REAP co-director Scott Rozelle begins a ten-part series for Caixin Magazine titled, "Inequality 2030: Glimmering Hope in China in a Future Facing Extreme Despair." Rozelle explains why continued high income inequality could spell trouble for China's future growth and stability.

REAP co-director Scott Rozelle begins a ten-part series for Caixin Magazine titled, "Inequality 2030: Glimmering Hope in China in a Future Facing Extreme Despair." Rozelle explains why continued high income inequality could spell trouble for China's future growth and stability.

To read the column in Chinese, click here.

> To read Column 2: China's Inequality Starts During the First 1,000 Days, click here. 

> To read Column 3: Behind Before They Start - The Preschool Years (Part 1), click here. 

> To read Column 4: Behind Before They Start - The Preschool Years (Part 2), click here.  

> To read Column 5: How to Cure China's Largest Epidemic, click here.

> To read Column 6: A Tale of Two Travesties, click here. 

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Inequality 2030:

Glimmering Hope in China in a Future Facing Extreme Despair

Column 1: Introduction and why we need to worry about inequality

Inequality is underrated

China’s growth slowed in 2012 and in the first half of 2013. And, the world is holding its collective breath. Can China’s once white-hot economy be re-ignited and continue to blaze ahead? Or has its economy finally begun its inevitable slow down, a braking that all countries that reach middle income levels of development experience.

While the financial pundits and economic crystal ball gazers are focused on growth rates and world economy spillovers, we are worrying about another indicator: China’s level of inequality. In fact, we believe that what happens to inequality in the future is probably more important in the long run than growth. Whether high or low, we believe the nation’s income distribution will be one of the most important determinants of the quality of life in China in the 2030s.

Why is inequality more important than growth? Of course, nominally both are important. China needs to maintain 6 to 8 percent over the next 10 years. China needs to continue to grow 4 to 6 percent until 2030. However, we believe that as China’s economy matures over the next two decades, growth will slow. The growth rates of healthy, developed economies are never more than 2 to 3 percent. This slowing is inevitable. It is a done deal. Inequality, on the other hand, could be high or low. And, if it is high: China could be in for a troubled adulthood. It could even be headed for stagnation. High inequality could even lead to collapse and the loss of all things good that have been built up over the past three decades.

Remedial learning about Inequality and the Middle Income Trap

So what allows some countries to successfully transition from middle to high income? Solid banking practices: important. Good corporate governance: a must. Competition policy: few would argue. In this part of the column we want to put forth an argument that an equitable income distribution is also a necessary ingredient for long-run, stable growth. The basis of this statement is an empirical regularity that characterizes nearly every case of successful development (during the shift from middle to high income) in the last half of the 20^th century.

Since 1945, we can divide the world into three groups of countries. The high income countries, like the US, the UK, Germany and France; the poor and chronically underdeveloped; and the new members of the OECD club. Somewhat surprisingly, over the past 70 years, there have been only 15 or so countries that have graduated from poor to middle to high income. The list includes two East Asian countries/regions (South Korea and Taiwan); four Mediterranean countries (Portugal; Spain; Greece and Israel); six Eastern European countries (Croatia; Slovenia; Slovak Republic; Hungary; Czech Republic and Estonia; and two other countries (Ireland and New Zealand).

Most salient for our column is that in the case of all of these successful countries an equitable income distribution is feature they all share. This is true goingback as early in their development paths as possible. Using a popular measure of inequality, the Gini ratio (where 0 is perfect equality and 100 is perfect inequality), it can be shown that the average Gini ratio of the new members of the OECD club is only 33, a level of the Gini that is relative low. The range of the Gini measures for these successfully graduating countries is from 26 to 39. Not one of the Gini ratios is more than 40. Such a pattern of income distributions suggests that, on average, those countries that were successful in moving from low to middle to higher income not only share a common growth path, successfully took them from middle to high income, all of the nations did so with fairy low levels of inequality.

Such low levels of inequality for the successfully developed countries can be seen to be in stark contrast to the countries in the world that grew, hit middle income status and then ultimately stagnated or collapsed. Argentina, Brazil, Iraq and Mexico are examples of countries that had rapid spurts of growth, joined the ranks of the world’s middle income countries, only to find their growth aspirations squashed. These countries all were striving to become high income, industrialized, developed countries. At some point during the past 70 years, however, each of these countries experienced either dire collapse or long and frustrating stagnation.

What is a characteristic that all of these failed-to-move-up-from-middle-income countries share? When comparing the Gini ratios of these wannabe-but-never-made-it nations with those that successfully graduated, there could not be a greater contrast. Whereas there were no successful developed countries with a Gini ratio over 40, there were no countries that experience growth and stagnation/collapse with Gini ratios under 40. The Gini ratios of Brazil and Mexico and Iraq were all around 50.

So where is China on this list? China’s level of inequality, according to one of the most complete and internationally comparable study done at Beijing Normal University by Professor Li Shi and his colleagues, is among the highest in the world. As of 2007, it was 50 (or 49.7 to be precise). Between 2003 and 2007 it rose more than any country in the world. Others say it is higher—see the work of Li Gan from Sichuan University. Hence, although China has attained middle income status in the past decade, it also is part of a group of countries that is trying to transition to high income status at levels of inequality which have not ever been associated with successful transition—at least not in the past 70 years.

What is the problem with high inequality?

So why is it that inequality is so inimical for a middle income country striving to reach high income? We believe the reason is twofold. The first has to do with the inevitability of growth slow down and expectations. When a country is growing fast (as countries can do when they are moving from poor to middle income—as China has been over the past three decades), even if there is a high level inequality, most people in society have expectations that they will be better off if they stick inside the system. In China during the past several decades, even for those at the lower end of the income distribution, their standard of living is higher now than 10 years ago. Relying on extrapolations from the past, most people believe that they will continue to become better off. At the very least they will tell you that they expect their children will be able to live a better life in the future.

High growth has made these rising expectations possible—even for the poor. There has been enough for all to “go around.” Hence, with positive expectations about being able to get better in the future, even facing long working hours, cruel living conditions and low wages, individuals have chosen to work “inside the system.” For most, working in the system mean that they get a job, save as much as possible and look forward to making even more and having more savings in the future.

This whole system, however, is predicated on growth trickling down to the poor. If growth slows, it is possible that the expectations may not be realized. We believe that it is these expectations that have produced the glue holding society together—despite the high levels of inequality.  The key question or the real fear is that when expectations are popped, individuals may decide to opt out of the system into the informal or even the gray/black economy.

The second problem with high income inequality is that it often is accompanied by high inequality in education, nutrition and health. So why is this a problem? In a high income, developed economy, by definition wages are high. Because wages are high, however, employers will demand that employees are equipped with the requisite skills—math, language, science, English, computer skills—to perform tasks that create earnings that help offset the high wages. If individuals do not have such skills, employers may take actions to layoff such employees or not hire them in the first place. Employers will look to replace labor with capital and/or move low-skilled jobs off shore. The problem with many countries that have grown fast from poor the middle income and are currently trying to push onto high income status is that there was a disconnect between what students learned in the previous decade or so and what job skills are needed. If a high enough proportion of the labor force is not equipped with the skills needed for a high wage economy, a share of the labor force might become unemployable. As before, if this polarization of the labor force occurs, the only choice of those that are unemployable by the formal labor force would be to move into the informal labor force and/or gray/black economy.

While all economies have such polarized segments of their economy, there are several problems facing middle income countries—especially those that had grown fast in recent years. Dealing with large shares of population in an informal economy requires lots of resources—for unemployment insurance, disability, retraining, health, etc. Since these countries have not yet graduated to high income status, by definition, their level of wealth might make it difficult to spend large sums of money to contain disruption out of the informal economy. If the disruption continues, it can lead to escalating violence and unrest, which will require even more resources to contain. Ironically, the very disruption that is being created by the slowing growth could very well lead to a further slowing of growth if fewer resources are spent on productive investments (instead of containment) and if the disruption itself diminishes interest in investment inside the country. In addition, many of those in the informal economy may exhibit particularly unsatisfied behavior (read anger and disaffection) since the may well feel their original expectations were undermined by the formal establishment. If the size of this part of the population is big enough, the country could find itself atop a powder keg.

In summary, then, the problem with inequality is complicated but real. Inequality in the face of slow growth can lead to unfulfilled expectations and diminished opportunities. Individuals can be polarized into two groups: those inside the system and those outside the system. If inequality is particularly great, the number of those outside the system could be large. Since middle income countries are not rich yet, resources may be insufficient to contain the anger and violence of those in the gray/black economies and/or support the needs of those in the informal economy (who are not contributing a lot to the overall economy). If the disruption is large enough, there could be negative feedback onto growth which could serve to further exacerbate the problem. An end point of stagnation or collapse is certainly plausible.

Our column’s real title: 10 ways to battle inequality; 10 ways to save China’s future

This column is going to be a series of ten articles about China’s inequality. It is a column about how managing that inequality may mean the difference between a bright and vibrant China in 2033 and a China teetering on the edge of collapse. Despite the potential doom, however, this is a column of hope because we believe inequality can be managed—given aggressive, enlightened and motivated decisions TODAY … or at least in the very near future.

However, this column is not about inequality today. We are not going to analyze the accuracy of the estimates of income inequality produced by the China National Bureau of Statistics. We are not going to vote for the higher estimate of Li Shi and his group from Beijing Normal University or the even higher one from Sichuan University’s Li Gan. We are simply going to live with the status quo, one that virtually everyone agrees with: China’s income distribution in 2013 is highly unequal.

Instead we are going to be writing about inequality tomorrow. However, one of the most basic axioms of poverty economics—especially given China’s high inequality today—means that we need to be engaged in this battle against high inequality tomorrow today. The axiom that we are talking about has been made famous both by Nobel Laureates who are spinning their advice for the global economy and by retiring economic planners-cum-policy makers as they write their memoirs. The iron rule of income distribution—lets call this Axiom 1, at some point in the future is:

Tomorrow’s income inequality = Today’s income inequality + Today’s human capital inequality.

This simple formula, above all, embodies on important lesson. Tomorrow’s income inequality is what we are interested in. The first installment of our column today has tried to motivate that this has to be low – or at least not too high – for China to enjoy long-run sustained growth and stable prosperity. We also know—by assumption or by common sense—that Today’s income inequality is high. Hence: to get to where we want to go—that is, low income inequality in the 2030s—we have one and only one degree of freedom. We need to put tremendous attention on reducing human capital inequality today.

If you are following our argument, and if you know anything about the gap between health and education in China today, this column would appear to be one of despair. In fact, this column will fuel that despair. Why? Because are going to show that the human capital gap in China today is ugly. Ugly as in wide. The gap is wide for education. The gap is wide for nutrition. The gap is wide for health. It is wide for babies, preschoolers, elementary school kids, those in middle and high school and for the college-bound. If China does not do anything—and, we mean act seriously—about this gap, and you believe in Axiom 1, it may be time for you to begin to plan for the worst in the coming years.

However, this column will also try to be a source of hope. We will discuss a large number of interventions that work. There are actions that can reduce the human capital gaps at all age levels—from infants to those in elite universities. They are proven. Many are cheap. Many are simple. Some need fundamental rethinking. But, when you add up the price tag of them all and you compare it to the possible costs in the future, we believe a War on Rural Education, Nutrition and Health Inequality is the Best Buy that the government can make.

Stay tuned, then, in the coming months—one column per month. We are going to write about inequality in baby health, nutrition and cognitive abilities between infants in the Qingling Mountains in Southern Shaanxi and China’s tiny princes and princesses in the cities in October. We are going to write about preschool inequality in November. December, January and February will examine the health, nutrition and education crises in poor rural elementary schools and in schools in China’s migrant communities. The rest of the months will talk about inequality in middle school, vocational high school, academic high school and college. There is not a lot of pretty about the gaps that exist in each of these age groups. However, as we stated above, we also will offer solutions—ones that we have evaluated; others that others have initiated. Many of them work. Others need more effort. We will try to inform you of the choices and the hope that can be created by trying. Seriously trying.

The Liberation Technology Seminar Series is set to continue this fall with a remarkable set of speakers. The series debuts on Thursday, September 26, 2013 and will continue until December 5, 2013. The last season focused on domestic issues given the debates around SOPA and the use of technology in the U.S. Presidential elections. This emphasis this fall will be tilted towards international initiatives. 

The series will begin with Canada’s effort at direct diplomacy with people abroad using technology and move on to crowd-souring of a law by the Parliament of Finland. Talks will also cover the political impact of the internet in Malaysia, a review of the world’s most ambitious open government project by a state government in India, and an ambitious Stanford project to bring design thinking to accountability projects internationally. On the domestic front, we have timely presentation on mass surveillance in the United States and a discussion on Code for America’s initiatives to build civic engagement by coders. Finally, we are set to have a look at the history of information technology in social initiatives by our own Terry Winograd who retired from the Department of Computer Science last year. 

Students can take this as a one credit course by attending at least seven out of the ten seminars. The course is listed as CS 546 / POLISCI 337S.

Where: Wallenberg Auditorium [Map]

When: Every Thursday 4.30 – 6 pm from Sept 26 – Dec 5 (except Nov 28)

Many resource dependent states have to varying degrees, failed to provide for the welfare of their own populations, could threaten global energy markets, and could pose security risks for the United States and other countries.  Many are in Africa, but also Central Asia (Turkmenistan, Kazakhstan, Azerbaijan), Southeast Asia (Cambodia, Burma, East Timor), and South America (Bolivia, Colombia, Ecuador) Some have only recently become – or are about to become – significant resource exporters.  Many have histories of conflict and poor governance.  The recent boom and decline in commodity prices – the largest price shock since the 1970s – will almost certainly cause them special difficulties.  The growing role of India and China, as commodity importers and investors, makes the policy landscape even more challenging.

We believe there is much the new administration can learn from both academic research, and recent global initiatives, about how to address the challenge of poorly governed states that are dependent on oil, gas, and mineral exports.  Over the last eight years there has been a wealth of new research on the special problems that resource dependence can cause in low-income countries – including violent conflict, authoritarian rule, economic volatility, and disappointing growth.  The better we understand the causes of these problems, the more we can learn about how to mitigate them.

There has also been a new set of policy initiatives to address these issues: the Kimberley Process, the Extractive Industries Transparency Initiative, the World Bank’s new “EITI plus plus,” Norway’s Oil for Development initiative, and the incipient Resource Charter.  NGOs have played an important role in most of these initiatives; key players include Global Witness, the Publish What You Pay campaign, the Revenue Watch Institute, Oxfam America, and an extensive network of civil society organizations in the resource-rich countries themselves.

Some of these initiatives have been remarkably successful.  The campaign against ‘blood diamonds,’ through the Kimberley Process, has reduced the trade in illicit diamonds to a fraction of its former level, and may have helped curtail conflicts in Angola, Liberia, and Sierra Leone.  Many other initiatives are so new they have not been have not been carefully evaluated.

This workshop is designed to bring together people in the academic and policy worlds to identify lessons from this research, and from these policy initiatives, that can inform US policy towards resource-dependent poorly states in the new administration.

Amy Zegart, one of the nation’s leading experts on national security, intelligence and foreign policy, has been appointed the next co-director of the Center for International Security and Cooperation.

Zegart, a CISAC faculty member and senior fellow at the Hoover Institution, will take up her new role July 1. She succeeds Mariano-Florentino Cuéllar, who was named director of the Freeman Spogli Institute for International Studies, CISAC’s parent organization.

“Amy Zegart is an award-winning scholar, an accomplished professional with public and private sector experience, and a trusted voice on national security and foreign policy,” said Cuéllar. “Her multi-disciplinary scholarship, diverse experiences, and commitment to getting it right will complement the Freeman Spogli Institute's growing focus on governance problems, and will make her a dynamic leader for CISAC as the center continues its vital work on international cooperation and security.”

Zegart, once named one of the 10 most influential experts in intelligence reform by the National Journal, said she intends to continue expanding the center’s focus on emerging security issues, such as cybersecurity, drones and challenges to governance while building on CISAC’s distinguished reputation in nuclear security.

“The international threat environment is changing faster and in more profound ways than anyone could have imagined 10 or 20 years ago,” said Zegart, who is also a professor of political economy (by courtesy) at the Stanford Graduate School of Business, where she co-teaches a course on managing political risk with former Secretary of State Condoleezza Rice.

“CISAC will continue to be at the forefront of addressing these new challenges with the same secret sauce it’s had since its founding in 1983: world class talent; a commitment to teaching the next generation; and a deep belief that bridging the natural and social sciences is vital to solving the world’s most dangerous problems,” she said.

 CISAC, more than any other institution, provided a scholarly environment that was intellectually challenging and personally supportive at the same time. That’s quite a rare cultural combination."

Zegart’s research examines the organization of American national security agencies and their effectiveness. She served on the Clinton administration's National Security Council staff and as a foreign policy adviser to the 2000 presidential campaign of George W. Bush. She has testified before the Senate Intelligence Committee, provided training to the Marine Corps, and advised officials on intelligence and homeland security matters. From 2009 to 2011 she served on the National Academies of Science Panel to Improve Intelligence Analysis. Her commentary has been featured on national television and radio shows and in The New York Times, Washington Post, and Los Angeles Times.

Zegart writes  regular commentary for Foreign Policy about national security issues. In this excerpt from one of those posts about the privatization of American intelligence and the growing businesses of political risk management, her approach accentuates her ability to bring complex issues to a general audience:

In the old days, the ‘free world’ and ‘Soviet bloc’ were two different universes. Not anymore. Now everything is connected. Sweden’s Ikea has stores in Russia. My CIA alarm clock was made in China. Unrest in Cairo can cause legging shortages in California. And communications happen everywhere. Wifi can be found in Bedouin tents, on the top of Mount Everest, and on buses in rural Rwanda. Kenyan fisherman may lack electricity, but they can check weather conditions and fish market prices on their cell phones. All of this connectedness means that political risks – civil strife, instability, insurgency, coups, weak legal standards, corruption – have more spillover effects. What happens in Vegas does not stay in Vegas.

Zegart recalls being fascinated with politics since she was a kid. She spent her childhood tracking election night tallies and writing her congressman. When she was 13, she followed on TV the late Chinese leader Deng Xiaoping’s historic visit to the United States in 1979 and was thrilled when he donned a cowboy hat at a Texas rodeo.

“I was enthralled,” Zegart said. “My mother, an antique dealer who can find anyone and anything, tracked down a local Taiwanese graduate student and convinced her to teach me Mandarin after school.”

She would continue studying Chinese at Andover, majored in East Asian Studies at Harvard, and would win a Fulbright Scholarship to travel to China and study the 1989 Chinese democracy movement and Tiananmen Square tragedy. Zegart then earned her M.A. and Ph.D. in political science from Stanford and became a full professor of public policy at UCLA’s Luskin School of Public Affairs as well as a fellow at the Burkle Center for International Relations.

Zegart notes she’s been connected to CISAC for more than two decades. She first showed up at the center’s former Galvez House headquarters during her first quarter as a Stanford graduate student. She kept coming back even after she got her Ph.D.; both of her award-winning books were germinated in presentations she gave to CISAC seminars.

“CISAC, more than any other institution, provided a scholarly environment that was intellectually challenging and personally supportive at the same time,” Zegart said. “That’s quite a rare cultural combination.”

This academic year, she co-taught with Martha Crenshaw the popular CISAC-sponsored class International Security in a Changing World, which culminates in a U.N. Security Council simulation in which students debate a pressing global issue.

CISAC has a tradition of appointing co-directors – one from the social sciences and the other from the natural sciences – to advance the center’s interdisciplinary mission to conduct and promote cutting-edge research to make the world a safer place.

“Amy brings to CISAC a wealth of expertise in international security issues, a deep commitment to scholarship and a sincere desire to strengthen and expand the center’s activities and impact,” said David Relman, CISAC’s other co-director, a Stanford microbiologist and professor of infectious diseases, as well as expert on emerging biological threats. “We share an interest in emerging technologies and the effective international mechanisms that address 21^st century challenges and threats.”

Zegart is the author of two award-winning books. Flawed by Design, which chronicles the development of the Central Intelligence Agency, Joint Chiefs of Staff, and National Security Council, won the highest national dissertation award in political science. Spying Blind, which examines why American intelligence agencies failed to adapt to the terrorist threat before 9/11, won the National Academy of Public Administration’s Brownlow Book Award. She has also published in International Security, Political Science Quarterly, and other leading academic journals. She serves on the editorial boards of Terrorism and Political Violence and Intelligence and National Security. Her most recent book is Eyes on Spies: Congress and the United States Intelligence Community.

Before her academic career, Zegart spent three years at McKinsey & Company advising Fortune 100 companies about strategy and organizational effectiveness.

She serves on the FBI Intelligence Analysts Association National Advisory Board and the Los Angeles Police Department’s Counter-terrorism and Community Police Advisory Board and is a lifetime member of the Council on Foreign Relations.