Microsoft Word EcRefChina Oct06. doc

feng zou chi fang
(“eating from separate 
pots”). Although some recentralization has taken place since then, the resources for providing human 
services still vary dramatically among provinces and municipalities. 
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The distribution of per capita public spending across provinces seems to be at least as uneven as the 
distribution of per capita GDP, perhaps even more so (China Human Development Report, 2005, p. 75); 
OECD, 2005a, Fig. 4). 

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in constructing new systems of social insurance. The social consequences – poor income 
security and deficient human services – are consistent with the traditional inference in 
microeconomic textbooks that a market economy does not automatically generate 
adequate arrangements in these fields. Naturally, I refer to various limitations of markets 
for voluntary income insurance, myopia among some individuals, and difficulties to 
borrow for investment in human capital; poverty (and liquidity constraints) is, of course, 
another reason why individuals to not acquire voluntary insurance policies or invest in 
human capital. 
It is not clear why the Chinese authorities were so late in building up new systems of 
income insurance and the provision of human services, when the old systems broke down 
in connection with the economic reforms. We may speculate that the overriding concern 
for economic growth meant that other objectives were put aside, possibly since such 
objectives were regarded as potentially harming the growth strategy. Alternatively, the 
authorities did not realize that markets do not automatically solve problems in the social 
field.
However, the shift to a new economic system is not the only background factor for 
the need, and demands, to reform the social arrangements in China. Two other 
factors should also be emphasized, namely changes in demography
 
and the 
urbanization process. Behind the recent 
demographic
development in China, there 
are dramatic changes in both fertility and longevity. Broadly speaking, the fertility 
rate has dropped from about 6.0 immediately after World War II to about 1.5 today, 
and life expectancy (at birth) has increased from about 35 years to about 72 years.
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To begin with, these developments “improved” the age composition of the 
population in the sense that the share of individuals of working age (15-59) 
increased from about 53 % in 1975 to about 67 % today – a development often 
characterized by demographers as a “demographic dividend”. However, as a result 
of the rise in longevity, this dividend is bound to be transformed into a 
“demographic deficit” when the number of elderly increases substantially.
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While the US Population Reference Bureau (PRB, 2005) reports today’s fertility rate at 1.6, The 
China 2000 County Population Census (All China Marketing Research Co., 2003, reports the figure at 
1.3; see, for instance, the discussion in Liu (2006).
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For instance, the UNPD (2000) predicts that the population share of individuals of working age will 
start to fall after 2010, and
 
return to about 53 % by 2050 – the lowest predicted share at that time among 

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Until a new comprehensive pension system and new arrangements for old-age care 
outside the family have been built up (which is bound to take a long time), relatives will 
continue to play the major part in these fields, in particular in rural areas. As a (slight) 
caricature of the development, demographers in China talk about the “4-2-1 problem”: a 
situation when one child may be required to support and service two aged parents and 
four grandparents! The caricature is, of course, only meant to illustrate the likelihood of 
either a heavy burden for individuals of working age, or serious poverty and deficient 
services among a large future population of elderly citizens in the country – or, most 
likely, a combination of both. 
Recent suggestions and tendencies to soften the “one-child policy” are probably