A Center for Strategic & International Studies presentation, “How Inequality Is Undermining China’s Prosperity,” recently focused on trends in China’s labor market, educational attainment, automation and rural employment.
The discussion centered on the idea that these elements are colluding to worsen inequality, which can harm the outlook for growth and sabotage political stability in the Asian superpower.
Ilaria Mazzocco, a CSIS fellow and trustee chair in Chinese business and economics, moderated the event.
Panelists included Mary Gallagher, a professor of democracy, democratization and human rights at the University of Michigan, Mary Lovely, senior fellow at the Peterson Institute for International Economics and a professor emeritus of the Department of Economics at Syracuse University, and Martin K. Whyte, professor emeritus of international studies and sociology at Harvard University.
Scott Kennedy, a CSIS senior adviser and trustee chair in Chinese business and economics, served as the host. He said the inequality study highlighted the work of Scott Rozelle, a senior fellow at the Freeman Spogli Institute for International Studies who holds the Helen F. Farnsworth Endowed Professorship, and is co-director at the Stanford Center on China's Economy and Institutions, as well as his many collaborators across the globe.
The event was made possible by funding from Stanford University.
Kennedy said the work on inequality is “desperately needed in Washington” to help improve the quality of the policy conversation in American policy.
Rozelle said it’s important to note that this report should not be seen as “China bashing.”
“You're going to see some things that show that China faces some very severe challenges,” he said. “What you saw was most people in China are people like you and me. They want to have good lives. They want to have their children educated and grow up in basically peace and a stable, growing economy. And that's what I want for China, too. I want it for that stability and security of East Asia and for the prosperity of the whole world.”
Rozelle said there is a growing problem with a disparity in educational opportunity, and that will be a major factor in economic growth. A growth rate that was as high as 12% has declined to around 5%, he said.
“I think with some of the things that are going on now, we'll probably see very low growth in 2022,” Rozelle said. “We know in the United States we have high inequality. The inequality in China is higher. Our inequality is more or less stable. But China has an inequality that, if anything, has the danger of growing even higher.
"And it's not just income inequality," he said. "You can see that the inequality is bunched up. If you take assets and put it across the quintiles there, what you see is a very distorted economy where 60% of households only access a small 20 to 30% of the income there.”
Officials say 600 million people — half the population — lives on 1,000 yen per month or less, he said.
“That's $5 a day or less. That’s poor,” Rozelle said. “Research done by Chinese scholars that are based in Canada, the U.S., Europe and China together show that 900 million individuals live on less than $10 a day to 2,000 yen per month. That's a lot of people at a very low, low level.”
China launched a movement called Common Prosperity to address this, he said.
“But just trying to shift income between these groups, I think there's really been a more fundamental challenge and that's to allow individuals to enjoy the fruits of China's, it hopes, high economy in the future,” Rozelle said.
But the Chinese labor force is not prepared for more challenging work, he added, because in 2015, more than 70% of the labor force had not attended a single day of high school, he said.
“They have almost no math or computer or science skills," Rozelle said. "And they don't have that ability to learn how to learn. China has an even more fundamental problem. When we give this [reading] test to any sort of group in rural China, they score the lowest on this test of any of the countries that were taken."
He said there are “fundamental problems of cognitive development” in the country, adding, “There's poor quality of schools, and it goes on and on."
Another concern is the rise of an informal economy.
“When this informal economy gets big enough, it actually started dragging down the rest of the economy, not letting it advance, the high income,” Rozelle said. “You can see who’s in this informal economy. It’s the little repair men standing on the side of the road. It's women hawking fruit on the street. And that's what China's economy is increasingly being made up of. And look what's happening to wages."
“The fact that 900 million people are low income means that a national strategy to try to stimulate demand and growth in the economy through the service sector is going to be hard to do when three-quarters of your economy is low income," he added. "People with low income, people with low social protection, don't consume services."
Whyte said he wonders why this was allowed to happen.
“China is such an ancient civilization with such a high value of education, how did they get in this mess," he said. “You mention a little of the post-1949 history that helps explain that so briefly back to the Mao era. You had, under Mao, some impressive gains in health and in basic education of the population, eliminating illiteracy and so forth. But, in the countryside the rural population, which was then more than 80% of the total population, you had imposed after the end of the 1950s, a system that can fairly be characterized as socialist serfdom. People were bound to the soil. They were prevented from voluntarily deciding to leave the countryside and go into the towns and cities, not to mention overseas.
China’s caste system included the unique household registration (hukou) system. But that has changed and the population is much more fluid, Whyte noted.
“First, socialist serfdom is eliminated by releasing peasants, rural people from these migration restrictions, so they're able to flood out into the towns and cities and seek employment and better opportunities,” he said. “And we all know some estimates out there are more than 300 million rural migrants in China's cities today as a result of this. The exploitation of migrant labor is the major engine that has driven China's extremely impressive economic boom.
"But the second very important consequence was that education, beyond the basic levels in the countryside, virtually totally collapsed," he added. "Rural, upper middle school education and beyond, in 1977, according to Chinese figures nationwide, rural and urban, there were 18 million students studying in upper middle schools. Six years later, in 1983, there were 6.3 million.”
This created a system of stark inequality and tens of millions of young people were left behind.
“They're neglecting and hindering the progress of more than two-thirds of their young people,” Whyte said.
Rozelle said China's education problem is something that is understood in the United States.
“We have 40,000 school districts in the United States, and all of them are basically locally funded by property taxes,” he said. “China has 40,000 school districts. It's almost exactly the same number we have. They're all basically locally funded by value-added taxes.”
These schools need more funding, he said, but the political will to provide it is lacking.
“It’s the responsiveness of the system," he said. "They look up. They don't look down. I thought that was the perfect sort of description of that.”
Rozelle said the problem is serious but there's not much effort into resolving it.
“We've just published a paper in British medical journal Global Health that shows that in central and western China, where half of kids are, over half of the kids have a developmental delay in cognition, language or social emotional abilities,” he said. “We give them the best schools in the world and they aren't even going to be able to learn. That needs to be addressed. And guess what? If we start investing as today, it's going to solve the education problem in 2050. China has a long, long way to go.”
However, Gallagher said government reform attempts and the expansion of the welfare state in recent years were well received.
“[President of the People's Republic of China] Xi Jinping remains popular," she said. ''‘Common Prosperity’ as a slogan is popular. Poverty alleviation, even if exaggerated, is popular. So I often wonder whether or not ‘Common Prosperity,’ even as an empty slogan, might be enough to keep his high popular support for Xi Jinping, although I think his locked-out policies right now are probably not gaining a lot of popularity."
Lovely focused on trade, investment and longer-run growth.
“I guess I'm a little less pessimistic, even though the number of people employed in manufacturing is decreasing,” she said. “I think China's place in the global factory is going to be very hard to replace, despite a lot of the rhetoric we hear in the West. I think this poses a very real concern, not only in employment, but also in wage growth."
Lovely said she saw two warning signs in automation and productivity growth and competition from elsewhere in Asia.
Gallagher agreed with Lovely’s assessment on the president’s popularity.
“Xi Jinping can throw lots of nice words around and the rural areas seem to eat it up,” Gallagher said. “As Mary said, ‘Common Prosperity’ is highly popular. You see Xi Jinping's picture in rural areas. There is some real affection there. It's not just all for show.
Mazzocco asked the panel about the global implications of this growing inequality as well as the implications domestically for China.
“I think that the U.S. continually overstates the trajectory for the Chinese economy and responds to it, takes the bait, in other words,” Lovely said. “And I think that's a mistake It needs to see China as it really is and look at what it is that we are cooperating with, competing with — confronting, to use the terminology these days."
Gallagher of the University of Michigan said she wonders what the COVID-19 lockdowns will do to China’s political and social stability.
“A key question is what will happen during the lockdowns to the service sector, because, obviously, many of these workers in labor-intensive services are rural migrants in cities. Some of them are still working,” she said. “We've seen pictures of them sleeping in tents in places like Shanghai. These are very drastic and terrible conditions that they're in. They are receiving very little support.
“The lax enforcement of labor laws, and the ways in which enterprises have been more protected and given more subsidies and things is really disappointing given Common Prosperity as a slogan," she said. "All of these policies seem to me to be going in the wrong direction.”
Common Prosperity was supposed to include implementing nationwide property taxes on people's housing, which still doesn't exist.
“But what kind of a socialist country is this," Whyte asked. "Obviously, it's not really a socialist country anymore … that essentially treats the majority of the population as a lower quality and not deserving of equal treatment,” he said. “Each time this brings up, I start ranting.”
Rozelle said there is no unemployment insurance for millions of people living in rural areas. leaving them few choices.
“I love that when they say the rural people can always go back to the farm," he said. "We did a survey of 20,000 workers in a big factory owned by a U.S. company run by a Taiwanese management firm. And we asked the 20,000 workers what were they going to do 10 years from now. And of the 20,000 workers, 1% said, ‘I'm going to go back to the farm.’"
“Plus their farms are so small that they make in three weeks in the factory what they make in a year of hard work on the farm,” Whyte said. “I think that there was huge negative impact on rural people in the early lockdowns. They aren't working. There is no unemployment.”
He said Chinese officials seem unaware of the problem, or unconcerned about it. Most people felt better days were ahead.
“And until recently, everybody at the bottom in the distribution would say, ‘Yeah, I know there's big inequality in China,’'' Whyte said. "And then they would say, ‘Well, I'm better off than my parents were when they were this age. I'm better off than I was 10 years ago. And I think I'm going to be better off 10 years from now than I am now.’''