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Human Capital Roots of the Middle Income Trap: Education, Nutrition and Health Inequality in China

Human Capital Roots of the Middle Income Trap: Education, Nutrition and Health Inequality in China. Scott Rozelle Stanford University (Senior Fellow) Director, Rural Education Action Project (REAP) & Collaborators in China, the US and Elsewhere. Two goals.

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Human Capital Roots of the Middle Income Trap: Education, Nutrition and Health Inequality in China

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  1. Human Capital Roots of the Middle Income Trap:Education, Nutrition and Health Inequality in China Scott Rozelle Stanford University (Senior Fellow) Director, Rural Education Action Project (REAP) & Collaborators in China, the US and Elsewhere

  2. Two goals 1. Tell a story (and show some numbers): • about Growth/Development and Inequality (as a way to motivating why it is that inequality is important) … this is a story (not evidence) … it may or may not be true … but, I think the question is “is it possible” … and if it is, is there any thing we can do about it … and is it worth the investment (even as an insurance policy) … 2. Try to show you the extent of human capital inequality in China today • … and why if it is not addressed, tomorrow’s income inequality is likely to be very high … and how, if nothing is done about it, how such high human capital inequality today may be what undermines / endangers China’s future growth.

  3. We all know why such a large share of the things the world makes are manufactured in China today! It is because China’s wage rates were so low in the 1980s and 1990s … 0.50 Japan EU Korea Australia Mexico Brazil Sri Lan. China US Hourly Wage, 1990s

  4. But, it was not always like this … in the 1970s and 1980s, most things were made in South Korea (and Taiwan, Hong Kong, Singapore … and Mexico) Korea 1970s /Early 1980s 0.50 0.75 Japan EU Korea Australia Mexico Brazil Sri Lan. China US Hourly Wage, 1990s

  5. But through the 1980s and 1990s, South Korea’s wages rose rapidly … Korea 1970s /Early 1980s Korea Today 13.56 0.50 0.75 0.75 Japan EU Korea Australia Mexico Brazil Sri Lan. China US Hourly Wage, 2005

  6. And a transformation took place in its economy (and work force): From a low-wage, labor-intensive economy … … to a high-productivity, service-base, innovative-based economy The 1970s/Early 1980s Late 1990s to Today

  7. South Korea in the 1970s/1980s How did South Korea make this transformation? Percent of students that go to High School • In no small part it was due to the fact that it labor force was highly educated … • Even in the early 1980s, almost everyone (urban and rural) in South Korea graduated from high school Today 1980s

  8. But, not all countries made this transformation (from middle income to rich) as smoothly in the 1980s and 1990s as South Korea

  9. That is not to say that there were not other candidates for “developing” successes in the 1970s/80s/early 90s … One was our neighbor, Mexico … although wages in the 1970s were low … manufacturing was growing … Mexico Early 1970s 4.00 0.50 0.75 Japan EU Korea Australia Mexico Brazil Sri Lan. China US Hourly Wage, 1990s

  10. And just as in Korea, wages in Mexico began rising in the late 1980s and early 1990s … Mexico looked like it was on the path to becoming a developed country … Mexico Early 1970s Mexico Mid-1990s 4.00 0.50 0.75 Japan EU Korea Australia Mexico Brazil Sri Lan. China US Hourly Wage, 1990s

  11. As would be expected, low-wage factories in Mexico shut down and moved elsewhere in the world

  12. The hope was that employers would invest in higher productivity jobs that would be able to support the rising wage rates (this is what development is all about, after all …)

  13. South Korea in the 1970s/1980s Mexico in the 1980s! BUT, Mexico’s education system did not succeed in educating large share of the labor force for the new economy … Percent of students that go to High School 1980s 1980s Today

  14. Mexico in Crisis Travel WarningU.S. DEPARTMENT OF STATEBureau of Consular Affairs, Mexico Foreign Direct Investment in Mexico Cartels & gangs Violence Unemployment

  15. This motivates a more fundamental question:Is it inevitable that Developing Countries that are growing fast and achieve Middle Income status always will continue to grow and become rich, industrialized nations? • In fact, history is littered with a lot of wannabe OECD members: • Argentina … one of the four richest countries in the world in the early 20th century … collapse and stagnation after WWII • Uruguay / Iraq / Venezuela (in the 1960s & 70s) • MORE RECENTLY: • How about .Mexico / Egypt / Tunisia / etc

  16. List of Countries/Regions that Have Moved from Middle Income to High Income After WWII[“Graduates”]

  17. List of Countries/Regions that Have Moved from Middle Income to High Income After WWII and the GINI Ratios (“Graduates”)

  18. List of Countries/Regions that Have Moved from Middle Income to High Income After WWII and the GINI Ratios (“Graduates”) Growth With Equity

  19. Aspiring Middle Income Countries(“Aspirees”) • Argentina • Brazil • Chile • Costa Rica • Malaysia • Mexico • Russia • Thailand • Tunisia • Turkey • Uruguay • Venezuela + China

  20. Aspirees Inequality (gini ratios) • Argentina (46) • Brazil (54) • Chile (52) • Costa Rica (50) • Malaysia (46) • Mexico (52) • Russia (42) • Thailand (42) • Tunisia (41) • Turkey (43) • Uruguay (42) • Venezuela (44)

  21. Aspirees Inequality (gini ratios) • Argentina (46) • Brazil (54) • Chile (52) • Costa Rica (50) • Malaysia (46) • Mexico (52) • Russia (42) • Thailand (42) • Tunisia (41) • Turkey (43) • Uruguay (42) • Venezuela (44) Average Aspirees: 47

  22. Aspirees Inequality (gini ratios) • Argentina (46) • Brazil (54) • Chile (52) • Costa Rica (50) • Malaysia (46) • Mexico (52) • Russia (42) • Thailand (42) • Tunisia (41) • Turkey (43) • Uruguay (42) • Venezuela (44) China: ≈50 and rising!

  23. The stories of Korea and Mexico provide the backdrop for interpreting what is happening in China today and where China is heading While low wages and labor-intensive manufacturing fueled economic growth in China in the 1980s and 1990s … China today (like Korea and Mexico earlier) is entering a new era … 0.50 0.75 Japan EU Korea Australia Mexico Brazil Sri Lan. China US Hourly Wage, 1990s

  24. Annual Real Hourly Wage (1978 dollars) ≈ $2.00 / hour in 2011 Unskilled wage ≈ 30 ¢ / hour in 1978 2010 Park and Cai, 2008

  25. Implications China continues to grow: RISING DEMAND Size of labor force falls: FALLING SUPPLY Rising wages in the future Changing industrial structure By 2025 to 2030  $6 to $8 to $10/hour

  26. How Expensive are Chinese Workers?Manufacturing Wages 1994-2008 (USD/year) China Philippines Thailand China Indonesia India Of course, as we will see later in the presentation, this also has implications for farming Source: International Labor Organization LABORSTA Database

  27. But, with higher wages, can China move itself up the productivity ladder

  28. “Textile worker” in high wage countries “made to order” Gucci shoe factory To do his job, he needs to be competent in math, language, English and computers …

  29. Will these young women … who are working in China’s textile plants now … be able to do the job in a modern high fashion textile plant? Unfortunately, most barely know how to read and write …

  30. This is my auto mechanic … in Palo Alto …

  31. Question: “Will these boys be able to do the jobs that need to be done in the future economy?” None of these students have ever touched a computer or surfed the web

  32. So: China’s real challenge is coming … and there are fundamental questions: Can China transform itself like: South Korea / Spain / New Zealand Or  will China become a: Mexico / Argentina

  33. A Middle Income Trap?What is the problem of trying to move from middle to high income with such high levels of inequality? A lot of it has to do with the slowing growth that occurs during this phase of development … … and the stability of a country [can all individuals share in the prosperity (when growth stops? … and if they can’t will they take actions that will slow growth further?]

  34. Key question: What will China’s inequality be like in the coming years (when growth slows)? • Sure it is high now … but, will it be high when China’s growth inevitably slows? • To examine this question rely, in part, on part of this equation: Today’s human capital inequality among children (health / nutrition / education) is one of the strongest determinants of tomorrow income inequality

  35. China’s Inequality in 2025 to 2030[must look at one of the “iron laws of inequality] Income Inequality TODAY + Human Capital Inequality TODAY = Income Inequality TOMORROW

  36. China’s Inequality in 2025 to 2030[must look at one of the “iron laws of inequality] Income Inequality TODAY  VERY HIGH + Human Capital Inequality TODAY = Income Inequality TOMORROW

  37. China’s Inequality in 2025 to 2030[must look at one of the “iron laws of inequality] Income Inequality TODAY  VERY HIGH + Human Capital Inequality TODAY ? = Income Inequality TOMORROW Education equality? Health equality? Nutrition equality?

  38. China’s Inequality in 2025 to 2030[must look at one of the “iron laws of inequality] Income Inequality TODAY  VERY HIGH + Human Capital Inequality TODAY ? = Income Inequality TOMORROW Education equality? Health equality? Nutrition equality?

  39. What will China’s inequality be like in 2025 or so? • Sure it is high now … but, will it be high when China’s growth slows? • To examine this question rely, in part, on part of this equation: In short: Today’s human capital inequality among children (health / nutrition / education) is one of the strongest determinants of tomorrow income inequality are workers today employable tomorrow?   and a strong determinant of tomorrow’s stability

  40. Rest of presentation Examine Today’s China Human Capital Inequality? • How equal are China’s education skills? • How poor is nutrition in China’s poor rural areas? • How are China’s health outcomes distributed between eastern and western China?

  41. So: What is the nature of China’s human capital today? … in poor rural areas ? • ≈ 45 (nearly half) of school-aged children in poor rural areas (≈ 80 million children, ages 6 to 15 … > 100 million if include infants and toddlers) cities other rural Remember: today’s children are tomorrow workers and professionals …

  42. How unequal is China’s education system today? infants elementary junior high vocational academic college school school high school high school

  43. How unequal is China’s education system today? infants elementary junior high vocational academic college school school high school high school

  44. Probability of a child from a poor rural area going to college (relative to child from the city) Times (x) Urban 8 out of 100 (rural) versus 70 out of 100 (urban) 21x Urban 13x Urban Poor Rural Poor Rural 8x Poor Rural Using data for 6 million Gaokao takers (2003)

  45. Probability of a child from a poor rural area going to college (relative to child from the city) Times (x) Urban 53x 5 out of 100 versus 75 out of 100 Poor rural youth Urban 32x Urban Poor Rural Poor Rural 15x Poor Rural Urban youth Using data for 6 million Gaokao takers (2003)

  46. Probability of a child from a poor rural area going to college (relative to child from the city) Times (x) Urban 21x Urban 13x Urban Poor Rural Poor Rural 8x Poor Rural Even worse odds for four year colleges … and elite colleges …

  47. Probability of a child from a poor rural area going to college (relative to child from the city) Times (x) Urban 21x Do you know how many poor, rural, female minorities are in PKU and Tsinghua? Urban 13x Urban Poor Rural Poor Rural 8x Poor Rural

  48. Probability of a child from a poor rural area going to college (relative to child from the city) Times (x) Urban 21x Urban Only 7 13x Urban Poor Rural Poor Rural 8x Poor Rural Do you know how many poor, rural, female minorities are in PKU and Tsinghua?

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