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China should be aiming lower, not higher

Recently I had the chance to discuss the fascinating article, “The Sick Man of Asia” with the doctors at my hospital. The author, Huang Yanzhong, argues that despite China’s seemingly impressive gains in health over the past 60 years, they are lagging behind its economic growth. Furthermore, the author seems to argue that the average Chinese person (as far as health is concerned) saw greater benefits from Mao’s time in power than during Deng, Jiang, and Hu.

The author argues that Mao’s regime was able to make large gains because they focused on bringing medicine to rural populations. Huang also shows that the chaos of the Cultural Revolution caused the bureaucratic powers of the Ministry of Health to retreat, while millions of doctors were sent to the countryside.

Opening up and reform in the 80’s though focused resources into a few urban hospitals, which by 2004 were receiving 80% of all gov’t health spending. This problem was compounded by the new choices brought to rural residents with opening up, and people from the countryside bypassed the local clinics in favor of the bigger and better equipped urban hospitals. While I would not want to deny villagers the option of coming to the cities for treatment, it has exacerbated the issue and removes some of the pressure to reform smaller clinics.

Additionally, funding from the central gov’t for health was reduced during this time, making hospitals increasingly dependent on prescriptions, surgeries, and additional testing for income. This caused a rapid increase in the cost of treatment, and as a study from 2004 showed, nearly 41% of farmers living below the poverty line reported falling ill or being injured as a cause of their poverty.

Even more troubling is the fact that 60-80% of farmers died at home because they could not afford hospital costs. The author cites the fact that surgery for stomach cancer costs nearly 12,000 RMB, which is far more than an average farmer makes. A friend told me that farmers use the expression “得了阑尾炎,白种一年田” (appendicitis costs a year in the field) to complain about the high cost of medicine.

While China has continued to increase medical spending, especially after the outbreak of SARS, there is still a strong urban bias. In the two groups I discussed this article with, virtually none of the sixty doctors agreed with the author that healthcare had not improved much (which wouldn’t have surprised Huang; they work in a well funded urban hospital), but when asked if healthcare was unequal, they agreed unanimously. When asked “Who benefits from China’s health care spending?” The first answer was gov’t officials, followed by the rich, and finally people in cities. Nothing shows this more clearly than the fact that Shanghai’s life expectancy is now over 82.5 years, while the average for the rest of China is only 73 years.

Instead of focusing on improving healthcare across all segments of the population, the Party’s policies (and in some cases inaction) have reduced the possible gains that could have been made.

The priority given to the urban population after reform and opening up is something we’ve discussed before in relation to Hukou issues, and the state of rural education. China’s obsession with creating institutions for the elite, means that the masses are excluded from fully participating in the benefits of China’s growth.  

I think that many would agree that it was the push by the Party in the early days of Mao’s leadership for literacy and expanded access to education (for women and the poor) that have allowed China to become such a powerhouse in low-end manufacturing. The Party has also stated that for the economy to continue to grow, the country needs to move towards more skilled manufacturing, but they didn’t start taking steps to promote vocational education until a few years ago. Instead, for years the focus had been on creating “world class” universities and pushing more students through graduate programs. A Chinese friend told me that he had always opposed this because there were so few jobs requiring such degrees, other masters students I have met have agreed.

The gov’t has also allowed the collapse of social security programs which in the past would have encouraged families to keep their children in school; some of China’s poorest counties have dropout rates of over 50%. These children are pulled out of school to try to support their family, frequently when a working family member falls ill or dies. Meanwhile urban children who fall behind their classmates are pushed out of schools by teachers who fear losing the bonuses that come with good exam scores.

With increasingly out of reach premiums for decent healthcare and schools that focus only on the most talented students in urban areas, it’s easy to see why some argue that China’s growth is unsustainable.These gaps in basic services between rural and urban citizens are a major cause of the gap between rich and poor; which consequently, drives a wedge between the people and the Party. The key then to stability is aiming lower, not higher.

If-Then rewards cause a search for loopholes – how psychology explains China

I recently finished a book called “Drive: The Surprising Truth About What Motivates Us” that focuses on intrinsic motivation, how it can be bolstered or buffeted by workplace policies, and how it effects our overall happiness (I enjoyed the book, even if it was a little short). Like most things these days, there were several parts that reminded me of China (we’ll be looking at a second aspect in a later post).

If-Then rewards cause a search for loopholes

China’s government since reform and opening up has functioned more as a corporation than as a country. Within each level of government there is fierce competition for promotions that come with clear perks and benefits (and some that aren’t made quite so public).

As Daniel Pink points out in his well researched book, rewards (like promotions or bonuses) often create a desperate search for loopholes instead of actually accomplishing the goal as it was intended. Perhaps the best example of this run amok, is how much GDP growth factors into gov’t performance reviews. Even though on its face, it would seem that this kind of metric would benefit a wide range of people, from construction workers to farmers, instead gov’t officials search for ways to manipulate the statistics to reach their goals.

Similar things can be seen in China’s environmental pursuits. Like the fact that Beijing is increasing its number of “blue sky days” (which just reflect air of a certain quality, not the ability to see blue sky), even though days of extremely bad air quality are increasing. The problem is that the system allows local officials to shut down factories for a few days to meet the goal before continuing as usual; real progress is not being made.

As Pink points out, this ends up causing people to focus on only the short-term rewards instead of the long-term benefits. The results of this kind of if-then reward have been well documented; gov’t officials, who are only in a place for a fixed period of time, often ignore the long-term debt caused by their get rich quick schemes or pollution belching industries.

The same reward system also effects China’s students. Since the reward (getting into college) is such a major focus of education, a shift occurs in the students’ learning. No longer is the goal to actually obtain mastery of a subject, but becomes entirely focused on passing tests.

As several studies have shown, students motivated by grades alone instead of mastery, are capable of achieving high scores, but are less capable when the time comes to apply that knowledge to a new situation.

It means that not only do tests not create an accurate picture of who is worthy of college, but that in many cases high stakes tests create the problem in the first place.

As Pink suggests in the book, the way to curb the loophole seeking tendencies that go with large rewards is to broaden the requirements for the reward. In gov’t if long-term growth and environmental protection were a large part of the metric in deciding who is promoted, it would limit the short-sighted games. If colleges looked more at students as a complete individual, instead of as the sum of a single test, they would be better able to spot those full of potential, instead of simply finding those best at memorization.

(next we’ll look at why intrinsically motivated people are key to China’s future)

China’s global crisis recovery – economic success or economic illusion?

As the world braces for what looks like a possible second economic downturn, it is increasingly important to understand how China weathered the first one. Today and tomorrow we are going to take a very simplified look at this issue. Please keep in mind that this is meant to give a broad overview and is in no way a complete account.

When the markets started to drop off in 2008, the gov’t took a number of actions to try and prevent a financial collapse in the middle kingdom. They made it easier for companies to get loans, pushed a massive economic stimulus, propped up domestic consumption by offering discounts on things like home appliances and cars, increased college enrollment to delay entrance to the job market (while preparing the next generation of white collar workers), and fixed the RMB to the USD (this one I’ve already discussed).

As the rest of the world has faltered, China seems to have emerge unscathed. But before we start implementing Soviet style 5-year plans in the US, it’s important to consider the long term effects these measures are having on China’s economy three years later, and whether or not they are the success they first appear to be.

Company Loans & Stimulus Spending

Much has been made in the U.S. of China’s stimulus spending and how it helped maintain China’s GDP growth. I think the benefits of this are not yet clear. Instead of the gov’t literally giving money to local gov’ts to spend (something like what happened in the U.S.), the Chinese gov’t required the banks to make these loans. This has had a few important ramifications that have not yet been resolved.

One of the major issues is that this allowed local gov’ts to borrow far beyond their means. It is estimated that these local gov’ts now hold over $2 trillion in debt which financed their infrastructure projects. While many visitors to China have marveled at the Party’s ability to construct high-speed rails and other expensive projects during the recession, few realize they were funded in part because of the need to stimulate the economy and that the resulting debt is held by ministries and local governments instead of the Central gov’t.

Another way of describing this stimulus would be to say that China created a line of “easy credit” (which you may remember as the villain of the US downturn). This has made investments in areas that were traditionally considered too risky or too low yield to be attractive to local gov’ts and state owned enterprises. As Dan from China Law Blog caught, at least 60% of Chinese companies have now invested in property, and many others are engaged in gray market lending. This is a large part of what is fueling China’s real estate boom, which many are calling a bubble, and has helped keep China’s GDP enviously high.

The catch here is that the loans made to local governments were taken out against gov’t land holdings, whose prices have increased dramatically over the past few years due to speculation done by companies who can borrow money at low rates from the banks because of gov’t encouraged loans. This reinforcing loop has allowed local gov’ts to spend far beyond their means and has pushed property prices beyond the reach of many Chinese.

If the property bubble bursts, the source of revenue for many local govt’s will disappear; they will default on their loans and the land they used as a guarantee won’t be worth as much as the banks had bet on. Patrick Chovanec compared China’s economy to Wile E. Coyote, “He’s running and running and goes off the cliff, and as long as he doesn’t look down he’s fine. But when he does – he drops.”

However, there are also many who would argue that China is rapidly urbanizing and only recently removed restrictions on housing prices, so the 400+% increases seen in some cities may actually be moving closer to the actual value of the property, since it was far undervalued before (or the bubble deflates instead of bursts). The gov’t has also been cautiously monitoring the housing market and local gov’t debt issues, and may be able to guide the economy. One of my Chinese friends recently bought a new apartment based on this line of thinking. He argued that as long as enough people believe that the gov’t can control the prices, the market will remain stable and in 10-15 years, his investment will pay off.

China’s loans have helped grow both the GDP and a possible property bubble. They have created a number of jobs through massive infrastructure projects, but those projects have also displaced a huge number of farmers. All in all its still not yet clear whether or not China’s creation of easy credit has created a sturdy foundation for future economic growth.

Is China Headed For An Economic Crash?

I had a great discussion with a German man on the train yesterday, and thought you might find it interesting. He is in the garment manufacturing business and works for a large German chain similar to The GAP or H&M, and has been in China for 3 years.

In our conversation we talked about a variety of topics: Manufacturing, GDP growth, High speed rail, the housing boom, China’s environment, and in each topic he brought up that it wasn’t sustainable.

Perhaps it was made more apparent by traveling 300km/hour through what used to be China’s countryside, which now offers little other than new apartment buildings, gray skies, and a dozen coal power plants.

One of the most interesting things he said was that wages have gone up enough now that China was becoming less attractive for garment manufacturers, with almost all of the factories moving away from China’s wealthy East coast. He said wages in China are about $150-$200 a month, but in Bangladesh its only $50. The bigger part though were the tariffs being put on imported clothes from China, which he said were around 10% in Europe. He said that he still thinks garments will be made here for another 5-10 years, but companies are starting to look elsewhere.

He also mentioned that for health reasons he would refuse to stay in China more than 2 more years. He has a 10 year old daughter, and was quite concerned about what China’s air would mean for her long term health. However he did say that since the World Expo, it seemed that Shanghai’s air has improved somewhat. He said several times that it was better than it had been in the past.

Lately it seems that I’ve been having more conversations like this one with foreigners who have been in China more than a few years. They will bring up the China’s massive growth, but they no longer seem to be as impressed by it.

At the moment it seems like China is a bus headed for a cliff, and economists from outside China and within are saying, “Hit the brakes! We’re going to crash!” and the government’s response is to slow down from 80 to 75.

This article seems to be the perfect compliment to this conversation, so I hope you will take the time to read it. It raises a number of questions about the sustainability of China’s rapid growth, and the uneven distribution of wealth.

Note: This is not to say that I want China’s economy to falter. I work in development, and I would love nothing more than to see China continue to pull millions out of poverty. That is why I think it is important to highlight these issues, so the gov’t will address these issues instead of ignoring they exist.