The threat to China from its invisible population
How 800m starkly poor & undereducated people pose a challenge to Beijing
Hello and welcome to What China Wants.
In this, the penultimate geopolitical post of Series 2, I want to explore one of the most important (but underreported) reasons why China will struggle to fulfil the great expectations of global dominance that it has laid out for itself. In short, the country is dangerously divided at home, with its rural population badly educated, badly paid, and increasingly anxious about the future. It is not a recipe for stability.
Foreign leadership begins with security at home, a pattern that has been the case for every major power in history. The Chinese Communist Party has long recognized this, and it is no accident that according to estimates (as Beijing no longer publishes the real figures), domestic security spending is higher than for external defence.
Not that the ability to physically control the population is the only thing going for the government. The CCP is has high popularity ratings, given its success in providing for hundreds of millions of citizens the strength and prosperity that has long been in short supply in China.
However, not everything is rosy. In their book Invisible China: How the Urban-Rural Divide Threatens China’s Rise, Scott Rozelle, a development economist from Stanford, and Natalie Hell, explore the fate of the 800 million rural Chinese and show how their uncertain economic futures could likely spell trouble for Beijing in the not too distant future. In today’s post, I interview Scott on how the rural-urban divide could destabilise China, how the situation happened in the first place, and what Beijing could do about it - if they wanted.
I’ll be back next week for the last in newsletter before Christmas when I’ll round up the challenges facing China. In the meantime, don’t miss this Saturday’s culture post: I’ll be exploring some more Chinese books and films to enjoy over the holidays.
Please feel free to like, comment, and share. Many thanks for reading.
Sam Olsen: How divided is China between rural and urban?
Scott Rozelle: It is very divided. The rural population is about 60% if you take the hukou figures. [The hukou system is a system of household registration in China which officially identifies where you permanently live and legally divides the population into rural and urban. If, for example, your hukou records state that you are from rural area X, but, you are working in urban area Y, you cannot officially live in urban area Y, and you and your family cannot have access to education, healthcare etc. in that urban district.]
The urban areas have more money and more resources because this is where the manufacturing and services are, so this is where the taxes get raised and spent. Rural areas are generally poorer and have poorer fiscal bases. What’s important to note is that the divide is getting bigger: nearly 75% of babies are in rural China or migrant communities today and will likely grow up to be adults with rural hukou.
SO: Is rural China being developed at all?
SR: Yes it is. There has been enormous investment into infrastructure as well as significant improvements to social services in the past decades. And there are ambitions for more.
Over the coming decades the government wants to urbanise the fourth and fifth tier cities, and they aim to achieve this by taking the 2,000 county/prefectural seats and turning them into cities of 200,000 people, about the same size as Cincinnati.
The problem is, these cities will largely not be populated by the educated middle class, but by the less-educated population that belong to China’s low-income class. In a system like China’s, where social services (including pensions and unemployment insurance, and catastrophic healthcare is fairly low for the rural population), those in lower classes that don’t consume much. Hence, in these newly planned urban areas, there will almost certainly be significant challenges for job creation.
Such a policy may be beneficial to provide short-term gains in education and health, but, in the longer run it could be setting China up for disaster.
SO: Is there a difference in the education for rural and urban?
SR: Very much so. To add some context, in the US there are 40,000 independently funded school districts, which is the same as China. In China, the funds for these schools come from local taxes, which as mentioned are much lower because there is much less industry there. And there are more kids to educate, so schools have a double negative whammy.
The results of this are problematic to say the least. In the 2010 census, 44% of the urban labour force had at least high school education, whereas only 11% of the rural workforce did so. The paucity of rural education is an almost unbelievable oversight by China’s past leaders.
SO: Does this mean that China is lowly educated?
SR: China has a lot of college grads, but as a share of the entire population it is still low. Whilst about half of the labour force in Russia and Japan has a college education, only a tenth of China’s does. Of course, an even larger problem appears at the lower levels of society. China’s workforce is seriously lagging in its education compared to the rest of the world, and in fact, China lags behind every other upper-middle income country in the world. Almost nine out of ten working Americans has high school education; less than three in ten Chinese workers do.
Why is this not commonly perceived as a problem? Over the past few decades, as China was moving from a poor nation to a middle-income one, if you had factories full of disciplined workers you did not need them to be massively educated. This is changing now. Over the last decade or so wages have been rising, and with rising wages companies leave China or automate. This is turn means less jobs for the lower educated.
Now the government is trying to keep companies and the tax-base within China, and are further encouraging automation, but what do they do with the workers they don’t need anymore? Low skilled jobs are disappearing and not just from factories: construction is slowing down as much of the infrastructure is almost done. So the workers get dumped into the gig economy (or as China’s premiere called it in August 2020, the “farmer’s market economy,” with all its insecurities and low pay.
Overall, China is the lowest educated country in the middle-income world. And this has an impact on industrial success, because in order to go from a middle income to high income country you need more education.
SO: Does this realignment of the job market, especially at the lower ends, have any social impact?
SR: The sociologist Martin Whyte has heavily studied this. He has done regular surveys asking if there was inequality in China. Naturally the poor replies “yes”. Then he asked if they minded, and, in the past several decades, the poor often replied “no” because they were still a lot better off than their parents and grandparents and they also believed this would continue. This prospect of future growth kept the people - even those on the bottom-end of the income spectrum - happy for a long time.
But in recent years there are signs emerging that some segments of those in the low-income class are beginning to lose their optimism about the future, and are less confident that their standard of living will continue to rise. In no small part this is due to a beginning of the slowing down the growth of the unskilled wage and rise of jobs in the low-wage, unskilled, informal service sector. What happens if this stagnation continues for another ten years? Or twenty? Will the people remain optimistic and therefore happy?
There are already small glimpses of some of the potential future social effects. Not a lot, but, more than in the past. For example, up in China’s poor villages, I interviewed some young, rural men who had recently been laid off their jobs. They complained the new jobs were getting hard to find. And that wages and hours worked were not as high as before. In a moment of frustration, they actually whispered how if things continued to stay bad for them financially, they and some friends might go to town and find some rich storeowners to “tax.” When they complain that jobs are too difficult to find, they say that the government responds by saying, “… then, you should return to farming.” Unfortunately, there is almost zero interest in farming due to the extremely small plot sizes and low returns. In fact, most of them don’t know how to farm. In one interview, a frustrated young man stated, “I would rather go to war than learn to farm.”
There is a chance that this rural struggle with education and job prospects will lead to a rise in social unrest and other disruptive activities that have been found in many other stagnated middle-income countries, from Mexico to South Africa.
SO: Beijing has said that it will focus on building a high-tech economy to drive the country forward. Is this likely in your opinion?
SR: In may view, moving towards a high-tech economy is what China needs to do. However, what I worry about is that China is not letting the market move to towards that goal. Most economist firmly believe that you can’t plan a high-tech high-income economy. There is no example of a solidly, growing high-income, high-technology economy that is run by planners. Even Japan, which tried to plan its high-tech economy by building a small number of high-technology industries, like electronics, cars and chemicals, growth has been nearly zero for the past 25 years. If you want an economy to keep growing you need to make sure all the sectors grow (scores of different industries), and, that will almost certainly need the market to guide such growth.
The worry is that this is not happening in China. Politics is getting in the way of what sectors to encourage and which not to. For example, Beijing is not allowing its tech firms to flourish by accessing financial markets and engaging in the markets that have growth potential, Instead they are demanding that its chip industry expand - but such government-directed investments do not seem to be successful. High-quality chip production from domestic plants has not flourished. Rather than import chips and focus on what they are good at, the authorities are clamping down on successful sectors like real estate, high-tech, education and entertainment. In an ideal world they would import their chips and double the size of Tencent.
SO: What can Beijing do to improve the situation of the divide?
SR: The first thing Beijing needs to do is to realise that there is a problem. What is the probability that the rural divide could undermine the stability and growth of the country? 50%? 25%? 10%? 5%? Even if it is 5% (which I believe is not true … I would say 25% or above is more accurate), such a risk would suggest that the government focus large resources into trying to avoid a negative outcome.
In other words, with odds at all above zero, they should be buying insurance. But, in this case, insurance would not be paying an insurance company, it would mean re-establishing spending priorities. Rather than go to the moon in the next few years and building endless high-speed railways (both of which are not bad prospects – in the future), I believe China should radically increase its investment into rural China: provide more unemployment insurance for rural China; rural education; rural health; pre-schools; parental training and maternity/paternity leaves for parents of 0-3 year olds. The rural-urban divide is a potential source of chronic instability and Beijing needs to pay more attention to it.