Economic Efficiency and Social Insurance Reforms in China

By Li, Haizheng | Contemporary Economic Policy, April 2000 | Go to article overview

Economic Efficiency and Social Insurance Reforms in China


Li, Haizheng, Contemporary Economic Policy


HAIZHENG LI [*]

This study discusses efficiency issues related to social insurance provisions and their implications for the newly established three-pillar pension system and three-tier health insurance system in China. It shows that these new systems can be improved substantially through some restructuring to reduce efficiency losses. The discussion of efficiency consequences focuses on correction for market failure and alternative mechanisms for financing and providing social insurance benefits. Alternative methods for financing the transition are also discussed. (JEL H55, P35, O53)

1. INTRODUCTION

Profound economic reform in China has been moving the country toward a market-oriented economy. Key features of this economic transition include the separation of the government from daily economic operations, a reduction in the share of state-owned industry, and the establishment of a market system. When it comes to social insurance, however, the transition appears to need the reverse course: the market mechanism may not provide an efficient level of social insurance, and government intervention is thus generally needed. This situation complicates the reform of China's social insurance system: on the one hand, a good social insurance system is necessary to facilitate the economic transition toward a market system; on the other hand, the market mechanism itself may not result in a good social insurance system.

One concern regarding government intervention is loss of economic efficiency. Any government action will inevitably involve collecting monies and distributing benefits in some way. This intervention may distort the market outcome. The possible distortion and especially the reduction in employment caused by a social insurance program will have a significant impact on China's economic transition. A natural question is whether there exists a mechanism that provides the same amount of social insurance services but causes fewer efficiency losses than other alternatives.

This study discusses efficiency issues related to social insurance provision and their implications for the reform of China's social insurance system. Previous studies have evaluated two sources of efficiency loss resulting from social insurance programs: declining labor force participation resulting from early retirements in pay-as-you-go pension systems (Gruber and Wise, 1998), and the evasion of workers to informal jobs, which generally have lower productivity (James, 1996). This study discusses a third source: distortions caused by alternative mechanisms for financing and providing social insurance benefits. Two types of mechanisms are discussed: indirect mandated provision and direct public provision.

There exist a number of studies of China's social insurance system. Selden and You (1997), Hussain (1994), and Song and Chu (1997) survey and examine China's old-age insurance system, World Bank (1997a) outlines a three-pillar pension system for China, World Bank (1997b) assesses China's health care system, and Gertler (1998) reviews the Asian (including China) experience of social health insurance. This study differs from the existing literature in the following aspects.

First, since 1997, there have been significant changes in China's old age insurance system and health insurance system. Some issues and potential problems have surfaced and have not yet been discussed in literature. This article assesses the new pension system and heath insurance system. Second, this study focuses on economic efficiency in the design of a social insurance program. It discusses the means of correcting for market failures and the efficiency consequences of alternative mechanisms for a social security program. Third, this study proposes a restructuring for the new Chinese pension and health insurance systems that will substantially improve their economic efficiency.

While the social insurance system includes a variety of programs, this study focuses on old-age insurance and health insurance.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Economic Efficiency and Social Insurance Reforms in China
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.