"Fairy Tales of Western Development" by Yuen Yuen Ang: A review

by Anirudh Burman.

Introduction

Yuen Yuen Ang's "Fairy Tales of Western Development: The Non-Democratic Origins of Fiscal Capacity in Britain, the US, and China" challenges an influential account of fiscal-state formation. According to her, this prevailing account explains that representative institutions secured citizens' consent to taxation in exchange for public goods. Ang argues that this account gives an incomplete, sanitised history of Western development. This has then shaped policy advice to poorer countries. She instead emphasises financial improvisation, public-private arrangements, and cycles of crisis and institutional repair. In the essay, she seeks to revise that history and broaden the meaning of fiscal capacity beyond tax collection.

Ang's argument is useful for gaining a different perspective on how Indian cities raise and spend money. In my opinion, the prevalent discourse on improving the fiscal condition of Indian cities over-emphasises the importance of property tax. This property-tax-centred reform agenda starts from weak collections and seeks to increase both receipts and their share of municipal revenue. Yet, cities also use land-based instruments, including development charges and premiums for additional floor space and other development rights, to finance infrastructure. Property-tax reform is important, but it must not be the predominant focus of urban public finance. Applying Ang's argument, especially alongside John Wallis's history (discussed later), focuses attention on how land-based finance can expand the resources available to cities and change their reliance on particular taxes. The important question is how these instruments are designed and governed.

Ang uses "taxless finance", a term she credits to Wallis, to describe arrangements that finance infrastructure without raising current taxes. These include land monetisation, credit, shadow finance, and the sale of monopoly rights. They can mobilise resources without formal public consent. However, they leave taxpayers responsible for losses when projects fail. To this, Ang adds the concept of Adaptive Fiscal Capacity (AFC). AFC is a government's ability to raise, manage, and adjust its mix of tax and taxless resources as conditions change. She uses this concept to explain the process of fiscal capacity development in countries like the UK, USA, and China.

Ang's argument concerns how fiscal and economic development occur together. She argues, based on the evidence she presents, that early risk-taking and credit expansion in the developmental path of states may be necessary, with later regulation and taxation consolidating the gains from such early risk-taking. She also distinguishes the capability of enforcing tax compliance from developing an economy capable of generating tax revenue. This promotes a developmental reading of taxless finance, not merely a view of it as a temporary response to weak taxation.

Argument

Ang first questions the historical account behind the prevailing institutional and democracy focused explanations of fiscal strength. She asks how fiscal capacity actually developed, rather than assuming that representative government and consensual taxation deterministically led to this capacity creation. Britain, the United States, and China provide the comparisons through which she develops her alternative account. In this argument, infrastructure finance matters because land, credit, and public-private arrangements helped governments mobilise resources. The narrower question of how states have actually financed infrastructure when tax receipts are insufficient is one important implication of this history.

Ang uses Britain's history to challenge the prevailing account of fiscal development. The familiar story stresses how constitutional changes after 1688 protected property and made public borrowing more credible. Ang argues that this must be considered alongside the equally significant history of heavy taxation, monopoly profits, colonial extraction, slavery, and trade policies that protected domestic producers. Her point is that constitutional reform alone cannot explain how Britain financed its development.

Ang's account of the United States more clearly traces the change in financing arrangements over time. In the early to mid-1800s, US state governments used land, banks, bonds, and corporate charters to support infrastructure when direct taxation faced resistance. Ang connects these arrangements to the Panic of 1837, state defaults in 1841-42, and later reforms. These reforms limited borrowing, changed the rules for forming corporations, and made tax arrangements more uniform. The case shows how arrangements that enabled infrastructure investment were later regulated and redesigned. Those reforms are part of Ang's narrative of fiscal development. In this account, the earlier financing was not just a mistake, but an important strategy in its own right.

Ang cites Wallis extensively to support this argument. Wallis documents how many American states reduced or eliminated state property taxes as other income became available. American state governments initially relied on property taxes, but expanded their investments in banks, canals, and railroads through private, public, and mixed corporations. They earned income from canal tolls, dividends on bank stock, and land sales, alongside indirect taxes on business. Rising asset income allowed many states to reduce or eliminate their state property taxes. These governments did not merely supplement inadequate taxation. They replaced an established tax source, state property taxes, as other receipts became available.

Wallis presents a historical account that Ang uses to argue that taxless finance can contribute to development. It is not just a stop-gap arrangement or a necessary evil. It can expand the resources available to governments and, in some circumstances, replace established taxes. Fiscal development involves changes in the mix of taxes, asset income, and borrowing, together with the institutions needed to govern them.

Ang then moves on to an analysis of China's development. After market reforms began in 1978, fiscal contracts between the centre and provinces allowed the latter to retain revenue above negotiated quotas. Local governments also kept extra-budgetary income, including profits from township and village enterprises, encouraging them to promote industrial growth. The 1994 tax-sharing reform replaced these bargains with a unified allocation of taxes and strengthened central revenue collection. Local governments retained responsibility for education, health care, and infrastructure but lacked authority to introduce new taxes and faced restrictions on direct borrowing.

In this context, land-use-right leases became an important source of local funds. Ang describes local governments converting rural land for urban or commercial use, compensating farmers, and preparing sites with basic infrastructure. Developers then bid for fixed-term rights to use the land and paid a one-time land-transfer fee. The receipt was therefore payment for a lease of use rights, not an annual property tax. Local governments gained access to substantial funds.

Land also provided collateral for borrowing through government financing vehicles, state-owned companies established by local governments to fund infrastructure. Ang traces one model to a 1998 collaboration between the China Development Bank and Wuhu City Government, which bundled construction projects so that financing vehicles could borrow and repay collectively. The model spread, and local governments could borrow through these companies from local banks despite restrictions on direct public borrowing. Ang connects this financing to the expansion of public utilities, roads, and other infrastructure from the 2000s (Ang 2025, p. 13).

The resulting investment created both development opportunities and debt exposure. Repayment depended on projects generating growth and revenue, while falling land prices or wasteful investment could leave local governments unable to meet their obligations. Ang describes attempts by the central government to control these risks, but reports that debt continued to grow. China therefore supports her argument that taxless finance helped build infrastructure while also showing an unresolved problem of institutional adaptation.

How Ang's thesis relates to earlier work

Earlier scholarship already questioned the idea that states grew through voluntary agreements between rulers and citizens. Ang cites many of these works in introducing her argument. Tilly's account placed war and coercion at the centre of European state formation (Tilly 1990). Ang is therefore not the first to challenge a peaceful story of consent and taxation. She, however, draws attention to the range of financial arrangements through which governments acquired resources, especially those outside ordinary taxation.

North and Weingast argue that the constitutional settlement after 1688 made government promises more credible and substantially expanded its ability to borrow. Parliamentary constraints reduced the Crown's ability to alter agreements, giving lenders greater confidence in repayment (North and Weingast 1989). This does not conflict with Ang's emphasis on taxless finance. Borrowing is itself one of the instruments she describes. Their argument helps explain the institutional conditions that made such finance possible, while hers examines its role in development and subsequent reform. Ang explicitly acknowledges the borrowing mechanism, although she challenges the broader claims North and Weingast make with regard to post-1688 institutional change. Her evidence of coercion, monopoly privileges, and colonial extraction broadens the historical account. However, it does not by itself refute the narrower proposition that credible commitments increased access to public credit.

Besley and Persson explain low taxation through factors such as narrow tax bases, weak administration, limited transparency, and poor compliance (Besley and Persson 2014). Ang shifts attention from this explanation to the historical formation of fiscal systems on the one hand, and the relationship between financing development and generating taxable economic activity on the other. One helps explain weaknesses in tax collection; the other widens the inquiry to how investment, revenue sources, and fiscal institutions develop.

Indian cities and local government finance

Indian cities need to finance expansion while also paying for existing services. Their ability to do so depends on how powers and revenues are divided between governments. Article 243W of the Constitution of India provides that a State Legislature "may, by law, endow" municipalities with powers and responsibilities for functions including those in the Twelfth Schedule. Article 243X similarly provides that a State Legislature may "authorise a Municipality to levy, collect and appropriate" taxes, duties, tolls, and fees. Municipal corporations must therefore be understood within a wider system of State governments, development authorities, and other public agencies.

Property-tax reform addresses a real weakness, but it should not be the only test of municipal fiscal strength. The RBI reports that property-tax revenue growth has not kept pace with rising urban property values. It also identifies development charges, betterment charges, and building-approval fees among municipal non-tax revenues (Reserve Bank of India 2024). Increasing property-tax collections and increasing their share of revenue are different objectives. That share can fall even when collections improve if other receipts grow faster. Given the institutional structure of India's urban governance, we must also distinguish money received by municipalities from receipts collected by development authorities and other urban agencies.

Land-based finance is already part of India's policy approach to urban infrastructure. Ang's argument is useful here, since we can study the current fiscal situation within her paradigm of fiscal development, and not understand the low levels of property tax collection merely as an indicator of weak property taxation. The policy implication is to design instruments properly to finance investment now while supporting reliable revenues over time. This requires clear rules for collections, spending, and future obligations.

These instruments perform different functions. A development charge may recover infrastructure costs associated with new development. A premium floor space index (FSI) charge is a payment for permission to build additional floor area. A land sale raises money by disposing of a public asset. These receipts should not be treated as interchangeable merely because they are linked to land. Recurring income need not come only from taxes. But income from operating or holding an asset differs from selling it, just as receipts tied to new development differ from a continuing annual revenue stream.

These differences matter when designing a fiscal system. Taxes, land-based receipts, borrowing, and transfers need rules suited to their functions, so that financing investment today also supports the ability to meet continuing obligations.

A related concern is about the allocation of revenues. Raising money for a city is not the same as giving its municipality control over that money. A development authority may collect a land-based charge while a municipal corporation later pays to maintain the infrastructure. In such a case, it matters who receives the money, who decides how to spend it, whether its use is restricted, and who pays for continuing services. Ang's framework also considers how governments adapt their relations with one another and manage future obligations. Applied to Indian urban finance, the framework directs attention to how receipts and service responsibilities are divided. Institutionalising land-based finance therefore requires more than regularising collections. It also requires arrangements that connect investment decisions to the resources and responsibilities needed to sustain services.

Contributions and limitations

Ang makes three useful contributions. She challenges a selective account of Western fiscal-state formation and its use as a model for developing countries. She places taxless finance and institutional adaptation within the explanation of fiscal development. She also uses China to help construct a comparative argument, rather than treating Western experience alone as the source of general theory.

This review draws on Ang's argument that early risk-taking and credit expansion may be necessary, and that regulation and taxation can consolidate earlier gains. Consequently, the later redesign of financial instruments is part of fiscal development, not simply a correction to an undesirable practice. Taxless finance can help governments build infrastructure and develop their economies rather than merely compensate for weak tax collection. Wallis's account adds that this process can also involve reducing established taxes. Taken together, these arguments support examining how instruments are designed and institutionalised without assuming that taxation must take a larger share.

The distribution of costs and benefits also needs more attention. Ang discusses heavy excise taxes borne by UK consumers whose interests Parliament did not necessarily represent, and the possibility that taxpayers would bear losses from failed local investment in China. These examples make the allocation of risks and costs part of the assessment of fiscal development.

How governments move from raising resources to sustaining services still needs explanation. This is a question about how the developmental process works, not a reason to dismiss its earlier stages. Ang's account creates the ground for a closer examination of the reforms that turn early financing arrangements into lasting fiscal capability.

Conclusion

"Fairy Tales of Western Development" challenges the idea of representative democracy and consensual taxation as the defining history of fiscal-state formation. Ang's alternative account additionally emphasises financial improvisation, non-democratic arrangements, and institutional repair. The American case connects infrastructure finance to later regulation and tax reform. China shows the scale of investment made possible through land and borrowing, alongside unresolved fiscal pressures. Britain challenges a selective account of Western development. This thesis supports a broader interpretation of fiscal development as a changing mix of resources and institutions, often extracted through coercion, resulting in their present forms after a series of trials and experiments.

For Indian cities, land-based finance should be assessed as part of the fiscal system in its own right, not only as compensation for weak property taxation or a temporary step towards greater tax dependence. Property tax can support recurring services. Development charges and premiums may finance infrastructure, and borrowing can spread capital costs over time.

Governing this changing mix requires institutional work. Collection rules, spending powers, debt obligations, and responsibility for maintenance must fit together, especially when different agencies receive revenues and provide services. The question is how to design improvements to existing extractive processes so that the design incrementally creates lasting fiscal strength.

Bibliography

Ang, Yuen Yuen. 2025. "Fairy Tales of Western Development: The Non-Democratic Origins of Fiscal Capacity in Britain, the US, and China." Forthcoming in Political Economy Rebooted, edited by Marion Fourcade, Greta Krippner, and James A. Quinn. Duke University Press. SSRN 5661111.

Tirumala, Raghu Dharmapuri, and Piyush Tiwari. 2021. "Land-Based Financing Elements in Infrastructure Policy Formulation: A Case of India." Land 10 (2): 133.

Ministry of Urban Development, Government of India. 2017. Value Capture Finance Policy Framework.

Reserve Bank of India. 2024. "Own Sources of Revenue Generation in Municipal Corporations: Opportunities and Challenges."

Besley, Timothy, and Torsten Persson. 2014. "Why Do Developing Countries Tax So Little?" Journal of Economic Perspectives 28 (4): 99-120.

North, Douglass C., and Barry R. Weingast. 1989. "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England." Journal of Economic History 49 (4): 803-832.

Tilly, Charles. 1990. Coercion, Capital, and European States, AD 990-1990. Oxford: Basil Blackwell.

Wallis, John Joseph. 2000. "American Government Finance in the Long Run: 1790 to 1990." Journal of Economic Perspectives 14 (1): 61-82.

Anirudh Burman is a research at XKDR Forum, working on land, urban governance, public finance, and regulation.