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. 

Image

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 Obama administration says there is no doubt that Syrian President Bashar al-Assad was responsible for a recent chemical weapons attack near Damascus, which Syrian opposition forces and human rights groups allege killed hundreds of civilians.

Secretary of State John Kerry called the attack a “moral obscenity” and the White House has vowed to respond – though the question of how is still under debate.

The Syrian government denies using nerve agents on its own people and has allowed U.N. weapons inspectors into the country to investigate.

As the U.S. weighs its options and rallies its allies for a possible military strike, Stanford scholars examine the intelligence and discuss the implications of military action against Syria. Those scholars are:

• Martha Crenshaw, one of the nation’s leading experts on terrorist organizations and a senior fellow at the Center for International Security and Cooperation and the Freeman Spogli Institute for International Studies
• Thomas Fingar, former chairman of the National Intelligence Council and currently the Oksenberg-Rohlen distinguished fellow at FSI
• Thomas Henriksen, a senior fellow at the Hoover Institution specializing in U.S. foreign policy and author of the book, “America and the Rogue States”
• Anja Manuel a CISAC affiliate, co-founder and principal at RiceHadleyGates LLC, a strategic consulting firm, and lecturer in Stanford's International Policy Studies
• Allen S. Weiner, a CISAC affiliated faculty member and co-director of the Stanford Program in International Law at the Stanford Law School
• Amy Zegart, an intelligence specialist who is the CISAC co-director and a senior fellow at the Hoover Institution

Does a military strike on Damascus risk further inflaming terrorists operating in Syria who hate the United States?

Crenshaw: I doubt that an American military response to the Assad regime's use of chemical weapons will make al-Qaida and affiliates hate us any more than they already do. The effect on wider public opinion in the Arab and Muslim worlds is what we should be thinking about. As the U.N. noted in a recent report, al-Qaida has a strong presence in Syria and is attracting outside recruits. The Al Nusrah Front in Syria is affiliated with the Iraqi al-Qaida branch. And Hezbollah's involvement has only intensified sectarian violence.

The three-year civil war has claimed some 100,000 lives and forced an estimated 1.9 million Syrians to flee their country, according to the U.N. Why is it taking President Obama so long to take a more assertive policy in Syria?

Manuel: There are no great policy options in Syria. The administration said several times that “stability” in Syria — even if that means a continuing, limited civil war — is more important than a decisive victory over President Bashar al-Assad.  The administration also believes that U.S. military intervention short of using ground troops is unlikely to lead to the creation of a new post-Assad regime that will be friendly to the United States.  Finally, the Obama administration is understandably hesitant to side with the rebel groups, which — in part due to U.S. unwillingness to actively assist moderate Syrian elements for the past two years — have become increasingly radicalized. Al Qaida-allied extremists now make up a growing segment of the rebel movement and some groups are reportedly creating “safe havens” within Syria and Iraq.

Listen to Manuel on public radio KQED Forum about whether U.S. should intervene. 

CISAC's Anja Manuel talks to Al Jazeera America about Syria: 

Have past U.S. intelligence failures made Obama skittish about taking a tougher stance against Syria?

Zegart: Iraq's shadow looms large over Syria. The intelligence community got the crucial WMD estimate wrong before the Iraq war and they absolutely don't want to get it wrong now. People often don't realize just how rare it is to find a smoking gun in intelligence. Information is almost always incomplete, contradictory and murky. Intentions – among governments, rebel groups, individuals – are often not known to the participants themselves and everyone is trying to deceive someone.

What is the intelligence gathering that goes into making the determination that nerve agents were used?

Fingar: The first challenge for the U.S. government is to determine whether and what kind of chemical agents were used. Chain-of-custody issues must be addressed to ensure that samples obtained are what they are claimed to be, and once samples have been obtained, what they are can be established with reasonably high confidence using standard laboratory and pathology techniques.

If it is determined that specific chemical agents were used in a specific place and time, then the next step is to determine who used the agents. Analysts would then search previously collected information to discover what is known about the agents in question, which groups were operating in the area, and whether we might have information germane to the specific incident. Policymakers must be informed about any analytical disagreements if they’re to make informed decisions about what to do in response to the incident.

Pressure on decision-makers to “do something” about Syria may influence their decisions, but it should not influence the judgments of intelligence analysts. If they are suspected of cherry-picking the facts and skewing judgments to fit pre-determined outcomes – they are worse than useless.

See Fingar's comments in The New York Times about the echoes of Iraq.

How do we know the Syrian opposition did not use nerve gas in an effort to provoke military intervention and aid their efforts to topple Assad?

Henriksen: Tracing the precise origin of gas weapons is not an exact forensic science.  It is conceivable that a rebel group staged a "black flag" operation of releasing a deadly gas to provoke a U.S. attack on the Assad regime.  But in this case, both Israeli and Jordanian intelligence reports appear to confirm U.S. identification of Assad as the perpetrator of the chemical attacks. 

If it's confirmed that Syria did use chemical weapons against it own people, is this a violation of the Geneva or Chemical Weapons Conventions?

Weiner:  A chemical weapons attack of the kind that's been described in the media certainly violates the laws of war. Syria, as it happens, is one of only a few countries in the world that is not a party to the Chemical Weapons Convention. Nevertheless, the prohibition on the use of chemical weapons in warfare is a longstanding rule. It is reflected in both the 1907 Hague Convention regulating the conduct of war and the 1925 Protocol for the Prohibition of the Use in War of Asphyxiating, Poisonous or Other Gases, and of Bacteriological Methods of Warfare. (Syria is a party to the 1925 Convention.) The use of a weapon like this also violates the prohibition in the 1977 Geneva Protocols and customary international law on indiscriminate attacks that are incapable of distinguishing between permissible military targets, on the one hand, and the prohibited targeting of civilians and civilian objects, on the other.

If Damascus has violated the conventions, are there non-military actions that can be taken?

Weiner: The illegal use of chemical weapons is a violation of a jus cogens norm, i.e., a duty owed to all states, which means states would have the right to respond to the breach. Such an attack would presumably be a basis for the unilateral imposition of sanctions or severance of relations with Syria. There's an open question under international law whether states not directly injured by Syria's actions could take "countermeasures" that would otherwise be illegal as a way of responding to Syria's illegal action. Under a traditional reading of international law, a violation like this does not give rise to the right by other states to use force against Syria absent an authorization under Chapter VII of the U.N. Charter by the Security Council.

Are there legal means for Washington to bypass the Security Council, knowing that Russia and China would veto any call to action against Syria? 

Weiner: Under the U.N. Charter, a state may use force against another state without Security Council authorization only if it is the victim of an armed attack. Most commentators believe this has been expanded to include the right to use force against an imminent threat of attack. But under the prevailing reading of the U.N. Charter, a mere "threat" to U.S. national security would not provide a justification for the use of force.

But the Obama administration is arguing that Assad's actions pose a direct threat to U.S. national security?

Weiner: Some international lawyers – but not very many – argue that there is a right of humanitarian intervention under international law that would permit states to use force even without Security Council approval to stop widespread atrocities against its own population. But this remains a contested position, and most states, including the United States, have not to date embraced a legal right of humanitarian intervention.

What are some recent precedents in which the U.S. intervened militarily?

Weiner: The situation in Syria is not unlike the one faced in Kosovo in 1999, when a U.S.-led coalition did use force to stop atrocities that the Milosevic regime was committing against Kosovar Albanians. As part of its justification for the use of force, the United States cited the ongoing humanitarian crisis and the growing security threat to the region. What's interesting is that the U.S. was careful to characterize its use of force in Kosovo as "legitimate," rather than "legal."  I am among those observers who think that choice of words was intentional, and that the U.S. during the Kosovo campaign advanced a moral and political justification for a use of force that it recognized was technically unlawful.

How does one know when diplomacy has reached a dead-end and military intervention remains the only course of action?

Henriksen: It has become nearly reflexive in U.S. diplomacy that force is the last resort after painstaking applications of diplomacy. The Obama administration followed that arc dutifully with appeals and hoped that U.N. envoys could persuade Assad to step aside. In retrospect, it seems that U.S. intervention soon after the outbreak of widespread violence in the spring of 2011 would have been a better course of action. Now, Russia, China and Iran have entrenched their support of Damascus. And, importantly, Hezbollah has joined the fight.

Now, with Washington's "red line" crossed by Syria's use of chemical arms, America almost has to strike or lose all credibility in the Middle East and beyond.

Should we be concerned about getting pulled into another long and costly war? Or is there a way to get in, make our point, and get out?

Henriksen: The worry about stepping on a slippery slope into another war in the Middle East is of genuine concern.  Obama's intervention into Libya in early 2011 does provide a model for the use of limited American power. President Bill Clinton's handling of the 77-day air campaign during the Kosovo crisis in early 1999 provides an example of limited interventions. Both these interventions can be analyzed for their pluses and minuses to aid the White House in striking a balance.  But no two conflicts are ever exactly the same.

What is the endgame here?

Henriksen: American interest in the Syrian imbroglio are to check Iran, the most threatening power in the Middle East, and to curtail the conditions lending themselves to spawning further jihadists who will prey on Americans and their allies. At this juncture, it appears that the fragmentation of Syria will become permanent. It's fracturing like that of Yugoslavia in the 1990s and will result in several small states. One or more of these mini-states might possibly align with the United States; others could become Sunni countries with Salafist governments, and the rump state of Assad will stay tight with Iran. The fighting could subside, leaving a cold peace or the tiny countries could continue to destabilize the region. Any efforts that undercut al-Qaida franchises or aspirants are in American interests.