The Chinese Dream: Will China Become A Land of Opportunity?

Living in China for the past nine years, my sense was that it was a nation with limited social mobility. Now I’ve seen data that confirms my impression.

If one father earns 100% more than another, then how much more on average will his children earn relative to the other father’s children?  Miles Corak answers this question by calculating the elasticity of inter-generational income.  In Denmark the answer is 15%: there’s an advantage to being born into a high-income family, but it’s pretty small.  The U.S. sustains a myth that anyone can get ahead, but in fact the U.S. has low social mobility among developed countries: here, the children of the higher-income dad will earn 47% more. In China the figure is 60%.

Why is Chinese Social Mobility So Low?

1. The hukou registration system

   Hukou makes it difficult to move around. About 60% of the population is still registered as rural.  If your father was a farmer, a relatively low-income occupation, that constrains your opportunities sharply. You can move to the city to do menial labor as a migrant, but you cannot compete for good urban jobs.

2. Locally funded education

   Here, China is similar to the U.S. in that financing for education and other social services is often decentralized.  The Shanghai schools stood out on recent international tests as among the best in the world. But in smaller cities around China the resources devoted to public education and its quality are much lower.  For children in rural areas the situation is worse still. 

3. Growing corruption

   On the World Bank’s Control of Corruption cross-country index, China has been going backward In2012 it was at the 39^th percentile; that is, it was perceived to be more corrupt than 61% of countries. Corruption affects social mobility because it’s easier for elite families to pass on status and income to their children when there aren’t clear rules and fair competition.

How Low Social Mobility Damages Chinese Prospects

Aside from being unjust, low social mobility undermines the legitimacy and efficiency of a market economy.  If a large part of the population effectively has no chance to utilize their talents and get ahead, that will inevitably affect the society’s innovation and productivity. I have written before that China is at a stage where it needs to rely more on innovation and productivity growth, and less on merely increasing inputs such as the number of workers or the amount of capital. 

As China moves ahead with reforms in the wake of its Third Plenum, it has a real opportunity to pursue measures that would be both socially just and economically efficient.  Measures that aim to increase social mobility–dismantling the hukou system, fiscal reform to ensure adequate resources for education for all, and political reforms to strengthen rule of law and limit corruption–will probably be good for China’s growth, and especially good for those currently in the bottom half of the income distribution.