China’s Human Capital Crisis Presents the Single Largest Threat to its Future Growth
Excerpt from Invisible China: How the Urban-Rural Divide Threatens China’s Rise by Scott Rozelle, the co-director of the Rural Education Action Program (REAP) at the Freeman Spogli Institute for International Studies, and Natalie Hell, a writer and researcher at REAP (re-printed with permission from the publisher):
China is at a critical juncture in its development. Amidst the glitter and gold of China’s urban miracle, economists and financial pundits are just now becoming concerned about slowing growth rates. A few bold scholars are warning that China is at risk of falling into what economists refer to as the “Middle Income Trap.” This describes the empirical regularity in which many countries that have attained middle income status (as China has) are unable to keep developing into stable, high income, developed countries, and instead stagnate or collapse (Mexico, Turkey, Argentina and Thailand are famous examples). These economic observers have written a flurry of concerned articles presenting the dangers of misaligned exchange rates and outdated industrialization policies for China’s growth. But they are completely missing the human capital crisis we have documented in the other China.
We argue that this human capital crisis actually presents the single largest threat to China’s future growth. Allow us to explain.
China’s astronomical growth was fueled by the rise of unskilled manufacturing. Manufacturers eager to cut costs flocked to China in the 1980s and 1990s because of its abundant supply of workers and the low wages they would work for. While that strategy proved successful, it is crystal clear that that engine of growth is finally running out.
China’s unskilled wage rate has risen rapidly since the early 2000s. While higher wages are good for workers in the short run, in the long run companies are going to start leaving China to find cheaper labor in other countries. Indeed, the exit has already commenced. Samsung is in the middle of moving millions of jobs out of China to its new low-wage electronics production bases in Vietnam. The iPhone 6 was built in China. The iPhone 7 and 8 will be too. But, where will the iPhone 9 be built? Almost certainly not in China. And with it will go millions and millions of jobs. This exodus is happening not just in electronics. It is also happening in textiles and toys and tools and Christmas tree decorations and more and more and more. Ten years ago, almost every product for sale in an American WalMart was made in China. Today, that is no longer the case. Textiles are now coming from Bangladesh, shoes from Ethiopia, toys from Indonesia, and on and on.
And when the factories leave China, the danger is that the country will be left with a huge vacuum. Just like the American Rust Belt communities devastated by the exit of large-scale manufacturing, we believe (and will attempt to show) that huge groups of Chinese workers are likely to be left jobless and disappointed.
