Minxin Pei recently wrote an essay that went to the heart of the Central Government’s Fears about the global economic downturn: unemployment.

….high unemployment of migrant labourers and university graduates could pose a more deadly threat to social stability. Based on surveys by Chinese sociologists, only about half of the jobless migrant labourers have returned to their native villages, leaving roughly 5m unemployed, mainly young, migrants in urban areas (the number is expected to rise significantly this year). Chinese graduates, most of them the only child of their family, are among relatively privileged members of Chinese society. Unlike the proletariat in moribund SOEs, Chinese graduates harbour powerful individual ambitions, possess strong organisational skills and have a tradition of challenging government authorities.

The author proposes that though it is necessary to build China’s “hardware” infrastructure – roads, airports, railways – it is as important to invest in China’s human capital.

While infrastructure spending can help absorb some of China’s overcapacity in heavy industries (especially steel), it will have a negligible impact on generating employment for jobless migrant labourers and graduates.

I would add to this point that China’s desire to move up the industrial value-add ladder will require more and better trained personnel than it currently has on hand.

A more effective approach to staving off potential unrest in urban areas would be to increase investment, not in more hardware, but in human capital. For example, China should create its own “Teach for China Corp” (modelled after the successful Teach for America Corp) and hire hundreds of thousands of new university graduates as teachers in rural areas, which have a severe shortage of qualified teachers.

I realize this smacks of the programs of the Cultural Revolution in which young people were sent to (and sometimes stranded in) the countryside, but a loosening of the hukou (residency) permit requirement as well as the “contractualization” of the education terms for teachers could go a long way toward dispersing a great deal of creative and potentially destructive energy.

If implemented, these two “human capital investment” programmes would absorb 2.5m migrant labourers and new graduates, with the job creation effect equal to 2.5 per cent of gross domestic product growth. This would be money well spent. By investing in people, China would not only increase its human capital, but also secure social peace in hard times.