Solutions to China’s Healthcare and Environmental problems Gregory C Chow Princeton University Gregory C Chow Princeton University June, 2008

Outline 1. Introduction 2. China’s healthcare system 3. Supply per capita remained constant and how to increase it. 4. Economic approach to environmental problems 5. How to improve the regulation of pollution 6. Conclusions

1. Introduction This lecture shows how simple economic analysis can be applied to solve important social problems. This lecture shows how simple economic analysis can be applied to solve important social problems. The two examples are China ’ s healthcare provision and China ’ s environmental protection. The two examples are China ’ s healthcare provision and China ’ s environmental protection. Even if the presented proposals to solve the two problems are effective if adopted, to get them adopted is not easy and depends on political factors. Even if the presented proposals to solve the two problems are effective if adopted, to get them adopted is not easy and depends on political factors.

2. China’s Health Care System §Institutions before 1980’s 2. China’s Health Care System §Institutions before 1980’s A cost-effective three-tear health care system improved the health of the Chinese people: A cost-effective three-tear health care system improved the health of the Chinese people:.reduction of diseases.reduction of diseases.decline in the annual death rate.decline in the annual death rate 17 per 1000 population in 1952→6.34 per 1000 in per 1000 population in 1952→6.34 per 1000 in 1980.increase in life expectancy.increase in life expectancy early 1950s: 40.8 years→ early 1960s: 49.5 years → late 1970s: early 1950s: 40.8 years→ early 1960s: 49.5 years → late 1970s: 65.3 years 65.3 years

2. China’s Healthcare system since 1980’s 2. China’s Healthcare system since 1980’s Rural: Rural:.Privatization of farming led to the disintegration of public health provided collectively under the Commune system..Privatization of farming led to the disintegration of public health provided collectively under the Commune system. Urban: Urban:.Privatization of state-owned enterprises was a very slow process that took over two decades..Privatization of state-owned enterprises was a very slow process that took over two decades..The government tried to provide a substitute for the public provision of health care through the state-owned enterprises..The government tried to provide a substitute for the public provision of health care through the state-owned enterprises.

2. Data on expenditures for healthcare 2. Data on expenditures for healthcare YearTotal (100 million) Government Budgetary Social Expenditure ResidentIndividual Percent Government Percent Individual

§ Health Care Expenditures and Funding Resources § Health Care Expenditures and Funding Resources

Time-Series Data on Aggregate Demand for Health Care YearCPIGDP Price index of healthcare pr Quantity of health services q = exp/pr services q = exp/pr

3. Supply of Health care per capita remained constant #hospital #hospital Beds/10, Beds/10, # doctors # doctors per per The amount of health care supplied per capita remained approximately constant between 1989 and 2003 (as also seen by the quantity q = total healthcare expenditure / price index of health care service in Table 2). The amount of health care supplied per capita remained approximately constant between 1989 and 2003 (as also seen by the quantity q = total healthcare expenditure / price index of health care service in Table 2).

Reason for supply to remain constant The Chinese Constitution of 1982 stipulates that the provision of healthcare is the responsibility of the government. The stipulation gives less room for private participation than the case of education. The Chinese Constitution of 1982 stipulates that the provision of healthcare is the responsibility of the government. The stipulation gives less room for private participation than the case of education. The central government assigned the responsibility to local governments which often do not have the financial resources nor incentive to increase supply. The central government assigned the responsibility to local governments which often do not have the financial resources nor incentive to increase supply.

A simple solution to increase supply A simple solution is for the government to allow and encourage private or “ people-operated (minban) ” hospitals and healthcare centers. A simple solution is for the government to allow and encourage private or “ people-operated (minban) ” hospitals and healthcare centers. In 2004 the government has begun to allow some hospitals in urban and rural areas to be run privately to reduce the burden to the government but allowing and encouraging the establishment of more private hospitals, thereby increasing competition to public hospitals, is essential for increasing both the quantity and quality of healthcare in China. In 2004 the government has begun to allow some hospitals in urban and rural areas to be run privately to reduce the burden to the government but allowing and encouraging the establishment of more private hospitals, thereby increasing competition to public hospitals, is essential for increasing both the quantity and quality of healthcare in China. There may be inertia for local government health officials to resist this suggestion for it may interfere with their authority and make their job more difficult. Higher officials in the government may not be willing to make such a change for fear of rocking the boat. There may be inertia for local government health officials to resist this suggestion for it may interfere with their authority and make their job more difficult. Higher officials in the government may not be willing to make such a change for fear of rocking the boat. Personal experience in making this suggestion to government officials. Personal experience in making this suggestion to government officials.

Experience of Suqian City Experience of Suqian City with 5 million population located in northern Jiangsu province in to allow privately operated hospitals and clinics demonstrated success of this solution. Experience of Suqian City with 5 million population located in northern Jiangsu province in to allow privately operated hospitals and clinics demonstrated success of this solution. Skeptics insist that hospitals and clinics should be operated by the government. The solution allows for government operated hospitals but opens the door for privately operated hospitals. Skeptics insist that hospitals and clinics should be operated by the government. The solution allows for government operated hospitals but opens the door for privately operated hospitals. The experience of China ’ s successful open-door policy demonstrated the usefulness of allowing foreign competition to stimulate and improve government operated enterprises. The experience of China ’ s successful open-door policy demonstrated the usefulness of allowing foreign competition to stimulate and improve government operated enterprises.

Government’s program to pay for healthcare – a different problem from increasing supply "Decision on Health Reform and Development by the Central Party Committee and State Council." (January 15, 1997) "Decision on Health Reform and Development by the Central Party Committee and State Council." (January 15, 1997) Basic objective : to insure that every Chinese will have access to basic health protection. Basic objective : to insure that every Chinese will have access to basic health protection. Rural : to develop and improve CMS through education, by mobilizing more farmers to participate and gradually expanding its coverage; 40 yuan subsidy per person. Rural : to develop and improve CMS through education, by mobilizing more farmers to participate and gradually expanding its coverage; 40 yuan subsidy per person. Urban ： a basic medical insurance system was established in 1998, financed by 6 ％ of the wage bill of employing units and 2 ％ of the personal wages. Urban ： a basic medical insurance system was established in 1998, financed by 6 ％ of the wage bill of employing units and 2 ％ of the personal wages.

§ Possible Alternatives in the Management of Health Care Medical insurance in urban area mainly for illnesses with large expenses. No insurance or high co-payment for ordinary illnesses requiring small expenses Medical insurance in urban area mainly for illnesses with large expenses. No insurance or high co-payment for ordinary illnesses requiring small expenses Incentive payment for physicians in public hospitals Incentive payment for physicians in public hospitals Leasing of public hospitals for private management without changing existing subsidies Leasing of public hospitals for private management without changing existing subsidies Encouraging establishment of private hospitals Encouraging establishment of private hospitals

Four environmental problems Economic activities of production and consumption require the use of energy Economic activities of production and consumption require the use of energy Use of energy creates environmental problems of Use of energy creates environmental problems of 1. Air pollution 1. Air pollution 2. Water pollution 2. Water pollution 3 CO2 emission that causes global warming 3 CO2 emission that causes global warming 4. Possible future energy shortage 4. Possible future energy shortage

Economic view to environmental problems Economics deals with the efficient use of resources. “ Being efficient ” means getting as much output or utility as possible given the same resources. Economics deals with the efficient use of resources. “ Being efficient ” means getting as much output or utility as possible given the same resources. Environment is “ natural capital ” and an important resource for production and consumption, similar to physical capital and labor that are used for production. Environment is “ natural capital ” and an important resource for production and consumption, similar to physical capital and labor that are used for production. Historically environmental resources were plentiful and waste in its use does not affect efficient use of resources. Historically environmental resources were plentiful and waste in its use does not affect efficient use of resources. In recent years environmental resources are no longer as plentiful and the extensive use of them has created environmental problems. In recent years environmental resources are no longer as plentiful and the extensive use of them has created environmental problems.

Market solution to environmental problems Condition for efficient allocation of resources is violated if producers do not pay for the cost of some resources, leading to waste in using these resources. Condition for efficient allocation of resources is violated if producers do not pay for the cost of some resources, leading to waste in using these resources. If the producers do not pay for the cost of emissions they will pollute too much. If the producers do not pay for the cost of emissions they will pollute too much. An obvious solution to this problem is to design a scheme for the people responsible for pollution to pay for the cost of their action (emission of pollutants). An obvious solution to this problem is to design a scheme for the people responsible for pollution to pay for the cost of their action (emission of pollutants). If the consumers were given property rights to natural resources (air and water) and could charge the cost of emission to the producers, the natural resources would not be abused. If the consumers were given property rights to natural resources (air and water) and could charge the cost of emission to the producers, the natural resources would not be abused. The above “ market solution ” is often not feasible because it is difficult to assign property rights to the consumers. However I will suggest an institutional arrangement below for the government to act on behalf of the consumers to achieve an efficient allocation of natural resource. The above “ market solution ” is often not feasible because it is difficult to assign property rights to the consumers. However I will suggest an institutional arrangement below for the government to act on behalf of the consumers to achieve an efficient allocation of natural resource.

Four components in the solution for regulating pollution (1) For each case of air or water pollution the local office of the Ministry of Environmental Protection issues a fixed number of emission permits per quarter. Each polluter is required to report the amount of pollution during the quarter and to pay for a number of permits equal to the amount of pollution reported. (1) For each case of air or water pollution the local office of the Ministry of Environmental Protection issues a fixed number of emission permits per quarter. Each polluter is required to report the amount of pollution during the quarter and to pay for a number of permits equal to the amount of pollution reported. (2) Given the number of permits issued, demand by polluters will determine the price per permit. The Administration ’ s local office will first set an initial price for the permits. If the price is too low, the permits will run out and some polluters need to purchase them from others. If the initial price is too high, there will be unsold permits and the local office will lower the price until all permits are sold. (2) Given the number of permits issued, demand by polluters will determine the price per permit. The Administration ’ s local office will first set an initial price for the permits. If the price is too low, the permits will run out and some polluters need to purchase them from others. If the initial price is too high, there will be unsold permits and the local office will lower the price until all permits are sold.

Four components in the solution for regulating pollution - continued (3) In determining the number of permits to issue in each local area affected by the pollution, the local office solicits and respects suggestions from the directly elected village heads in rural areas and the directly elected representatives in urban areas. This is a way to give property rights of air and water to the citizens. (3) In determining the number of permits to issue in each local area affected by the pollution, the local office solicits and respects suggestions from the directly elected village heads in rural areas and the directly elected representatives in urban areas. This is a way to give property rights of air and water to the citizens. (4) The revenue received from the permits will be returned to the local government of the area affected. Under the proposal the local residents through their representatives and the local government will have an incentive not only to determine a suitable amount of permitted pollution but to help enforce the amount. (4) The revenue received from the permits will be returned to the local government of the area affected. Under the proposal the local residents through their representatives and the local government will have an incentive not only to determine a suitable amount of permitted pollution but to help enforce the amount.

Conclusions I have demonstrated that simple economic ideas can be applied to solve important economic problems and illustrate this point in the case of provision of healthcare and the regulation of pollution in China. I have demonstrated that simple economic ideas can be applied to solve important economic problems and illustrate this point in the case of provision of healthcare and the regulation of pollution in China. Additional steps are required to put these ideas into practice as I have discussed in an article published in the May 2008 issue of Hong Kong Economic Review Monthly entitled “ From Research to Social Change. ” These steps include working through the government and outside the government but are beyond the scope of my lecture today. Working outside the government includes spread the ideas to the public as I am trying to do today. Additional steps are required to put these ideas into practice as I have discussed in an article published in the May 2008 issue of Hong Kong Economic Review Monthly entitled “ From Research to Social Change. ” These steps include working through the government and outside the government but are beyond the scope of my lecture today. Working outside the government includes spread the ideas to the public as I am trying to do today.

THANK YOU