Why did the Japanese succeed in modernizing while Qing China failed to do so? Historians have proposed numerous explanations. In our paper, however, rather than focusing on cultural differences between Japan and China, we focus on how different geopolitical incentives shaped their decisions to invest in state capacity and state centralization.

Before the mid-19th century China only faced a threat from inner Asia from where historically nomadic invasions had routinely invaded and threatened the sedentary population of the Chinese plain. Due to this threat, historically China tended to be a centralized empire with its capital and the bulk of its professional army stationed close to the northern frontier (see Ko, Koyama, and Sng (2018)). In contrast, Japan faced no major geopolitical threats prior to 1850. This meant that it could retain a loose and decentralized political system.

After 1850 both countries faced major threats from several directions. China was threatened on its landward borders by Russian expansionism and from the coast by Britain and France (and later Germany and the United States). Japan was threatened from all directions by western encroachment.

We build a simple model which allows for multidirectional geopolitical threats. We represent each state as a line of variable length. States have to invest in state capacity to defend against external geopolitical threats. Each state can use centralized fiscal institutions or decentralized fiscal institutions.

If there is strong threat from one direction, as China faced prior to 1850, the dominant strategy is political centralization. In the absence of major geopolitical threats decentralization may be preferable as was the case in Tokugawa Japan.

The emergence of a multidirectional threat, however, changes things. A large country facing a multidirectional threat may have to decentralize in order to meet the different challenges it now faces. This is what happened in China after 1850. In contrast, for a small state with limited resources, an increase in the threat level makes centralization and resource pooling more attractive. For a small territory like Japan, the emergence of non-trivial foreign threats renders political decentralization untenable.

We then consider the incentives to modernize. Modernization is costly. It entails social dislocation and creates losers as well as winners, the losers will attempt to block any changes that hurt their interests. We show that for geographically compact polities, it is always a dominant strategy to modernize in the face of a multidirectional threat as the state is able to manage local opposition to reform. This helps to explain why all members of the Japanese political elite came around to favoring rapid modernization by the late 1860s.

Consistent with our model, modernization was more difficult and controversial in China. The Qing government and particularly the Empress Dowager famously opposed the building of railroads. The most well-known example of this was the Wusong Road in Shanghai. Built using foreign investment it was dismantled in 1877 after locals complained about it. The Qing state remained reactive and prepared to kowtow to local powerholders and vested interests rather than confront them. Despite local initiatives, no effort was made at wholesale reforms until after China’s defeat at the hands of Japan in 1895.