Human Capital Roots of the Middle Income Trap: Education, Nutrition and Health Inequality in China

Human Capital Roots of the Middle Income Trap:

Education, Nutrition and Health Inequality in China

Scott Rozelle

Stanford University (Senior Fellow)

Director, Rural Education Action Project (REAP)

&

Collaborators in China, the US and Elsewhere

Two goals

1. Tell a story (and show some numbers):– about Growth/Development and Inequality (as a

way to motivating why it is that inequality is important) … this is a story (not evidence) … it may or may not be true … but, I think the question is “is it possible” … and if it is, is there any thing we can do about it … and is it worth the investment (even as an insurance policy) …

2. Try to show you the extent of human capital inequality in China today– … and why if it is not addressed, tomorrow’s income

inequality is likely to be very high … and how, if nothing is done about it, how such high human capital inequality today may be what undermines / endangers China’s future growth.

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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

/美

元小

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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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Hourly Wage, 1990s


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Korea

1970s /Early

1980s

But, it was not always like this … in the 1970s and 1980s, most things were made in South Korea (and Taiwan, Hong Kong, Singapore … and Mexico)

0.50

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23.65

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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

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 1970s/1980s

0

20

40

60

80

100

Large citiesin China

Poor ruralareas

Percent of students that go to High School

• In no small part it was due to the fact that it labor force was highly educated …

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

Today

0

20

40

60

80

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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

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21.76

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24.91

2.634.09

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/美

元小

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Hourly Wage, 1990s


0.75

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 …

0.504.00

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23.65

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2.634.09

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/美

元小

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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

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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Poor ruralareas


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Large citiesin Mexico

Rural / UrbanPoor

1980sToday

0

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Rural Korea

1980s

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

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

15

20

25

30

2005

2006

2007

2008

2009

2010

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 .Mexico / Egypt / Tunisia / etc

List 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.

Estonia

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

Income After WWII and the GINI Ratios (“Graduates”)


Mediterra-nean

Eastern Europe

Others

S. Korea (32) Portugal (38) Croatia (34) Ireland (34)

Taiwan (32) Spain (35) Slovenia (31) New Zea. (36)

Greece (34) Slovakia (26)

Israel (39) Hungary (31)

Czech (26)

Estonia (36)

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

Income After WWII and the GINI Ratios (“Graduates”)


Mediterra-nean

Eastern Europe

Others (oil countries*)

S. Korea (32) Portugal (38) Croatia (34) Ireland (34)

Taiwan (32) Spain (35) Slovenia (31) New Zea. (36)

Greece (34) Slovakia (26)

Israel (39) Hungary (31)

Czech (26)

Estonia (36)Growth With Equity

Aspiring Middle Income Countries(“Aspirees”)

• Argentina • Brazil • Chile • Costa Rica • Malaysia • Mexico• Russia • Thailand • Tunisia • Turkey • Uruguay • Venezuela

+ China

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)

• 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: 47



• 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!

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/美

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Hourly Wage, 1990s


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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 …

0.75

0

2000

4000

1978 1983 1988 1993 1998 2003

Year

Unskilled wage

2010

≈ $2.00 / hour in 2011

Park and Cai, 2008

Annual Real Hourly Wage (1978 dollars)

≈ 30 ¢ / hour in 1978

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 $6 to $8 to $10/hour

How Expensive are Chinese Workers?Manufacturing Wages 1994-2008 (USD/year)

Source: International Labor Organization LABORSTA Database

China

Thailand

Philippines

IndiaIndonesia

China

Of course, as we will see later in the presentation, this also has implications for farming

But, with higher wages, can China move itself up the

productivity ladder

“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:• South Korea / Spain / New Zealand

– Or will China become a:• Mexico / Argentina

A Middle Income Trap?

What is the problem of trying to move from middle to high income

with such high levels of inequality?

A lot of it has to do with the slowing growth that occurs during this phase of development …

… and the stability of a country

[can all individuals share in the prosperity (when growth stops? … and if they can’t will they take actions that will slow growth further?]

Key question: What will China’s inequality be like in the coming

years (when growth slows)?

• Sure it is high now … but, will it be high when China’s growth inevitably slows?

• To examine this question rely, in part, on part of this equation:

Today’s human capital inequality among children (health / nutrition / education) is one of the strongest determinants of tomorrow income inequality

China’s Inequality in 2025 to 2030[must look at one of the “iron laws of inequality]

Income Inequality TODAY

+

Human Capital Inequality TODAY

=Income Inequality TOMORROW


Income Inequality TODAY VERY HIGH

+





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Human Capital Inequality TODAY ?


Education equality?

Health equality?

Nutrition equality?



+

Human Capital Inequality TODAY ?


Education equality?

Health equality?

Nutrition equality?

What will China’s inequality be like in 2025 or so?

• Sure it is high now … but, will it be high when China’s growth slows?

• To examine this question rely, in part, on part of this equation:

In short: Today’s human capital inequality among children (health / nutrition / education) is one of the strongest determinants of tomorrow income inequality are workers today employable tomorrow? and a strong determinant of tomorrow’s stability

Rest of presentation

Examine Today’s China Human Capital Inequality?

– How equal are China’s education skills?

– How poor is nutrition in China’s poor rural areas?

– How are China’s health outcomes distributed between eastern and western China?

So: What is the nature of China’s human capital today? … in poor rural areas ?

• ≈ 45 (nearly half) of school-aged children in poor rural areas

(≈ 80 million children, ages 6 to 15 … > 100 million if include infants and toddlers)

cities

other rural

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

How unequal is China’s education system today?

infants elementary junior high vocational academic college school school high school high school



Probability of a child from a poor rural area going to college (relative

to child from the city)

0

5

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25

Any college Four Year College Elite College

Times (x)

PoorRural

Urban

Urban

Urban

8x

13x

21x

PoorRural

PoorRural

Using data for 6 million Gaokao takers (2003)

8 out of 100 (rural)

versus

70 out of 100 (urban)



0

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40

50

60


Times (x)

PoorRural

Urban

Urban

Urban

15x

32x

53x

PoorRural

PoorRural

Using data for 6 million Gaokao takers (2003)

5 out of 100

versus

75 out of 100

Poor rural youth

Urban youth



0

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10

15

20

25


Times (x)

PoorRural

Urban

Urban

Urban

8x

13x

21x

PoorRural

PoorRural

Even worse odds for four year colleges … and elite colleges …



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Times (x)

PoorRural

Urban

Urban

Urban

8x

13x

21x

PoorRural

PoorRural

Do you know how many poor, rural, female minorities are in PKU and Tsinghua?



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Times (x)

PoorRural

Urban

Urban

Urban

8x

13x

21x

PoorRural

PoorRural

Only 7

Do you know how many poor, rural, female minorities are in PKU and Tsinghua?



While all kids do not need to go to college, all children should be going to high school … to get skills for workforce 20 years from now!!

… as we have seen from the discussion above, this is critical at this stage of development to get all children the skills they will need in the future

• Only 40% of junior high grads in poor rural areas go on to academic high school ..

While all kids do not need to go to college, all children should be going to high school … to get skills for workforce 20 years from now!!

… as we have seen from the discussion above, this is critical at this stage of development to get all children the skills they will need in the future

• BUT: Only 40% of junior high grads in poor rural areas go on to academic high school ..

High School Gap in China today

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Poor ruralareas


China in the 2005 Mexico in the 1980s!

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

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Poor ruralareas


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Large citiesin Mexico

Rural / UrbanPoor

1980sToday

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Rural Korea

1980s

Who Does China Look Like? South Korea/Taiwan or Mexico?

High School Gap in China today

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Poor ruralareas


China in the 2005 Mexico in the 1980s!Difference between Mexico and China?

This gap represents more than 100 million children / youth / young adults …

If Chinese children do not get educated today … what are their options tomorrow?

各国高中每年的学费(美圆)

160

0 0 0 0 0 0 0 0 0 0

50

0 0 0

25

0 0 0 0

25

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13 13

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China

Ger

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Belgiu

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Franc

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Poland

Roman

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Canad

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Unied

Sta

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Austra

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Indon

esia

Iran

Philli

ppine

s

Turke

y

Vietna

m

Argen

tina

Brazil

Chile

Domin

ican R

epubl

ic

Mex

ico

Nicara

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Peru

Urugu

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Benin

Ethiop

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Ken

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Lesot

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Tanza

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Ugand

a

$ U

SD

High School Tuition Levels around the world

(in US dollars – public rural high schools)

China

Why is high school attendance so low?

Minister of Education (March 2013)

• We will NOT eliminate tuition in Academic High School!

• We will NOT increase enrollment in Academic High School!

• Keep with the PLAN: expansion of education is through Vocational Education and Training (VET)

Is this a good idea?

So what do they say?

Minister of Education

• We will NOT eliminate tuition in Academic High School!

• We will NOT increase enrollment in Academic High School!

• Keep with the PLAN: expansion of education is through Vocational Education and Training (VET)

Is this a good idea?

So what do they say?



REAP study on VET in Zhejiang and Shaanxi

• Vocational Education and Training (VET):

– Rich areas (75 VET programs in Zhejiang):• Students are learning vocational skills • Basic academic skills of students are NOT deteriorating

– Poor areas (65 VET programs in Shaanxi)• Students are not learning any vocational skills• Math and Chinese skills are deteriorating

[Students are NOT learning anything in VET programs]

[Students in academic high school (AHS) are learning

New study on VET in Zhejiang and Shaanxi




[Students are NOT learning anything in VET programs]

[Students in academic high school (AHS) are learning]

New study on VET in Zhejiang and Shaanxi




[In other words: Students are NOT learning anything in VET programs in Poor Areas]

So what are the consequences of such poor quality VET?

drop outs in VET

[sample of 140 VET schools in ZJ and SX]

Rich Students Poorest students Average Poorest

students

22%

6%

Drop out rate

after 1 year after 3 years

49%

61%

drop outs in VET

[sample of 140 VET schools in ZJ and SX]

Rich area students Poorer Rich area Poorer students

22%

6%

Drop out rate

after 1 year after 3 years

25%

61%

In fact, REAP is showing the the problems are starting before upper

secondary school

****Let’s examine the nature of Junior High education:

quality of education

nature of Junior High drop outs



Junior High SchoolStudent achievement gains

(in 175 poor rural jr. high schools) using IRT-scaled achievement tests

-.12-.09

.04

-.03

-.15

-.1

-.05

0.0

5

labor market voc. HS acad. HS undecided

(IRT-scaled z-scores)

By Students' Expected Plans at the Start of Grade 7

Mean Math Achievement Gains

Lots of students had negative or zero gains in achievement!

Unsurprising: REAP study shows (in part due to poor quality of education / and rising wages) China’s

rural students are not even getting through junior high school

Grade 7 Grade 8 Grade 9

15%

+

14%14%

Drop out rate

?

Nearly 40 percent of students from poor rural areas are dropping out of JUNIOR HIGH SCHOOL!

9%

+

15%

+

14%

14% 29% 38%

What are kids who are dropping out of Junior High today (they are 13

years old) going to do in 2030 (when they are 30 years old)?

• They barely know how to read

• They barely know how to write

• They are angry at the school system for ignoring them … and this translates into anger at the government & society!

Is this the breeding grounds of China’s future instability?



Maybe the “REAL source” of problem begins before junior high

school

• Why?

– Poor quality of education in grades 1-9 and before• Poor facilities … teachers … curriculum …

• Poor nutrition …

For example: There are many ways … many

potential technology-based solutions …

In fact, in the 12th Five-year plan, the government is committed to supply every rural school with a computer room …

But, if the government just drops computers into rural schools is not enough…

Even Worse…

Need to figure out sustainable, implemenatable, effective solutions


school

• Why?


• Poor nutrition / health!!

No matter how much investment into facilities / teacher salaries & training / curriculum … if students are sick or malnourished, may not be able to learn …

Is this a problem?


school

• Why?


• Poor nutrition / health!!

No matter how much investment into facilities / teacher salaries & training / curriculum … if students are sick or malnourished, may not be able to learn …

Is this a problem?

Between 2008 and 2012 we tested nearly 60,000 children

across China for iron-deficiency anemia

In fact, anemia is all over China

Luo, R., X. Wang, C. Liu, et al. (2011) “Alarmingly High Anemia Prevalence in Western China.” Southeast Asian Journal of Tropical Medicine and Public Health Vol. 42 No. 5

Total

Total 33.7 Shaanxi—2008 (Dataset 1) 37.5 Shanxi—2009a (Dataset 2) 31.6 Gansu—2010 (Dataset 3) 31.2 Qinghai—2009 (Dataset 4) 51.1 Ningxia—2009 (Dataset 5) 25.4 Sichuan—2010 (Dataset 6) 24.8 Guizhou—2010 (Dataset 7) 33.1

Poor areas of China

Children with anemia (≈ 33%)

Children with out ≈ 30 to 35 million school aged

children are estimated to be suffering from malnutrition!

Non-poor areas

of China

Children with anemia (≈ 8%)

Children with out (92%) < 5 million school aged children

in all of the rest of China

Testing 19,500 children in Gansu and Shaanxi Provinces

myopic

normal vision

5000 (≈25%) were myopic (or nearsighted).

Testing 19,500 children in Gansu and Shaanxi Provinces

myopic

normal vision

5000 (≈25%) were myopic (or nearsighted).

Only 650 had eyeglasses (≈ 3%) … only 1 of 8 that needed glasses have them …

Chinese Academy of Sciences

Center for Disease Control, Shanghai

Stanford University (with support of Asia Health Care Initiative funding)

We have tested nearly 5000 children for:

Stanford alum volunteer, Susan Chen (class of 2009)

Incidences of Intestinal Worms, Guizhou Province, 2010

3 to 5 year olds 8 to 10 year olds

33.9% with worms

41.7% with worms

Without Without

Zhang et al., 2011

… millions of children are infested with these …

http://images.google.com/imgres?imgurl=http://www.petkareclinic.com/img_roundworms.jpg&imgrefurl=http://www.petkareclinic.com/parasitism.htm&usg=__OlFR_U_YKB7JfOX5efn1pDfNgFw=&h=228&w=248&sz=12&hl=en&start=10&tbnid=C0PlLKBgKWhmZM:&tbnh=102&tbnw=111&prev=/images%3Fq%3Dround%2Bworms%26gbv%3D2%26hl%3Den%26sa%3DG


infants & elementary junior high vocational academic collegetoddlers school school high school high school

Even earlier (malnutrition during the first 1000

days)• Testing ≈1000

babies and their Mom’s in Southern Shaanxi

(these areas are 2 to 3 hour drive from Xi’an – one of China’s fastest growing cities)

Even earlier (malnutrition during the first 1000 days)

• Of the 948 babies tested (as of last week)

556 of them are malnourished

[or ≈ 60 percent of infants are seriously sick]

Severe malnutrition problems in babies in China’s rural communities

• Of the 949 babies tested (as of last night)

556 of them are malnourished

[or ≈ 60 percent of infants are seriously sick]

< 20% are stunted / wasted

What are the Cognitive Consequences of Malnutrition

All babies are being given an Infant IQ test (Bayles test)

High school volunteer from Harker School (San Jose) … Wendy will be in Stanford’s new incoming class …

Cognitive Consequence of Malnutrition

• Around 70 percent of infants FAILED their baby infant IQ tests

– Sub-normal cognition– Sub-normal motor skills

Ultimate Consequences:

If the micronutrient deficiencies of infants / toddlers are not corrected before baby is 30 months old

• Life time effects on:– IQ– Mental health– Height– Weight– Health

What does this mean?

In harshest terms:

Between 20 to 30 percent of China’s future population are in danger of becoming PERMANENTLY physically and mentally HANDICAPPED

By the way: we also executed several non-cognitive scales for infants … results available soon ..

Final Summary / Conclusions

What are the prospects for China’s inequality in the coming years?

Income Inequality TODAY

+




Income Inequality TODAY (highest in the world)

+





+

Human Capital Inequality TODAY (very high)


Unequal Education

Unequal Nutrition

Unequal Health



+



EXTREME?

Education equality?

Health equality?

Nutrition equality?

Summary of China’s development experience …

• In past 30 years success with growth

BUT: at cost of GREAT inequality– High income inequality today– High human capital inequality today

• Fact: growth will slow– Ageing / lower rate of effective investment– Max rate of growth after 2030 is 2 to 3 to 4 %

Many reasons to be concerned it will go to ZERO

Unlike the patterns of growth in countries that successfully graduated from middle

income to high income

• Japan, South Korea, Taiwan, Ireland, New Zealand, Israel, Czech Republic, Slovikia … and more: GROWTH WITH EQUITY

• Argentina, Venezuela, Mexico, Brazil and Chile (in 1960s/1970s): GROWTH WITH HIGH INEQUALITY

COLLAPSE / STAGNATION




• Argentina, Venezuela, Mexico, Brazil and Chile (in 1960s/1970s): GROWTH WITH HIGH INEQUALITY


China is NOT on the path of




• Argentina (in the 1950s); Venezuela, Brazil and Chile (in 1960s/1970s); Mexico (Today): GROWTH WITH HIGH INEQUALITY


In many ways, China is following the paths of

Can China address this issue?

• Can not do much about growth?

[Growth will slow … of course, need to keep growth as high as possible for as long as possible … raises issues of sustainable growth … save for another time]

• Can not do anything about Today’s Income Inequality (it is a FACT)

• One of main interventions Investment Heavily TODAY in human capital … for ALL

Declare WAR on RURAL EDUCATION, NUTRITION and HEALTH

• Better classrooms / Better teachers / Better curriculum

• Vitamin / day 0.2 yuan per day• Eyeglasses 80 yuan per yuan (< 0.10 yuan per day)

• Deworming 1-2 yuan per year• Early Childhood Education• Computer room + Software + Teacher training

– Computer Assisted Learning• Conditional cash transfers for junior high students• Counseling programs• VET internships• Making High School Free

“Vitamin / Day”

Give students one over the counter multi-vitamin with iron per day (5 mg of iron) … from November 2008 to May 2009

(≈4 US cents/day)

The Intervention

Chewable Vitamin per Day

Impact of vitamin on students:

Hemoglobin Points Anemia Rates (%)

Math Test Scores (std. dev.)

250 Quanta Computers into 50 Migrant Schools in Beijing …

490 Desktop Computers into Rural Schools in the Mountains of Southern Shaanxi

550 ACER Computers into Rural Schools into Some of the Poorest Minority Schools in Qinghai







0

0.1

0.2

0.3

0.4

0.5

Beijing MigrantStudents

Shaanxi RuralSchools

Qinghai MigrantSchool

Impact of Computer Assisted Learning Program on Student Learning

Standard Deviations

Control CAL Control CAL Control CAL

My Group (REAP)with the support of many in China, the US

and elsewhere in the world …

has shown that these work to improve health, nutrition and education …

And, government is willing to partner to upscale …

http://reap.stanford.edu

115

Can China Afford This?

• Better classrooms / Better teachers / Better curriculum

• Vitamin / day 0.2 yuan per day• Eyeglasses 80 yuan per yuan (< 0.10 yuan per day)

• Deworming 1-2 yuan per year• Early Childhood Education• Computer room + Software + Teacher training

– Computer Assisted Learning• Conditional cash transfers for junior high students• Counseling programs• VET internships• Making High School Free

Yes … easy …

• Keep its promises: Government promised to spend 4% of budget to education [have never made it]

• Reallocate (Half of Moon Budget)

• Allocate all increases fiscal funds from today on (don’t displace any current programs)

What if China can not overcome the [BIG] human capital challenge?

• If human capital does not rise, will China stop growing?

• What happens if there are two distinct classes … haves and have nots … and China’s growth slows?

• What happens if there are:

200 million or more unemployed?

80 million unmarried?

There will only be two choices for the unemployed in China (they will NOT be able to cross the border into a neighboring rich country) … they will either

seek employment in the informal economy OR seek refuge in organized crime [this is NOT new in Chinese history]

I hope that we can choose “Optimism”

“there is exactly enough time … starting now!”

But, the time is now … the clock is ticking!

Thank You!

http://reap.stanford.edu120

Human Capital Roots of the Middle Income Trap: Education, Nutrition and Health Inequality in China

Documents

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