Will China Fall into a Middle Income Trap? Growth, Inequality and Future Instability Introductory...

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)

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中国美国日本 15欧盟国韩国澳大利亚墨西哥巴西斯里兰卡

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Hourly Wage, 1990s

China US Australia Mexico Brazil Sri Lan.Japan EU Korea

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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 …

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Korea

1970s / Early

1980s

But, it was not always like this … in the 1970s, most things were made in South Korea … and Taiwan … and Mexico

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Korea

Today

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But through the 1980s and 1990s, South Korea’s wages rose rapidly …

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Korea

1970s /Early

1980s

Hourly Wage, 1990s

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

Late 1990s to Today

The 1970s/Early 1980s

South Korea in the early 1980s

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Large citiesin China

Poor ruralareas

Percent of students that go to High School

• 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)

Today

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Rural Korea

1980s

How did South Korea make this transformation?

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

1990s as South Korea

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Mexico

Early

1970s

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 …

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Mexico

Early

1970s

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 …

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Mexico

Mid-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 …)

South Korea in the 1970s/1980s Mexico in the 1980s!

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Large citiesin Mexico

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1980sToday

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Large citiesin Korea

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BUT, Mexico’s education system had not succeeded in educating large share of the labor force for the new economy.

Travel WarningU.S. DEPARTMENT OF STATEBureau of Consular Affairs, Mexico

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2005 2007 2009

Foreign Direct Investment

in Mexico

Mexico in Crisis

Cartels & gangs

Violence

Unemployment

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 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

Mediterra-nean

Eastern Europe

Others (oil countries*)

S. Korea Portugal Croatia E. Guinea*

Taiwan Spain Slovenia Trin & Tob*

Greece Slovak Rep.

Israel Hungary Ireland

Czech New Zea.

Estonia


and the GINI Ratios (XX)East Asian Countries / Regions

Mediterra-nean

Eastern Europe


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)


and the GINI Ratios (XX)East Asian Countries / Regions

Mediterra-nean

Eastern Europe


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)Average Graduates: 33

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 (46)• Brazil (54)• Chile (52)• Costa Rica (50)• Malaysia (46)• Mexico (52)• Russia (42)• Thailand (42)• Tunisia (41)• Turkey (43)• Uruguay (42)• Venezuela (44)


• 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


• 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: 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

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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 …

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1978 1983 1988 1993 1998 2003

Year

Ann

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Collective Other

Unskilled wage

2010

Skilled / managerial wage

Since 2000

> 2.00 per hours

They are rising now … and rising 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?]

Will China Fall into a Middle Income Trap? Growth, Inequality and Future Instability Introductory...

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Transcript of Will China Fall into a Middle Income Trap? Growth, Inequality and Future Instability Introductory...