The Chinese economy is growing rapidly and the Chinese society is changing as rapidly. The Chinese Government is working to revamp the social welfare system. In this area, China’s impact on the outside world is not as great as the latter’s influence on China.
China’s Economic Growth and Social Development
1. China’s economy has been growing rapidly since the start of reform and opening in 1978. In 2006, China’s gross domestic product (GDP) amounted to 20.9 trillion yuan (1.3 trillion pounds), having grown at an annualised rate of 9.7 per cent in the 28 years since 1978.
In the intervening years, China’s welfare provision improved significantly. In 2005, per capita area of housing in urban areas increased to 26.1 square metres from 8.1 square metres in 1978. In rural areas, housing area per head grew from 6.7 square metres to 29.7 square metres. Home ownership currently stands at 81.6 per cent. Since 2000, private ownership of cars has grown substantially, as more Chinese own a wider variety of private property. Meanwhile, China’s human development environment has improved sharply. In 1982, people aged 15 and above had average schooling of only 4.6 years. Now, the averaged schooling has extended to 8.5 years, making illiteracy in the same age group something of a rarity. Life expectancy grew from 67.8 years in 1981 to 71.9 years in 2006, as infant mortality rate dropped from 3.8 per cent to 2.2 per cent in the same period. China’s Human Development Index ranking, having increased from 0.68 in 1995 to 0.77 in 2006, currently stands at 81.
2. China’s impressive economic growth is a result of industrialisation and urbanisation. Over the last two decades, China has transformed from an agrarian economy to an urban economy, from command economy to market economy and from a self-contained economy to an open economy.
In 1978, only 17.9 per cent of China’s population lived in urban areas; in 2005, 43 per cent of them did. Since the mid-1990s, in particular, urban population has been growing by 1.3-1.4 per cent annually, as many farmers leave the countryside for odd jobs in urban centres, particularly those on the eastern seaboard. In 2005, some 147 million farmers were working in cities. If their families are counted, the number would exceed 200 million. Industrialisation and urbanisation, while boosting productivity, has proven to be a key driver of the Chinese economy.
China’s market-oriented economic reform resulted in a major change of the economic system. Prices of either products or services are no longer set by the government but decided by the market, leading to significantly more efficient allocation of resources. In 2005, foreign-invested businesses accounted for almost half of all industrial value-added in China and four-fifth of China’s export earnings.
The Chinese economy is increasingly open to foreign capital, technology and managerial know-how. This puts pressure on domestic companies to reform and develop.
3. Despite the significant improvement in social services in tandem with economic growth, they still fall short of public needs. In the rural areas, particularly in the middle and west, public services are still quite inadequate. For example, 6.6 per cent of rural schools are dilapidated, some 30 million rural residents do not have access to safe drinking water. Even in urban areas, the social safety net is quite weak. For example, endowment insurance only covers those employed in the formal sector and medical insurance, only 34 per cent of the urban population. Thus, to spread the benefits of growth to all Chinese regardless of their age, whereabouts, profession, gender and ethnical background – or put it another way, to achieve social progress in addition to economic growth – is a major challenge confronting the Chinese Government.
4. Social reform and the rebuilding of the welfare system must be treated as a matter of great urgency. For one thing, the income gap between town and country and different regions is widening. According to World Bank (WB) estimates, the Gini coefficient in China has already reached 0.45, up 60 per cent from the pre-reform level of 0.28. The yawning income gap not only reflects historical factors and resource constraints but also reveals deficiencies in the social system. Compounded by the rapid spread of information and large-scale migration, it could lead to instability.
For another thing, China’s social structure is undergoing change. There are hundreds of millions of new entrants into the urban labour force who used to till contracted farmland in the countryside. They are joined by about 30 million urban workers laid off from public-owned enterprises, who no longer have lifelong job security. Most of these people have seen their income rise, but with more employment uncertainty and sense of insecurity. The tension between labour and capital may add to the instability.
Finally, underdeveloped social services will, in the short term at least, dampen retail consumption and discourage domestic market expansion and in the longer term stifle the growth of human capital and dim the prospects of sustainable economic growth in China.
Common prosperity is a long-term commitment the Chinese Government has made to its people. In 2002, the government set the goal of ensuring a comfortable life for every Chinese. Three years later, it called for the building of a harmonious society in China. These initiatives have ushered in a new phase in China’s reform and opening, in which social reform and revamping of the welfare system suited to the national conditions becomes an important task.
Revamping China’s Social Security System
Under the command economy, the Chinese welfare system was founded on enterprises in urban areas and communes in the countryside (see Figure 1). Though modest, the level of welfare provision was quite impressive when compared with the income level at the time.
Figure 1: Traditional social security system in China
Employees of state organs and public institutions enjoyed retirement security, free medical care, compensation for industrial injury and maternity protection, state relief, state welfare, support to servicemen, price subsidies, subsidised or free housing and education, etc.
Employees of enterprises enjoy labour insurance (covering retirement, medical expenses, industrial injury, maternity leave, etc.), welfare benefits, living allowances for poor households, etc.
Rural collective provision
Farmers enjoy co-operative medical care, collective relief, etc.; infirm or childless elderly people are provided for in major aspects of life; families of servicemen enjoy preferential treatment, etc.
For many years since 1978, SOEs and collective enterprises are considered the best employers since they offer good welfare provision. As the payroll grew, welfare burden began to take its toll. Inefficient and hobbled by institutional constraints, SOEs began a radical shake-up in 1998. In the countryside, soon after the collapse of people’s communes and as farmland was contracted to households, the responsibility for welfare provision was shifted from the collective to individual households. However, as the economy becomes increasingly market-oriented and globally integrated, urban employees and farmers are vulnerable to unemployment, poverty, diseases and a host of other risks, both natural and man-made. This has results in more social tensions.
Since the 1990s, the Chinese Government has taken numerous steps to revamp the social security system in the following five areas: poverty reduction, old-age support, education, medical care and housing.
Reform of the economic and social system has proven the most effective means of reducing poverty in China. The policy of allowing farmer households to contract land adopted in 1978 lifted the majority of them out of poverty. The abolition of agricultural tax in 2006 significantly improved the economic conditions of low-income farmer households. The rural medical care and education reform in recent years has also benefited large numbers of poor farmers.
The Chinese Government resorts to a two-pronged approach – development and relief – in fighting poverty. Three large-scale relief programmes have been successively implemented since 1986. Development policies, such as increasing government investment in and low-interest loans to impoverished rural areas, have enabled farmers to improve production conditions and poor villages to improve infrastructure. Thanks to these efforts, China’s rural population who lived under the poverty line declined sharply from 260 million in 1978 to 23 million in 2006.
In urban areas, creating employment is the main policy tool to reduce poverty, supplemented by support for securing small loans and training and preferential taxation policies. Some urban governments have experimented with paying people to provide public and community services as a way of eliminating “zero-employment households” (i.e. ensuring at least one person per household who has labour capability is employed), with great success.
In terms of relief in urban areas, a policy of providing basic living allowances was implemented since 1999 to subsidise the living costs of those who live under the locally defined poverty line. At the end of 2006, 22.4 million people were receiving subsidies averaging 83 yuan per person per month. This ensures they have at least 170 yuan per month to spend on daily necessities. In 2004, this policy, with some modification, was extended to rural areas, where eligible farmers receive a set sum from the local government (ranging from 30 yuan to 50 yuan per month, depending on the province). At the end of 2006, nearly 15.1 million rural residents in 25 provinces across China were receiving living allowances, which totalled 4.2 billion yuan in that year.
China practises nine-year compulsory education. Before 1978, education expenses were borne by rural collectives. When the household contract responsibility system deprived many rural collectives of their source of revenue, the costs were in effect borne by individual households. This not only added to their financial burden, but made the money needed to run local schools unavailable in many cases, leading to delays in teachers’ salary payment and inadequate teaching facilities. To improve the situation, the Chinese Government decided in 2001 to share some of the costs with local governments. Under the burden-sharing scheme, farmers no longer had to raise money to keep schools open, which would henceforth be funded by the central government budget, as would rural teachers’ salaries and the cost of building rural schools. In 2006, it was further decided that all tuition and miscellaneous fees would be abolished for 150 million rural students for the duration of their nine-year compulsory education. Under the new policy, poor rural students could also get free textbooks and received subsidies on boarding fees. On average, this policy could save every primary school student 140 yuan, every junior middle school student 180 yuan and every poor boarding student 500 yuan. This was great news for many poor rural households whose per capita annual income barely exceeds 1,000 yuan.
Good progress has also been made in higher education and secondary vocational education. The Chinese Government increased investment in both areas in addition to encouraging private investment. In 2006, the gross enrolment ratio (GER)1 of senior middle schools reached 59 per cent. In higher education, GER topped 22 per cent, 7 points higher than the 15 per cent threshold for mass higher education.
Education expenditures accounted for 15 per cent the Chinese Government’s total expenditures and 2.9 per cent of GDP in the same year. The goal is to increase this to 4 per cent of GDP.
For many years, pay-as-you-go (PAYG) was the only model of providing old-age pension in China. Having studied the “Three-Pillar Model” – consisting of a mandatory publicly-managed one, a mandatory privately-managed one and a voluntary one – proposed by the WB in 1994, the Chinese Government adopted it in 1997, which has been practised across China since then.
Of the three pillars, the first one is funded by the employer on a PAYG basis. A variation of income redistribution, it amounts to 20 per cent of each employee’s annual income. The second one is a cumulative account jointly funded by the employer and the employee and is equivalent to 40 per cent of the latter’s annual wage income. The third one consists of enterprise annuity and is at present only practised in profitable enterprises.
The number of people covered by this scheme, having grown from 86.71 million in 1997 to 186 million in 2006, currently accounts for 48 per cent of all urban employees.
Although the overarching structure is in place, the details are being constantly studied and improved. Some issues remain unresolved. First, the shortfall in accounts held by people who worked under the old scheme but will paid under the new one (the “middle men”) is currently funded by budgetary allocations. However, this way of financing “implicit debt” is clearly unsustainable. Second, the endowment insurance scheme is still plagued by limited coverage. To expand it to cover the self-employed and those working in informal sectors – who account for nearly half of the workforce – and provide enough incentives to them remains a challenge. Third, the management and investment of the funds still has room for improvement. The accounts are currently managed at the provincial level. This creates problems when the accountholders want to work in another province. In addition, China’s underdeveloped capital market and poor oversight make it difficult and risky to invest the huge funds. This said, though several policies are being mooted, the partial accumulation system itself is most unlikely to change.
In the countryside, old-age security is provided by farmland and the extended family. However, as family size shrinks, more people move to cities for jobs as the rural population ages, endowment insurance becomes a pressing imperative. In 1992, the urban model was adopted in some counties on a trial basis. By the end of 2005, it has expanded to cover more than 54 million people in over 1,900 counties. With accounts averaging 570 yuan per capita, the total accumulated funds amounted to 31 billion yuan. In the same year, 3.01 million people collected an average pension of 707 yuan per head from the funds. In 2005, the more developed municipalities and provinces such as Beijing, Jiangsu, Guangdong and Shandong decided to allocate more funds to subsidize rural endowment insurance so that it is not funded entirely by the individuals.
The Chinese Government has also borne the cost of endowment insurance for two categories of rural population. Infirm or childless elderly people, who used to be supported by rural collectives, are now supported by the central government budget. In 2006, 4.8 million of them received subsidies each month from the state, costing the central government budget 4.1 billion yuan altogether. For rural parents over 60 years old who only have one child or two daughters, they are eligible to receive no less than 600 yuan per year from the state as a reward. This policy was put on a trial basis in 2005 and adopted nationwide two years later. In the western region, 80 per cent of these allocations comes from the central government while the rest is mainly funded by the provincial government. In the central provinces, the cost is shared equally between the central and the provincial government. This policy was designed to support aging single-child parents.
In the 1960s and 1970s, the Chinese state provided health services to the world’s largest population at a low cost. It managed to do this through a nationwide “patriotic public health campaign” and prevention system, supplemented by “barefoot doctors” in rural areas and free medical care in cities. These policies helped to extend the life expectancy of Chinese citizens and the significant decline in infant mortality.
Since market-oriented reform was adopted, there has been significant expansion of medical resources and improvement in medical facilities. The number of clinics, health workers, medical equipment and medicine supply all grew rapidly. Nationwide expenditures on health reached 759 billion yuan in 2004. However, as medical expenses grew faster than personal income, in 2003, nearly one-fifth patients across China could not afford to see the doctor. A nationwide survey conducted by the Ministry of Health in 2003 showed that 65 per cent of Chinese did not have any medical cover. The figure was lower in cities, at 45 per cent, but staggeringly high among rural residents, at 70 per cent. In another large-scale survey, three-fourths of Chinese ranked expensive medical bills as the top social issue in China.
While the cost of public medical facilities continues to climb, a large part of it is borne by patients. Public health expenditure accounted for only 36.2 per cent of all health expenditures in 2003, ranking China at the 196th place of 199 countries surveyed by the World Health Organisation.
The Chinese Government is determined to change this. In recent years, public health is taking up an increasing share of the total government budget. For every year between 2003 and 2007, China’s health budget increased by more than 20 per cent. On the back of a 65.4 per cent increase in 2006, it grew by another 86.8 per cent in 2007.
Since 2004, the Chinese Government has been taking steps to rebuild and improve the urban and rural medical care system (see Figure 2). In urban areas, the system mainly relies on the “employee medical insurance” scheme, which currently covers 130 million workers. It is jointly funded by the employee and his or her employer and covers out-patient and hospitalisation expenses respectively. To maintain personal medical accounts is a Chinese invention.
Figure 2: Urban and rural medical care system
The Chinese Government began to experiment with co-operative medical care in the countryside in 2003. Under the scheme, large medical bills or hospitalisation expenses of those who have signed up are covered by a fund – to which each year individual farmers contribute 10 yuan and central and local governments, 40 yuan. At the end of 2006, some 410 million farmers, or 45.8 per cent of the entire rural population, were covered. The scheme is expected to cover all rural residents in 2010. In 2006, the central government budget allocated 4.3 billion yuan for the purpose. Over the years, some 9.6 billion yuan has been earmarked, benefiting 140 million people.
In 2006, a model similar to the rural co-operative medical care was adopted in Chinese cities, aiming to cover the bills of treating major illnesses for those who work in informal sectors or do not yet have a job. For minors, the elderly and the rural and urban unemployed population, they are entitled to subsidies on a par with those covered by the rural co-operative scheme provided they or their households have contributed certain sums as required.
In addition, support will soon be offered to impoverished populations in urban and rural areas by subsidising some or all of their medical bills, depending on the degree of poverty.
For most Chinese, apartments owned but provided by employers were an important welfare under the command economy. However, an end was put to such welfare provision in 1998 after lengthy trials and study. The new policy offers different things to different people: the poorest families can rent subsidised apartments provided by the government or their employers, the lower-to-middle income households can buy inexpensive apartments whose cost is subsidised, and the more prosperous can either buy or rent commercial apartments at market price.
As the economy grows, the Chinese now enjoy much better housing conditions, with per capita housing area reaching 28.7 square metres in 2005. However, not all people have benefited equally, as some local governments encouraged the development of commercial housing at the expense of affordable or low-rent housing. In some places, affordable housing becomes unaffordable to many people. So, instead of closing the income gap, it serves to widen it. As skyrocketing housing price becomes the subject of widespread complaint, it is no longer a purely economic issue but has acquired “political significance”, as one mayor put it. The Chinese Government has responded by issuing new regulations proscribing greater housing provision at a price affordable to ordinary wage-earners. Local governments across China have formulated plans accordingly to cater to the low-income population by either subsidising their rent or building more low-rent apartments. In Liaoning and other provinces, the government has subsidised the renovation of shantytowns populated by ordinary miners or workers. In Liaoning alone, 1.2 million people moved to new homes as a result of the policy. Many provinces are studying Liaoning’s experience with a view to adopting similar policies.
Characteristics of the Chinese Welfare system and Difficulties in Revamping it
1. The characteristics of China’s new welfare system
— A dual structure on the way to integration: China operates a dual economy, a feature reflected in its poverty relief, pension, medical care, education and housing programmes. The medium goal of the Chinese Government is to establish a system covering all the population, and its ultimate goal is to integrate welfare programmes currently divided between urban and rural areas and improve the social rights for all its citizens.
— Wide coverage with low levels of provision: China is a middle-to-low income country with a vast population and weak economic foundation. Welfare provision has traditionally focussed on “the fundamentals”. Examples are nine-year compulsory education, basic medical care and small subsidies to impoverished populations. This was a necessary compromise in order to achieve universal coverage and fair treatment.
— Rapidly increasing burden on the government: The government has replaced SOEs and rural collectives as the provider of welfare and seen its welfare budget ballooning. The disintegration of the traditional “work units” has shifted the responsibility of looking after their employees on to the government. As the economy and society grows, both the absolute and relative cost of welfare provision will continue to increase, placing a heavy burden on the government.
— The goal is no longer equal pay through income redistribution but universal social security with special focus on low-incomers: Welfare programmes in China will remain market-based; the government is not going to take over the role of the market. The responsibilities of the individual, the family, the community and the employer will remain fundamental to welfare provision, which the government supplements.
2. Welfare policies towards rural migrant workers
There are 140 million rural migrant workers in China. The name belies their difficult circumstances: they spend more than half the time working in cities, but they are excluded from the urban welfare system; they have homes in the countryside and most of them have farmland there, but the rural co-operative medical care system is not designed for them. As the household registration system dividing urban and rural residents is phased out, farmers now enjoy legal liberty in terms of migration, employment and settlement. But social policies and welfare provision are still divided, leaving most rural migrant workers to fend for themselves (See Table 1).
Table 1: Dual welfare structure and the migrant worker
This is a political issue as well as an economic one. It involves the value and policies pursued by the government as much as its financial capacity and governance skills. It would be unrealistic to proclaim equal welfare provision to migrant workers before resolving the basic infrastructure such as schools, transport and housing. For a while, some cities adopted radical reforms allowing the children of migrant workers free access to primary education. As education standards are higher in cities than in rural areas, many farmers chosen to migrate to cities in order to give their children a better education, which imposed additional burden on urban governments and facilities. As a result, the policy had to be dropped.
Currently, the only ways through which farmers can enjoy the welfare provided in cities are buying homes (a la “investment migrants”) or going to colleges (a la “skilled migrants”). This is not fair. The Chinese Government is contemplating welfare provision on the basis of a stable job. The rationale behind this is: migrant workers should be entitled to welfare benefits if they pay tax.
To provide for the welfare of migrant workers clearly needs budgetary allocations from both the central and provincial governments. Depending solely on municipal governments is not enough. To truly protect the rights and interests of migrant workers, who are a huge, underprivileged community, more needs to be spent on their education, medical care, housing and pension. This is an important area where both the central and local governments need to shoulder more responsibility.
3. Reforming public finance
As China’s economy rapidly expands, government revenues are growing strongly. Since the “tax assignment system” was introduced in 1994, which improved the tax regime and standardised revenue sharing between the central and local governments, both total tax revenues and the central government’s share increased rapidly.
Figure 3: Government Revenue of China
Apart from the budgetary revenues, some departments of the Chinese Government also receive extra-budgetary revenues. There are also the so-called “extra-system revenues” (income from non-agricultural land auctions). As urbanisation advances, many local governments have seen their revenues increase from making agricultural land available for non-agricultural purposes. At present, such revenue sources are not managed as part of the budget and they are mainly used for funding economic construction activities and government operations. If extra-budgetary and extra-system revenues are included together with the budgetary ones, central government revenues in 2006 would account for 31 per cent to 32 per cent of that year’s GDP.
As the Chinese Government’s financial position improves, it is better placed to refashion the welfare system. Meanwhile, further public finance reform is necessary to make government budget more “fair, efficient and transparent” and the government function better.
Firstly, the structure of public spending can be improved. Government investment in economic construction activities should be reduced and spending on administrative overhead strictly controlled.
Though having shrunk from 64 per cent of all budgeted expenditures in 1978 to 27 per cent in 2005, economic construction spending still outweighs spending on social programmes (culture, preservation of artefacts, sports, publishing, education, public health, etc.). In the same period, administrative costs ballooned, too – and at a rate faster than social spending (see Figure 4).
Figure 4: China’s budgetary expenditures
Clearly, the Chinese Government is in a position to release more resources for social programmes and rebuilding the welfare system by improving the structure of public spending.
Secondly, budgetary management should be reformed to establish sound public finance. While budgetary revenues and expenditures are well managed in China, extra-budgetary and extra-system revenues are not. The latter, in particular, are growing rapidly yet are poorly managed and inefficiently used. It is imperative to include all sources of government revenue in the budget and establish a sound public finance system.
Thirdly, a “sunshine project” is necessary to improve the transparency of public finance. Government budgets are usually approved by the legislature. In China’s case, however, the National People’s Congress (NPC) lacks both the necessary time and skills to do so. It is high time to strengthen NPC oversight of both the government’s budget and final accounts and subject all sources of government revenue to NPC scrutiny. Moreover, as spending on social programmes are closely linked with the needs of the people, it should be made more transparent and involve greater public participation if government-sponsored social programmes are to be better aligned to the needs of the people.
4. Reforming government performance evaluation
Building an effective welfare system and sponsoring more social programmes is a way of investing in human and social capital and likely to have a long-term positive impact on economic growth. While market mechanisms are sometimes ineffective in dealing with these issues, government intervention can also fail. To secure public support for the new welfare system, it is critical that official corruption, inefficiency and bureaucratism be uprooted.
The experience of Organisation for Economic Co-operation and Development (OECD) countries has demonstrated that a sound government performance evaluation system will help improve governance and efficiency. The China Development Research Foundation (CDRF) is to introduce OECD countries’ methodology and experience to China through joint study and training.
The Chinese Government has launched a major initiative to rebuild the country’s welfare system as part of its effort to improve the living standards of the 1.3 billion Chinese. More policies and measures are in the pipeline, and they will lead to positive change over the next three years.
1. Revamping the welfare system will help improve the living conditions of all people across China, but particularly those in the low-income bracket, thus leading to greater stability and harmony in society.
2. The people will have more incentives to spend. And as urbanisation advances, the domestic market will further expand (see Table 2).
Table 2: Level of consumer spending in China (yuan)
3. Labour productivity will grow, as will labour costs in China. This will put more pressure on the industries to modernise.
4. The service sector, from health to education, insurance, banking to real estate, will register robust growth.
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The United Kingdom was the first industrialised country the world has known. It was also the world’s first welfare state and the first country to reform it. China has much to learn from you.
The CDRF has received generous support in its work from the Government of UK and many British companies. The China Development Forum, which the CDRF hosts every year, has enjoy the support of such British companies as HSBC, Vodafone, BP, Shell, Rio Tinto, Anglo American and Tesco and benefited from the participation of their CEOs or Chairmen over the years. Our research and projects on social fairness, public finance, poverty elimination and children’s nutrition have had the support, financial or otherwise, of the UK Government’s Department for International Development and companies like Shell and HSBC. The CDRF also runs a successful programme with the Cambridge China Development Trust to train leaders and managers of large Chinese companies. So, last but not least, I wish to say a big thank you to the UK Government, various British companies and Cambridge University for your strong support to China’s reform and development endeavours!
Wen Jiabao, Government Work Report, 2007.
Wang Mengkui ed., China Social Security System Reform, China Development Press, 2001.
Chen Jiagui, Wang Yanzhong ed., Green Book of China Social Security System: China Social Security System Development Report (2001-2004), Social Sciences Academic Press, 2004.
National Bureau of Statistics of China, China Statistical Yearbook 2006, China Statistics Press, 2006.
UNDP, CDRF, China Human Development Report 2005, China Translation & Publishing Corporation, 2005.
CDRF, China Development Report 2006: Eliminating Poverty Through Development, 2007.
1 National GER in the higher education sector is calculated by dividing the total number of students enrolled at institutions of higher education nationwide by the population of the corresponding age group (i.e. 18-22 year-olds) that should be enrolled at the start of the academic year. “Gross” does not indicate rough approximation; it means students enrolled at institutions of higher education are calculated regardless of their age. In “net enrolment ratio”, only those belonging to the same age group as in the denominator (i.e. 18-22 year-olds) are calculated, excluding those who fall outside this range. Both indicators may be used to measure the level of higher education either in the past or the present. However, because it is difficult to know the age structure of enrolled students in any future year, GER alone is used in making predictions.