Feudalism and macroeconomic cannibalism

The revered Chinese author Lu Xun (1881-1936) described feudalism as sort of predatory structure that caused ordinary people to descend into cannibalistic rituals. In his seminal work, The Diary of a Madman (1918), he provided a scathing critique of feudalism as the cause of gross social dysfunction. This sentiment is mirrored in macroeconomics, where there is a growing area of investigation that examines how feudal structures create inter-sectoral "cannibalism" through the distortion of government taxation decisions (see the literature survey of Erickson and Vollrath (2004)). This is done by increasing the tax burden of the manufacturing and service sectors at the expense of the oftentimes semi-feudal agricultural sector in numerous developing countries (Rangazas and Mourmouras 2008: 8).

The effect is manifested as follows: the feudal landowning class politically nudges governments towards a tax realignment away from the agricultural sector and towards the advanced economic sectors such as manufacturing and services, in order to discourage the growth of these sectors and therefore prevent the outflow of labour towards them; which lets them keep a large pool of low-cost labour to toil on their land assets (Rangazas and Mourmouras 2008: 8). Hayashi and Prescott (2006) find this to be the reason for the Japanese economic boom to have occurred only after WWII, because the prewar agrarian structure applied measures to keep a surplus of labour in the agricultural sector, including by forcing the eldest son of each household to stay in agriculture. Modern production sectors in developing countries thus face a tremendous barrier when the feudal agrarian sector diverts the government's taxation efforts towards the advanced sectors to dissuade their growth.

A poignant case that reflects this phenomenon is Pakistan, where the agricultural sector accounts for 25% of GDP (>30% in 1980's, >50% in 1950's), half of the labour force, and the largest vessel of foreign exchange earnings (World Bank 2015; Khan and Khan 1998). Yet despite the weight of agriculture in the economy, the sector is virtually untaxed, at least in terms of direct taxation (Khan and Khan 1998). This is because the feudal landowning class applies unbridled political pressure to extort tax exemptions for the agricultural sector. Khan and Khan (1998) point out that, under the Constitution of Pakistan, the federal government could not levy taxes on agriculture. As a result, the tax-exempt status of the agrarian sector incentivizes illegal transfers from other economic sectors to profit from this unsustainable tax shelter (Khan and Khan 1998). This carte blanche is being granted despite the fact that Pakistan's tax collection ratio is below 10%, one of the lowest in the world, which creates a frightening fiscal position with large structural deficits.

The feudal landowning class therefore does not simply squeeze a disproportionately large bargain for itself, but it also puts unbearable pressure on other sectors of the economy, which then have to attempt to compensate for the fiscal black hole that is left by not taxing a quarter of the economy. This is true cost of feudalism: that it diverts progress not just by obtaining favourable treatment for its own assets, but by burdening other sectors that could spur development, such as manufacturing and services.

In light of this body of research, leadership in contemporary feudal economies must take the politically difficult step of levying direct taxes on their feudal landholders, while creating policy measures (such as favourable tax regimes) that stimulate the flourishing of the advanced productive sectors. In the case of Pakistan, Khan and Khan (1998) state that taxing agricultural incomes would produce significant revenues in the medium term. In order to maintain fiscal discipline, the leadership of such economies must emphasize direct taxation on the feudal agrarian sector itself, because this will create a clear stream of revenues from a large pillar of the economy, as well as ease the taxation pressures on more advanced economic sectors.

The cannibalistic nature of feudalism, as Lu Xun figuratively presaged in his seminal critique, finds strong resonance in macroeconomics. Nevertheless, the fiscal inter-sectoral rebalancing via direct taxation of feudal landowning sector can help to mitigate its cannibalistic tendencies vis-à-vis the more modern sectors of the economies of developing countries.