US economic statecraft adrift as China seeks to join mega Asian trade deal
China’s decision to formally seek to join the Comprehensive and Progressive Trans-pacific Partnership (CPTPP), the world’s most important Asian trade deal, presents the U.S. with an enormous set of economic and diplomatic challenges. China joining CPTPP would deal a significant blow to U.S. economic statecraft and further strengthen Chinese leadership in the Indo-Pacific. Taiwan’s recent announcement that it also wants to join CPTPP further complicates the picture.
The CPTPP is what was left of the original U.S.-led 12 nation deal the Trans-pacific Partnership (TPP) that was a priority under Presidents Bush and Obama, but which President Trump pulled the U.S. out of in his first week in office.
Since the APEC CEO Summit in November last year, China had indicated its interest in joining CPTPP. Yet, this apparent interest was greeted with skepticism around China’s ability to undertake the economic reforms required to meet the high CPTPP standards, such as more competition for state-owned enterprises, freer flows of data across borders, and curbs on China’s industrial subsidies.
Yet, it is increasingly clear that China’s request to join CPTPP needs to be taken seriously and may happen sooner than expected. For one, China is the largest export market for nine of the current 11 CPTPP countries. Second, it may be less difficult than generally thought for China to meet many CPTPP standards. China could also lean into to the agreements broad exceptions to justify non-compliance. Where China has justified trade restrictions as being about national security, there is also a very broad national security carve out that China could rely on.
Second, in order for many developing countries such as Vietnam to join the agreement, full compliance with various rules needed to be delayed as these governments undertook domestic reforms. This sets the precedence for China to argue that where it is unable to meet CPTPP standards today, similar flexibilities should be extended to China and not delay it becoming a party to the agreement.
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A key question for many governments will be whether they can be convinced of China’s eventual compliance with the CPTPP. The Australian trade minister when asked about China joining the CPTPP noted the need for China to demonstrate a track record of compliance with trade agreements. This speaks not only to China’s recent restrictions on Australia’s exports that are inconsistent with the China-Australia FTA, but also well-documented ways China has avoided its WTO commitments.
The announcement by the U.K. earlier this year of its interest to join the CPTPP likely hastened China’s decision to join. In part as U.K. membership in CPTPP would be another bulwark and hurdle to China joining, and it is harder for CPTPP governments to seriously negotiate U.K. accession, and to then not do the same for China. Taiwan’s request this week to also join the CPTPP will complicate the accession process, as China will oppose Taiwan joining as being at odds with its One-China policy.
So now the U.S. is faced with a flipped script—as China readies to join the CPTPP, it is left on the outside, still unsure how to show leadership on trade in the Indo-Pacific.
Should China succeed in joining CPTPP, this will foreclose the U.S. rejoining the agreement. The U.S. then having to negotiate with China to join the CPTPP is an irony that would be too much to bear. Indeed, re-engagement by the U.S. on trade in the Indo-Pacific region will require the U.S. to start the process again. However, after Trump’s withdrawal from CPTPP, getting other governments to agree to again make high standard trade commitments with the U.S. will be a big lift. In addition, with China party to CPTPP, the economic impact on China of a new U.S.-led trade agreement that excluded China would be significantly diminished. Indeed, China joining CPTPP will for the foreseeable future undercut the effectiveness of U.S. trade policy as a tool for achieving U.S.’ strategic goals with respect to China.
As President Biden made clear in his speech to the U.N. General Assembly this week, the U.S. needs to lead a collation of countries to counter China’s strategic challenges. To do this, the U.S. will need to continuously show up, lead and demonstrate consistency of purpose. This will require a renewed economic engagement strategy for the Indo-Pacific. The U.S. no longer has the luxury of spending precious political capital getting other countries to join a major international economic initiative like CPTPP and then decide to withdraw because it makes for good domestic politics. Leaving CPTPP was costly and China’s decision to join CPTPP has raised the stakes even higher.
Addressing youth unemployment through industries without smokestacks: A Tunisia case study
Abstract
Although the manufacturing sector is known to have a unique role in structural transformation, the industries without smokestacks (IWOSS) that include tradable services, and that concern in Tunisia mainly IT, tourism, transport, trade, and financial services, can provide new opportunities for export development and in turn drive economic growth. As such, and for each of these sectors, Tunisia is particularly well positioned to exploit the opportunities in industries without smokestacks.
This study takes the case of Tunisia and examines the current state and contribution of the industries without smokestacks to the economy and exports with the aim of improving our understanding of the major bottlenecks and solutions to unlocking the potential of these industries. The study gives special attention to the main market service activities cited above, given their great importance in job creation especially for youth. It aims particularly to analyze how youth unemployment can be solved through job creation in these IWOSS industries, as well as the identification of the skills required for these young people to find work.
Download the full case study
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The risks of an uneven economic recovery in an unequal world
The COVID-19 pandemic has impacted the world’s most vulnerable populations through lost lives, health, jobs, incomes, assets, and education. The World Bank’s High-Frequency Phone Surveys (HFPS) help identify the main fault lines along which the pandemic’s unequal impacts are emerging in developing countries (country-level indicators produced with this data are shown in an interactive dashboard). The pandemic intensified inequalities between higher-income and lower-income countries, men and women, and workers from different socioeconomic groups. While the initial impacts of the pandemic reinforced preexisting inequalities, the world must now turn its attention to the risks of an uneven economic recovery and the long-term threat it poses to social mobility and inequality.
Early insights (using harmonized multicountry HFPS data) from April-June 2020 suggested extremely large impacts on incomes, jobs, food security, and children’s education, associated with the stringency of policy measures undertaken during the pandemic. On average, more than one-third of those working before COVID-19 across 52 countries stopped working; more than 60 percent of households reported income losses across 30 countries. A pattern of widening gaps between rich and poor countries emerged early on: Income losses, disruptions to children’s education, and food insecurity were much more common among households in poorer countries. In addition, emergency social transfers were inadequate to offset impacts on income in low-income countries. For example, per capita social protection spending on COVID-19-related measures was $4 on average from March 2020 to May 2021 in low-income countries, compared to nearly $850 per capita in high-income countries.
Within developing countries, the economic impacts seemed to reinforce preexisting inequality patterns. Large segments of the population who were at a disadvantage in the labor market before the shock—women, younger workers, and workers with less education—were much more likely to lose their jobs in the first three months of the pandemic (Figure 1). Income losses were also more likely among respondents with no college education and households with self-employed or casual workers. Access to learning while schools were closed was more severely limited for children in larger households and in households where the survey respondent was less educated. There were some exceptions to these patterns. For example, in some low-income countries, educated workers were more likely to stop working, as they tended to be employed in the urban service sector that was strongly affected by the pandemic.
Men and women also experienced the pandemic with significant differences. While men were more likely to die from COVID-19, women were affected more in other dimensions of well-being. Women disproportionately suffered from mental health impacts and experienced a higher risk of dying during childbirth or having stillbirths. Women shouldered increased responsibility for additional care needs with school closures and increased illnesses among family members, which affects their ability to return to work as economies reopen. As women lost paid work at a higher rate relative to men, their unpaid work went up; and women entrepreneurs were at a greater risk of having their businesses closed than men. Evidence also suggests a steep increase in violence against women during the pandemic.
COVID-19 hit in a world where inequality was already pervasive and socioeconomic mobility was not improving. It may worsen these trends through three main channels:
Lasting impacts of job and business losses, which can be particularly severe for vulnerable workers.
Higher likelihood among poor households to adopt strategies to cope with income losses that reduce their productivity over time.
Disruptions to schooling unequally affecting children from different socioeconomic strata.
Evidence from past crises shows that those who are most affected may take longer to recover. Our analysis of the HFPS data shows early indications of this occurring from the current pandemic.
After severe dips in April-June 2020, income and employment saw a partial rebound by September 2020 in the 17 countries in our sample where policies restricting mobility became less stringent. Encouragingly, food security and employment improved at a similar rate for countries at different income levels. However, the improvements by September did not restore employment to pre-pandemic levels and were not enough to significantly reduce the gaps in initial job losses between women and men, non-college- and college-educated, and young and older workers. For example, female employment had only recovered 30 percent of what was lost between pre-pandemic and May-June (versus 49 percent for men). Furthermore, a detailed analysis of six countries shows that male, younger, and college-educated workers in these countries were less likely to lose their jobs and more likely to find a new job if they lost one.
Particularly among poorer households, much of the recovery may also be driven by lower-quality jobs. In six countries, self-employment accounted for 83 percent of the increase in employment rates from May to September for primary-educated workers, compared to 58 percent for workers with tertiary education. In some countries (such as Nigeria), agricultural employment increased sharply, suggesting individuals took on farm work to cope with other job losses.
While food security continued to improve, data from September 2020-January 2021 for eight countries indicates that disparities by gender and location in employment persisted even as policy stringency improved. There were warning signs about a stagnating recovery—in a sample of 14 countries, the recovery in employment appears to have stalled in the last quarter of 2020.
The pandemic has underscored the need for building an effective and equitable public health system, investing in safety nets and social insurance, and instituting fiscal policy that raises resources fairly and efficiently to finance investments. The first priority is ensuring widespread and equitable access to vaccines. Second, governments need to help children and parents transition back to school and facilitate reentry of workers most likely to remain unemployed. Older and low-educated workers might also require more support to deal with the consequences of rapid technological change. To reverse gender disparities, there must be a concerted, multisectoral effort to empower women and girls worldwide. These recommendations are a first step in what should be a coordinated global effort to prevent the growth in socioeconomic inequities and disparities across income, age, and gender that may result from the COVID-19 pandemic. Making our societies more equitable and resilient to future crises requires taking on structural inequalities today.
Supporting families supports the economy: Social nets are economic foundations
“Why I won’t support spending another 3.5 trillion… There’s not a rush to do that right now. We don’t have an urgency. Don’t you think we ought to debate a little bit more, talk about it, and see what we’ve got out there?”
– Senator Joe Manchin in the Wall Street Journal
It is time to change the narrative around social infrastructure investments for families. We beg to differ with people like Senator Manchin. It is urgent that our country invest in high-quality care, family leave, and universal pre-K not only because it helps children thrive in high-quality early environments, but because it enables parents to enter the workforce—raising families out of poverty. Remarkably, in 2017, the United States ranked 30th out of 33 member nations of the Organization for Economic Co-operation and Development in public spending on families and children, which includes policies such as child payments and allowances, parental leave benefits, and child care support. A 2019 study by the Pew Research Center noted that of the 41 industrial countries surveyed, only the U.S. did not have a policy around paid parental leave.
The proposed $3.5 trillion bill before the U.S. Congress right now could go a long way toward bringing the United States into alignment with other industrialized nations around the globe. It calls for a universal pre-K program for 3- and 4-year-olds; enhanced child care for working families, a total of 12 weeks of guaranteed paid parental, family, and personal leave, and a child tax credit totaling $3,600 for each child under 6 and $3,000 for each one under age 18.
What the science shows on social infrastructure policies
The scientific evidence shows why investments in each of these policies are an investment in the future—not just in the long run with respect to child outcomes, but in the short run with respect to parental employment. The COVID-19 pandemic laid the problem bare. Women represented half of the workforce in 2020—a number that post-pandemic fell by 56 percent. When child care was unavailable, women became the default option, drastically reducing family income. Reduced family income appears to lead to lower social and cognitive outcomes for children. Current work by Professor Kim Nobel and her team is investigating through a randomized controlled study whether paid allowances from $20 to $333 per month would raise achievement outcomes for children as has been clearly shown in prior research.
The science also speaks to the longer-term improved outcomes of high-quality child care, family leave, and universal pre-K for the children. With respect to early child care, the evidence is substantive. The small-scale Perry and Abecedarian research experiments demonstrated that high-quality child care could lead to higher levels of education, employment, and health and lower levels of incarceration as adults. These studies demonstrated that participants’ lives could be changed with responsive, supportive, and stimulating child care experiences. The larger-scale Infant Health and Development Program noted similar benefits when combined with home visiting. These programs stressed high-quality language interactions (back and forth conversations, shared book readings, and rich vocabulary), nutrition (prenatal and beyond), and healthy parenting strategies (feeding and sleeping routines, strategies to deal with misbehavior, and so on). A large and comprehensive study of early child care, the NICHD Study of Early Care, found that high-quality child care starting in infancy is linked to higher outcomes on math and reading tests that persisted until age 15, and higher levels of education and employment at 26 years of age.
Taken together, the scientific data strongly suggests that supporting families supports the economy. It helps to fill jobs today and it helps to prepare children for the workplace of tomorrow.
With respect to paid family leave (PFL), several studies indicate that it improves the infant’s health and early development, maternal well-being, and longer-term maternal employment. A series of studies using rigorous quasi-experimental designs and representative national samples indicated that infants had higher levels of cognitive and behavioral skills when mothers spent their first six to 12 months at home with them. More recent rigorous quasi-experimental research of California’s PFL found improvements in the infants’ overall health and reductions in asthma, as well as higher levels of coping with the challenges of parenting, parental engagement, and an increased likelihood that skilled women return and stay in the workforce after the birth of their child.
Finally, scaled studies of universal pre-K highlight that rigorous high-quality experimental programs support children through large gains in academic skills, and moderate to small gains in social skills and executive functioning; follow-up studies have shown long-term gains such as modestly higher academic skills in upper elementary school and higher levels of high school graduation and college entrance. In addition to improving child outcomes, access to subsidized care increases employment among parents of young children. Thus, research suggests that investing in family leave, increased access to high-quality child care, and universal pre-K will boost children’s cognitive and social skills.
The critical child care shortage
These promising studies from the child care literature mask another critical issue. The U.S. system depends on parent fees to pay for child care, and thereby limits the salaries of child care providers. Child care workers who are entrusted with the nation’s youngest children are, on average, paid less than $11 an hour. Indeed, on a list of professions from the U.S. Bureau of Labor Statistics, child care workers rank right between laundry and dry-cleaning workers and parking lot attendants. Child care centers now struggle to recruit teachers given they can earn more at almost any other job, leaving many centers unable to open post-pandemic. Parents of young children, especially mothers, cannot return to the workforce without child care, leaving many employers unable to fill positions. Furthermore, the low salaries make it difficult for programs that try to provide high-quality care to recruit and retain highly qualified teachers.
If child care programs do not open—or if children are in custodial rather than in high-quality environments—child care programs cannot deliver on the promise of better outcomes. With limited access to child care, employers find it more difficult to fill open position, families with young children face financial loss, and children lose their opportunity for an academic and social booster.
Taken together, the scientific data strongly suggests that supporting families supports the economy. It helps to fill jobs today and it helps to prepare children for the workplace of tomorrow.
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Aligning COVID-19 recovery efforts with the SDGs – Toolbox and principles
Tony PipaThe Brookings InstitutionMia Alibegovic Fondazione Eni Enrico Mattei
Filippo ArrasAssessorato della Difesa dell’Ambiente, Regione Autonomadella Sardegna
Laura CavalliFondazione Eni Enrico Mattei
Gianluca CoccoAssessorato della Difesa dell’Ambiente, Regione Autonomadella Sardegna
Edward Cruickshank Fondazione Eni Enrico Mattei
Meagan DooleyThe Brookings Institution
Luca FarniaFondazione Eni Enrico Mattei
Homi KharasThe Brookings Institution
Emanuela MancaAssessorato della Difesa dell’Ambiente, Regione Autonomadella Sardegna
Luisa F. MulasAssessorato della Difesa dell’Ambiente, Regione Autonomadella Sardegna
Marco OnnisCentro Regionale di Programmazione (CRP), Regione Autonomadella Sardegna
Sandro OrtuAssessorato del Lavoro, formazione professionale, cooperazione esicurezza sociale – Servizio di Supporto all’Autorità di Gestione, Regione Autonomadella Sardegna
Ilenia G. Romani Fondazione Eni Enrico Mattei
Sandro SannaCentro Regionale di Programmazione (CRP), Regione Autonomadella Sardegna
Marta TestaAssessorato del Lavoro, formazione professionale, cooperazione esicurezza sociale – Servizio di Supporto all’Autorità di Gestione, Regione Autonomadella Sardegna
How does control of the seas affect global trade and security?
The vast majority of global trade today moves by sea, so control of the world’s oceans has become critical for both commerce and security. In this episode, Brookings Senior Fellow Bruce Jones joins David Dollar to discuss evolutions in sea-based trade, including the growing size of container ships, threat of modern piracy, explosion of data flows, and the transformation of global value chains.
Jones draws on his experience visiting ports around the world and sailing on one of the largest container ships to illustrate the mechanics of sea-based trade. He shares details from his travels in this conversation and his new book, “To Rule the Waves: How Control of the World’s Oceans Shapes the Fate of the Superpowers” (Scribner, 2021).
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Africa in the news: Nigeria, climate change, and Tunisia updates
COVID-19 maintains lingering economic disruption in Nigeria
On Tuesday, Nigeria’s National Bureau of Statistics and the United Nations Development Program reported that approximately 20 percent of workers in Nigeria lost their jobs due to the COVID-19 pandemic. In fact, the joint research examining the pandemic’s impact on Africa’s largest economy uncovered a staggering 33 percent unemployment rate in the fourth quarter of 2020. Informal-sector workers particularly struggled to access credit and funding to stay open as commerce slowed. Notably, losses across sectors were not uniform, as more than half of the businesses surveyed managed to retain their staffing levels, a finding which the authors say suggests that Nigeria maintained “pockets of resilience” throughout the pandemic.
In related news, on Wednesday, JP Morgan announced markedly lower economic growth forecasts for Nigeria than the International Monetary Fund (IMF) and Central Bank of Nigeria. JP Morgan now predicts that the Nigerian economy, which contracted by 1.79 percent in 2020, will grow by only 1.5 percent in 2021. The IMF and Central Bank of Nigeria had estimated GDP growth to be about 2.5 and 3 percent, respectively, for the country this year. JP Morgan explained its prediction of a weaker outlook on the country’s “continued lack of foreign-exchange liquidity, underlying economic weakness, an emerging third wave of Covid-19 infections and a slow rollout of vaccines will likely slow the recovery process.”
For more commentary on COVID-19’s impacts on Nigeria’s economy, see: “Understanding the impact of the COVID-19 outbreak on the Nigerian economy.” For more on strategies for creating jobs for Africa’s youth, see the paper, “Addressing youth unemployment in Africa through industries without smokestacks: A synthesis on prospects, constraints, and policies.”
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Gabon wants payment for its role in the fight against climate change; South Africa takes steps to reduce emissions
Earlier this week, officials in Gabon stated that the country will be seeking payment for its role in the fight against climate change. Importantly, in March of last year, a study published by the journal Nature found that many areas of the Congo Basin were showing signs of reduced carbon uptake and specifically predicted that, by 2030, the basin will absorb 14 percent less carbon than over the previous 10 to 15 years. This decrease in the carbon-absorbing capabilities of the Congo Basin will be detrimental to the fight against climate change given the area’s key role in regulating moisture transport, rainfall patterns, and the global climate. In fact, according to the study, while the Congo Basin is the world’s second-largest rainforest behind the Amazon, it stores more carbon over the same area of land. Gabon, which is home to 12 percent of the Congo Basin, has managed to protect its share of the rainforest, making it one of the few carbon-negative countries in the world.
In related updates, on Thursday, September 23, South Africa’s cabinet adopted new, ambitious emissions reduction targets. As a result, South Africa, Africa’s biggest emitter of greenhouse gases, is now aiming to reduce emissions to between 350 million and 420 million tons of carbon dioxide by 2030. This announcement comes ahead of the United Nations Climate Change Conference taking place in November where South Africa’s state-owned power company, Eskom, plans to ask for funding to help finance its shift from coal to renewable energy sources. Similarly, an announcement by the Minerals Council of South Africa stated that South African mining companies plan to invest $2.7 billion to construct 2,000 megawatts of power generation capacity. According to Bloomberg, persistent power cuts by Eskom have pushed mining companies to develop power plants, and mining companies have shown a willingness to move away from power fueled by coal as investors become more attentive to the climate crisis.
In other climate news, a startup in Benin has been building computers from jerrycans—plastic containers used for carrying liquids. The startup, BlowLab, has not only been utilizing recycled jerrycans, old computer parts, and other recycled materials to build computers, but has also been teaching others how to build their own for free. These computers are also cost-effective: A traditional office computer can cost between 300 and 350,000 CFA francs ($0.54 and $625) while the “jerrys” can cost between 100 and 150,000 CFA francs ($0.18 and $266). BlowLab has also announced plans to make these computers available to schools in remote areas.
Tunisian president declares rule by decree
On Wednesday, September 22, Tunisian President Kais Saied announced new measures that will allow him to rule by decree, ignoring stipulations in the current constitution. The measures, which include bestowing himself with the power to unilaterally issue legislative directives and appoint cabinet positions, come on the heels of Saied suspending the Tunisian parliament and sacking the prime minister on July 25. The actions of the past few months have drawn criticism from Tunisian political rivals as well as from Western donors, who have pressured Saied to take steps toward finding a new prime minister and reinstating democratic rule. On Thursday, four political parties in opposition to the president (who ran as an independent)—Attayar, Al Jouhmouri, Akef and Ettakatol—released a joint statement condemning Saied’s decision, stating, “We consider the president has lost his legitimacy by violating the constitution.” The party with the greatest representation in Tunisia’s parliament, Ennahda, also rejected Saied’s claim and had previously called his suspension of the parliament a “coup.”
In Wednesday’s announcement, Saied indicated that he would form a committee to draft amendments to the 2014 constitution with the goal of eventually establishing “a true democracy in which the people are truly sovereign.” In the meantime, Saied indicated that the preamble to the 2014 constitution and any clauses that do not contradict his new legislative and executive powers will still be enforceable.
What’s next for poverty reduction policies in China?
Earlier this year China’s government announced that it had eradicated absolute poverty, measured against a standard equivalent to $2.30 per person per day applied to rural areas. The latest Household Survey on Income, Expenditure and Living Conditions data by China’s National Bureau of Statistics, available for the year 2018, suggest that against an international poverty line of $1.90 per day, the poverty rate had declined to below 0.5 percent. This suggests China has reduced the number of poor people by close to 800 million since 1980. Whatever the specific numbers, China’s poverty reduction is a remarkable achievement. Yet, it cannot be the end of China’s efforts. As the country looks to the 2020s, what lessons can the authorities learn from the past 40 years and what should be the focus of policy?
Growth, mostly
China’s poverty reduction success since 1980 is primarily a story of sustained economic growth. The first decade of reform saw rapid income gains in agriculture, as China removed some of the biggest distortions of the Mao era. In the second decade, industry took the leading role, both in urban and rural areas, as reforms widened and deepened. During the third decade, the dynamism of China’s export-oriented coastal areas spread further inland, as migration to the urban centers accelerated, infrastructure investments (such as with the “Western Development Strategy”) multiplied, and a growing proportion of China’s territory became economically integrated into global value chains. This decade also saw an expansion of China’s social policies, including place-based interventions in the most backward counties and the creation of a basic safety net for China’s rural population. During the final decade, these social policies were widened, culminating in the targeted poverty eradication campaign of the past five years. Only during this final period did transfers become a more important driver of poverty reduction than labor incomes (see Figure 1).
Three lessons stand out:
The speed and scale of China’s poverty reduction since 1980 is partially related to the starting point. As Martin Ravallion points out, China in 1980 was one of the poorest countries in the world, and yet had a relatively healthy and well-educated population—comparable to other East Asian countries with much higher levels of income. China’s savings rates were also high and land distribution equal—initial conditions that allowed other East Asian countries to grow rapidly during the 1960s and 1970s. China in the 1980s and 1990s was thus to some extent catching up with its peers.
Market-oriented reforms drove the expansion of economic opportunities. China’s economic transformation from a largely rural and agrarian country to a predominantly urban, industrial powerhouse followed the country’s comparative advantage, using market signals to create appropriate incentives, and competition among regional governments to test policies and among companies to catalyze productivity gains. China introduced market incentives gradually. But its story of transformation and growth is consistent with classical economic theories of development.
Although markets and business played the leading role, government policy was also instrumental. China’s state is endowed with high administrative capacity and the government used this to provide public goods and overcome collective action failures. This is most evident in the expansion of public infrastructure that helped integrate rural areas with urban economies, and in the coordination of stakeholders in the targeted poverty reduction. High-powered incentives in the management of China’s civil service created a strong performance orientation, while a high degree of decentralization allowed policy to be responsive to local conditions.
What’s next?
China’s conditions today create mixed prospects for growth and income gains among the poor. China’s technological capabilities and the competitiveness of its leading companies are on par with high-income countries, and its best performing schools and students rank top in the world. But these capabilities are not broadly shared. The dispersion of productivity levels across Chinese companies is high. Average educational attainment of the labor force is low by comparison with high-income countries and access to good education remains unequal (Figure 2). China needs to pay more attention to these inequalities.
Market-oriented reforms could be an important catalyst for the greater diffusion of technological capabilities and for improved access to quality services. Among companies, leveling the playing field in access to finance and land could help promising small and medium businesses grow and create the jobs of the future. Lifting the remaining hukou related restrictions to labor mobility could help the current generation of school children access better education and health services in urban areas, improving social mobility and economic opportunities. This would over time help alleviate the risk of shortages of skilled labor, including in the urban service sector, which is likely to drive future productivity growth.
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China’s administrative capacity is an asset in its transition to high income, but the government’s role in supporting the poor and vulnerable will have to shift. China’s poverty line is below the level in most upper-middle-income countries, and less than half the $5.50 per day typical of upper-middle-income countries. Adopting a higher line would change the profile of the poor: At $5.50, around one-third of the roughly 180 million poor would be in urban areas, for example, and many of them would be informal, migrant workers outside of agriculture. Among these groups, poverty is more likely to be transient, associated with spells of unemployment and out of pocket health and education expenses. Social policies would need to recognize these differences, just as targeted poverty reduction was based on an evaluation of household needs in rural areas.
Following the eradication of absolute poverty, China has set the year 2035 as the target date to achieve common prosperity. This is understood as providing the opportunity for a decent standard of living to all Chinese citizens. Ensuring equal access to education, health care, and other services, leveraging market signals and competition to encourage innovation and the diffusion of technologies, and repeatedly adjusting government policies to ensure social transfers target key vulnerabilities and help China’s citizens manage the risk of a rapid socioeconomic transformation—these are the lesson of the past 40 years. They will continue to serve China well on the road ahead.
A new proposal for the G-20 to strengthen the global financial safety net
By Brahima Sangafowa Coulibaly and Eswar Prasad Undoubtedly, the economic recovery from the COVID-19 pandemic will dominate the agenda for the G20 Summit in Rome in late October. The summit also presents an opportunity to lay the foundation for a more robust and resilient global financial system. The creation of a new global liquidity insurance […]
The new child tax credit does more than just cut poverty
With COVID-19’s disruptions in employment, child care, and education, it is unsurprising that child poverty substantially increased in 2020—roughly 1.2 million more children were living in poverty in 2020 when compared to 2019 (an increase from 15.7% to 17.5%). As child poverty is unequally distributed in America, so too were its increases—poverty rates grew the most among Latino children (4.2 percentage points), Black children (2.8 percentage points), and children from female-headed families (4.1 percentage points), while they remained flat for white and Asian children.
In response to these trends, President Biden signed a bill this March that restructures the child tax credit (CTC) for one year—making it larger ($3,000 per child between the ages of six and 17 and $3,600 per child under six), broader (gradual phaseouts start at $75,000 for individuals and $150,000 for those married filing jointly), and more periodic (monthly payments). This restructuring would allow the CTC to act like a child allowance, which has been used in a variety of other countries. While the new CTC officially launched in July of 2021, policymakers are already considering whether or not to extend the new CTC beyond 2021. Here, policymakers are not only considering the impact that the new CTC will have on child poverty, but also the impact that it could have on family social mobility.
Concerning child poverty and racial/ethnic equity, researchers from Columbia University estimate that the new CTC could cut child poverty by 45 percent and would have the largest impacts on Latino and Black children. Considering other outcomes, some scholars argue that the new CTC could disincentivize parental employment and thus curb social mobility, while other scholars argue the contrary: Cash payments can simultaneously decrease child poverty and increase mobility. Some scholars also suggest that policies like the CTC could increase birth rates, an important consideration given that recent declines in U.S. birth rates may pose both social and economic challenges such as reductions in GDP growth rates.
Our findings suggest that the child tax credit will not only act as a tool for decreasing child poverty in the short term, but also as a tool for increasing family social mobility in the long term.
As policymakers grapple with whether or not to extend the new CTC beyond 2021, it is important to understand how families will use the CTC payments. To inform these policymakers, we utilized a probability-based online panel to survey a nationally representative group of 1,514 U.S. parents eligible for the credit. The survey was administered immediately before the first CTC payments were delivered. One of the key questions we asked parents in this survey was how they planned to use their CTC payments. Our findings suggest that the CTC will not only act as a tool for decreasing child poverty in the short term, but also as a tool for increasing family social mobility in the long term.
Figure 1. Planned usage of the child tax credit
Source: Employment, Financial and Well-being Effects of the 2021 Expanded Child Tax Credit, Social Policy Institute. Notes: n=1,056 – 1,078 respondents who anticipate receiving the CTC. Responses differ slightly across categories as some respondents skipped answering yes/no for certain categories.
Overall, 64 percent of eligible parents anticipated receiving the CTC. We examine how these parents planned to use these payments in Figure 1. The most common planned use was building emergency savings (75%), followed by paying for routine expenses (67%), essential items for children (58%), purchasing more or better food (49%), starting or growing a college fund (42%), and paying for child activities (42%), moving or making home improvements (32%), health care expenses (29%), child care expenses (26%), spending more time with children (20%), and purchasing gifts or entertainment (20%). Relatively few parents planned to use the CTC to pay for tutors for children (7%), working less or changing jobs (6%), or sending their children to a different school (6%).
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In Figure 2, we look at the relationship between planned uses of the CTC and families’ income in 2020. Overall, we find that:
Families across the income spectrum planned to use the CTC to build emergencies savings at similar rates.
A greater proportion of lower-income families (76%) planned on using their CTC for routine expenses than middle- (64%) and higher-income (54%) families
A substantially greater proportion of lower-income families (75%) planned on using their CTC for essential items than middle- (52%) and higher-income (37%) families
A substantially greater proportion of lower-income families (66%) planned on using their CTC to purchase more or better food than middle- (44%) and higher-income (27%) families
A slightly smaller proportion of lower-income families (38%) planned on using their CTC to start or grow a college fund than middle- (42%) and higher-income (50%) families
A slightly greater proportion of lower-income families (45%) planned on using their CTC for child activities than middle- (44%) and higher-income (32%) families
A slightly greater proportion of lower-income families (29%) planned on using their CTC for emergency savings than middle- (24%) and higher-income (24%) families
A substantially greater proportion of lower-income families (28%) planned on using their CTC to spend more time with their children than middle- (16%) and higher-income (11%) families
A greater proportion of lower-income families (12%) planned on using their CTC to hire tutors for their children than middle- (5%) and higher-income (3%) families.
Figure 2. Planned usage of the child tax credit, by 2020 household income
Source: Employment, Financial and Well-being Effects of the 2021 Expanded Child Tax Credit, Social Policy Institute.Notes: n=1,049 – 1,071 respondents who anticipate receiving the CTC. Responses differ slightly across categories as some respondents skipped answering yes/no for certain categories.
There are four main takeaways from these results:
The results show that the new CTC will likely have the intended effect of alleviating child poverty, as seen in the relatively large proportions of respondents planning to use their CTC for emergency savings, routine expenses, essential items, purchasing more or better food, and paying for health care and child care expenses.
The results show that the new CTC will likely increase social mobility both for families and their children. For example, when considering family social mobility, a relatively large proportion of respondents planned to use their CTC for moving and making home improvements or starting/growing a college fund for their children.
While some fear that the CTC will disincentive work, this fear appears to be relatively unfounded, as only 6 percent of families planned on working less or changing jobs.
These results show that low-income families planned to use the CTC to both cover the essential expenses for their households and children, while also commonly planning to use the CTC to build their emergency savings. This is important for promoting the financial well-being of these families, who often struggle with severe budgetary constraints and have very minimal amounts of emergency savings.
U.S. families, and low- and middle-income families in particular, must often manage tight budgets that make it difficult to build even modest savings and put them at risk of taking on high (and often expensive) debt burdens. Based on these results, it appears that the CTC will help give families a little more slack in their budgets to help them meet their essential needs, while also allowing them to make important investments in their children’s future, such as college savings or paying for extracurricular activities. Both of these functions may help improve children’s well-being both now and over the long term, and policymakers should consider these benefits as they debate whether or not to make the CTC permanent.