---

Scott Rozelle is a development economist who has spent more than three decades researching rural development in China. His new book Invisible China, written with Natalie Hell, warns of a growing divide between urban and rural China in terms of education and health, as well as income. Scott is the Helen F. Farnsworth Senior Fellow at Stanford University and a senior fellow at the Freeman Spogli Institute for International Studies. He also directs the Rural Education Action Plan and is a fellow at the Stanford Institute for Economic Policy Research. 

Q: In your book, Invisible China, you paint a stark portrait of rural China and those left behind in the country’s economic boom, and you offer some dire warnings about the consequences of such a large and potentially growing underclass. Can you tell us how and why they’ve been left behind?

A: Well, China has 1.4 billion people, and nearly 70 percent of them are rural. That’s more than 900 million people. That means one out of nine people in the world is from rural China. They’re factory and construction workers. They’re in the informal service sector. They’re the ones who sweep the streets and collect the garbage and deliver the packages to the door and open little stores and sit on the curbside and hawk apples and plums. 

The ironic thing is that even though there are so many of them, in many ways they are invisible to the outside world. They mostly live in villages in central and western China, which is a separate world from the cities that we see on CNN or read about in The New York Times. They have to send their kids to rural schools in their own remote local counties. They get their health care in home counties. 

In fact, in a number of ways it’s very much like the United States. We have 40,000 school districts in the United States. China has 40,000 school districts. All the school districts in the U.S. are funded by local property taxes. So if you’re rich, like Palo Alto [California] or Cambridge [Mass.], you have lots of resources to invest in your schools. About the only people they hire as new teachers at Palo Alto High School have PhDs. But if you’re in Fresno, California, or in the Appalachians or Mississippi, property taxes are really low, so the localities cannot afford to have very good schools. 

The same thing happens in China. Schools are supported by local fiscal resources, which in rural counties are terribly scarce. So you’ve got this system where there’s really two castes: a rural caste and an urban caste. You can move from rural to urban if you get a college degree but that tends to be very hard.

In fact, China has some of the highest rates of inequality in the world. And yet many of these people will say, “I’m much better off than my parents were…” And until now, this has sort of allowed them to buy into the system. There is also a long-held belief that the progress of the past will continue; that they will be better off 10 years from now. This is the China dream. 

But if some of those people at the bottom begin to lose hope that the future will be better — and, if they see the lives of others, meanwhile, continuing to improve — you could start to have the emergence of a polarized society where wages for those in the lower income strata start to top off or even fall, and their employment prospects also fall. People could begin to say, “I don’t know what my life is going to be like 10 years from now.” 

That’s what I try to address in the book; precisely that danger. It’s not a 100 percent certainty that the economy is going to unfold in that way, but if polarization does begin to emerge, hope for a better life would begin to fade for a large segment of society. And if it is going to happen, it is likely to begin to unfold now, since this often happens when a nation tries to go from an upper middle income society to a high income one; the nature of jobs change and the nature of opportunities in high-skilled economies changes.

But haven’t we been told for much of the past decade that there is a huge middle class in China? 

My favorite paper recently was done by an economist at the University of Western Ontario, Terry Sicular and her collaborators in China and Europe. It’s called “China’s Emerging Global Middle Class.” There are 400 to 450 million people that have joined the middle class, according to the World Bank definition of the middle class. And that’s all good. But what the researchers show is that almost all of the growth of the middle income class is occurring among urban residents. 

This is not a new story. This is exactly what happened in Brazil, Mexico, Turkey, South Africa. These are middle-income economies that have been middle income for 60 or 70 years. 

So what is happening to the rural people? Xi Jinping has pushed the country to wipe out poverty, and he claims that true poverty is [now] zero. Assuming this is true, if you do the math, it’s pretty easy to know what is happening to the incomes of those in rural China. There are 1.4 billion people in China. If you take away the 450 million people in the middle class, that means that 950 million people are low income. And what that means in terms of the well-being of China’s rural people is a couple things. First, there’s a spectrum within the low income. Do you know that 500 million people live on $2 to $5 a day? It is not poverty, but it’s really low income. Those on the upper end of the low income spectrum are still taking in only $300 a month. 

So, think now about how these 900 million low income people play into China’s objective of having a “dual circulation” economy, of having the domestic economy drive growth. Manufacturing jobs are falling because of automation. Construction jobs are disappearing because they’ve already built high-rise buildings and high-speed rail and freeways. So the only type of jobs that are going to be left are in the service sector. And, of course, that is what should be expected because it is demand for services that drives the economies of high-income societies. But how much will those low income people spend on services? What if you do not have sufficient levels of social security or catastrophic coverage for illnesses? Because of this I just don’t see how this economy takes off with that many low-income people. 

This is not a new story. This is exactly what happened in Brazil, Mexico, Turkey, South Africa. These are middle-income economies that have been middle income for 60 or 70 years. 

What you’re describing is the middle-income trap, a challenge for nations seeking to move from an economy fueled by manufacturing and low skilled labor to a more advanced economy more reliant on services. And you’re worried that China isn’t going to make it; that it’s going to fall into the trap. Is that right? 

Yes, basically. When I was in grad school, the superstar of developing countries was Mexico. For 20 years, the country had grown at 8, 9, 10 percent a year. I was in a development economics class and there was a whole part of the class that was called “The Next Taiwan.” And that was Mexico. Mexico was admitted into the OECD because it had become a high income country. 

But this also coincided with the end of cheap wages in the country. Because of this, factories moved and factories automated. And since the economy didn’t have the internal domestic engine to drive growth, 20 to 30 percent of their workforce suddenly became unemployed — something like 10 to 15 million workers out of a labor force of 50 million. In the case of Mexico, 3 to 5 million of them migrated to the United States. And note that in China, if there is [massive] unemployment, the workers will not be able to migrate out. In Mexico, another 3 to 5 million joined the informal economy; and 4 to 6 million joined organized crime syndicates. Did you know that Mexico was one of the safest countries in the world in the 1970s and 1980s? Then came stagnation. And that’s what worries me about China.

Can you talk a little about the role of education? In reading your book, I was struck by data about the low level of educational attainment in China — something that surprised me, even though I spent more than a decade in China. You write that only 30 percent of China’s labor force has a high school education, the lowest rate of educational attainment of any middle income country, and behind even Mexico, Thailand and South Africa. How can this be?

This is based on the OECD metric that provides a measure of the health of a labor force, or the share of the labor force [those ages 18 to 65] that have attended high school. The OECD is trying to measure the economic trait that is important for middle-income countries to be able to continue to grow and to become a high-income country. This is why I use the share of the labor force that has been to high school or above to assess the nature of China’s labor force as it seeks to move from middle-income to high-income. 

And when I give my talk, regardless of whether it’s to academics at Tsinghua [University] or a group of investors in Shenzhen, when I put up a slide showing them that China has the lowest educated labor force in the entire middle income world, you can hear the gasps. According to the census, only 30 percent of China’s labor force has ever been to high school. This is lower than South Africa, lower than Turkey and lower than Mexico. The other 70 percent are those that at most graduated from junior high, and hence, have relatively poor skills in math, language, science and computers. 

Although in recent years matriculation to high school has been growing, this will not solve China’s education problem immediately because it takes 40 years to educate your labor force. It all goes back to the nature of the education system that relies on local counties and local bureaus of education for financing. You have fiscally strapped local governments, and the local officials ask themselves: “Should I invest in rural education or a park downtown? Or a new shopping street that can be enjoyed by the local urban residents?” The leaders also know that if they invest in rural education and send everybody to high school, a large share of the rural graduates will leave town and never come back. The local county will not benefit. China as a whole may benefit but they won’t. This is one of the fundamental challenges that China needs to overcome. 

But many will ask, isn’t China now an increasingly wealthy country? Its economic growth has lasted for decades now. Won’t this likely be solved in the coming decades?

I don’t think many people, even in China, understand the depth of the problem. You know, I love space exploration. I want China to go to the moon. I like that they recently succeeded in their first mission to Mars. But they also have a problem — a potentially huge problem — at home. Let’s slow down and send the space capsules in 2030. Right now, take that money and invest it in rural education and health and early childhood development because China’s future is going to depend on the nature of these things for all children. 

We know China does a lot for prestige, just like the United States. Sending someone to Mars is a sign that China has arrived, whereas rural education, well that’s never ending. In Beijing, like in all capitals, the officials are probably saying, “Investing in babies is not going to get me recognition now or for the next 20 years. I will get a higher reward for something that is tangible” — even though human capital is the most important thing for the long-run, future growth of the economy. 

It’s a very politically incorrect thing to say in the U.S. today that you hope that China is successful, but for someone who’s been going to China for 40 years of my life, I want China to succeed. I want them to succeed fairly, on a level playing field. I understand that there are lots of challenges, but I don’t want China’s growth to stall out and fail.

You’ve written that it’s not just essential for China to deal with growing inequality and the rural poor, but it’s important for the rest of the world. Why should those of us outside China be interested in them making better strides in educating and equipping the rural poor?

Because a failing China would be a scary thing. There’s a likelihood that this huge, uneducated, low income, rural population might end up pulling the [entire] country down. Whenever I say that people just shake their heads. They don’t get it. Then I use the illustrations of the other middle-income countries that have been stuck in middle income [status] for years. 

Second, there’s an economic motive. Regardless of what you’ve heard from the mainstream media lately, the economy of the U.S. has benefited tremendously from its relationship with China — from the flow of so many of the goods that we buy and consume (at reasonable prices) to investment opportunities for tens of thousands of U.S. firms and individuals. And also, as a citizen of the world and as someone who has spent a lot of time with these rural families and individuals all around the country, I don’t want to see the future of these people collapse and have them fall back into grinding poverty.

A failing China would be a scary thing. There’s a likelihood that this huge, uneducated, low income, rural population might end up pulling the [entire] country down.

Also, let’s think about the different scenarios that could happen if China’s economy were to stagnate or contract sharply. The legitimacy of the government for the past 40 years has been based on economic growth. If growth were to stall, would the government use other approaches to boost their legitimacy? I am not saying it will happen but other countries that have faced similar political choices have taken actions to stoke nationalism and get citizens to throw their support to the leadership — despite a falling economy. Again, I am not saying this is going to happen, but to avoid even the chance of it happening, we outside of China should not want China’s economy to fail.

So you foresee the possibility of a rise of nationalism, something that could shape more hardline Beijing policies?

I’m drawing on lessons we’ve learned from other places. And I’m asking whether they will follow the path of Mexico or Colombia or Turkey. When places like Colombia are hurt, we may not feel it at all. But if China falters a lot of people get hurt. We’re already starting to see [some signs of] polarization in China. What happens when the younger generation suddenly loses faith that it will outperform the older one? What do you think gave rise to Donald Trump in America? It was the end of cheap wages in the United States. It was the polarization that has characterized the U.S. since the 1980s. This is what the Harvard economist Raj Chetty describes as the end of the American dream. Of course, there were those that tried to jolt the institutional memory of the American Dream. And no one used this strategy more effectively — for himself — than Donald Trump. Over and over he said that he was going to make America great again. And, in saying this he tapped into this nationalistic vein. 

This is, of course, what we fear might happen to China. If the polarization that seems to be emerging takes hold, China’s dream might even be expected to fall apart quicker than it has in the US. Per capita incomes are much lower; social services in large parts of the economy are nearly non-existent; and the risks associated with falling income and unstable employment are higher. And, if the end of the China dream was coupled with economy-wide stagnation or even collapse, one of the world economy’s engines of growth would be lost and you could see the spillover onto the the world economy 

In the book, you say that globalization, technology and automation could make it more difficult for China to deal with the growing inequality between urban and rural China. How so?

We’re moving into a new era, and it’s going past the old era that was defined by the last 50 years of globalization. The new era is going to be about automation. And, it has already started in China. There is some great work being done by my colleague Hongbin Li on this. China has added more robots into their factories in the last five years than all of the Western economies combined, including Japan. So will this new time period when machines can replace labor also shift the tide against globalization? Many people believe there will be jobs — mainly to take care of the robots — coming back to America. This could also happen in western Europe. Cheap labor is no longer needed and goods will go to where demand is high. When you have 1.4 billion people — of which 500 million of them will be in the middle class — China’s robots will be producing for that economy. 

Of course, a key question is who will be working in these high-tech, high wage economies. It almost certainly will be the highly-trained and the well-educated. The economies of the future will not need that many low-skill jobs. And, then the key question becomes how to deal with the expanding rates of inequality. Officials will have to start thinking, “Do I need massive redistribution?” Some people call it universal income. At the very least there will be a need for much more complete unemployment insurance and social security. And, this is a scary situation. It will be a difficult enough set of decisions for the U.S. and Western Europe. How does a country like China that is much poorer handle this? 

Indeed, we are in a time of massive change. China is adding robots because they do not want to lose jobs to globalization. But that could put hundreds of millions of people out of work and/or push them into the informal sector, where there’s no social support and no labor protection. This is at the heart of the question: how does the leadership of China keep this sustainable in this new world? And how do you deal with inequality?

What can be done? What should Beijing be doing now?

Many things are needed. What our research team is working hardest on is early childhood development. The children in rural China that are being born today won’t enter the labor force until 2030 to 2040. But China must start thinking through how it’s going to overcome the challenge of having nearly half of its babies in central and western China grow up with cognitive, language and social-emotional delays. At the other end of the spectrum, they need to set up a system that can deal with the large number of unemployed. Are these workers going to be retrained? That’s a huge investment, and a lot of retraining programs don’t work. 

China also needs to put a huge safety net under them so the country doesn’t become like Mexico. Do you think the young Mexicans who were laid off from their jobs in the 1990s wanted to go into organized crime? No. It’s basically that they were so poor they either went into the informal sector, where the returns were abysmally low, or turned to something else. Some chose the former and others the latter. To confront these problems, hard choices in investment priorities will be needed. These are the kinds of decisions China is going to have to face. There needs to be a massive redistribution of wealth. Where do I believe the investments should go? China’s leaders need to shift their investment priorities into just three things: human capital, human capital, human capital.

---