Transcript The Transformation of China’s Rural Economy and

Will China Fall into a Middle Income Trap?
Growth, Inequality and Future Instability
Introductory thoughts 
Scott Rozelle
Stanford University (FSE, APARC, SCID)
Director, Rural Education Action Project (REAP)
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
28
low in the 1980s and 1990s … 27.52
24.91
20
23.65
美元/小时
24
21.76
16
13.56
12
8
4.09
4
2.63
0.50
0.7
0.52
0
中国
China
美国
US
日本
Japan 欧盟15国
EU
韩国
Korea
Hourly Wage, 1990s
澳大利亚
Australia 墨西哥
Mexico 巴西
Brazil 斯里兰卡
Sri Lan.
But, it was not always like this … in the 1970s, most things were made in
South Korea … and Taiwan … and Mexico
28
27.52
20
23.65
美元/小时
24
24.91
21.76
Korea
16
1970s / Early
13.56
1980s
12
8
4.09
4
2.63
0.50
0.75
0.7
0.52
0
中国
China
美国
US
日本
Japan 欧盟15国
EU
韩国
Korea
Hourly Wage, 1990s
澳大利亚
Australia 墨西哥
Mexico 巴西
Brazil 斯里兰卡
Sri Lan.
But through the 1980s and 1990s, South Korea’s wages rose rapidly …
28
27.52
20
23.65
美元/小时
24
24.91
21.76
Korea
16
1970s /Early
12
1980s
Korea
13.56
13.56
Today
8
4.09
4
2.63
0.75
0.50
0.7
0.52
0
中国
China
美国
US
日本
Japan 欧盟15国
EU
韩国
Korea
Hourly Wage, 1990s
2005
澳大利亚
Australia 墨西哥
Mexico 巴西
Brazil 斯里兰卡
Sri Lan.
And a transformation took place
in its economy (and work force):
From a low-wage, labor-intensive
economy …
… to a high-productivity, servicebase, innovative-based economy
The 1970s/Early 1980s
Late 1990s to Today
How did South Korea make this transformation?
South Korea in the early 1980s
100
Percent of 100
students
that go to 8080
High
6060
School
Today
1980s
4040
2020
00
Largecities
cities Rural
Poor Korea
rural
Large
China
areas
ininKorea
• In no small part it was
due to the fact that its
labor force was highly
educated …
• Even in the early
1980s, almost
everyone (urban and
rural) in South Korea
graduated from high
school (or attended
school to reach a high
school level of training)
But, not all countries made this
transformation (from middle income
to rich) as smoothly in the 1980s and
1990s as South Korea
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 …
28
although
wages in the 1970s were low … manufacturing was growing …
27.52
20
23.65
美元/小时
24
24.91
21.76
Mexico
16
Early
13.56
1970s
12
8
4.09
4.00
2.63
4
0.50
0.75
0.7
0.52
0
中国
China
美国
US
日本
Japan欧盟15国
EU
韩国
Korea
澳大利亚
Australia墨西哥
Mexico 巴西
Brazil 斯里兰卡
Sri Lan.
Hourly Wage, 1990s
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 …
28
27.52
20
23.65
美元/小时
24
24.91
21.76
16
Mexico
Mexico
Early
13.56
Mid-1990s
1970s
12
8
4.00
4
4.09
2.63
0.50
0.75
0.7
0.52
0
中国
China
美国
US
日本
Japan欧盟15国
EU
韩国
Korea
澳大利亚
Australia墨西哥
Mexico 巴西
Brazil 斯里兰卡
Sri Lan.
Hourly Wage, 1990s
As would be expected, low-wage
factories in Mexico shut down and
moved elsewhere in the world
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 …)
BUT, Mexico’s education system had not succeeded in
educating large share of the labor force for the new economy.
South Korea in the 1970s/1980s
100
Percent of 100
students
that go to 8080
High
6060
School
1980s
Today
Mexico in the 1980s!
100
1980s
80
60
4040
40
2020
20
00
0
Large
Largecities
cities Rural
Poor Korea
rural
ininKorea
China
areas
Large cities Rural / Urban
in Mexico
Poor
Mexico in Crisis
Travel Warning
U.S. DEPARTMENT OF STATE
Bureau of Consular Affairs, Mexico
Foreign Direct Investment
in Mexico
30
Cartels & gangs
25
Violence
20
15
Unemployment
2005
2007
2009
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?
This motivates a more fundamental question:
• 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 Tunisia?
• Or … as we are seeing before our eyes: Mexico
List of Countries that Have Moved from
Middle Income to High Income After WWII
East Asian
Countries /
Regions
S. Korea
Mediterra- Eastern
nean
Europe
Others (oil
countries*)
Portugal
Croatia
E. Guinea*
Taiwan
Spain
Slovenia
Trin & Tob*
Greece
Slovak Rep.
Israel
Hungary
Ireland
Czech
New Zea.
Estonia
List of Countries that Have Moved from
Middle Income to High Income After WWII
and the GINI Ratios (XX)
East Asian
Countries /
Regions
Mediterra- Eastern
nean
Europe
Others (oil
countries*)
S. Korea (32)
Portugal (38)
Croatia (34)
E. Guinea*
Taiwan (32)
Spain (35)
Slovenia (31)
Trin & Tob*
Greece (34)
Slovakia (26)
Israel (39)
Hungary (31)
Ireland (34)
Czech (26)
New Zea. (36)
Estonia (36)
List of Countries that Have Moved from
Middle Income to High Income After WWII
and the GINI Ratios (XX)
East Asian
Countries /
Regions
Mediterra- Eastern
nean
Europe
Others (oil
countries*)
S. Korea (32)
Portugal (38)
Croatia (34)
E. Guinea*
Taiwan (32)
Spain (35)
Slovenia (31)
Trin & Tob*
Greece (34)
Slovakia (26)
Israel (39)
Hungary (31)
Ireland (34)
Czech (26)
New Zea. (36)
Average Graduates: 33
Estonia (36)
Aspiring / Struggling (?) Middle
Income Countries
•
•
•
•
•
•
•
•
•
•
•
•
Argentina
Brazil
Chile
Costa Rica
Malaysia
Mexico
Russia
Thailand
Tunisia
Turkey
Uruguay
Venezuela
Aspiring / Struggling (?) Middle Income Countries
and their levels of Inequality (gini ratios)
•
•
•
•
•
•
•
•
•
•
•
•
Argentina
Brazil
Chile
Costa Rica
Malaysia
Mexico
Russia
Thailand
Tunisia
Turkey
Uruguay
Venezuela
(46)
(54)
(52)
(50)
(46)
(52)
(42)
(42)
(41)
(43)
(42)
(44)
Aspiring / Struggling (?) Middle Income Countries
and their levels of 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: HIGH
Aspiring / Struggling (?) Middle Income Countries
and their levels of Inequality (gini ratios)
•
•
•
•
•
•
•
•
•
•
•
•
Argentina
Brazil
Chile
Costa Rica
Malaysia
Mexico
Russia
Thailand
Tunisia
Turkey
Uruguay
Venezuela
(46)
(54)
(52)
(50)
(46)
(52)
(42)
(42)
(41)
(43)
(42)
(44)
Average Aspirees: 46
So how different are inequality levels in the
successfully graduating countries and the
countries currently aspiring to move from
middle income to high income?
Average Graduates:
33
Average Aspirees & Stugglers:
46
GAP between Graduates / Aspirees & Struggles
13
So how big of a difference is 13 points …
Illustration 1: China current Gini is 49 … China’s Gini was 36 in the 1980s, a
time when people thought China’s income was quite equitably distributed …
Illustration 2: US is 41  Finland is 28
The stories of Korea and Mexico provide the backdrop for interpreting what is
happening in China today and where China is heading
28
20
美元/小时
While low wages and labor-intensive
manufacturing
fueled economic growth in
27.52
24.91
23.65 and 1990s … China today (like Korea and Mexico earlier) is
China
in the 1980s
24
entering a new era … 21.76
16
13.56
12
8
4.09
4
2.63
0.50
0.75
0.7
0.52
0
中国
China
美国
US
日本
Japan 欧盟15国
EU
韩国
Korea
澳大利亚
Australia 墨西哥
Mexico 巴西
Brazil 斯里兰卡
Sri Lan.
Hourly Wage, mid-1990s
Annual wage (1978 real yuan)
Since
2000
3500
> 2.00
per
hours
3000
2500
Skilled / managerial wage
2000
1500
Unskilled wage
1000
500
0
1978
1983
1988
1993
1998
2003
2010
Year
They are rising nowCollective
… and rising
Other fast!
In coming years … wages are projected to rise even faster
…
Unskilled wage rate increased by 19% in 2010
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 
$10/hour or so
But, with higher wages, China will
have to move itself up the
productivity ladder
Can it?
“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 …
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 …
This is my auto mechanic … in Palo Alto …
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
So: China’s real challenge is coming … and
there are fundamental questions:
– Can China transform itself like:
• Taiwan / South Korea / Spain / Slovenia
– Or  will China become a:
• Mexico / Argentina / Tunisia
Today’s Agenda
• Session 1: Inequality in China Today
• Session 2: Inequality Tomorrow and the
Forces that Shape / Affect Tomorrow’s
Economy
• Session 3: Countries that are Flailing
(Mexico) / Fixing it (Brazil) / Free and
Clear (South Korea)
[Can we draw lessons for China?]