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Why Has China Grown So Fast For So Long?

For analysts China presents a conundrum. It is clear that China has made rapid progress, and the landscape of the world is changing due to China’s unique position. Yet for decades, many have questioned this phenomenon, showing concern about cooked data, asset bubbles about to burst, and so on. Yet the Chinese economy has kept growing at a blistering pace, 9-10 per cent annually, and more at times, over a span of almost three decades.

Analysing the last 30 years of reforms, this book helps us understand the Chinese growth success, the factors that made this possible, and the lessons that can be distilled from this experience for other developing countries. Arguing that traditional explanations are inadequate, the author applies the “development as transformation” thesis to provide answers to a wide range of questions: Why has China grown so rapidly over such a long time, and what are the country’s prospects in the future? Will it keep growing? Will it in the next few decades actually overtake the US as the largest economy in the world, as some observers have been forecasting, or will it implode as the many contradictions in the economy and society grind it to a halt? This is a unique book in that it is based on years of close interaction with the Chinese leadership, institutions, and society, as well as international organizations in the development community, when the author was posted in China.   —Oxford University Press

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Khalid Malik is a development economist with extensive leadership, research and advocacy experience. He was appointed Director of the UNDP Human Development Report in June 2011. Prior to that he served as Special Advisor on New Development Partnerships (2010-2011); UN Resident Coordinator in China (2003-2010); Director, Evaluation Office (1997-2003); and UN Representative in Uzbekistan (1993-1997). He previously worked as a senior economist and programme manager in Africa, Asia, the Caribbean, and on science and technology matters. Born in Pakistan, he studied economics at the universities of Punjab, Cambridge, Essex, and Oxford.

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November 2012
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Governing Health in Contemporary China

The lack of significant improvement in people’s health status and other mounting health challenges in China raise a puzzling question about the country’s internal transition: why did the reform-induced dynamics produce an economic miracle, but fail to reproduce the success Mao had achieved in the health sector? This book examines the political and policy dynamics of health governance in post-Mao China. It explores the political-institutional roots of the public health and health care challenges and the evolution of the leaders’ policy response in contemporary China. It argues that reform-induced institutional dynamics, when interacting with Maoist health policy structure in an authoritarian setting, have not only contributed to the rising health challenges in contemporary China, but also shaped the patterns and outcomes of China’s health system transition. The study of China’s health governance will further our understanding of the evolving political system in China and the complexities of China’s rise. As the world economy and international security are increasingly vulnerable to major disease outbreaks in China, it also sheds critical light on China’s role in global health governance. —Routledge

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Yanzhong Huang is an Associate Professor at the John C. Whitehead School of Diplomacy and International Relations, Seton Hall University, and a Senior Fellow for Global Health at the Council on Foreign Relations. He is also the founding editor of Global Health Governance: The Scholarly Journal for the New Health Security Paradigm.

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Moneyless Pensions Yield No Gold for the Old

SHENYANG—Morning breezes turn chilly in late August, signaling fall’s approach in the Tiexi factory district.

For the unemployed men and women standing on sidewalks between a labor bureau office and a park every day at 6 a.m., the change of seasons is a reminder that searching for jobs will grow more desperate as cold weather nears.

Most of these streetside job-hunters in this section of Shenyang, an industrial city in Liaoning province, are more than forty years old and have been jobless for years.

They include some of the estimated 700,000 workers laid off in the late 1990s when state-owned smokestack industries downsized or closed. China was at the time eliminating the last vestiges of its planned economy, cradle-to-grave workforce support system.

In the short run, most of Tiexi’s unemployed would gladly take a temporary job or even a one-day handyman’s project. In the long run, though, they hope to benefit from the government’s ongoing effort to support retirees by improving what’s now a fragmented pension system.

For the system to work, experts say, China will have to take advantage of a demographic window of opportunity. It’s a window that’s expected to close, however, over the next few years as the population rapidly ages.

Some 13 percent of the nation’s population of 1.3 billion is at least sixty years old. That percentage is expected to jump to 30 percent by 2020, according to the Chinese Academy of Social Sciences.

The central government is counting on its three-year-old national social security fund, which held 772.7 billion yuan at the end of last year, to over time effectively buttress its graying citizens. Most of the fund’s money comes from direct central government injections, state-owned company stock, and capital gains from various investments.

Officials such as Yin Chengji, spokesman for Ministry of Human Resources and Social Security, say the fund is financially sustainable.

At a press conference in July, Yin said overall pension contributions by workers and companies already exceed spending levels. The social security fund and the rest of the nation’s public pension accounts had a 2 trillion yuan surplus during the first half 2012, he said.

Yin did not mention, however, that private pension accounts in China are running a combined deficit of around 2.2 trillion yuan. Nor did he acknowledge the looming challenges connected to the rising tide of retirees, or the pension fund gaps separating rich parts of the country from rural areas and the northeastern rust belt.

“The gap” between funds on hand and pension obligations “cannot be resolved by the social security fund alone,” said Zuo Xuejin, deputy director for the China Academy of Social Sciences in Shanghai. “The fund is tiny compared with the potential pension system burden.”

Workers dismissed in Tiexi in the 1990s typically received buyout packages in the tens of thousands of yuan. That money is long gone, and today new jobs are hard if not impossible to find in part because by Chinese company standards most of these ex-workers are considered too old to hire.

Temporary and handyman work keeps food on the table for jobless men such as a fifty-seven-year-old surnamed Wang who stood on the street August 26 with a cardboard sign declaring his availability and skill: “Electrician,” it read.

Wang waited all morning and got no bites. “I’m too old,” he told a reporter. “Employers are not interested.”

Dual Track

Zheng Bingwen, an Academy of Sciences research fellow, is urging the government to switch to an individualistic pay-as-you-go social security system, also known as a notional defined contribution (NDC) scheme. Each worker would contribute to and tap his or her own retirement account. The social pool would be eliminated, and gaps between public and private accounts would be closed.

But Zheng and other NDC proponents face an uphill climb in the face of financial hurdles tied to previous attempts to redesign China’s pension system.

For example, an experimental project approved by the State Council in 2001 for Liaoning and twelve other communities has so far failed to reach its goal. Social pool contributions haven’t matched rising expenditures, forcing the Liaoning government to dip into private accounts to cover obligations.

Now, more than a decade later, “the situation is severe” across the province, said Zhao Wenxiang, deputy chairman of the Labor and Social Security Institution in Liaoning. “We should issue a warning card for the Liaoning program.”

Work on a national pension scheme started in 1997. Emerging from the drafting process was a system with two pillars—a pay-as-you-go social pool providing support for all retirees based on contributions from the active labor pool, and a supplementary system for private, retirement savings.

The social pool is financed by employers who contribute 20 percent of each employee’s wages. Private account funds come from employees who contribute 8 percent of his or her wages.

The system is not without critics. Some question its fairness, since government workers and government-affiliated institution staffers don’t have to pay anything out-of-pocket yet enjoy annuities higher than those for other retired urban workers.

Government retirees in Liaoning receive an average of 3,800 yuan per month, according to Feng Youwei, a former provincial congress member in Liaoning. But company retirees average 1,800 yuan monthly.

The dual-track system has run into trouble financially, too. In fact, fourteen provinces, including Liaoning and the Xinjiang Production and Construction Corps, reported their social accounts were running in red now, forcing them to borrow from private accounts.

Exacerbating the problem is the system’s fragmented oversight. Major policies are handed down by the central government, but planning is handled at provincial and municipality levels, and actual everyday operations are carried out by cities.

Any city or other government entity that can’t cover its obligations has to beg the central government for money. Rich cities, on the other hand, enjoy surpluses but sometimes struggle to manage their pension accounts.

The Liaoning government, for example, asked Beijing for help and got it in 2009 when the central government started pumping the province’s social pool with 1.63 billion yuan a year, up from the earlier subsidy of 1.44 billion yuan.

Beijing also gave the nod for the provincial government to borrow from the private accounts, tapping up to 30 percent of the input from worker contributions.

The province has yet to spell out plans or a possible timetable for repaying private accounts.

Other provinces and municipalities followed Liaoning’s lead by tapping their own private accounts, but none dipped as deeply and instead created reserve funds that can be tapped as needed to meet costs.

Running Dry

With a strong and relatively young workforce, Liaoning—like most parts of China—has enjoyed a demographic dividend since the 1980s. But it’s disappearing quickly. And by 2017, more than 14 percent of the province’s population will be age sixty-five or older.

Even now, pension expenditures weigh on local government budgets. Shenyang’s social pool in 2010 posted a deficit of 3.1 billion yuan, equal to 6.75 percent of the city government’s budget.

Fushun, a Liaoning city once nicknamed China’s “capital of coal,” has run out of mining resources and has been stuck with an even heavier burden: More than 15 percent of the government’s budget went toward retiree payments in 2011.

“In developed countries, social spending takes usually 20 percent of a government’s budget,” said Liu Haining, a professor at the School of Economics and Management at Shenyang Aerospace University. “It’s mostly put toward education, medical care and subsidies to disadvantaged families.

“If pension spending alone comprises up to 15 percent of a government budget, as in Fushun, the burden is really too high,” Liu said.

Liaoning officials vowed to adjust the system to make the public account sustainable and repay the private account. They followed up by expanding pension coverage to generate higher contributions between 2006 and 2011 to supplement central government transfers.

But it was not enough to relieve headaches linked to Liaoning’s modern history and demographics.

In the 1950s and early 1960s, women were encouraged to bear as many children as possible. As a result some 1 million people retired in Liaoning between 2006 and 2011. But the working-age labor pool increased much less during that time.

Liaoning’s pension system is also designed to support people who retired before 1997 but never contributed to the pension system, as well as those who retired in the late 1990s after contributing relatively little.

Local governments such as those in Tiexi and Fushun were ordered to cover the pensions for people laid off during the state-owned company shutdowns in the late 1990s.

Companies affiliated with Fushun’s state-owned coal bureau, for example, burdened the city with what grew by 2011 to about 1 billion yuan in pension obligations for 360,000 ex-workers.

Experts expect these historical costs to saddle the province’s government budgets until around 2040. If not for these former state workers, though, officials say Liaoning’s social pool would have had a 55 billion yuan surplus in 2010.

Meanwhile, employees and employers who pay into the system have complained about the high costs they bear. Many companies say they’re already squeezed by rising labor costs.

A 2011 survey conducted by the Shenyang government found 41 percent of local residents think they can’t afford pension payments. And many of the estimated 300,000 people in Shenyang who stopped contributing to private accounts in 2011 were college graduates who chose to delay payments until they feel they can better afford it.

The pension rules say a worker who contributes for fifteen years continuously can receive benefits at retirement.

Wang the electrician says he finds the payments impossibly high. He earns about 500 yuan a month by taking on temporary jobs and fishing in trash cans for empty plastic bottles. The local pension plan’s minimum, out-of-pocket payment for a man like Wang is 457 yuan a year.

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From the Caixin Editors

Laying off millions of northeastern factory workers was painful but economically predictable during an overhaul for China’s state-run manufacturing sector in the 1990s. Yet long-term pension needs were overlooked by government planners who abruptly ended the era of the iron rice bowl. Today, the consequences of that oversight are growing increasingly serious, as this report from Liaoning province shows. The pension crunch is a nationwide problem that’s already entrenched in the industrial northeast, which bore the brunt of the 1990s factory shutdowns. But the problem is spreading fast as the retiree population swells everywhere. Particularly vexing for policymakers are questions surrounding iron-rice-bowl pensioners who paid no social security taxes in the past but who need benefits to survive. Ultimately, it seems, someone will have to pay.

By Caixin staff reporter Lan Fang

Socialist Insecurity

Over the past two decades, China has rapidly increased its spending on its public pension programs, to the point that pension funding is one of the government’s largest expenditures. Despite this, only about fifty million citizens—one-third of the country’s population above the age of sixty—receive pensions. Combined with the growing and increasingly violent unrest over inequalities brought about by China’s reform model, the escalating costs of an aging society have brought the Chinese political leadership to a critical juncture in its economic and social policies.

In Socialist Insecurity, Mark W. Frazier explores pension policy in the People’s Republic of China, arguing that the government’s push to expand pension and health insurance coverage to urban residents and rural migrants has not reduced, but rather reproduced, economic inequalities. He explains this apparent paradox by analyzing the decisions of the political actors responsible for pension reform: urban officials and state-owned enterprise managers. Frazier shows that China’s highly decentralized pension administration both encourages the “grabbing hand” of local officials to collect large amounts of pension and other social insurance revenue and compels redistribution of these revenues to urban pensioners, a crucial political constituency.

More broadly, Socialist Insecurity shows that the inequalities of welfare policy put China in the same quandary as other large uneven developers—countries that have succeeded in achieving rapid growth but with growing economic inequalities. While most explanations of the formation and expansion of welfare states are derived from experience in today’s mature welfare systems, developing countries such as China, Frazier argues, provide new terrain to explore how welfare programs evolve, who drives the process, and who sees the greatest benefit.  —Cornell University Press

Pensions and the Politics of Uneven Development in China

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Mark W. Frazier is a Professor of Politics at The New School for Social Research and Co-Academic Director of the India China Institute at The New School. He is the author of Socialist Insecurity: Pensions and the Politics of Uneven Development in China (Cornell University Press, 2010) and The Making of the Chinese Industrial Workplace (Cambridge University Press, 2002), as well as articles in Asia Policy, Studies in Comparative International Development, and The China Journal. Before 2012, he was an Associate Professor of International and Area Studies at the University of Oklahoma. 
Frazier received a Ph.D. in political science from the University of California, Berkeley.

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A Simple Solution to China's Pension Crisis

China’s rapidly aging population, strong economic growth, and high return on capital mean that a funded pension system would be more efficient than a state-directed system. Yet, there are many problems in implementing a new privatized pension system. The root problem is the lack of a well-designed transition plan that bridges the old system and the new one. The paper analyzes the transition problem and argues that the combination of Chinese families’ emphasis on education, strong economic growth into the foreseeable future, and the current lack of income smoothing at the individual level makes borrowing now and taxing future generations a fairer and more cost-effective way to finance the transition cost. many problems in implementing the new Chinese pension system. The root problem is the lack of a well-designed transition plan that bridges the old system and the new one. In this study, we analyze the transition problem and provide a simple solution. We argue that the combination of Chinese families’ emphasis on education, strong economic growth into the foreseeable future, and the current lack of income smoothing at the individual level makes borrowing now and taxing future generations a fairer and more cost-effective way to finance the transition cost.

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