Business at Oxford | The challenge of ending disparity

Business at Oxford | The challenge of ending disparity
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First Published: Sun, May 04 2008. 11 09 PM IST

Christine Wong
Christine Wong
Updated: Sun, May 04 2008. 11 09 PM IST
Christine Wong
The Chinese economy is booming; growth is running at around 9% as the world’s most populous nation races towards economic superpowerdom. But, in China’s economic miracle, not everyone is being reborn equal. A massive disparity in affluence exists between the increasingly prosperous urban classes and the millions of rural dwellers—average urban income per capita is more than three times the average rural income per capita. The Hu Jintao-Wen Jiabao administration plans to address this situation with its Harmonious Society Programme (HSP).
The question is, despite China’s incredible success, can the government afford to fund the programme, and can it manage its resources effectively to meet this goal?
Under China’s plans to build a “harmonious society”, the country’s leaders have pledged to put people first and increase the government’s commitment of resources to pro-poor, pro-rural programmes. This commitment is laid out in some detail in China’s 11th Five-year Plan. Ministers are already on record promising free compulsory education in rural areas, “a fair and equitable system of health care”, and a minimum living stipend scheme to cover both urban and rural citizens.
Illustration by Malay Karmakar/ MINT
With numerous programmes already rolled out, the main challenge for the government is to maintain funding. Under China’s system of decentralized management, these programmes are implemented by county and township governments, with the help of central government funding. This arrangement, however, may prove difficult under the current administrative system, where the central government’s reach becomes progressively weaker down the government hierarchy.
The challenge faced by decentralized local governments is highlighted by the New Cooperative Medical Scheme—a principal component of HSP. The scheme involves rural counties setting up a community-based risk pooling system to provide medical care for residents on a voluntary basis. The central government requires the schemes to set minimum contribution at ¥50 per person enrolled, to be funded from a ¥20 contribution from the central government, ¥20 from local governments (jointly from provinces, municipalities and counties), and ¥10 from personal contributions. Under this arrangement, county governments have substantial leeway to set coverage under the schemes to fit local needs.
With the majority of financing costs, including the administration and collection costs, as well as all the financial risks borne by the counties, some—especially the counties in the poor inland areas—are reining back plans for the provision of medical care, to the detriment of the local rural population.
Similar funding problems face the free rural compulsory education programme, under which the central government is rapidly increasing subsidies to local governments. Even so, the central subsidy at present covers only part of the revenues lost due to the abolition of school fees, leaving large gaps to be filled by local governments.
In other words, while HSP is improving rural services on average, its implementation is constrained by financial difficulties of local governments in the poorest regions—exactly the places where “harmony” is most needed.
Despite the current funding problems, money is not the problem. In a recent paper, I made estimates for a rural programme covering education, medical insurance, income support and infrastructural investment that are more generous than the current HSP policy. The total cost came to around ¥205 billion, just 7% of central revenues of ¥2.77 trillion in 2006, or 11% of central government transfers of ¥1.81 trillion.
To show that it is well within the central government’s compass to increase funding for the various initiatives under way, I will cite just two statistics from the finance minister’s recent report to the National People’s Congress: government revenues grew 32.4% in 2006, and the unbudgeted increase was ¥533 billion.
The future success of HSP is more likely to be bound up with the administration of the project and, in particular, its financial organization, rather than the government’s overall ability to pay. At present, the low input, in percentage terms, of central government money towards rural social services means the central government has less control over outcomes. This is especially true given the decentralized government system and an apparent lack of robust accountability and governance provisions.
At the heart of the problem are inadequate intergovernmental fiscal arrangements, which mean that local governments do not always have the resources required to implement policy decisions. There is also a problem with a lack of sound information finding its way back up the government chain.
For example, figures reported by the ministry of finance for budgetary expenditure on rural compulsory education are 10% greater than those from the ministry of education. It is a similar story for data reported by different levels of the administrative hierarchy. In 2004, for example, the sum of central and provincial expenditures on education exceeded the “national consolidated” figure by 22%. Data on social indicators and service outputs are even weaker. Metrics such as school enrolment numbers, hospital bed usage, and so on, are widely considered unreliable.
If China is going to sustain its dramatic economic progress, it will need to share the benefits across society, and that includes the rural populace. At present—as is clear from a raft of statistics and research—millions of Chinese have yet to participate in the economic miracle. What is required is public sector reform that addresses issues such as imbalances in the intergovernmental fiscal system, weak accountability of local governments to the central government, and greater transparency facilitated by a more robust system of information gathering and reporting.
Tackle these issues, and Chinese society may be a little more harmonious. For a large country such as China—and India—the key will lie in building an effective fiscal federalism that governs the relationship between the central and local governments.
Christine Wong is a senior research fellow in Chinese studies at the School of Interdisciplinary and Area Studies and the Saïd Business School, University of Oxford.
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First Published: Sun, May 04 2008. 11 09 PM IST