China’s Broken Ladder Will Halt Further Growth

China must remember that a healthy level of inequality can motivate people to strive for more

Broken ladder. China is making it more difficult for young people to climb toward economic success. Image Credit: Richard Bailey/Getty Images

In 2012, Chinese President Xi Jinping first touted his ambition for a national rejuvenation, dubbed the “Chinese Dream.” One might argue whether there was ever one, but to China’s youth, it surely seems over now. Last month, the government stopped releasing youth unemployment rates after the official number hit a record 21%. The reality is arguably much worse. But even for those who have a job, frustration abounds: The cost of living continues to rise while the economy slows down, homeownership is increasingly unattainable, and tightened social control is strangling trivial escapes from reality like video games and cartoons.

Granted, young people in many parts of the world face hurdles on their way up in society, but that’s how upward mobility is supposed to work. A certain amount of healthy inequality functions like a ladder that motivates the young generation to climb. But for today’s China, this mechanism is fundamentally broken.

Beijing policymakers seem determined to do away with income inequality, but history shows that’s the wrong way to go. I grew up in China as the country launched into the post-Mao market reforms. I’ve seen how the healthy kind of inequality worked, and when it did, the country was full of hope and excitement.

When I Almost Chose the ‘Nuclear Option’

In my case, I did well in school—so well that I almost took part in China’s most secretive nuclear programs.

It was the spring of 2002, when I was about to graduate from high school. For 12th graders in China, spring isn’t a synonym for beach time or beer pong. Instead, their minds are most likely on the single most important event in their youth: the college entrance exam.

Since 1977, college admission in China—and thereby much of one’s future education and career—has been determined almost entirely by a nationwide entry exam that takes place every spring. One might have the combined talent of Johann Sebastian Bach and Vincent van Gogh, but it means little unless you attain a good score on the exam. Moreover, each student is allowed to apply to only a handful of schools—out of the thousands the country has. So it’s no small feat to pick schools around one’s expected performance and hope that others don’t have the same ideas.

If that sounds bad, it gets worse. Schools admit disproportionally more students from their own provinces than elsewhere, but close to half of China’s best universities are in Beijing or Shanghai. Therefore, exam-takers elsewhere face much taller odds to get into top schools. For example, Beijing’s Tsinghua University, China’s equivalent of the Massachusetts Institute of Technology, admitted 190 out of 65,000 students from the city this year—about as rare as a pregnancy resulting in twins. But it admitted just 61 out of 739,000 applicants from Guangdong Province, my hometown. That’s equivalent to the odds of being struck by lightning.

Like other aspiring souls, I wanted to beat those odds and turn my life around, and that’s when I almost stepped foot in China’s nuclear programs. In 1996, China’s nuclear industry was hitting a rough patch amid market reforms. Young people wanted to have an urban lifestyle along the eastern coast, but nuclear jobs were in the remote inland. The challenge prompted the China National Nuclear Corporation—the state-owned giant overseeing the country’s nuclear projects, civilian and military—to create a special degree program in nuclear engineering and technology at Tsinghua to produce its future employees. The deal was music to my ears: a lower score to get accepted, a scholarship that more than covered the tuition, and guaranteed, lucrative employment at one of China’s most prized enterprises.

The catch? According to an acquaintance of mine who got the degree, the students were not allowed to change majors within Tsinghua. They would be required to stay in that lucrative job for at least five years after graduation, and, due to the classified nature of their work, they would face strict travel rules even to just visit their families.

It was an easy call: My family wasn’t going to lose their only child to a faraway facility to make something that could blow up the world. Instead, I was accepted to a less prestigious program elsewhere in China. After that, I was fortunate to be able to come to America, the land I now call home, to pursue my doctorate and passion in economics—that’s the “lightning” that did strike me—and I continue to write the words you’re reading today.

When Hard Work Is Hardly Rewarded

From today’s vantage point, the 2000s was arguably the most optimistic and exciting era for many in China. The economy was growing over 10% a year throughout the decade, and the optimism was intimately felt by young people like me. The college entrance exam, though tough, was a surmountable barrier to higher education, which, in turn, was a powerful equalizer. Everyone had a shot to forever change their lives if they worked hard.

In a way, the 2000s were an island of hope in China amid significantly dimmer times. China’s youth in the late 1970s were not that lucky, and, sadly, China’s youth today aren’t either. When the college entrance exam resumed in 1977, after a decade of the Cultural Revolution in which education was despised, 5.7 million students competed to get into one of the 400 schools with openings. Their odds of success were about 5%.

Today, there are thousands of colleges in China thanks to the massive educational expansion. This year, 13 million students took the entrance exam: Almost all were admitted, and almost all will graduate with a college degree a few years from now. This may sound like other countries that have also expanded education, but China’s case is problematic: For decades, the government has demonstrated a partiality to fewer than 200 colleges across China. These schools are considered “first class” in the country, a status that comes with outsized favoritism from all levels of government.

But because top schools in China have barely expanded over the years, getting into the so-called first-class colleges remains miserably hard. In 2023, such odds for a high school senior were about 5% (as likely as it was for students trying to get into any Chinese college in 1977). Incentives matter, and China’s higher education is in a way drifting back to the 1970s model, where getting rewarded for hard work was too hard to accomplish. (It’s arguably even worse if we consider the students who spent a few years in college learning a skill that employers don't want.)

If a religion sent 5% of its believers to heaven and the rest to hell, it wouldn’t have a very devout following; it would be too hard to avoid eternal punishment. But if it sent 5% to heaven and all the rest to some sort of limbo—the in-between or purgatory, as in Catholicism—it wouldn’t be very popular either; it would be too hard to achieve eternal joy. The best incentive scheme is like a ladder, where it’s realistic for some to climb from hell to limbo and for some others to move up from limbo to heaven. Some popular religions even have multiple levels for heaven and hell to draw out the most devotion.

Students like me who took the college entrance exam in 2002 had such a ladder. Only about 60% of the students were accepted to a college—about the same as in the United States today—and, among them, more than half were admitted to less prestigious three-year programs as opposed to the regular four-year ones. While very few could make it into first-class schools, some were eager enough to explore shortcuts like Tsinghua’s nuclear degree—and enough of them took the deal. In many ways, hard work made a big difference.

The Top Is No Longer Safe

In the mid-2000s, National Bureau of Economic Research scholars Richard Freeman and Alex Gelber conducted a set of maze experiments at Harvard and found the same effect of an incentive “ladder” in a controlled setting. Subjects of the experiment were asked to compete in a tournament in solving maze puzzles. When the economists gave a big prize to the top scorer and nothing to everyone else, the competitors responded only modestly to the scheme; it’s only so likely to be the winner who takes all. But when they spread out the prize on a sliding scale based on everyone’s performance, the subjects worked significantly harder to solve the mazes. The reason was simple: Everyone had something to aspire to.

In today’s China, the discouraging winner-take-all model is spreading in the economy well beyond college admissions. In 1994, the Chinese government started to select entry-level civil servants using a similar nationwide exam open to eligible college graduates. But the odds of being selected for any vacant position decreased from 14% in 2001 to 4.4% in 2004 and 1.4% in 2023. Positions with the lucrative tax authorities are particularly hot commodities. This year, for example, a county-level tax enforcement position in Qinghai Province saw nearly 5,000 exam-takers competing for it. One can only imagine how difficult it is for the chosen ones to rise through the ranks of the mammoth Chinese government.

It’s no surprise that when competition is overly fierce, corruption becomes a bigger problem. More and more Chinese netizens are complaining about nepotism in the selection process. In 2013, the head of China’s Ministry of Human Resources and Social Security, the agency that oversees the exam, was concerned enough about the criticism to address it publicly. The minister claimed that more than 60% of the selected applicants came from families that were not politically connected, leaving the public to conclude that the other 40% were. (The agency hasn’t given an update on that statistic since.)

Even for those who have reached the top of the upward mobility ladder—in the public or private sectors—there’s an ever-increasing possibility of falling to the ground in the blink of an eye. Xi shook the world when he kicked off his reign in 2013 with an aggressive anti-graft campaign, but cleansing has persisted to this day. This month, China’s defense minister, Li Shangfu, was removed for corruption after being missing for weeks, strikingly similar to former Foreign Minister Qin Gang, who was ousted in July after weeks of absence from the public eye, ostensibly because of an affair.

One might say that those officials were just unusually corrupt or infidel—or both—compared to others in the Chinese Communist Party, but the fall of Chinese billionaires is no less striking. Earlier this year, renowned investment banker Bao Fan was investigated by authorities after a mysterious disappearance, joining a growing list of “vanishing billionaires” that included Alibaba’s founder Jack Ma and Fosun International’s Guo Guangchang, who was once dubbed China’s Warren Buffett. For stars in any field in the country, there’s no escape from the fact that their success—and even they, themselves—could disappear if they don’t stay on the good side of the party.

This may be the most discouraging “religion” ever. Not only does it pick just 5% for heaven and the rest for hell, but the 5% must be relatives of the clergy. There are plenty of obstacles in such a system, but none that are surmountable and, consequently, none that motivate effort.

Many think of China as simply being in a “middle income trap,” suggesting that the country must experience an inevitable phase of stagnation before it can become rich. But this broken ladder analysis points to a different view. First, Beijing might have various grandiose ideas to boost its slowing economy, but its success fundamentally requires fixing the upward mobility mechanism for China’s youth. It would be a good start to stop favoring those fortunate few with vast government connections.

Second, a broken ladder is not inevitable because the upward mobility mechanism used to work, and the Chinese Communist Party is known for its ability to make seismic changes without losing power. The Chinese economy would have a real chance to come back to its trajectory of rapid growth if the government brought back fair competition and the healthy kind of inequality.

But all that, of course, requires an open mind at the top—and that’s a scarce resource in Beijing these days.