Microsoft Word EcRefChina Oct06. doc

III:3 Human Services 
Although a number of public-sector firms, or more often their subsidiaries, still provide 
human services to their employees, the authorities are gradually taking over the main 
responsibility in this field as well, with local governments as the dominant service 
providers. In some urban areas, however, non-government organizations (“civil society”) 
have also expanded their provision of human services – a development sometimes 
referred to as “societization” rather than “socialization” of human services. Such 
developments seem to be most advanced in some of the large cities, in particular in 
Shanghai (Sun and Tuan, 2003).
At the present time, suggestions and promises abound for improving the volume, quality, 
and accessibility of human services, especially in poor areas and among disfavored 
population groups. It is quite obvious that a considerably more equal distribution of such 
services would require both more government financing and larger financial transfers 
from the central government to poor local governments – general grants or earmarked 
grants for specific services depending on the degree of paternalism of the central 
authorities towards lower levels of government.
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At the same time, experiences from 
developed countries suggest that such inter-governmental transfers may result in waste at 
the local government level if not combined with incentives to economize with resources 
(such as by cutting of bureaucracies).
At the 11
th
Congress of the Communist Party in early 2006, the Chinese authorities 
emphasized their ambitions to speed up reforms that boost local provision of human 
services, in particular in rural areas. A continuation of fast GDP growth would certainly 
make this economically feasible in the sense that increased provision of human services 
will then be possible alongside a simultaneous rise in the consumption of ordinary 
consumer goods. Sooner or later China will, however, encounter the same types of 
problems in this sphere as developed countries have already experienced. One example is 
gradually rising relative costs of labor-intensive human services (William Baumol’s “cost 
disease”, Baumol, 1967) – assuming (realistically) that wages in the long run tend to rise 
at about the same rate in the production of such services as in other sectors. As a result, 
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Local authorities account for about 67 percent of public-sector spending in China, although they only 
collect about 48 percent of tax revenues (Jourmard and Kongsrud, 2003). According to Tsang (2002, 
p.13), grants from central and provincial governments to poor villages and municipalities only amounted 
to about one percent of GDP in 1997.

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taxes will have to be raised without limit as long as a country allocates a gradually rising 
share of the labor force to producing tax-financed services of these types (Lindbeck, 
2006). Indeed, the fast rate of real wage growth in manufacturing in China will bring 
about such cost problems relatively soon. 
Another problem, which is already apparent in China, is related to the difficulties in 
providing effective mechanisms for adjusting quantities and qualities of human services to 
consumers’ needs and preferences. In particular, in countries where local governments 
have a monopoly on the provision of human services, the “exit option” is not available as 
a method for consumers to exert such influence (except possibly when an individual 
moves to another municipality). The “voice option”, exerted via the political system, is 
necessarily also rather weak, because citizens’ political influence basically refers to the 
entire “policy packages” offered by politicians, rather than to specific services and/or 
specific service providers. The voice option would be expected to be especially weak in 
countries without free and contestable elections. To strengthen the voice option at the 
local level, China has recently introduced elections of leaders of village administration in 
some parts of the country (and in a few townships as well). There is some evidence that 
this reform has increased the responsiveness of local authorities to the demands of public 
goods by the citizens (Luo et al., 2006). But the extent to which such reforms will actually 
increase the citizens’ influence on the provision of human services is limited both because 
of the absence of competing political parties and by the fact that centrally appointed party 
officials (party secretaries) still have strong political powers over the local administration.