Chinese medicine and wisdom

OECD Economics Department

The report entitled Challenges for China’s Public Spending: Toward Greater Effectiveness and Equity, published earlier this year, identified education and healthcare as priority areas for public spending. Why does China need to spend more on education and health?

Some public services in China have come under serious strain, even as the economy has boomed. This appears to be the case with health and education, whose present level of public spending seems to be out of line with the country’s development needs and goals.

The available data indicate that public spending on education and health was 2.8% and 0.6% respectively of revised GDP in 2004. These ratios are lower than in many developing countries such as Thailand and the Philippines, let alone OECD countries. Spending on education and health appears low not only relative to other countries, but also in comparison with China’s own national objectives.

Not that the authorities are unaware of the situation. Indeed, they have for instance long recognised the need for strong government support for education, which has been a key target of development policy and public expenditure during the past decade. As early as 1993, a medium-term goal for public expenditure on education (to be reached by the end of the century) was set at 4% of GDP. This was around the developing country average at the time.

The objective has not been reached. The same is true for healthcare: the objective set in the early 1990s for the growth of spending on health to exceed that of total spending has not been attained. Indeed, its share in total spending has fallen over the past ten years.

Despite the focus of the public policy debate on government inputs, outcomes are what ultimately count. In education, China compares favourably to other countries in terms of pupil-teacher ratio at the primary school level, but its secondary school enrolment rate and adult literacy rate are not only lower than in OECD countries but also lower than in many developing countries. Health outcomes show a similar pattern: in terms of life expectancy, China compares well with some OECD countries, but its infant and maternal mortality rates are even higher than in many developing countries. Moreover, there are large disparities among regions, and particularly between urban and rural areas. Focusing increased inputs in needy areas would help to improve the overall picture.

What seems clear is that most of that extra input will probably have to come from the public purse. Why? For a start, the private sector in China already provides a higher share of spending on education and health than in most other countries. In fact, the share of private spending on health is higher than it is even in the US.

In China’s case, with its already wide income disparities, raising the private share of spending would not necessarily improve the access of poor people to education and healthcare services, and could even reduce their access in many cases. Already, education is not free even at the primary level, with parental wealth largely determining access. Similarly, nearly 80% of the rural population and half of urban dwellers are not covered by health insurance and so cannot afford to visit a doctor.

This situation became evident during the SARS (severe acute respiratory syndrome) outbreak in 2003 and it complicated efforts to prevent the disease from spreading.

Much of the access problem can be traced to the large disparities in local government revenues between wealthier provinces in the east of China and poorer provinces in the interior, and between rural and urban areas. Many local governments, which bear the main responsibility for providing education and healthcare services, face a persistent shortage of revenues and cannot meet their expenditure mandates. China’s extensive system of inter-government transfers only partially makes up for these gaps. As a result, poorer localities are often unable adequately to provide even the most basic services.

The market can be harnessed to help overcome some of these problems. For instance, the usual practice in OECD countries is for government to fund primary and secondary education because of its broad social benefits, and allow the market to contribute finance to higher education, through fees for instance, because the private benefits to graduates are considered greater. In China, though, the emphasis is the other way around, with a relatively large share of government education spending channelled into tertiary education. Yet if more private money were coaxed into higher education instead, this would free up public resources for investment in primary and secondary schools.

The market cannot do it all though. The entry of private capital into the health sector has been insufficient to meet the increasing demand for healthcare services. True, the share of private hospitals has reached 10% of the total, but their overall role is limited by their small size. Also, the financial capacity of rural citizens is simply too weak to pay for their own healthcare. In short, to provide accessible healthcare for all, and to prevent major outbreaks of disease, increased government outlays will inevitably be necessary. China’s government will also need to spend more to alleviate the problems now facing schools in poorer areas.

However, money alone will not solve the problems. Better governance is called for to improve efficiency. Public funds are often used in inefficient ways, and this is reflected in the structure of spending. For instance, in education, the share of spending on infrastructure and equipment is lower than in other countries, while labour costs, particularly of non-teaching staff, are far higher. There are also serious inefficiencies in healthcare. For example, the insurance system fosters substantial overuse of prescription drugs in relation to less costly but equally effective alternatives that are not covered.

China is certainly not sitting on its laurels. Providing universal compulsory education for free and access to healthcare services for the poor, especially in rural areas, were among the major immediate objectives of public policy at the annual session of the Chinese National People’s Congress in March 2006. These steps are seen as critical to achieving the broader goal of raising living standards of rural citizens.

The goals are important for the growth and development of China as a whole, and not just for social reasons. Education and health affect human capital, productivity and competitiveness. Upgrading skills would also make it easier to adopt new technologies and hence strengthen another pillar of growth. For China, more well-managed public spending on health and education really could make a difference.

References

OECD (2006), Challenges for China’s Public Spending: Toward Greater Effectiveness and Equity, Paris.

OECD (2005), Economic Surveys: China, Paris.

OECD (2005), Governance in China, Paris.

©OECD Observer No 256, July 2006




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