Investing in Human Capital for Economic Development in China

The following sections are included:

• Foreword

• Preface

• Contents

In 2002, the Chinese Communist Party (CCP) announced a goal of quadrupling per capita income by the year 2020. Starting at income levels of the year 2000, this would require a growth rate of 7.2 percent per annum in per capita income or close to 8.0 percent in GDP. Such unresolved and emerging problems as growing income disparities, increasing pollution, pressures on infrastructure, the inefficiency of stateowned enterprises, and political instability are often cited as reasons to doubt the attainability of the CCP's goal. However, China's progress in addressing fundamental constraints that might limit rapid economic growth augurs well for the success of its economic goals. Although there are disagreements about economic policy among top leaders, the continued transformation into a market economy and the promotion of increasing local autonomy in economic matters are not in doubt. In education, China has substantially increased the percentage of its workforce receiving a college education, and continuing growth in this investment in human capital could account for a large portion of the desired growth rate. In addition, the value of improvements in the quality of economic output unmeasured by GDP, such as advances in the quality of health care and education, could raise reported growth rates by as much as 60 percent. Finally, the government's increasing sensitivity to public opinion and issues of inequality and corruption, combined with improving living conditions, have resulted in a level of popular confidence in the government that makes political instability unlikely.

This paper assesses the effects of education and health on economic growth by partitioning the reasons for cross-country variation in income levels into three components: (i) persistent factors influencing the level of output; (ii) time-varying factors influencing the level of output (e.g., levels of health and education); and (iii) persistent factors influencing a country's rate of technical progress. Persistent factors are ones that remain unchanged (e.g., geographical location) or that change only slightly in the time period under study (e.g., potentially endogenous determinants of technical progress such as a country's orientation toward free trade). Multi-level modeling techniques using maximum likelihood methods were used for estimation. This paper draws on earlier work but extends it to use more recently available data including China. The initial analysis used data on 53 countries over the period 1965–1990 and estimated that education improvements accounted for about 14% of economic growth over this period and health improvements accounted for about 11%. The extended analysis, including China, that this paper reports included data from 86 countries over the period 1960–2000 at 10-year intervals. Findings were broadly similar to the initial analysis, although the magnitude of the estimated effects for education and for health were smaller. Taking our range of models and parameter estimates into account, we feel that education improvements probably accounted for 5%–8% of China's economic growth between 1970 and 2000 and that health improvements accounted for 1%–5%. Our small and imprecise China-specific estimate of health's effect probably results from the atypical pattern in China of successful early efforts to improve health followed by stagnation in health during the later period of rapid growth.

Because of the non-rivalry of knowledge, the R&D-based endogenous growth model implies the scale effect, which means the larger the population, and the more the number of R&D employees, the faster the economic growth. Although the scale effect is supported by the empirical work of Kremer (1993), Jones (1995a) finds that the experience of OECD countries during the last one hundred years does not show any scale effect. Jones (1995a) and Young (1998), therefore, manage to make some modification to the original R&D-based model to eliminate the scale effect. The modification they make, however, also has some problems. The motivation of this paper is thus to bridge the gap between the R&D-based theoretic model and the empirical facts on scale effect. By introducing the effective time of innovation activity of researchers into the idea production function adopted by the original R&D model, we can get two types of equilibria of economic growth: one with scale effect, the other without it. Thus the model can meet the two ends of contradictive empirical findings of both Kremer (1993) and Jones (1995a, b). To test the model, we simulate the GDP per worker growth rate of 49 countries and check whether the simulated data match the real cross-country data. The results show that our model is better than the Lucas (1988) model and the Romer (1990) model. If the success of the model is judged by the sum of the squared error between the simulated data and the real data, then our model improves the Lucas model and Romer model by at least 20 percent and 59 percent. The policy implication of the model is:in terms of the increase of the economic growth rate, the model suggests that the countries without scale effect should adopt policies to increase the average human capital of the whole population, while the countries with scale effect should increase the number of scientists and engineers as a priority.

We study the endogenous relationship between health care, life expectancy and output in a neoclassical growth model. While health care competes resources away from goods production, it prolongs life expectancy which, in turn, leads to higher capital accumulation through a private annuity market. We show that savings and health care are complements in equilibrium, with both rising with economic development. Our model is therefore consistent with several stylized facts, namely: (i) countries spend more on health care as they prosper, (ii) individuals in rich countries tend to live longer, and (iii) population aging is more pronounced in rich countries. Moreover, via the longevity-enhancing channel, health care and health production technology are found by simulation to be growth- and welfare-promoting.

This paper offers an explanation of the quantitative changes in education spending by the framework of demand analysis, including the changes in the ratio of educational funding to GDP in the period 1991–2002. The income effect is estimated mainly by using cross-provincial data, while time series data are used to estimate the price effect. Changes in government and non-government spending through time can be satisfactorily explained by the income and price effects. Demand for education services in the three levels of primary school, secondary school and higher education, and aggregate demand for all education services are investigated. The relation between income inequality and inequality in education opportunities is briefly discussed. Ten important findings are stated.

This article employs a multi-state model to project human capital and the demand for education personnel and investment in China during the first three decades of the 21st century. The multi-state model is based on the carefully adjusted 2000 national census and previous studies that estimate fertility, mortality, net migration and education transition. The findings will provide evidence for education development-related decision-making in China.

This paper updates our knowledge of Chinese school enrollment and graduation patterns by analyzing the 2000 Chinese Census. Looking at the school enrollment and attainment snapshot in 2000 and comparing these rates with the enrollment rates in 1990 provides us with important insight into the effect of economic, social and institutional reforms of the 1990s on the generation of students coming through the system in the early post economic reform era. The findings show that substantial progress has been made in China's goal of universal education for all children through the 9th grade.

In the past few decades, China has made great achievements in improving rural education. These have been reflected in both the increase in literacy rate and in school attainments. However, studies also have shown that although efforts have been made to maintain the level of attainments, dropouts are still common in rural areas. This is especially true in poor areas or among poor households. The objectives of this study are: (i) to understand what is the current situation of school attainments in rural China, (ii) to find out what are the major causes of kid dropouts from schools and (iii) to analyze what is the implication of education cost and household welfare. The ultimate goal of the study is to provide some basic information for policy makers to better formulate rural educational policies or some educational support programs. Based on a household survey data collected from six provinces for 2000, this study found that the level of school attainments vary between regions and it happened more often at higher level of schooling (e.g., middle school). The dropout rate was higher for girls than for boys. It was also true that more than 54 percent of students dropped out because they could not afford the tuition fees. Further analysis indicates that if a household had a child in school, this family is likely to drop under the poverty line. Findings by others indicate that investing in rural education is the most effective way for poverty alleviation in rural areas. Thus, this study concludes with arguments that the government should develop certain policies that ensure kids from poor households can also get sufficient education. Making basic rural education free to poor families, if not to all rural households, is one of the options that can be considered.

Recent research literature on migration in China has mainly focused on adult migrants. As more and more people participate in the migration process and as migrants expand the duration of their stays in cities, migrant children increasingly become part of the migration stream. The presence of large numbers of migrant children in cities, especially children without local hukou, creates major problems for their parents and challenges for education policy-makers. In this paper, we examine the school enrollment of migrant children who resided in cities of Guangdong province in 1995. Using data from the 1995 China 1% Population Sample Survey, we apply a research strategy that incorporates both migration origin as well as destination. This allows us to estimate school enrollment rates for temporary migrant children, permanent migrant children, and local children, in addition to non-migrant children at the place of origin. Two major findings emerge from multivariate analyses of school enrollment. First, temporary migrant children are much less likely to be enrolled in school compared to local children. Temporary migrants with less than one year of residence in cities suffer the most. Perhaps somewhat surprisingly, permanent migrant children are more likely to be enrolled in school than local children due largely to the highly selective nature of their parents. Second, compared to non-migrant children at the place of origin, rural temporary migrant children from Guangdong also encounter a major disadvantage in terms of school enrollment. As education becomes more and more important for socio-economic mobility in the Chinese society, such disadvantages faced by temporary migrant children is likely to have detrimental and long-term consequences for migrant children and for urban society as a whole.

After describing the institutions for health care in China as they evolved since 1949, this paper presents statistical demand functions for health care. It applies the demand functions to explain the rapid increase in health care demand and the resulting rapid increase in price when supply failed to increase. The failure in increase in supply was traced to the system of public supply of health care in China. The reform experience of Suqian city in the privatization of health care is reported to demonstrate the positive effect of privatization on supply. The government's health care program for the urban and rural population is described and an evaluation of it is provided.

In this paper, we develop an expected utility maximization model for Chinese rural residents who make their health care and health insurance decisions in two stages, choosing among no insurance, the New Rural Cooperative Medical System (NRCMS), and a commercial health insurance. It is found that although not everyone benefits from the NRCMS, it does improve the welfare of a large number of rural residents and help them seek a higher level of medical care service. The results suggest that additional aid to the extremely poor is still needed during catastrophic medical loss, and detailed provisions that can differentiate the support level to rural residents based on income are needed. It is also found that commercial health insurance can still play a role in protecting rural residents from financial losses caused by health risks.

Since the 1980s health care reform in rural China, the coverage of public health insurance has considerably diminished and the price of medical service continues to increase. Using data from the 1991 and 1997 China Health and Nutrition Surveys, this paper examines the rural residents' demand for medical care and illustrates the impact of the reform. Our study reveals a positive relationship between education and health status, and a negative relationship between education and medical expenditure. Simultaneously, the income effect of medical care is inelastic (0.31), which means that individuals with lower income are burdened with higher medical expenditure. In addition, the income effect significantly influences the decision to seek care when ill, which implies a credit constraint in health care consumption. There has been a persistent increase of inequality in rural China. Our study suggests that the situation is much worse if we take into account the health inequality and higher medical expenditure of the poor people.

An increasing literature examines the association between restricted fetal or early childhood growth and the incidence of diseases in adulthood. Using the China Health and Nutrition Survey, we assess the impact of nutritional deficiency in the early lives of survivors of the Chinese Great Famine on overweight in adulthood by comparing the famine cohort and non-famine cohorts as well as severe famine regions and elsewhere. The relation is found to be sex-specific. The effect appears to be more pronounced in women than in men.

While the contributions of immunization to fighting infectious diseases have been widely recognized, economists have paid little attention to the determinants of immunization uptake. In this paper, we first develop an intuitive theoretical model of the demand for immunization services. A novel prediction of our model is that the presence of an easily accessible health facility does not necessarily raise the immunization rate of the community as it reduces both the cost and benefits of immunization. In the empirical work we try to control for the potential bias introduced by the endogeneity of “child quantity”. Our analysis shows that the number of siblings depends heavily on the degree of enforcement of the one-child policy. Therefore, the enforcement measures of this policy can be used as instruments for child quantity. However, our results show that the number of siblings does not affect a child's immunization uptake. The most important factor to a child immunization uptake is health insurance coverage. Given the lower health coverage rate in rural China, our findings thus suggest that the immunization rate can benefit from health policies aiming to broaden health insurance coverage. The other two factors that affect immunization uptake are parental education and family income, suggesting that a country's immunization rate increases as its citizens become richer and better educated.

This paper utilizes two cross-sections of the China Health and Nutrition Survey to estimate and decompose the income-related inequality in self-assessed health status. The increased level of income has outweighed the increased inequality in income, and disparities in access to education have contributed to increases in inequality. Ordinal probit estimates support the relative income hypothesis.

Many studies suggest that years of formal schooling completed is the most important correlate of good health. This finding emerges whether health levels are measured by mortality rates, morbidity rates, self-evaluation of health, or psychological indicators of health and whether the units of observation are individuals or groups. There is much less consensus as to whether this correlation reflects causality from more schooling to better health. The relationship may be traced in part to reverse causality since a longer life expectancy increases the payoffs to investments in schooling and since healthier students may attend school for longer periods of time. The relationship may also reflect “omitted third variables” that cause health and schooling to vary in the same direction. The past three and a half decades have witnessed the development of a large theoretical and empirical literature focusing on the issue just raised. I deal with that literature and what can be learned from it in this paper. Much of my paper deals with the empirical literature on the relationship between an individual's own health and own schooling or between child health and parents' schooling. To some extent, I focus on studies, including my own current research, that employ the technique of instrumental variables to investigate whether more schooling does in fact cause better health.

This study provides empirical evidence regarding the income productivity of health human capital in China. We appeal to concepts from human capital theory to support a basic model that treats health as a form of human capital in the income production process. Our model examines the economic return at the household level from the health of its individual members. We estimate this with a longitudinal sample drawn from the China Health and Nutrition Survey (CHNS), allowing us to exploit “within” variation in health and income to address possible unobservables biasing estimates of the impact of health on income in the simple cross-sectional setting. Household income is strongly influenced by the health of its members, particularly in rural areas. These findings could have important implications for health and economic policy-making aimed at reducing the long-standing urban-rural economic gap and more comprehensively insuring the rural population against health and economic risk.

Ill health is very expensive and could have significant impact on household consumptions. The purpose of this study is to examine the differences in household consumption patterns among households with or without ill health family member(s) in rural China. We also examine the opportunity cost of ill health by estimating the marginal effects of medical spending on consumption patterns.

The data used in this study are from the baseline survey of a community-based rural health insurance study in a poor rural area of China conducted in 2002. The unit of analysis in this study is the household; 4553 households are included in this survey. Fractional Logit model is used as our prediction model. Ill health is measured by the presence of hospitalization and presence of diagnosed chronic disease(s) in a household.

Findings from this study reveal that ill health and medical expenditure reduces household investment in human capital, physical capital for farm production, and other consumptions that are critical to human well-being. Subgroup analysis displayed that the impacts of medical expenditure on household consumption patterns described above are more significant in low-income households than in high-income households. In addition, the decline of the percentages of other consumptions is much larger for households with hospitalization than for households with chronic diseases.

This paper uses survey data from Chinese Household Income Project (CHIP) to document wages and returns to education for a large number of cities during China's economic transition. Between 1988 and 1995, average real wages and returns to education increased, yet their spatial dispersions across cities widened dramatically. While market-oriented reforms should help equalize returns to human capital across regions, there was no sign of significant wage convergence in Chinese cities during this period. I argue that coordinated reforms in pension systems, housing markets, hukou registration, and local government behavior are imperative for improving the integration of local labor markets in China.

Following Rauch's (1993) seminal study, there has been a growing interest among economists in estimating human capital externalities at the individual level. In this paper, we provide a first set of estimates of the external returns to education in Chinese cities. We find that the external returns are at least as high as the private returns to education. OLS estimates of the external returns range from a low of 4.9 percent to a high of 6.7 percent. Two-stage least squares estimates indicate that a one-year increase in city average education could increase individual earnings by between 11 percent and 13 percent. We also examine the impact of economic reforms on the external returns to education and find suggestive evidence that economic reforms have raised the external returns to education in Chinese cities.

Huge econometric literatures examine discrimination in wealthy countries, but very little is available on poorer countries. In this study we combine labor-market information, appraisals of respondents' beauty, and household expenditures to examine within a unified framework the role of beauty in economic success in China and the relative importance of the investment and consumption aspects of beautifying expenditures. We find that in China, beauty raises women's earnings adjusted for a wide range of controls. Additional spending on clothing and cosmetics has a generally positive marginal impact on a woman's perceived beauty. The relative size of the effect demonstrates, however, that such purchases pay back no more than 15 percent of additional expenditure in the form of higher earnings. Most such spending represents consumption. The overall effect of beauty on wages appears to be at least as high, or even higher, than in rich economies.

The following sections are included:

• About the Co-Editors and Contributors