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Double Movement in China

This paper traces China's move towards a market economy in the mid-1980s, the near triumph of market forces in the 1990s, and the countermovement this engendered as inequalities between the rich and poor increased and social security networks collapsed. It focuses on the country's regional and healthcare policies to illustrate how it has dealt with issues of inequality and insecurity over time. The prevailing view now is that the market is necessary but it must be embedded in society. And the state must play an active role in the market economy to prevent a disembedded and self-regulating market economy from dominating society.

CHINA SINCE 1978

Double Movement in China

Shaoguang Wang

This paper traces China’s move towards a market economy in the mid-1980s, the near triumph of market forces in the 1990s, and the countermovement this engendered as inequalities between the rich and poor increased and social security networks collapsed. It focuses on the country’s regional and healthcare policies to illustrate how it has dealt with issues of inequality and insecurity over time. The prevailing view now is that the market is necessary but it must be embedded in society. And the state must play an active role in the market economy to prevent a disembedded and self-regulating market economy from dominating society.

Shaoguang Wang (wangshaoguang@cuhk.edu.hk) is with the Department of Government and Public Administration, Chinese University of Hong Kong and the School of Public Policy and Management, Tsinghua University.

Economic & Political Weekly

EPW
december 27, 2008

T
he concept of “double movement” is adopted from Karl P olanyi, whose seminal book, The Great Transformation: The Political and Economic Origins of Our Time, was published in 1944. In Polanyi’s view, “the idea of a self-adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness” (2001: 3). Thus, the extension of the “self-regulating” market is bound to provoke a countermovement aiming at protecting society against “the ravages of this satanic mill” (ibid: 77).

Polanyi’s analytical framework is helpful for us to under- stand the great transformation China has experienced in the past decades.

Great Transformation

The Chinese economy in the traditional sense was a moral economy, where economic relations were embedded in kinship relations and ethical norms (Shuming 2005, Chapter 5). After the People’s Republic of China was founded in 1949, social values changed drastically, with collective interests and national interests replacing familial affections to become as the overriding s ocial value. In spite of the change in ethical connotation, the subordination of economic relations to social ethics remained i ntact. While the new regime did pursue economic development, efficiency and economic growth were taken only as secondary concerns, and markets did not play a very big role in the overall arrangement of the economic system. Under the planned (moral) economy, two mechanisms – the “soft budget constraint” and the “iron rice bowl” – helped embed economic relations into social and political relations. “The soft budget constraint” meant that the activities of an economic organisation (either a firm or a lowlevel government department) were not constrained by its own resources. In the event of failing to make ends meet and suffering deficits, it could expect help from an outside organisation (for example, an upper level government department) to survive without having to bear the brunt of disruptive change under the Darwinian law of “survival of the fittest”. “The iron rice bowl” meant permanent job security for everyone; nobody was exposed to the risk of unemployment regardless of performance. The soft budget constraint and the iron rice bowl obviously were not conducive to competition and maximising efficiency; they became the twin pillars of the planned economic system because the system focused on equality between economic entities and providing b asic subsistence support for all, even at the expense of efficiency.

In the planned (moral) economic system, communes and brigades in rural areas and work-units in urban areas were not only economic entities but also social and political entities. They o ffered job opportunities to their members and paid them without much difference, and also provided them and their dependents with various social benefits such as nurseries, kindergartens, schools, healthcare, pensions and funeral services. This included financial assistance to the disabled and the families of members who had died. In other words, welfare was furnished by communes and brigades in rural areas and work units in urban areas and it did not have to be provided directly by the government. That is why such a system was called the “Maoist moral economy” (Perry 1999). This situation lasted until the early stage of reform and opening up in the mid-1980s.

With reform and opening up, China changed its guiding ideology. Instead of pursuing basic assurance and equality, d ecisionmakers highlighted the overriding importance of develop ment and aggressively pursued economic growth. Hence came the s logan, “Top priority for efficiency, due consideration for equity”, but “due consideration” was soon pushed into the background. In pursuit of efficiency and a maximum economic growth rate, everything else had to give way. What was sacrificed included, among other things, fairness, employment, workers’ interests, public health, medical care, eco-environment, and national d efence construction. At that time, the leadership at all levels a ppeared to have intentionally or otherwise accepted the “trickle down hypothesis” advocated by neoliberal economists: as long as the economy kept growing and the pie became bigger, all other problems would be solved eventually.

Against the backdrop of such ideological change, China underwent an evolution from moral economy to market society in three stages. The first stage saw the emergence of markets (1979-84). At this stage, markets for consumer goods began to emerge on a

Figure 1: Gini Indices of Income Inequality in China (1981-2002)1

0.5 0.45 0.4 0.35 0.3 0.25 0.2 Without adjustment for cost of living differences With adjustment for cost of living differences

1980 1983 1986 1989 1992 1995 1998 2001 Source: Martin Ravallion and Shaohua Chen, “China’s (Uneven) Progress Against Poverty”, World Bank Policy Research Working Paper No 3408 (16 June 2004).

sporadic basis but played a very limited role in the overall economy. At that time, government interference in economic activity was still very pronounced, and non-market institutions and relations retained an upper hand. The second stage witnessed the emergence of market systems (1985-92). At this stage, a set of i ntertwined markets of production factors began to emerge, including the labour market, capital market, foreign exchange m arket, and land market. By this time, market principles such as equivalent exchange, the law of supply and demand, and competition began to work in economic lives, yet without making a big foray into non-economic areas. The third stage ushered in the

52 birth of market society (1993-1999). At this stage, the market threatened to become the dominant mechanism integrating all society.

The three-stage transformation ruined the foundation of the moral economy. The relationship between treasury coffers at different levels shifted from “eating from the same big pot” to “eating from separate kitchens”; the relationship between state treasuries and enterprises changed from the soft budget constraint to the hard budget constraint. While affording farmers’ latitude or freedom in production, an all-round contract system was enforced in rural areas to free communes from collective responsibility for individual farmers, and labour system reforms were meant to break-up the iron rice bowls for urban employees. When rural villages and urban enterprises were gradually extricated from their social responsibilities, evolving into pure economic entities, villagers and employees lost pensions, healthcare and welfare benefits, and had to spend money buying them. In P olanyi’s words, when China was transformed into a market society, the economy was “disembedded” from society and came to dominate it. From a grand historical perspective, the evolution from a moral economy to a market society was an unprecedented transition for China.

Rise of a Countermovement

Polanyi was absolutely right when he argued that a “disembedded,” fully self-regulating market force is a brute force, because creating it requires that human beings and the natural environment be turned into pure commodities and this assures the destruction of both society and the natural environment. Although China experienced perhaps the highest economic growth in the world for 30 years, the blind pursuit of high GDP growth rates also gave rise to a series of severe problems. Such problems were not very pronounced in the initial stages of reform, but as time went by, they became increasingly noticeable. By the late 1990s, as China was entering the stage of market society, some problems became too dreadful to ignore.

The two gravest challenges were rising income inequality and mounting human insecurity. China used to be an egalitarian society with income inequality well below the world average. However, it experienced a steep rise in inequality after it embarked on market-oriented economic reforms. By the turn of the century, China’s overall income distribution had become much more unequal than ever before in the history of the People’s Republic (Figure 1). More importantly, in a market society, people’s livelihoods were completely dependent on markets. Since markets serve only solvent people, the welfare of people depended on their solvency. Therefore, ordinary workers and farmers were less secure than before. In the face of massive unemployment, schooling difficulties and medical challenges, millions of people became keenly aware of the lack of economic and social security. In their view, the burdens i mposed on them by a market society were too heavy, even unbearable in some cases.

Against this background, the consensus on market reform fell apart. The classes whose interests were hurt or insufficiently e nriched by reform no longer lent unreserved support to new

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1999 Go-West programme.

2002 Urban minimum income guarantee programme.

2003 Rural fee and tax reform; re-establishing the rural cooperative medical system (CMS).

2004 Lowering agricultural taxes; introduction of three types of rural subsidies.

2005 Partially abolishing agricultural taxes.

2006 Abolishing all agricultural taxes; introduction of comprehensive rural subsidies; free compulsory education in the western and central rural areas; public housing for the urban poor.

2007 Free compulsory education in all rural areas; basic health insurance for all urban residents; CMS for more than 80% of the rural population; promoting the rural minimum income guarantee programme; pensions for migrant workers; promoting public housing for the urban poor.

2008 Free compulsory education for all; CMS for all the rural population.

market-oriented reform initiatives. On the contrary, they fretted about everything that had the label of “market” or “reform” for fear of getting hurt again. These people kindled hostility towards officials abusing power for personal gains, upstarts squandering money, and glib-tongued scholars making fortunes out of “ reforms”. They generally felt that China’s reforms had gone astray and it was time to stress economic and social development in a coordinated way. Thus arose a protective countermovement attempting to resist economic “disembedness”.

The Chinese government then began to pay more attention to “due consideration” for fairness or equity. If “due consideration” had in the past amounted to lip service, it now made a concerted effort to re-embed the economy into social relations through decommercialisation. Decommercialisation meant treating all services related to human subsistence (such as healthcare, education, and pensions) as basic human rights, not as market transactions. The purpose of decommercialisation was enabling people to maintain “a livelihood without reliance on the market” ( Esping-Andersen 1990).

From 1978 to the mid-1990s, China had only economic policies and no social policies. Starting from around the turn of the century, social policies began to re-emerge in the country. Table 1 lists a set of social policies introduced in recent years, which can be usefully divided into two large categories – the purpose of the first category is to reduce inequality; and the second is to lessen human insecurity.

Due to limited space, it is impossible to discuss the “double movement” in all policy areas. In what follows, we focus on two areas – regional policy and healthcare policy – to illustrate how China has dealt with issues of inequality and insecurity over time.

Regional Policy

Uneven regional development is a universal phenomenon. It exists in almost all large countries, developing and developed alike. Examples include India, Indonesia, Mexico, Brazil, Canada, Great Britain, France, Italy, and the United States. China is no exception. Covering 9.6 million square kilometres, China is the third largest country in the world. Given its gigantic size, it is inevitable that there are significant spatial variations in resource endowment, the sectoral distribution of economic activity, and levels of s ocio-economic development.

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When the Chinese Communists came to power in 1949, they inherited an extremely lopsided economy. Industrial activities were to a large extent concentrated in what was then called Manchuria (the north-east provinces of Heilongjiang, Jilin, and Liaoning) and a few major coastal cities such as Shanghai and Guangzhou. Although the coastal provinces accounted for only 11.34% of the land, they were the source of 77.6% of the total industrial output. Western China, which formed roughly half the country, lagged far behind with only 8% of the total industrial output originating from it (Sheng and Feng 1991).

The new Communist government made a strong commitment to achieving balanced distribution of productive capacity and income (Bo 1991). The First Five-Year Plan (1953-57) of the People’s Republic gave high priority to the development of new industrial bases in north, north-west, and central China. Among the 694 industrial projects completed during this period, most were l ocated in the inland areas. But Communist Party Chairman Mao Zedong hoped to see more changes. In his famous 1956 speech, “On Ten Major Relationships”, he dwelt on the relations between the coast and the interior. In his view, it was both e conomically irrational and politically unacceptable to have 70% of industry in the coastal areas while leaving the rest of the country more or less untouched by modernisation. To speed up the industrialisation of the interior, he suggested that new industrial facilities be located in the interior. Only by doing so, he believed, would industrial activities become more evenly distributed.

Indeed, Mao’s era was marked by an unprecedented spatial redeployment of productive capacity. Thanks to its strong extractive capacity, the central government under him had firm control over the geographic distribution of resources. The investment policy of this period clearly favoured backward regions. While more developed provinces experienced substantial outflows of revenues, less developed provinces received enormous infusions of funds for infrastructure and industrial development.

Moreover, in the mid-1960s, out of security considerations, China began a campaign to construct the Third Front, which covered all the western provinces and some parts of the central provinces. From late 1964 to 1971, hundreds of large and mediumsized industrial enterprises were moved from coastal provinces to inland provinces and more were built on site. Altogether, between 1956 and 1978, more than 2,000 large and medium-sized enterprises were established in west and central China. This shift in investment and the establishment of new industrial centres powerfully boosted industrial growth in the traditionally less d eveloped regions. In 1965, for example, the ratio of agriculture to light industry to heavy industry for central China was 71:15:14. By the end of the Fourth Five-Year Plan period (1971-75), it had become 44:22:34. During the same period, the ratio for west C hina changed from 69:16:15 to 40:23:37. In addition to financing investments in less developed regions, fiscal transfers were used to reduce regional inequality in income and provide public goods and services (Sheng and Feng 1991). Government transfers made it possible for consumption to be much more evenly distributed than output. As a result, Mao’s era witnessed a strong trend t oward greater equality in per capita consumption across the country.

After Mao’s death in 1976, his egalitarian regional development strategy was criticissed as too costly in terms of comparative advantage, production efficiency, and national growth foregone. Underlying the reform that followed was a fundamental transformation of development philosophy. Chinese policymakers then gave top priority to rapid aggregate growth. This predominant concern with growth made them less willing to sacrifice growth for such goals as balance and equity. Instead, they were ready to tolerate a certain degree of inequality or widened disparity. It was believed that if certain regions were allowed to first prosper, their affluence would eventually trickle down to other regions.

Figure 2: Coefficient of Variance of Provincial Per Capita GDP (1978 constant price)3

1.10 1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 1978 1980 1982 1984 1986 1988 1900 1992 1994 1996 1998 2000 2002 2004 2006 2007 CV CV (excluding BTS)

Which provinces should become prosperous first? It was the coastal provinces, of course, because they enjoyed considerable advantages (a large number of skilled workers, a high level of technology and managerial sophistication, and a relatively welldeveloped infrastructure) at the beginning of the reform period. For this reason, a so-called “gradient theory” dominated the thinking of Chinese policymakers for much of the 1980s and early 1990s. The theory divided China into three large geographic r egions – the eastern (coastal), central, and western – and likened them to steps on a ladder. According to it, the government had to first capitalise on the advantages of the coast. After the coast was sufficiently developed, attention had to be turned to the central region. The western region would have to wait p atiently for its turn. If this strategy had unfavourable implications for equity, its advocates advised people to consider its e ffects in the long term. In the long term, the theory promised, the fruits of development would eventually percolate to everyone in the country.

Mainstream economists have long argued that regional disparity is an abnormal phenomenon that will not last. They predict an inverted, U-shaped pattern of regional development in the n ational growth path, namely, regional gaps tend to increase in the earlier stages of development and diminish in the later stages (Williamsom 1965). Mainstream economists who studied China also believed that, coupled with economic growth, the operation of market forces by themselves would bring about a convergence of regional income (Tianlun, Sachs and Warner 1996). This p redication has proved wrong.

Figure 2 shows the changing track of the coefficient of variance (CV) of provincial per capita GDP from 1978 to 2007 (in 1978 constant price).2 It plots two measures of relative dispersion. The top and bottom curves differ only in sample size: the former includes Beijing, Tianjin, and Shanghai, whereas the latter excludes the three cities. We separate the two curves for a simple reason: although the three metropolitan areas enjoy provincial status, it would be problematic to treat them in the same way as we treat other provinces, because they are far more urbanised and industrialised than the others. As a result, they enjoy extraordinarily high levels of per capita GDP relative to the national a verage. For this reason, treating these metropolitan areas as

o rdinary pro vinces might greatly bias our analysis of regional disparities. In order to present an unbiased picture, it is necessary to segregate two sets of statistics – one including the three cities and the other excluding them. As Figure 2 reveals, changes in regional disparities display different patterns when the three cities are excluded.

The top curve represents changing CVs for the whole nation during the period 1978-2007. The time path yields an S curve. In other words, relative dispersion declined sharply between 1978 and 1991, but the falling trend was reversed afterwards. The years between 1992 and 2004 witnessed an upsurge in regional inequality before the trend reversed again.

The bottom curve (excluding figures for Beijing, Tianjin, and Shanghai) yields two noteworthy changes in CVs. First, CVs become much smaller. Rather than fluctuating between 0.80 and 1.05, it now oscillates in the neighborhood of 0.35-0.45. In other words, once extreme cases are excluded, relative dispersion in per capita GDP does not appear to be alarmingly large in China. Second, the patterns of change in CVs are more or less the same but the magnitudes of change are much smaller. Regional dispersion decreased only marginally in the initial years of reform, but the years following 1985 saw a steady increase in relative dispersion, especially during the 1990s. Consequently, by 2000, the CV was 0.14 percentage points higher than that in 1978 (increasing from 0.31 to 0.45). Since then, regional disparity has begun to level off and even shown signs of falling.

It seems reasonable to divide the years after 1978 into three sub-periods. Before 1985, when the role of market forces was at best marginal in the overall economy, the general trend was for relative dispersion to fall. But the trend was reversed in the mid1980s. As market forces played a bigger and bigger role in the economy, the country witnessed a sharp upsurge in regional inequality in the 1990s through the first years of the 21st century, no matter whether or not the three centrally administered metropolises were counted (Shaoguang and Angang 1999). Having e xperienced a secular increase in regional disparity for more than a decade, China seems to have entered a period of stabilisation or ever convergence in the last few years. Thus, the case of China does not support the inverted-U hypothesis. If anything, Figure 2 yields an S curve.

Why have regional disparities stopped widening? As early as in 1993, deputies from the interior provinces, especially those from the west, began to pour out their grievances against the centre’s pro-coastal bias at the annual sessions of the National People’s Congress. In 1994, even a report by the State Planning Commission sounded a serious warning that if problems caused by growing

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regional gaps were not settled properly, they might one day b ecome a threat to China’s social stability and national unity. Facing growing pressure, the central government decided to r everse its coastal development strategy in 1995. The new guiding principle was to “create conditions for gradually narrowing down regional gaps”. This principle was embodied in China’s Ninth Five-Year Plan (1996-2000), which promised to increase central support to the less-developed regions in the central and western parts of the country. But it was not until September 1999 that China formally launched a “Go West” programme, which was aimed at narrowing the socio-economic gaps between the coastal provinces and the western provinces.

Figure 3: Fiscal Transfers from the National to Sub-National Government (RMB billion) 2000

1800

1600

1400

1200

1000

800

600

400

200

0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

The main measure to reduce regional income disparity was to increase the central government’s fiscal transfers to the provinces, especially the economically least developed provinces in central and western China. Figure 3 shows that since 1994 the central government’s fiscal transfers have increased steadily. After 1999, when the Chinese central government introduced the policy of “Go West,” the amount increased every year and exceeded RMB 1,800 billion in 2007, which was 7.6 times the amount in 1994.

Which area got most benefits from the fiscal transfer system? According to the statistics of the Ministry of Finance, during the period 1994-2005, 10% of the central fiscal transfers went to the eastern coastal provinces, 44% to the central provinces, and 46% to the western provinces. Central fiscal transfers have helped r educe both vertical and horizontal fiscal imbalance and thereby regional inequalities. In 1994, the GDP growth rates differed v astly across regions, ranging from 12% in the north-eastern r egion to 19.5% in the coastal regions. After 1994, the growth rates began to converge. In 2005, the growth rates in the eastern, central, western, and north-eastern areas were 13.13%, 12.54% per cent, 12.81% and 12.01%, respectively. The difference became quite small (Feng and Xuan 2006).

The convergence of economic growth rates in different regions was helpful in preventing regional disparity from growing, and might even have reduced it. As Figure 2 demonstrates, the turning point was 1999 when the central government announced the policy of “Go West”. Although regional disparity continued to expand, it levelled off after 2000. In 2004, the expansion tendency was reversed for the first time since 1990. Since then, regional

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disparity has been reduced.4 It is a miracle that the fiscal transfer system has brought about such notable changes within such a short period of time.

Healthcare Policy

In Mao’s era, when China placed great emphasis on egalitarian principles, the government made enormous efforts to establish a healthcare system that could provide all citizens with access to basic health services at an affordable price.

In the urban areas, the healthcare finance system consisted of two schemes: (1) the Government Insurance Scheme (GIS) for all governmental employees (including retirees), disabled veterans, college teachers and students, and employees in non-profit

o rganisations, and (2) the Labour Insurance Scheme (LIS) for employees (including retirees) of all state-owned enterprises (SOEs) and some collective enterprises. The beneficiaries of the GIS could receive largely free outpatient and inpatient health services, e xcluding a small number of items, such as registeration fees, tonics and plastic surgeries. Moreover, there were avenues through which coverage could be extended to members’ dependents. The LIS provided its members with benefits similar to those provided by the GIS, and reimbursed half of medical expenditures to their immediate dependents (Henderson et al 1995).

In the countryside, China developed a nationwide rural health insurance system called the Rural Cooperative Medical System (CMS). The CMS was financed from three sources: (i) premiums between 0.5 and 2% of a peasant family’s annual income, (ii) the village’s collective welfare fund, and (iii) government funding used to defray health workers and acquire medical equipment (Yuanli 2004). Rural residents who participated in the CMS r eceived such benefits as free visits to the village clinic, free drugs or co-payment for drugs at the village clinic, co-payment for r eferred hospital visits and referred hospitalisation (Liu and Cao 1992). By the mid-1970s, about 90% of China’s rural villages were covered by the CMS schemes.

Thus, on the eve of the economic reform, China’s healthcare system provided an inexpensive and accessible medical care to virtually all urban residents and 90% of rural residents even though the quality of medical service was not very high (World Bank 1997).

During this period, China’s economic base was weak and the material standard of living was very low; nonetheless, in the field of health, China was a model for the developing world.5 There are two indicators that are commonly used internationally to m easure a nation’s health status. One is the average life e xpectancy; the other is the IMR. When the communists came to power in 1949, China’s health indicators ranked among the l owest in the world. By the late 1970s, China’s life expectancy had i ncreased from around 35 years to 68 years, and the infant m ortality rate decreased from about 200% per thousand to 34 per thousand (Blumenthal and Hsiao 2005).

Since the start of the post-Mao economic reforms, China has experienced 30 years of sustained economic growth; science and technology have made considerable progress; and above all per capita health spending has increased greatly. In these circumstances, one would expect major gains in healthcare; the results, however, have been disappointing. Some may say that once life expectancies approach age 70, further gains come more slowly. Yet trends in five countries or regions in the Asia-Pacific indicate otherwise. From 1980 to 1998, China’s average life e xpectancy rose by two years, but Australia, Hong Kong, J apan, New Zealand, and Singapore, which had started from higher bases, increased their average life expectancy by four to six years. Sri Lanka, whose base had been similar to China’s in 1980, increased average life expectancy by five years. Similar d isparities can be seen in changes in infant mortality rates ( Shaoguang 2004).

Figure 4: Structure of Total Health Expenditure

100

90

80

70

60

50

40

30

20

10

0

Government Social Insurance Out of-Pocket 16% 26.4% 60% 49.3%

1965 1970 1975 1980 1982 1984 1986 1988 1900 1902 1904 1906 1908 2000 2002 2004 2005 2006

How could China build-up one of most affordable and equitable healthcare systems in the world and make remarkable strides in improving the health status of its population during the Mao’s era when the country was dirt-poor? Why is it that despite a stronger economic base, higher scientific and technical p rogress, and greater expenditures, the performance of the n ation’s healthcare system has been so disappointing under m arket-oriented economic reforms? To answer these questions, we need to look into a myriad of factors. But it is clear that China’s healthcare system decayed from a model for the developing world to an embarrassment for itself largely due to the g overnment’s lack of willingness and capacity to tackle the issue of healthcare inequity.

The government’s unwillingness and inability to shoulder the responsibility of primary healthcare for all is evident in Figure 4. Before the economic reform, individual payments accounted for less than 20% of the country’s total health expenses, while the government’s fiscal allocations and social insurance accounted for more than 80%. In the early phase of economic reform, the social expense began to drop slowly. However, the share of governmental allocations went up and once reached 40%. At that time, although people had difficulty in finding good doctors, they did not have any problems paying for their healthcare.

The turning point came in the mid-1980s when market-oriented reforms accelerated. As reform deepened, market ideology s teadily infiltrated the health sector, becoming the effective guiding principle of health reform. This was evident in that official documents dealing with health reform were imbued with such buzzwords as “private initiative”, “market incentive”, “competition”, “choice”, and “individual responsibility”. Behind all these trendy catch phrases lay an unstated premise: the market would increase the efficiency of resource allocation, including health

56 r esources. Ideological shift aside, economic reform also critically enfeebled the government’s ability to deliver social welfare (Shaoguang and Hu 2001).

As the government became less willing and able to finance health, both the GIS and LIS began to crumble. Eventually, a new Urban Employees’ Basic Medical Insurance System emerged in 1999 to replace the two old urban healthcare schemes. Unlike the GIS and LIS, the new system, financed by joint contributions from employers and employees, aimed to provide a basic benefit package to all employees and retirees in the formal sector, including government employees and employees of both state and nonstate enterprises. However, employees’ dependents were no l onger covered. Also excluded were the self-employed, workers in informal sectors and migrant workers. Whereas the coverage of health insurance was nearly universal for the urban population at the onset of economic reforms, by the end of 2003, only roughly half of urban residents were insured by some schemes, including 30% by the newly established Urban Employees’ Basic Medical Insurance System.

Meanwhile, the once renowned rural CMS also collapsed. After the abolition of people’s communes in 1983, households replaced collectives as the basic productive unit in rural areas and the government took a laissez-faire attitude towards the CMS. Without support from the collective economy and the government, the rural CMS quickly broke down. In 1985, only two years after the abolishment of the people’s communes, the number of villages covered by the CMS decreased from 90% in 1979 to 5%. The c overage of the rural CMS remained below 10% until very r ecently because the government had no intention of funding the rural medical system.6 Instead, it insisted on the principle of “ premiums being paid mainly by individuals themselves, supplemented by collectively pooled subsidies and supported by g overnment policies”.

Both government allocations and social insurance dropped dramatically and almost reached a nadir at the beginning of the new century. By 2001, the share of government allocations in t otal health expenses had decreased to 15.93% and social insurance to 24.1%. Their combined share was barely 40%. This shrinkage led to people’s out-of-pocket payments skyrocketing. In 1975, Chinese people’s out-of-pocket payments only accounted for 16% but from 2000 to 2001, it increased to nearly 60%. In other words, China’s healthcare system effectively became a system funded mainly by private sources while public sources only filled up blanks here and there. This transformation fundamentally shifted the responsibility for healthcare from the government or society to individuals. Generally speaking, in developed countries, out-of-pocket payments account for 27% of total healthcare expenses; in transition countries, it is 30%; in other developing countries, it is 42.8%, and in least developed countries, it is 40.7%. Thus, compared to other countries, China’s healthcare system became one of the most commercialised in the world (Shaoguang 2004).

The problem is that the market only serves the consumers who are capable of paying the bill. Moreover, whatever gains market forces may engender, they are incapable of resolving either the problem of fairly allocating health resources or the problem of

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asymmetrical distribution of information between patients, i nsurers, and providers. Relying on a free market to finance and provide healthcare would inevitably lead to reduced access to health services for the poor and the vulnerable as well as i nefficiency. This was precisely what happened in China. The marketisation of healthcare was particularly detrimental to the well-being of the poor. While the rich now could enjoy first-class

Figure 5: Coverage of Basic Medical Insurance Schemes for Urban Residents (Million) 270

240

210

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150

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90

60

30

0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Active employees Retirees Migrant workers Other urban residents

medical care of international standards, the poor were often forced to endure minor health problems and put off dealing with major health conditions. Much worse, the malicious cycle of “ illness due to poverty” and “poverty due to illness” became a prominent social problem in both urban and rural China by the turn of the century (Shaoguang 2008).

This was the background of the countermovement in the area of healthcare, which has surfaced in the last several years. Since the beginning of the new century, the Chinese government has been gradually moving away from the reform strategy that is based on “the Washington Consensus” and adopting what Joseph Stiglitz calls “the second generation reform” that is concerned as much with economic growth as with distributive justice.7 Thus, the government sets out to redefine the appropriate scope and n ature for its involvement in economic and social affairs. The policy reorientation manifests itself in that the government has since then plunged more and more money into safety net building in general and healthcare in particular (Figure 4).

More specifically, various medical insurance schemes have d eveloped come up very fast (Figure 5). The number of active employees who joined the Urban Employees’ Basic Medical Insurance System, for instance, multiplied from 15.1 million in 1998 to

134.2 million in 2007. It needs to be noted that this basic medical insurance scheme also covers retirees, so those people who tend to have fragile constitutions can benefit from it. During the same period, the number of retirees under it increased from 5.6 million to 46 million, accounting for about 80% of them, proportionally much higher than the younger active employees.

Medical insurance for migrant workers is more complicated because they are unwilling to participate in insurance schemes due to their young age and high mobility, and because their employers are also reluctant to pay a share. As early as September 2002, the Shanghai Municipal Government promulgated The I nterim Regulations on Comprehensive Social Insurance for M igrant Workers and set up a comprehensive social insurance

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system for non-local personnel working in Shanghai. In March 2003, the Chengdu Municipal Government enacted The Interim Regulation on Comprehensive Social Insurance for Non-Urban Resident Employees and implemented comprehensive social i nsurance measures for migrant workers in the province. The Ministry of Labour and Social Security promulgated The G uidance Opinions on the Participation of Self-Employed Urban Personnel in Basic Medical Insurance and The Opinions on Pushing Forward the Participation of Mixed Ownership Enterprise and Non-Public Ownership Economic Entity Employees in Medical Insurance successively in 2003 and 2004, expressly requiring each local labour and social security authority to include migrant workers in the scope of medical insurance. Meanwhile, self-employed m igrant workers were required to participate in medical insurance pursuant to applicable rules and regulations.

A turning point occurred in 2006. At the end of March, the State Council issued The Opinions on Solving Peasant Worker Problems, stressing “the top urgency of solving medical care problems for migrant workers on serious diseases” and placing migrant worker medical insurance issues in a prominent position. The Ministry of Labour and Social Security subsequently promulgated The Opinions for Implementation. In mid-May, the ministry issued The Circular of Charting a Course of Action for Migrant Workers to Participate in Medical Insurance, setting an objective of “striving to enable the number of migrant worker participating in medical insurance to exceed 20 million by the end of 2006 … striving to include all migrant workers (who have entered into long-term working relationship with urban employers) in the scope of medical insurance by the end of 2008.” This signalled a new “push” stage in migrant worker medical care. Each locality responded swiftly with “opinions”, “regulations” and “measures” to solve migrant worker medical care problems.8 The number of migrant workers participating in medical insurance reached 23.67 million by the end of 2006 and rose to 31.3 million by the end of 2007. The government’s target for 2008 is to cover no less than 40 million.

In recent years, some cities began experimentally providing medical care to urban non-employees and about 10 million people had joined the medical care insurance scheme by the end of 2006. To realise “seamless” coverage for all urban residents, the State Council decided at an executive meeting in April 2007 to pilot a basic medical insurance system for residents in 88 cities. This new system was aimed at covering all those who were not eligible for the basic medical insurance system for urban employees, such as elementary and high school students, children, the elderly, youngsters, and other non-employed urban residents. By the end of 2007, an additional 42.91 million urban residents had joined the scheme. Then, in February 2008, the central government decided to expand the experiment to half of all Chinese cities and 90 million urban residents by the end of the year, and reach 80% of cities by 2009. In 2010, this medical insurance scheme is expected to be fully established in all cities in China (Meng 2007).

As early as in the late 1980s, the Chinese government had pledged to the World Health Organisation that China would fully improve primary healthcare in rural areas by 2000 (Ministry of Health 1990). To this end, it set out on “restoring and rebuilding” the rural cooperative medical system. However, the government had no intention of shouldering the responsibility of financing the system. Instead, it insisted on raising “funds mainly from individual contribution, supplemented by collectively pooled subsidies and supported by government policies”. So, after a decade-long endeavour, the rural cooperative medical system was not restored as anticipated and its coverage rate

Figure 6: Coverage of Rural Cooperative Medical System (%)

100 90 80 70 60 50 40 30 20 10 0 De-communisation New CMS

1976 1978 1980 1982 1984 1986 1988 1990 1902 1904 1906 1908 2000 2002 2004 2006 2008

remained below 10%. Worse, even such a poor coverage base risked being eroded, thereby falling prey to a vicious circle of “start-retreat-collapse-restart”, “getting started in the spring, going bust in the fall”.9

In October 2002, the Chinese government adopted a new approach towards rural cooperative medical system. In a jointly promulgated The Decision on Rural Healthcare, the Central Committee of the Chinese Communist Party and the State Council declared that the country would gradually set up a New Cooperative Medical System (NCMS) and ultimately expand the system to cover all rural residents by 2010.The difference between the NCMS and the traditional CMS lies in public finance involvement. In addition to an annual contribution from participating rural residents (RMB 10 per head in 2003, RMB 20 per head in 2008), local treasuries offer a specific annual subsidy for each NCMS participant (RMB 10 per head in 2003, RMB 40 per head in 2008), while the central treasury provides an annual subsidy for each farmer participating in the NCMS in the central and western regions (excluding cities) by way of earmarked transfer payments (RMB 10 per head in 2003, RMB 40 per head in 2008).10

The injection of public funds has vigorously pushed forward the development of the NCMS (Figure 6). In 2003, when the Ministry of Health conducted its Third National Survey on Healthcare Service, the rural CMS only covered 9.5% of the rural population. Five years later, by the end of June 2008, the new rural cooperative medical system covered all 31 provinces with more than eight million participants, accounting for close to 100% of China’s rural population.11

On 21 March 2007, the Executive Meetings of the State Council discussed and passed the “Outline of the 11th Five-Year

58 (2006-2010) Plan for Healthcare Development”, which required overhauling the country’s medical care system and setting up a basic healthcare framework covering all urban and rural residents by 2010. With efforts now focused on building four medical care networks (the Basic Medical Insurance System for Urban Employees, the Basic Medical Insurance System for Urban Residents, the Basic Medical Insurance System for Migrant Workers, and the New Rural Cooperative Medical System), China is moving steadily t owards its goal of “providing everyone with basic medical care”.

Summary

In the early 1980s, China began to march towards a market economy. At the outset, markets sprang up quietly in some corners of the economy; shortly after, market forces surrounded and encroached on the “plan” and “public ownership” components of the economy from all directions; finally, market forces crossed the boundary and spread across all society.

The market no doubt has magic power. Wherever it goes, a great deal of wealth emerges. The Chinese people who had once suffered from the material scarcity quickly went into a period of surplus. However, the market mechanism is not only an accelerator of economic growth, but also a double-aged sword that can recklessly cut ethical ties between individuals and various social groups and transform people into creatures who pursue maximum self-interest.

When market forces were turning China into a market society, people who had previously depended on collectives and families were compelled to make a living on their own. Paradoxically, however, modern society is replete with all sorts of risk, making it difficult for individuals (especially those living at the bottom of society) to bear the burden of taking care of themselves. When fast market transformation shattered social safety nets, it threatened to destroy the whole society. Against such a backdrop came a protective countermovement. An increasing number of people, including government decision-makers, have realised that the market can serve only as a means to improve people’s welfare but not as a goal in itself. The market is necessary but it must be embedded in society. And the state must play an active role in the market economy to prevent a disembedded and self-regulating market from dominating society.

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december 27, 2008

seen a burgeoning countermovement hastening the birth “decommodification” of a “social market.” In a social market, the market is still of existence.

Notes 11 See http://cn.chinagate.com.cn/health/2008-07/10/ 1 The Gini coefficient is a measure of relative

content_15987316.htm. i nequality ranging from 0, absolute equality, to 1, absolute inequality. 2 We use the coefficient of variation (CV) to indi-

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