Microsoft Word EcRefChina Oct06. doc

III. Social Policy Options 
When discussing the possibilities for the Chinese authorities to speed up improvement in 
social conditions, it is useful to classify policies into three categories: (i) interventions that 
boost and stabilize the 
factor income
of citizens, in particular among low-income groups; 
(ii) tax/transfer arrangements designed to stabilize and redistribute 
disposable income
for 
given factor incomes (”income security”); and (iii) improved and more evenly distributed 
provision of various types of 
human services
. Since the social arrangements (the “social 
system”) in China are undergoing rapid change, I concentrate on China’s basic social-
policy
 options
rather than on details of contemporary reform proposals and policy 
experiments.
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III:1. Policies to Influence Factor Income 
Since broad-based poverty reduction is often regarded as an overriding social ambition, a 
continuation of rapid growth of GDP, and hence of aggregate
 
factor income, is crucial for 
further social
 
progress in China. After all, China is still a very poor country, with about 40 
percent of the population living on less than $2 a day. There is also a strong social case 
for making the growth path more efficient and intensive, since more resources could then 
be devoted to social purposes without much (if any) loss in GDP growth. I argued in 
section I:2 that this would be facilitated by more flexible and less distorted capital and 
labor markets, more emphasis on investment in human capital as compared to physical 
capital assets, and more efficiency-based prices of energy and raw materials. The latter 
would, or course, also benefit the damaged environment in China. Less capital-intensive 
production would also help mitigate unemployment and underemployment, which may be 
an even more serious problem in the future.
Most likely, such a change in the character of the growth path would also be 
facilitated by a continuation of the privatization of SOEs and a removal of lingering 
discrimination of private firms, small firms and firms in the service sector. 
Moreover, a broadening of security markets (mainly shares, bonds and bills) would 
mean that large state firms could rely more on such markets rather than on bank 
loans, which would give small and medium-sized firms, including private ones, a 
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For comprehensive discussions of contemporary social policy issues in China, see, for instance, Tuan 
(2003) and UNDP (2005). 

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better chance of getting bank loans. Better functioning financial markets would, 
however, also require new instructions to public-sector banks (not to discriminate 
private firms) and an improved regulatory framework for financial institutions in 
general. More private banks through entry and privatization would also help remove 
the discrimination of private firms, and hence boost the efficiency in the banking 
system as a whole.
101
The hypothesis that such reforms would make GDP growth more intensive (less 
resource-demanding) is supported by the fact that the level
 
of total factor 
productivity is lower in SOEs and collectively owned TVEs than in “comparable” 
private firms (basically firms of the same size and type of industry), including 
foreign firms.
102 
A number of recent studies also suggest that economic efficiency 
has tended to increase in firms after being privatized.
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From a social point of view, the 
distribution
of factor income, and not just its level, is 
naturally crucial. This makes a strong case for combining general growth-promoting 
policies with