Policy Responses to Domestic Challenges :

Policy Responses to Domestic Challenges:

Inequality

Background

• Recall our discussion of– Global commodity chains– Labor

• Put China in comparative context

0.7

23.65

21.76

13.56

24.91

2.634.09

0.52

27.52

0

4

8

12

16

20

24

28

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

/美元小时

Hourly Wage, 1990s

China US Australia Mexico Brazil Sri Lan.Japan EU Korea

0.50

China as the world’s factory: wage rates were very low in the 1980s-90s

Source: Scott Rozelle, REAP,Stanford

0.7

23.65

21.76

13.56

24.91

2.634.09

0.52

27.52

0

4

8

12

16

20

24

28


/美元小时

Hourly Wage, 1990s


0.75

Korea

1970s /Early

1980s

Recall that in the 1970s and 1980s, most things were made in Taiwan, South Korea (and Hong Kong, Singapore … and Mexico)

0.50


0.7

23.65

21.76

13.56

24.91

2.634.09

0.52

27.52

0

4

8

12

16

20

24

28


/美元小时

Hourly Wage, 2005


Korea

Today

0.50 0.75

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

0.75

13.56

Korea

1970s /Early

1980s


South Korea in the 1970s/1980s

0

20

40

60

80

100

Large citiesin China

Poor ruralareas

Percent of students that go to High School

•Labor force was highly educated …

• As of early 1980s, almost everyone (urban and rural) in South Korea graduated from high school

Today

0

20

40

60

80

100

Large citiesin Korea

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


0.7

23.65

21.76

13.56

24.91

2.634.09

0.52

27.52

0

4

8

12

16

20

24

28


/美元小时

Hourly Wage, 1990s


0.75

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 …

0.50

4.00

Mexico

Mid-1990s


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

world…but could Mexican workers get

better, higher paying jobs?

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

0

20

40

60

80

100


Poor ruralareas


0

20

40

60

80

100

Large citiesin Mexico

Rural / UrbanPoor

1980sToday

0

20

40

60

80

100

Large citiesin Korea

Rural Korea

1980s

BUT, Mexico’s education system did not succeed in educating large share of the labor force for the new economy …


Ex’s of Countries/Regions that Have Moved from Middle Income to High Income After WWII

[“Graduates”]

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.

EstoniaSource: Scott Rozelle, REAP,Stanford

List of Countries/Regions that Have Moved from Middle Income to High Income After WWII and

the GINI Ratios (“Graduates”)

East Asian Countries / Regions

Mediterra-nean

Eastern 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)Source: Scott Rozelle, REAP,Stanford

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!


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: 46

GAP between Graduates / Aspirees 13


Poverty and Inequality in China

• Slides

• Measures– Gini coefficient

• 1980 .33• 1995 .45• 2002 .45 • 2012 .50

Human capital enables countries to

“move up” the productivity ladder Education

Health

Can China move up?

Human capital and inequality

• ≈ 35% of school-aged children in poor rural areas

(> 50 million children, ages 6 to 15)

cities

other rural

Remember: today’s children are tomorrow workers and professionals …


High school: urban- rural (poor) gap

0

20

40

60

80

100


Poor ruralareas


China in the 2005 Mexico in the 1980s!


College: urban-rural (poor) gap

0

20

40

60

80

100


Poor ruralareas

Percent of students that go to college

70%

2%


Results from 2009/2010 REAP survey of poor, rural areas

Grade 7 Grade 8 Grade 9

15%14%

Drop out rate

?

Nearly 40 percent of students from poor rural areas are dropping out of junior high school

9%


Hu Jintao/Wen Jiabao leadership

• Building a “harmonious society”– Attempt to address inequality

Inequality

• Education

• Health care

under-funded by state during first two decades of reform

Recall characteristics of fiscal system

• Revenues controlled by center• Expenditures very decentralized

– Center allocates 30% of budget– Localities allocate 70%

• Local governments tasked with funding– Health– Education– Society security

• Welfare, old-age pensions, unemployment

Recall: increases in equalizing intergovernmental fiscal transfers

to support rural areas

80

245305

523

661

0100200300400500600700

2001年 2002年 2003年 2004年 2005年

农村税费改革转移支付

New Rural Programs

• Farm subsidies– Direct subsidies to farmers– Subsidies for agricultural inputs

• Abolition of agriculture tax

• Free compulsory education grades 1-9

• Rural Cooperative Medical Scheme

• Rural Social Security Program

Inequality in access to health care

• Health care in rural China– As of 2000, roughly 80% of people in

rural China were without health insurance of any kind


• Health care in rural China– Illness major driver of poverty

• lack of health insurance raised the number of rural households living below the poverty line by an estimated 44%

– low-income families had to cover high-out-of-pocket medical costs themselves


• Health care in rural China– NEW Rural Cooperative Medical

Scheme (2003)• Implemented in 86% of counties by 2007• Subsidies per enrollee:

– 40 RMB from the central government and 40 RMB from local governments

• Reimbursement– Formula for inpatient service– Medical savings account for outpatient

services and preventive care


• Health care in rural China– Rural Cooperative Medical Scheme

• Benefits– Significantly improved access to care

• Remaining challenges– Has not significantly reduced “out-of-pocket

expenditure”– Rural household still face “catastrophic

expenditure risk”

Recall characteristics of fiscal system

• Expenditures very decentralized– Center allocates 30% of budget– Localities allocate 70%

• Local governments tasked with funding– Health– Education– Society security

• Welfare, old-age pensions, unemployment

Hu Jintao/Wen Jiabao leadership

• Slowly shifting emphasis in inter-governmental fiscal transfers

Central-local regular intergovernmental fiscal transfers

(equalizing)2005年中央对地方一般性转移支付地区分布图

537.448%

51.35%

531.547%

东部地区中部地区西部地区

Intergovernmental fiscal transfers to support rural tax/fee reform

(equalizing)

80

245305

523

661

0100200300400500600700

2001年 2002年 2003年 2004年 2005年

农村税费改革转移支付

Earmarked intergovernmental fiscal transfers (often disequalizing)

360 375 489 516889

13601648

2237 2435 2425

3423 3517

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

1994-2004年中央对地方专项转移支付（单位：亿元）

Policy Responses to Domestic Challenges :

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