Microsoft Word EcRefChina Oct06. doc

B. Health Care 
 
As a result of the earlier mentioned stagnation of public-sector health services during the 
period of economic reform (section II:1) – indeed a regress in many rural areas – the 
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According to Jefferson (2005), thiX Ziaoyun (2004). 
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Moreover, for a vast and heterogeneous country like China, modern information and communication 
technology (ICT) is like manna from heaven. Indeed, China has already started to exploit this source of 
productivity growth. For instance, while the country’s telecom system had 10 million fixed-line subscribers in 
1985, there are now more than 300 million fixed lines and close to 400 million mobile phones in operation 
(Ljunggren, 2006). ITC opportunities could also be more efficiently exploited by opening up and allowing free 
(non-censored) information flows in the new information channels.
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Jefferson (2005) reports that such firms contribute no more than a quarter of total R&D spending 
within mainland China. 
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R&D spending intensity of domestic (mainland) firms has recently increased most quickly in industries with 
much foreign (non-mainland) investment (Jefferson , Su and Zhang, 2004). “In-house” R&D activities of 
domestic firms also seem to be highly complementary to technology transfers (Hu et al., 2004). 
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Using provincial data, Cheung and Lin (2004) report positive effects of FDI on the number of 
domestic patent applications in the same province. Liu (2002) finds evidence of technological spillovers 
of foreign firms in the Shenzhen Special Economic Zone in the period 1993-1998. 

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private sector has taken over the responsibility for about a third of the production of such 
services (Kin et al., 2002). (However, some assets (medical facilities) are still owned by 
public-sector authorities, and rented to private agents.) In itself, this shift to private 
producers is not necessarily a problem. As in the case of education, and more so, the real 
problem is rather that the public sector has reduced and decentralized its responsibility for 
the 
financing
of these services. Only about 125 million individuals in urban areas seem to 
have comprehensive health-care insurance today,
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and perhaps about the same number 
participate in modest cooperative health plans in rural areas (Chow, 2006b). This is the 
background of the earlier mentioned fact that private financing in China covers about 60 
percent of the total health costs, usually taking the form of pocket money. The central 
government has, however, announced ambitions to expand the coverage both in urban and 
rural areas. 
In spite of the weaknesses of health services, there has been a rapid increase in total 
health spending – today amounting to 5.3 percent of GDP, which is 2-3 percentage points 
higher than in countries with a similar level of per capita income in Southeast Asia 
(except for Vietnam). The apparent paradox of increased spending and stagnating – and in 
some respects even deteriorating – health services suggests inefficiencies of health care 
(presumably reflecting deficiencies both in the organization and in the incentive 
structure). An additional indicator of inefficiencies is frequent reports of moral hazard in 
health care, for instance, in the form of excessive health investigations of patients (Chow, 
2006b) – a rather common problem in a number of countries, in particular when health 
care is financed by insurance. 
A more specific indicator of inefficiency in the Chinese health sector is that about 68 
percent of government funding was recently reported to have gone to hospitals rather than 
health clinics and preventive health, in spite of the fact that many experts regard the latter 
activities as potentially more important (on the margin) for the overall health situation 
(UNDP, 2000, p. 3).
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The inefficiencies in health care are also a result of the uneven 
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Blumenthal and Hsiao (2005) report that the share of employees in urban areas with health insurance is 55 
percent (in 2003) – a fall from 77 percent in 1993, largely a result of reduced employment in state firms and a 
rise in private and informal employment (UNDP, 2005, p. 65). In particularly poor areas of the country, many 
private doctors charge service fees simply because local governments often cannot afford to finance the 
services. 
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Of China’s total health expenditure (in 2002), 50 percent is reported to have been allotted to urban hospitals, 
and only 7 percent to health centers. It also appears that only about 7 percent was devoted to “public health” 

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