Policy Responses to Domestic Challenges:

1
Policy Responses to Domestic Challenges

• Inequality

2
Background

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

3
China as the worlds factory wage rates were
very low in the 1980s-90s
0.50
Australia Mexico Brazil Sri Lan.
Japan EU Korea
China US
Hourly Wage, 1990s
Source Scott Rozelle, REAP,Stanford
4
Recall that in the 1970s and 1980s, most things
were made in Taiwan, South Korea
(and Hong Kong, Singapore and Mexico)
Korea 1970s /Early 1980s
0.75
0.50
Australia Mexico Brazil Sri Lan.
Japan EU Korea
China US
Hourly Wage, 1990s
Source Scott Rozelle, REAP,Stanford
5
But through the 1980s and 1990s, South Koreas
wages rose rapidly
Korea Today
Korea 1970s /Early 1980s
13.56
0.50
0.75
0.75
Australia Mexico Brazil Sri Lan.
Japan EU Korea
China US
Hourly Wage, 2005
Source Scott Rozelle, REAP,Stanford
6
South Korea in the 1970s/1980s
How did South Korea make this transformation?
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
Source Scott Rozelle, REAP,Stanford
7
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
8
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 Early 1970s
Mexico Mid-1990s
4.00
0.50
0.75
Australia Mexico Brazil Sri Lan.
Japan EU Korea
China US

Hourly Wage, 1990s
Source Scott Rozelle, REAP,Stanford
9
As would be expected, low-wage factories in
Mexico shut down and moved elsewhere in the
worldbut could Mexican workers get better,
higher paying jobs?
10
South Korea in the 1970s/1980s Mexico
in the 1980s!
BUT, Mexicos education system did not succeed in
educating large share of the labor force for the
new economy
Percent of students that go to High School
1980s
1980s
Today
Source Scott Rozelle, REAP,Stanford
11
Exs of Countries/Regions that Have Moved from
Middle Income to High Income After
WWIIGraduates
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
Source Scott Rozelle, REAP,Stanford
12
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
13
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
14
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
15
Poverty and Inequality in China

• Slides
• Measures
• Gini coefficient
• 1980 .33
• 1995 .45
• 2002 .45
• 2012 .50

16

• Human capital enables countries to
• move up the productivity ladder
• ? Education
• Health

Can China move up?
17
Human capital and inequality

• 35 of school-aged children in poor rural areas
  
• (gt 50 million children, ages 6 to 15)

cities
other rural
Remember todays children are tomorrow workers
and professionals
Source Scott Rozelle, REAP,Stanford
18
High school urban- rural (poor) gap
China in the 2005 Mexico in the 1980s!
Percent of students that go to High School
Source Scott Rozelle, REAP,Stanford
19
College urban-rural (poor) gap
Percent of students that go to college
70
2
Source Scott Rozelle, REAP,Stanford
20
Results from 2009/2010 REAP survey of poor, rural
areas
Nearly 40 percent of students from poor rural
areas are dropping out of junior high school
Drop out rate
?
9
15
14
Grade 7 Grade 8 Grade 9
Source Scott Rozelle, REAP,Stanford
21
Hu Jintao/Wen Jiabao leadership

• Building a harmonious society
• Attempt to address inequality

22
Inequality

• Education
• Health care
• ? under-funded by state during first two decades
  of reform

23
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

24
Recall increases in equalizing intergovernmental
fiscal transfers to support rural areas
25
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

26
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

27
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

28
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

29
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

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31
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

32
Hu Jintao/Wen Jiabao leadership

• Slowly shifting emphasis in inter-governmental
  fiscal transfers

33
Central-local regular intergovernmental fiscal
transfers (equalizing)
34
Intergovernmental fiscal transfers to support
rural tax/fee reform (equalizing)
35
Earmarked intergovernmental fiscal transfers
(often disequalizing)