China Power

Health Series: The Economy

In the first of a series on health care in China, we look at health care and the economy.

Last month Chinese Vice President Xi Jinping delivered a speech at the opening session of the Boao Forum for Asia Annual Conference 2010 in Hainan Province. The main subject of the speech, entitled ‘Work Together for Asia’s Green and Sustainable Development,’ might seem only indirectly related to the issue of health care. But Xi raised a point of fundamental importance to understanding one of the reasons why health care is such an urgent issue for China’s continued economic development.

Xi said:

‘We need to develop the economy mainly by relying on the domestic market, and attach great importance to domestic demand, consumer demand in particular, in driving economic development.’

China’s (over) dependence on exports has been frequently noted by commentators who would agree with Xi that in order to maintain healthy growth, there needs to be a restructuring of the economy toward a broader base that includes more domestic consumption. So how is this related to health care?

Well, as Drew Thompson, director of China Studies at the Nixon Center, told me when I raised this question with him: ‘(A) result of the dysfunctional health care system is high savings rates, as many people in China effectively “self-insure” against future illnesses…This partly contributes to the economic imbalances that are a troublesome factor in the US-China relationship.’

According to the World Bank, more than 300 million Chinese don’t have health insurance, while the rest (about 1 billion) have partial coverage. It’s in part to cover themselves for health care costs that Chinese save about a quarter of their income each year, money that many would like to see being spent boosting domestic demand.

A working paper submitted to the IMF concurs that increases in health care expenditure would likely boost consumption. According to the paper, ‘Determinants of China’s Private Consumption: An International Perspective’, which was released last month:

‘Evidence from provincial data…suggests that government spending on health (but not on education) reduces urban household saving (with a one yuan increase in government health spending translating into a two yuan increase in households’ consumption).’

The report goes on to note that the evidence in rural areas is more mixed, although as Thompson also noted to me, a poorly functioning health care system and resulting poverty is anyway a particular problem in rural areas. It’s also in these areas that, as I mentioned last week, care is being further hampered by the fact that talented doctors are shunning smaller hospitals in the countryside in favour of better paying jobs in towns and cities.

Of course on a side note to the issue of health and domestic demand, it’s important not to overstate the importance of exports in the Chinese economy. Indeed some, including UBS analyst Jonathan Anderson who wrote a useful paper on this a couple of years back, argue that the headline export growth figure gives a highly misleading impression of the role exports play in the economy. He instead suggests restating the figure in value-added terms to arrive at the true share that exports make up of China’s economy.

But setting the export issue aside, it’s clear that with, by some estimates, 60 percent of the country’s gross domestic product relying on construction, that some rebalancing is in order. And better, more affordable, health will be crucial to efforts at doing so.

Tomorrow I’ll be looking at the issue of HIV/AIDS in China.