Policy Responses to Domestic Challenges: Inequality

Background Recall our discussion of –Global commodity chains –Labor Put China in comparative context

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

Hourly Wage, 1990s China US Australia Mexico Brazil Sri Lan.Japan EU Korea 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 Source: Scott Rozelle, REAP,Stanford

Hourly Wage, 2005 China US Australia Mexico Brazil Sri Lan.Japan EU Korea Korea Today But through the 1980s and 1990s, South Korea’s wages rose rapidly … Korea 1970s /Early 1980s Source: Scott Rozelle, REAP,Stanford

South Korea in the 1970s/1980s 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 1980s How did South Korea make this transformation? Source: Scott Rozelle, REAP,Stanford

But, not all countries made this transformation (from middle income to rich) as smoothly in the 1980s and 1990s as South Korea Source: Scott Rozelle, REAP,Stanford

Hourly Wage, 1990s China US Australia Mexico Brazil Sri Lan.Japan EU Korea 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 … Mexico Mid-1990s Source: Scott Rozelle, REAP,Stanford

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! Percent of students that go to High School 1980s Today 1980s BUT, Mexico’s education system did not succeed in educating large share of the labor force for the new economy … Source: Scott Rozelle, REAP,Stanford

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. KoreaPortugalCroatiaE. Guinea* TaiwanSpainSloveniaTrin & Tob* GreeceSlovak Rep. IsraelHungaryIreland CzechNew Zea. Estonia Source: 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! Source: Scott Rozelle, REAP,Stanford

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 Source: Scott Rozelle, REAP,Stanford

Poverty and Inequality in China Slides Measures –Gini coefficient

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 … Source: Scott Rozelle, REAP,Stanford

High school: urban- rural (poor) gap Percent of students that go to High School China in the 2005 Mexico in the 1980s! Source: Scott Rozelle, REAP,Stanford

College: urban-rural (poor) gap Percent of students that go to college 70% 2% Source: Scott Rozelle, REAP,Stanford

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% Source: Scott Rozelle, REAP,Stanford

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

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

Inequality in access to health care 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

Inequality in access to health care 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

Inequality in access to health 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)

Intergovernmental fiscal transfers to support rural tax/fee reform (equalizing)

Earmarked intergovernmental fiscal transfers (often disequalizing)