China's Stimulus Slights Human Capital

By ANDREW BATSON Beijing -- In its drive to avoid a sharp economic downturn, China plans to spend four trillion yuan ($581 billion) on a stimulus package that focuses on railways, airports and other hard assets. But just 1% of that sum is going to increased social services. That balance needs to be corrected, many scholars say, if China is to keep growing rapidly and improving living standards in the years ahead. More spending by its own consumers would both support growth and reduce reliance on exports, but that isn't going to happen unless the government eases the burden on families to provide for education, health care and old age. A healthier and better-educated populace should also be more productive. "You need investment in human capital to produce high growth rates in the future," says Khalid Malik, head of the United Nations Development Program in China. It's easy to understand why China is investing so heavily in infrastructure. Construction is the part of the economy that has slowed most sharply, and thus is most in need of support. Putting money into infrastructure has a quick payoff and is a tested strategy that China employed in 1998 to pull out of the Asian financial crisis. But improving infrastructure may not be enough to support long-term growth -- especially in China, which already has one of the highest investment rates of any major economy. Some worry that China could eventually go down the same road as Japan, which kept spending even after officials ran out of worthwhile projects. Yet weaving a social safety net has proved a particularly tricky task in China. President Hu Jintao and Premier Wen Jiabao have made social programs a higher priority, but spending has usually lagged behind government promises. In 1997, the government said it would spend 4% of China's annual gross domestic product on education by 2000. The goal was never reached. Last year spending totaled 2.8% of GDP. "We have no shortage of goals and targets. What we lack are specific policies and measures to achieve these targets," Zhao Dianguo, director of the department of rural social security at the Ministry of Human Resources and Social Security, said at a recent U.N. forum. In the U.S., expansion of social programs is a conventional part of measures to cope with economic downturns. Congress has already passed an extension of unemployment benefits, and more measures are likely in the stimulus package President-elect Barack Obama has promised to push through after he takes office in January. Options being discussed include increasing support for lower-income families' health-care costs, expanding food stamps and college grants, and further extending jobless benefits. Earlier, the administration of President George W. Bush offered tax rebates to boost consumer spending. But fiddling with personal taxes wouldn't help as much in China. That is because the country's nascent tax system covers so few people to begin with. And increasing social spending is surprisingly difficult in China because it is often unclear which parts of government are responsible for funding and operating the programs. China is a huge country with a bureaucracy to match: It has 31 provinces, 333 municipalities, 2,859 counties and 694,745 rural villages. For decades, there has been little direction on this issue from Beijing, which generally lets local governments fend for themselves financially. Local officials are often more interested in supporting industrial projects that boost their tax revenue than in expanding social programs that only cost them money. For instance, the program to support incomes of the worst-off -- the urban minimum living allowance, often known by its Chinese shorthand dibao -- reaches only a fraction of the people who are eligible for it, and its rolls haven't significantly expanded in recent years. Beijing often doesn't have the means to control how money is spent locally, where priorities are different. While local officials complain of unfunded mandates for new programs, central officials worry that any money they send to the provinces will get lost. "The central government has great difficulty in monitoring local government spending," says Mark Williams of Capital Economics in London. The lack of much of a social safety net is one reason Chinese consumers save so much. Urban households put away more than a quarter of their income, and that proportion has been gradually rising. That thrift is less a sign of virtue than of the great pressures on most families. Many of China's public institutions collapsed in the transition to a market economy and have mostly not been replaced. In today's China, welfare for the poorest and pensions for the elderly are minimal. There is little government or private health insurance. So families need to pay for education, health care and to support aged parents -- expenses that are broadly covered in Europe and to a lesser extent in the U.S. Optimists point out that China's government has been building up social programs for the past couple of years, such as free primary education and expanded health and welfare benefits for the rural poor. Though they are small now, the new programs mean the government may now be better able to live up to its promises. The government says improving living standards is a priority of the stimulus plan: It has promised to increase state pensions and welfare payments to the urban and rural poor. There is also 4.8 billion yuan in new funds going to support thousands of clinics in poor rural areas. That isn't much compared with China's other spending plans, but it's a start. And China's leaders, facing many calls for additional stimulus measures that will more directly aid consumers, could well do more in coming weeks. But a longer-term fix also requires sorting out the division of labor between central and local governments -- a messy task that could take years.