China Should Spend More on Public Services, UN Says

By Dune Lawrence

Nov. 16 (Bloomberg) -- China needs to spend more on education, health care and social welfare to sustain economic expansion as a global recession looms, the United Nations said in a report today.

The fruits of China's rapid growth haven't spread equally, and disparities limit continued expansion, according to the China Human Development Report. Shanghai and Beijing compare in development to European countries such as Cyprus and Portugal, while inland provinces like Guizhou in the southwest are closer to African economies like Botswana and Namibia, it said.

Improving services including health care will support a shift to consumption-led growth by boosting consumer spending and labor productivity, the UN said. Investing 372 billion yuan ($55 billion) a year, or 7.5 percent of state income, would let China assure nine years of compulsory education nationwide, basic medical care and old-age insurance, the report estimates.

``You have an opportunity here of doing the right thing, and also helping the financial crisis,'' said Khalid Malik, UN resident coordinator in China. ``If you can increase spending on health, education, social security, this would also help in maintaining the growth rates.''

China announced a 4 trillion yuan stimulus package focused on roads, railways, airports and low-rent housing on Nov. 9. Asia's second-biggest economy, which expanded by more than 10 percent a year since 2003, grew 9 percent in the three months from July to September, the fifth straight quarterly slowdown.

`Bang for Buck'

``There are many people who hope that this slowdown can be a reason the package can throw a lot more resources at social security and other social stuff,'' said Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai. ``There's a strong argument that more social spending would support more consumption in the medium term. The problem is you don't get instant GDP bang for your buck.''

Personal spending on education and medical care in 2005 reduced total consumption by 581 billion yuan, according to research cited in the document.

The government's stimulus plan, equivalent to almost a fifth of China's $3.3 trillion gross domestic product last year, includes funds for higher subsidies to farmers and allowances for poor city residents, according to the initial announcement. Most of the details released so far outline infrastructure spending.

Income Gap

The UN report argues that investment in public services may produce better results. Every 1 yuan rise in spending on rural education, for example, yields 8.43 yuan in added farm and livestock production, compared with a 6.75 yuan boost from infrastructure, it said.

In addition, unequal investment in public services between urban and rural areas is exacerbating China's wealth gap between cities and the countryside, threatening social stability, the UN said.

Last year, Chinese city dwellers' per-capita disposable income was three times as high as rural residents', official figures show. Taking public services and benefits into account, urban incomes were at least five times higher, according to UN estimates.

China's global rank in the UN's human development index has climbed to 81 from 101 in 1991. The ranking is based on life expectancy, adult literacy rates and school enrollment ratios, and real gross domestic product per capita.

To contact the reporter on this story: Dune Lawrence in Beijing at dlawrence6@bloomberg.net