HOW THE PEOPLES REPUBLIC OF CHINA CAN AVOID THE MIDDLE INCOME TRAP:

THE SOCIAL DIMENSION

Paul Vandenberg and Juzhong Zhuang
Economics and Research Department Asian Development Bank
Regional Workshop on Social Inclusiveness in Asias emerging middle-income countries 13 September 2010; Jakarta, Indonesia Partners: ADB, ILO, IPRCC and BAPPENAS

PRC: an impressive economic record

High GDP growth and high per capita growth Substantial poverty reduction Falling proportion of informal employment However, rising inequality

Average annual GDP growth

10%

1978-2010

Average annual GDP p.c. growth

$1.25/day poverty incidence $2.00/day poverty incidence % of employment that is informal Gini coefficient

8.9%
decrease: 60% to 9% decrease: 85% to 25% decrease: 64% to 59% increase: 0.41 to 0.47

1978-2010
1990-2008 1990-2008 1995-2008 1993-2004

Moving up the country-income ladder

Very low income when economic reforms began, in 1978
Advanced from low to upper-middle in 14 years Still, income level only one-third of high-income country
Classification GNI per capita Atlas, current $ 1978 1997 1998 2010 Low Low Lower middle Upper middle 190 650 790 4,260 Middle High income income Threshold, $ threshold, $ .. 786 761 1,006 .. > 9,655 > 9,630 > 12,275

2026 (2050) High

Avoiding the MIT

Three requirements for PRC to avoid the MIT (China 2030: Growing out of Low Cost Advantages, forthcoming):
Move up the value chain, through technological

innovation and industrial upgrading Reduce structural imbalances by deepening factor market reform, urbanization and services sector Ensure a solid foundation for growth based on:
macroeconomic and financial stability; making growth inclusive; managing resource constraints/environment; and, living in harmony with the outside world

Social dimensions of avoiding MIT

1. Urbanization-employment-social benefits

Reforming hukou

2. Rebalancing: toward domestic consumption

and reducing precautionary motive to save

Wages, education, health care, pensions Supporting growth, reducing social tension

3. Reducing inequality

1. Urbanization-employmentsocial benefits
Hukou is a large, unfinished reform Migrants hold rural hukou but work in cities
Thus denied rights to urban health, housing, schooling,

pensions, etc.

Granting of urban hukou to migrants would provide:

more settled urban population the attraction of more migrants rising domestic consumption higher level of economic development

But it would also substantially increase fiscal burden

for local governments

probably why hukou was not relaxed earlier

Social insurance programs coverage, urban/migrants, 2009

60 50

40

Percent

30

20

10

0
Maternity insurance Unemployment insurance Work injury insurance Basic health care Basic pension

Urban workers

Migrant workers

2. Rebalancing
Economy dependent on external demand and

investment component of domestic demand Need for rebalancing to domestic consumption High wages would help and they are rising Better social programs to reduce the precautionary motive to save (health, education, unemployment insurance, pension)

Growth in wages and labor productivity, 1992-2008

14 12

10

8 Percent 6 4 2 0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Secondary industry, labor productivity

Real wage

Education
Higher value production requires better

trained and educated workers More productive workers can be paid higher wages which increases domestic consumption and reduce inequality Urban education systems need to accommodate granting of more urban hukou

Education
Primary education is universal Secondary tertiary education have grown rapidly
Second.: from 39% to 78% of age cohort, 1990-2009 Tertiary: from 3% to 25% of the age cohort, 1990-2009

Tertiary students increased from 3.2 m to 21.5,

1997-2009
an astonishing increase of 18 m students in 12 years! but enrolment levels below those of other middle-

income countries and very much below developed countries

Enrollment in higher education and funding per student

25 120

100 20

15

60

10 40

5 20

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Enrollment in higher education (in million) Funding per student (as % of 1999 level)

Funding as % of 1999 level

80 Enrollment in million

Educational enrolment, selected countries, 2008 % of age cohort, 2008 Secondary

Korea, Rep. United States Sweden Japan United Kingdom France Chile Malaysia Brazil Mexico China, P.R. 97 94 103 101 99 113 90 69 101 90 76

Tertiary 98 83 71 58 57 55 55 36 34 27 23

Source: World Bank, WDI; Note: number students enrolled, regardless of age, as % of persons in the age bracket for that type of education, thus figures may be greater than 100%

Education attainment
Despite rapid increase in enrolment,

educational attainment of current workforce in tertiary education remains weak (because of the lag) Attainment similar to other middle-income countries in terms of secondary education
64% in 2005

Much lower attainment of for tertiary

education
6% in 2005

Health care
Health care expenditure per capita below

many middle income countries

Lower than Malaysia, Mexico, Brazil, Chile,

Argentina

But has increased five fold since 1995; much

faster than other countries Health expenditure as % of GDP remains low and not rising as rapidly because GDP growing fast

Health expenditure per capita, PPP, 2009

8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
Constant 2005 US $

Health expenditure per capita, % change, 1995 to 2009

600 500 Percent 400 300 200 100 0

NOTE: DATA FOR KOREA IS UP TO 2008 ONLY. SOURCE: WORLD BANK, WORLD DEVELOPMENT INDICATORS ONLINE (ACCESSED 5 SEPTEMBER 2011).

Health expenditure, % of GDP, 1995-2009

18 16 14 % of GDP

12
10 8 6 4 2 0

1995

2000

2005

2009

SOURCE: WORLD BANK, WORLD DEVELOPMENT INDICATORS ONLINE (ACCESSED 5 SEPTEMBER 2011).

3. Threat of inequality
Inequality may affect the growth process

through:
Limiting the contribution of lower classes to

growth by lower human capital (health and education) Generating social instability (public dissent) Limiting the contribution of lower classes to generating domestic consumption demand
Part of the rebalancing issue

Thank you