China Will Run Out of Growth if It Doesn’t Fix Its Rural Crisis

No country with China’s vast education and public health problems has ever broken out of the ranks of middle-income countries.

People in a migrant village on the outskirts of Beijing on June 20, 2017.
People in a migrant village on the outskirts of Beijing on June 20, 2017. NICOLAS ASFOURI/AFP via Getty Images

At a time when every other major economy is shrinking, China announced in late January that its GDP grew 2.3 percent in 2020. Beneath that impressive achievement, however, lies a very unbalanced recovery: As in the past, Beijing relied heavily on state investment and a state-led push for higher industrial production, while private investment and consumer spending remained weak. Easy credit to fuel growth has likely formed even more so-called zombie companies with little prospect of future profitability and filled the books of Chinese banks with even more bad loans.

That much is familiar to many who have taken a closer look at China’s skewed model for economic growth. What’s much less well known is the disproportionate burden of the COVID-19-induced downturn that has fallen on rural Chinese, including the 290 million migrant workers with rural hukou (household registrations) who work in cities throughout China. Lockdowns forced by the pandemic paralyzed economic sectors where many migrants work, such as services and retail. According to one estimate, Chinese migrant workers lost about $100 billion in wages that they are unlikely ever to recover.

Among migrant workers and the underdeveloped rural communities that depend on the wages they send home, a quiet crisis is taking place—with potentially dramatic consequences for China’s future growth. Despite what the GDP number suggests about the country’s successful handling of the pandemic, China’s longer-term economic risks have only grown—and are a direct result of the crisis in rural China. As Stanford University researchers Scott Rozelle and Natalie Hell document in their meticulously researched book, Invisible China: How the Urban-Rural Divide Threatens China’s Rise, hundreds of millions of rural Chinese face a dangerous lack of human capital and suffer from pervasive health problems, including widespread iron-deficiency anemia, uncorrected myopia, and parasitic intestinal worms. Exacerbated by the pandemic, China’s rural crisis remains largely invisible to outside observers, and even to many Chinese.

Before the pandemic hit, many migrant workers already found it harder than in the past to land a job in manufacturing or construction because of the evolving demands of China’s labor market. Living costs and wages have risen to the point where production relying on unskilled labor is moving to countries such as Ethiopia, Bangladesh, and Vietnam, where wages remain lower. As China climbs up the value chain and turns into a knowledge-based economy, it has less need for low-skilled workers. And now, the pandemic has further worsened structural unemployment. For China, an existential question for its future is whether hundreds of millions of unskilled laborers are equipped to play a productive role in the economy.

Only 30 percent of China’s labor force has completed high school, placing the country dead last among middle-income countries.

On the surface, China seems the least likely nation to have a human capital crisis. Teenagers in Shanghai and other cities in China outperform most the world as measured by the Program for International Student Assessment—the global PISA study by the Organization for Economic Cooperation and Development that compares the academic performance of students in secondary schools. Moreover, Chinese colleges and universities are now producing more than 8 million graduates every year, of which more than half have degrees in science, technology, engineering, and mathematics. China is also the largest source of international students studying in the United States, Britain, Australia, Japan, and many other advanced countries. How can China have a human capital crisis?

The problem is that China’s alarming human capital crisis is taking place in a part of the country mostly invisible to outsiders and even most urban Chinese: rural China.

The Chinese leadership recently unveiled a plan to reach high-income country status in the next five years and double the nation’s economic output by 2035. This could be challenging if China does not quickly catch up on the level of human capital—the foundation of productivity and growth. The World Bank already considers China to be an upper-middle-income country, but the looming question is whether China can escape the so-called middle-income trap, the historical phenomenon that the majority of countries reaching China’s level of development get stuck there and never make the leap into the ranks of the advanced economies. That suggests China has two paths before it: One is to follow the path of those few former developing countries that have managed to become wealthy—such as South Korea, Taiwan, Hong Kong, and Singapore—or to remain in perpetual limbo like Mexico and Brazil.

Which path China will ultimately take will depend above all on human capital. The handful of countries that have graduated from middle-income to high-income status in the past half-century or so had significantly better educated labor forces than China does today. As Rozelle and Hell point out, no country with less than 50 percent high-school attainment has been able to escape the middle-income trap; the average rate for countries that successfully made the transition is 76 percent. China is nowhere near either of those numbers: Only 30 percent of China’s labor force has completed high school, placing the country dead last among the world’s middle-income countries. Even some countries far poorer than China have higher levels of educational attainment.

China’s leadership knows this is a problem and has taken the human capital issue seriously in the last decade and a half by pouring money and resources into education. But it hasn’t been enough to correct for decades of insufficient attention. A little-known fact about China: Only since 2005 have the first nine years of school been free and mandatory, and even today completing high school after those nine years comes at a steep cost for families. Public high school, which is not yet mandatory, often costs many times the average rural family’s income. Eliminating tuition for poor families would likely lead to better educational outcomes by removing a key barrier, allowing more children to continue school and develop critical skills.

Without much more widespread high school completion, and better-quality schools, the risk is that hundreds of millions of young Chinese will become structurally unemployable and have insufficient skills to take up better paid, higher-productivity jobs. As the Stanford researchers warn in their book, those facing bleak prospects in the formal economy may end up working in the informal sector—or even turn to crime. This is what happened to Mexico, which had the same high-school attainment numbers as China when it failed to make the transition from middle to high income. China is not Mexico, of course, and it may continue its track record of creatively solving tough development challenges to maintain high growth. Nevertheless, the challenge to ensure that hundreds of millions of its citizens are not left behind and drag down China’s growth will not be solved any time soon.

China has overlooked rural development much too long. If it really wants to become a high-income economy, Beijing needs to take action now to raise the level of human capital as fast as possible and thereby lay the foundation for tomorrow’s workforce. The first urgent task is to make high school free and mandatory for all rural teenagers, many of whose parents lost out on too much income during the pandemic to afford the expense. Like other developing counties have done, China could even consider giving cash transfers to rural families conditional on their keeping their children in school. It will also need to expand retraining opportunities for unemployed migrant workers to upgrade their skills. Finally, the weak social-safety net for migrant workers also requires an overhaul. If China can finally ensure that all its citizens have access to the education, social services, and health resources to succeed in a modern economy, then those GDP growth figures are much more likely to continue being impressive.

Martin Chorzempa is senior fellow at the Peterson Institute for International Economics. Twitter: @ChorzempaMartin

Tianlei Huang is research fellow at the Peterson Institute for International Economics.