f the University of British Columbia. Also at U.B.C., the Institute o f Asian Research provided scholarly support and the Department o f Economics supplied computer facilities that were invaluable. Over the years, I have been very lucky in the help that I have received from colleagues and friends. In my struggles to decipher

Acknowledgments

the meaning o f Ch’ing dynasty documents, I have benefited greatly from the patient assistance o f Hsu-tu Ch’en and Ch’ingyi Dougherty. I am indebted to Chang Kia-ngau, Robert Dernberger, Erwin Diewert, Ramon Myers, Alan Richards, Bill Waters, and Ed Wickberg for their constructive suggestions and detailed comments. I owe a particularly large debt o f gratitude to three close friends—Ernie Berndt, Sam Ho, and Tom Rawski. I could not even begin to list all the contributions they have made. Suffice it to say that they have given me both scholarly assistance and emotional sustenance o f the finest quality. Special thanks must also go to Florence Trefethen o f the edi­ torial staff o f the Council on East Asian Studies at Harvard, who carried out her tasks with intelligence and tact. In both Western and Chinese culture, a mother-in-law has al­ ways been an object o f derision and dark humor, and I am happy to have this opportunity to right the balance. I am in the some­ what unusual position o f having two mothers-in-law, and I consider myself doubly lucky, for both o f them have been extraordinarily generous in their support. It is quite literally true that without their help I could not have continued, and it is not easy to find words to convey my gratitude to them. Our three children have grown up with this project, and it has been a source o f considerable bewilderment to them. Our young­ est still asks, "What is a thesis, anyway?", and our oldest has been heard to remark that it sure takes Dad a long time to write a book report. The opportunity costs o f this monograph—mea­ sured in bedtime stories and camping trips sacrificed—have been substantial, but our children have borne these costs quite pa­ tiently. What is true for the children is true in even greater mea­ sure for my wife, Sharon. Despite the costs, her support has always been unstinting, and my respect for her grows deeper with each passing year. It is to her that this work is affectionately dedicated.

Contents

A CK N O W LED G M EN TS ONE

The Policy Conundrum A DIDACTIC FABLE 8 MEASURING THE ECONOMIC BENEFIT DIRECTLY 13 MEASURING THE BENEFIT INDIRECTLY 24 AN ADDITIONAL NUANCE TO THE FABLE 32 IDENTIFYING THE BENEFICIARIES 33

tw o

The Tempo o f Construction, 1876-1937 THE SELF-STRENGTHENING PHASE. 1876-1894 37 THE SCRAMBLE FOR CONCESSIONS. 1894-1900 47

Contents THE NATIONALISTIC RESPONSE. 1900-1911 60 REVOLUTION AND DISINTEGRATION. 1911-1927 81 THE NANKING DECADE. 1927-1937 90 three

Skinning the Ox Twice -YHE MEANING OP EXPLOITATION 99 THE COUPON-CLIPPERS 104 THE PADDING OF CONSTRUCTION COSTS 108 THE FINANCIAL MIDDLEMEN 110 COAL MINING CONCESSIONS 122 -DISPLACEMENT OF NATIVE CAPITALISTS 126

four

The Structure o f Railroad Costs THE PUBLISHED DATA BASE 135 ECONOMIES OF SCALE AND THE MULTI­ PRODUCT FIRM 139 THE DIVERSITY OF A RAILROAD'S PRODUCTS 142 ECONOMIES OF SCOPE (JOINTNESS IN PRODUCTION) 147 TERRAIN: A NEGLECTED VARIABLE 156 ROUTE LENGTH AND ITS RELEVANCE 159 MEASURING THE OPERATING INPUTS 164 MEASURING THE QUANTITY OF ROADBED CAPITAL 167 ECONOMIES OF SCALE: THE EMPIRICAL RESULTS 170

—f iv e

The Causes o f Financial Distress THE CHRONOLOGY OF THE DEFAULTS 177 PRICING POLICIES AND REVENUES 186 VARIATIONS IN COSTS 205

six

Assessing the Economic Benefits A QUANTITATIVE MEASURE OF THE ECONOMIC BENEFITS 220 THE TERMS OF TRADE 229 THE DOMESTIC DISTRIBUTION OF INCOME 232

Contents

seven

Conclusions

240

APPENDIX A.

Detailed Construction Data

251

APPENDIX B.

Yields on Chinese Sterling Railway Bonds o f 1899-Î9Î3: Notes and Sources fo r Table 7

259

Estimating the True Interest Rates on Chinese Railway Loans, 1898-1914: Notes and Sources fo r Table 10

261

The Impact o f Foreign-Exchange Fluctuations on Railway Debt Payments: Notes and Sources fo r Table 32

267

Estimating the Railway Traffic in China: Notes and Sources fo r Table 33

271

APPENDIX C.

APPENDIX D.

APPENDIX E.

NOTES

273

B IB LIO G R A PH Y

311

G LO SSA RY

329

INDEX

343

Tables

1. The Pattern o f Economic Activity for Selected Values o f the Par­ ameter a . 2. Price Indexes for a Hypothetical Case 3. Miles o f Railroad Lines in China, Excluding Taiwan 4. Railroad Mileage Opened to Traffic between 1895 and 1911, by Cate­ gories 5. Railroad Mileage Opened to Traffic between 1912 and 1927, by Cate­ gories 6. Railroad Mileage Opened to Traffic between 1928 and 1937, by Cate­ gories 7. Yields o f Chinese Sterling Railway Bonds, 1899-1913 8. Dispersion o f Dividends on British Railway Securities, c. 1880 9. Data Used to Test for Exchange-Rate Manipulation 10. Upper-Bound Estimates o f True Interest Rates on Chinese Railway Loans, 1898-1914 11. Percentage o f Revenue Earned by Mineral Traffic, National Railways, 1933 12. Interest Rates in China 13. Percentage o f Total Route Miles Included in National System 14. Average Values o f Selected Variables for the Chinese National Rail­ ways, Excluding the Changchow-Amoy 15. Examples of Cost Functions Exhibiting Various Combinations o f Economies o f Scale and Economies o f Scope 16. Correlation between Selected Operating Inputs 17. Relationship o f Labor to Fuel 18. Regression Results for “ Length” Specification, Equation 4.23, Using 1916-1920 Data 19. Regression Results for “Density” Specification, Equation 4.24, Using 1916-1920 Data 20. Nominal Rates o f Return to Investment in Chinese National Railways 21. Funds Transferred to Government from National Railways

Tables

22. The Proportion o f Maintenance Expenditures in Total Operating Ex­ pense* 23. Nominal Rates o f Return and Estimated Interest Rates on Debt, Na­ tional Railways, 1918 24. Advances to National Railways, 1911-1915 25. Nominal Rates o f Return, Selected National Railways, Various Years 26. Financial Performance o f the South Manchuria Railway, Selected Years, 1907-1938 27. Traffic Density on National Railways, 1918 28. Nominal Rate o f Return to Investment in Taolcow-Chinghua 29. Percentage o f Total Revenues Earned by Passenger Traffic, 1918 and 1933 30. Average Monthly Wages, National Railways, Fiscal Year 1934-1935 31. Price Paid per Metric Ton o f Coal, National Railways, 1933 32. Scheduled Payments on Foreign Railway Debt, 1889-1937 33. Total Traffic on China’s Railroads, Selected Years, 1895-1979 34. Cost o f Water Transport in the Early 1930s 35. Cost o f Overland Transport by Traditional Modes, Late 1920s and Early 1930s 36. Exports o f Eggs and Egg Products, 1903-1937

Figures 1 1. The Production-Possibilities Frontier and the Effect o f Changes in Transportation Technology 2. Line Integral Measures o f the Changes in Grain and Cloth Consumption 3. Basis o f Cost-of-Living Indexes 4. The Pattern o f Demand for Transportation 5. Fogel’s Measure o f the Benefits from Railroads 6. Railroads in North China, 1895 7. Railroads in Manchuria, 1911 8. The Value o f the Haikwan Tael, in Shillings and Pence, 1895-1937 9. Gross Operating Revenues o f China’s National Railways, 1915-1935 10. Relationship between Rate o f Return and Traffic Density, National Railways, 1918 11. Present Value o f Windfall Gains and Losses Resulting from ForeignExchange Fluctuations, 1889-1937

ONE

The Policy Conundrum

What shall we do about telegraphs and railroads? The Ch ’in dynasty built the Great WaU, and at the time it was considered a calamity, but later generations relied on it. I f telegraphs and railroads are built, China will likewise enjoy great benefits from them in the future. Moreover, as the work [ o f their construction J is enormous, it will be quite beneficial to the poor people now [because o f the jobs created]. However, although the foreigners plead with the Court to conclude a form al treaty perm itting them to begin this work, this absolutely must not be done. . . . And yet, the cleverness o f the West is beyond compare. I f indeed they can devise a m ethod whereby arable fields, houses, and ancestral graves would no t be harmed in the least, let them draw up a detailed plan and have it widely disseminated. Then the masses witl yield w ithout further protest. In this case, the Court had best give its magnanimous permission. Otherwise, permission should decidedly not be given. —Shen Pao-chen ( 1867)1

The Policy Conundrum

The story o f how railroads came to China is a familiar and un­ happy tale. The iron horse represented a potent new technology, promising (and ultimately delivering) a substantial increase in the productivity o f transportation. But, as in other parts o f the world, the shifting pattern of economic activity that accompan­ ied the new technology brought economic and social disruption to China. In addition, railroads came to be the most visible man­ ifestation o f the imperialist presence in the Middle Kingdom. Thus, it is hardly surprising that many thoughtful Chinese shared, to one degree or another, the anguished ambivalence expressed by Shen Pao-chen in 1867. They recognized that they had no very satisfactory answer to the deceptively simple question— Should China build railroads? The importunate foreigners in the treaty ports had little patience with these Chinese misgivings and doubts. If polite petitions wouldn’t work, perhaps direct action would do the trick. As Robert Hart reported from Peking in 1873: Everybody hat been at the Yemen [the Board o f Foreign Affairs] for authority to start railways: the Yemen has set forth in reply, everything that could be said against the fire-horse, and, in the face o f its answer, no foreign official dare take on him to encourage cap­ italists to think o f introducing railways in China; on the other hand, private individuals at Shanghai have clubbed together and bought a road from Shanghai to Woosung, which they are quietly and w ithout opposition changing from road to tram road, and will, as quietly, change from tram road to railway!2

Events at Shanghai developed just as Hart predicted, and on 20 January 1876, a British engineer named Gabriel James Morri­ son hammered home the symbolic first spike o f the ShanghaiWoosung Railway. The 10 miles o f 2'6" track were opened to regular traffic on July 3 o f that same year.9 For a time it appeared that Chinese officialdom might be pre­ pared to tolerate the result. As Hart had noted in 1873, "The central Government in C hina. . . recognizes the grand truth that eyes have two uses—to see, and not to see; and it, as a rule, pins

The Pokey Conundrum

its faith to not seeing.*'4 But, in the end, the foreigners* strategem did not work. Late in 1877, Shen Pao-chen (who at the time was Governor-General o f the region in which the railway was located) put aside his earlier ambivalence and took decisive action. As is well known, Shen bought out the foreign owners, ordered the track dismantled, and had the equipment shipped to Taiwan, where it was abandoned to the elements.* Neverthe­ less, the technology had been demonstrated, and other—more enduring—lines were soon to follow. Thus, the year 1876 can reasonably be considered the beginning o f the railroad era in China. More than a century has passed since the Shanghai-Woosung episode, but the debate over whether or not the construction o f railroads during the late Ch’ing and Republican periods provided economic gains to China continues unresolved. O f course, where diplomatic and political events are concerned, there is little room for dispute. It is all too easy to document the fact that Western attitudes were an unholy amalgam o f nationalistic hubris and territorial expansionism. We can point to Leopold II’s fervent desire to dominate what he called la colonne verté­ brale (by which he meant the railroad from Peking to Canton).4 We can recall the glee with which the Russian official Sergei Witte, in his memoirs, described the “extremely favorable*' con­ cessions that he obtained in the lopsided negotiations over the Chinese Eastern Railway.7 And we can quote the speech that Paul Doumer, the Governor-General o f Indo-China, made to the French Chamber in 1898, when he told the cheering deputies that a planned railroad into Yunnan would be “an instrument of development and power.**4 In short, the Chinese had every reason to be worried about the political implications o f any Western (or Japanese) railway-building proposals. In a world o f gunboats, unequal treaties, and the “mad scramble for Chinese concessions,**9 China’s survival as a unified political entity was very much in doubt. And yet, since at least the days o f Hobson and Lenin, the con­ cept o f imperialism had been understood to involve something

The Policy Conundrum

more than just political domination. Deeply intertwined with the question o f humiliation (a political, or at least a nonpecuniary, issue) has been the question o f economic exploita­ tion. But, when we focus on the economic aspects o f China's railroads, we find that controversy still reigns. From Shen Pao-chen's day to our own there have been those who have argued that, despite the political dangers, railroads would or did bring economic benefits to China. For example, Liu Ming-ch'uan, who became famous for his efforts to en­ courage economic modernization in Taiwan, wrote in a memorial to the Throne in 1880: “If we have railways, their revenue will be sufficient to supply our troops, the likin tax can be abolished, and the problems posed by the circulation o f foreign currency will end. As a means to enrich the nation and benefit the people there is no means better than this.” 10 Liu’s optimism was echoed four decades later by China’s most famous railway en­ thusiast, Sun Yat-sen, who confidently believed that foreign railway loans could be the means by which he would “make capitalism create socialism in China.” Sun Yat-sen was equally confident that his projected lines would have no trouble paying off their loans, because he believed (quite fatuously) that he had hit upon a “new law in Railway Economics which hitherto had not been discovered by railwaymen and financiers.” 11 In more recent years, several Harvard monographs have lent support to the optimistic view of Chinese railroads. Wayne Altree’s evaluation is that “the lines were profitable from the first,” despite a heavy debt burden.12 Chi-ming Hou has argued that “foreign capital was largely responsible for the development of whatever economic modernization took place in China before 1937.” 13 And John Schrecker's study of German imperialism in Shantung concludes that “the Chinese. . . profited from the German efforts without having to finance them .” 14 The optimistic view, however, has always had its critics. One Chinese official who stressed the economic shortcomings o f rail­ roads was Liu Hsi-hung, who accompanied Kuo Sung-tao on his famous diplomatic mission to London in 1877. Henri Cordier,

The Policy Conundrum

who knew Liu personally, castigated him as ce personnage ob­ tus, jaloux, et acariâtre. 1S But Liu’s journal of his trip reveals a man who, although dismayed by Victorian England’s nude statuary, was reasonably open-minded about the achievements o f Western technology on its home terrain. Liu doubted, how­ ever, that railroads would ever be profitable in China, and he justified his skepticism with the following arguments, among others: (1) the Chinese people were too poor to buy many tickets; (2) the volume o f freight to be moved, both domestically and for export, was quite small; (3) railroad property would be a tempting target for thieves; and (4) the railroads would have to service a heavy debt burden.16 An even darker assessment was offered in the late 1880s by an official named Yü Lien-yuan. Yü predicted that, if a proposed railroad was built from Tientsin to Tungchow (which was the terminus for canal shipments to Peking), then “several tens of millions, who earn their living by holding the whip or grasping the tiller, will lose their jobs. If they don't end up starving in the ditches, they will surely gather [as outlaws] in the forests.” 17 Chinese publications since Liberation have been equally nega­ tive in their evaluations of the railways o f the late Ch’ing and Republican periods, stressing especially the exorbitant interest rates on the loans, the need for subsidies, the displacement of potential Chinese investment, and the opening of the country to a destructive pattern of foreign trade.18 And these criticisms have been paralleled in a variety of works published in the West. E-tu Zen Sun has written that the typical pattern was for the railroads to “live off the existing productivity of the areas they served,” without generating significant new traffic, and to be plagued by insufficient income.19 Joseph Esherick, in an explicit attack on the views of Hou, Schrecker, and others o f the “Harvard school,” has suggested that “the foreign-built Chinese railway network was notorious for its service to the political and commercial interests of the foreign powers, and its irrationality from the standpoint of China’s own development.” 30 In a similar vein, Conrad Thomason has criticized the revisionists of the Harvard

The PoUcy Conundrum

school for falling prey to what he calls the *‘Roadbed Syndrome,'* by which he means “the high priority given to railroad building in modernization models."*1 As can readily be seen from even these brief quotations, the debate has been an impassioned one. I am well aware that this cursory review o f the contending opinions does not do justice to any o f them. But a more detailed analysis o f these issues will emerge in the pages that follow. For the moment, my intention is merely to emphasize two simple but important points, both of which can be illustrated by considering the question o f profit­ ability. First, the facts themselves are still very much in dispute. Did the railroads make money? The authors o f Chung-kuo chintai chmg-chi shih t ’ung-chi tzu-liao hsuan-chi (A compilation o f statistical materials on China's modem economic history) cer­ tainly suggest that the railroads were profitable.** Altree and others agree. But E-tu Zen Sun strongly disagrees, and her view is by no means an isolated one. Second, the problem o f estab­ lishing a criterion by which to judge the facts remains equally contentious. For example, Yen Chung-p’ing and his colleagues are critical o f the railroads on the grounds that they were ex­ tremely profitable. Yet E-tu Zen Sun is equally critical o f the railroads, because they allegedly had poor earnings! The obvious conclusion that might be drawn from this sort o f inconsistency is that somebody is holding the analytical yard­ stick upside down. But the more appropriate conclusion, I think, is that the wrong yardstick is being used altogether. The rail­ roads’ financial performance is an important issue in its own right, since it is intimately related to such matters as optimal pricing policy, the use o f retained earning» to finance additional capital formation, and so on. Furthermore, it is dear that a strategy o f encouraging foreign investment (whatever its wis­ dom) simply is not viable if earnings are inadequate to cover the requisite interest and dividend payments. Thus, the profitability o f the railroads is an im portant issue, and many aspects o f this subject will be discussed in the chapters to follow. However, a financial analysis is just not the same thing as an economic

The PoUcy Conundrum

analysis. It is one thing to ask if the railroads made money. It is something quite different to ask if the railroads were economic­ ally beneficial. If we try to use an inappropriate or inadequate criterion (which is to say, if we have not developed a satisfactory analytical framework), the facts will march onto the page in their serried tanks, and then they will march off again. And un­ derstanding will elude us. By what yardstick, then, is the economic impact o f the rail­ roads to be measured? The appropriate answer is easily stated in principle. If the railroads brought about an increase in Chinese incomes, and if this increase was distributed in some acceptable fashion, then the railways were economically beneficial to China. Otherwise, they were not. The distributional aspect o f this criterion is important (and obviously a rich source for contro­ versy), but I propose to leave it aside temporarily in order to explore some o f the complexities o f the other aspect—the measurement o f changes in national income. In terms o f this latter issue, there appear to be two versions o f the critics' posi­ tion. The weaker version suggests that the railroads left Chinese incomes essentially unchanged. This, for example, is what Arthur Rosenbaum seems to be saying when he asserts that railways in China "did n o t. . . lead to modern economic growth in either the industrial or the agricultural sectors."39 The stronger version o f the argument suggests that the railroads actually caused a significant reduction in national income. Authors such as Wu Ch'eng-ming, who use terms like "robbery" (lueh-to) and "slav­ ery" (nu-i) to describe the effects o f foreign investment, almost certainly subscribe to the stronger version o f the argument, though they do not always spell this out explicitly.34 Although the measuring rod of national income is easily stated in general terms, it is by no means easy to apply in practice. In fret, my own view is that—for reasons to be discussed in con­ siderable detail in the pages that follow—the difficulties involved in gauging the impact o f railroads on Chinese incomes are so complex and intractable that we will never have a satisfactory measure o f that impact. The problem is not merely the practical

The Policy Conundrum

one that there are gaps and inaccuracies in the historical record. There are also significant problems at the conceptual level. In order to explore these latter issues, I propose to begin with a highly artificial, but illuminating, hypothetical case. This parable was inspired by Dan Usher's suggestion that the productionpossibilities frontier ceases to be well defined when transport exists as an intermediate good.25 David Ricardo's influence will also be quite evident. However, neither Usher nor Ricardo should be held responsible for the final result.

A DID A CTIC FABLE Imagine a fum ing community that is able to grow both grain for food and fiber for cloth, and that consumes only these two commodities. Specifically, the production o f grain (Gp ), mea­ sured annually in sacks o f a certain weight, is the following function o f the labor devoted to cultivating grain (L q )’ Gp = 2 0 0 0 (Ic )l/a.

(1.1)

The production o f cloth (Cp), measured annually in bales of the same weight as the sacks o f grain, is given by Cp - 1000 (Lc ),/2.

(1.2)

Living in the region are 900 workers and their dependents, plus a group o f gentry who own all the land and live at leisure on the rents. If the community is self-sufficient, its production-possibil­ ities frontier can be drawn as shown in Figure 1, where the frontier is the dotted curve through points A and d. Suppose that the community's tastes are independent o f the distribution o f income and that these tastes have the specific form U = 10000(ln Cc) + Cc,

(1.3)

A Didactic Fable FIGURE 1 The Production-Possibilities Frontier and the Effect

o f Changes in Transportation Technology

The Policy Conundrum

where Gc is grain consumed, Ce is d oth consumed, and U is an ordinal index o f utility. (Three o f the implied indifference curves are shown as dashed lines in Figure 1). The peculiar assumption that a change in the income distribution would leave aggregate tastes unchanged has often been made in the economic litera­ ture, in the spirit o f Arnold Harberger’s famous Third Postu­ late,3* so that questions of equity can be isolated from questions o f effidency. Here, however, the intent is somewhat different, for one o f the lessons that emerges from this rather nasty little parable is that, even when we put the issue o f income distribu­ tion to one side in this fashion, it comes back to trouble us at another level. If the community is self-sufficient, the highest income it can achieve will occur if it produces and consumes 31,883 sacks o f grain and 25,414 bales o f d o th each year, as indicated at point A in Figure 1. That is, at point A the community is on the highest attainable indifference curve, given the fum ing tech­ nologies o f Equations 1.1 and 1.2 and a labor force o f 900 workers. Suppose that there is a harbor located on the coast some distance from this community, and suppose that economic conditions in the rest o f the world are such that at this coastal market one sack o f grain exchanges for one bale o f doth. The technology in transportation, we will assume, dictates that a single worker can, over the course o f a year, haul a certain num­ ber (a) of sacks or bales to the marketplace and an equal number back again. Then, if L j is the number o f laborers who work in transport rather than in agriculture, otLT is the physical volume o f grain exports moving from the community to the coast, while an equal volume o f d o th is imported. The situation can now be analyzed as follows. The grain con­ sumed (Gc) must equal the grain produced (Gp) minus any exports, or Gc = 2000 (Lc )xn -