Policies to "create jobs" that may work in normal times can be too costly in the face of a large and generalized shock to labor demand. A firm facing much reduced demand for its products could require a substantial subsidy to hire new workers. Such spending could be wasteful, and its impacts unsustainable. Higher public sector employment or wages would also tend to help those who are already better off, and could be difficult to reverse in the future. While new high return public investments are a welcome part of the overall stimulus package, more artificial "public works" programs would create few permanently valuable skills and have a high non-wage component (and thus a high cost per job created). Job search programs, while not very costly, are also likely to be relatively ineffective at a time of low overall labor demand.

Various "job protection" policies can also have high indirect costs and may be unsustainable. Preventing or heavily discouraging firms from laying off workers could be bad for the business climate, could make firms less willing to hire new workers in the future, and ultimately fail if the company goes bankrupt as a result. Extensive bailouts of troubled firms would be very costly per 'job saved'. Higher minimum wages could harm employment, because they increase labor costs in a low labor demand environment. However, voluntary "worksharing" schemes agreed within an enterprise could be encouraged, as these can help maintain overall employment levels and allow workers to share the impact of the crisis.

Using the social safety net is much more promising, with due attention paid to the ability of programs to reach the most affected groups. Given the need for speed, the immediate focus could be on expanding and/or reforming existing programs. In many countries, the focus is on expanding unemployment benefits (UB). However, in China, two groups of particular concern–migrant workers and recent graduates–are not well covered by the UB program targeted at urban formal sector workers with an employment history. Thus, it could make more sense to focus on other existing programs, such as the urban and rural dibao (subsistence allowances). The first priority will be ensuring adequate funding for the selected program(s) under existing rules in the face of a rising number of beneficiaries. For programs administered by local governments, this may also require increased transfers from the central budget. If funding constraints permit, the second priority would be adjusting the rules governing these programs to expand the coverage, level and/or duration of benefits. However, any such changes need to fit into long-term reform plans and avoid adverse incentive effects on work effort.

Expanded enrollment in high quality and demand-driven education and training programs is also promising. If "job creation" efforts are too costly in the face of a sharp drop in labor demand, it could be better to use the current moment to provide China's citizens with additional skills, either by keeping students enrolled in school or by providing adult training. This would facilitate the movement of labor to the different and more sustainable jobs which will be in demand under China's new growth model. Workers who had deferred training out of a reluctance to forego earning opportunities during a boom may now show greater interest in such offerings. These programs should be as much as possible demand driven, both in terms of the skills provided and the locations where they are offered (especially the urban areas with the best long-run growth potential). As many persons may not be able to afford temporary inactivity or the direct cost of training, the additional offerings may need to be complemented by targeted scholarships, stipends, or loan programs.

Box 3. Health care sector reform.

China's health care system is widely recognized to be in need of reform. Recent years have seen a number of important policy initiatives, including in the areas of medical insurance and medical assistance. Building on these efforts, an Inter-ministerial Committee for Health Reform established in August 2006 has been working on a comprehensive health system reform plan for China.

An overall health care reform plan was formulated in consultation with and with input from different stakeholders, interest groups and experts. As part of the exercise, 8 institutions (including research centers, universities and international organizations (the World Bank and the WHO)) were invited to contribute a reform plan. The resulting draft outline of the government was put on its website last October to collect public feedback. This process in preparing the health reform plan has set an unprecedented model in China in the formulation of major national reform policy.

The plan sets out the government's approach.1/ The overall objective is to ensure universal coverage of basic health services through the establishment of a "basic health care system" which includes a public health system, a basic medical service delivery system; an essential drug supply system; and a health protection system. The health protection system is meant to consists of three main health insurance programs—basic medical insurance (BMI) for the urban formal sector, urban residents basic medical insurance (URBMI), the new rural cooperative medical system (NRCMS)—and a Medical Assistance (MA) program to subsidize health care premium and costs for the very poor.

The plan has five reform priorities. They are (i) scaling up basic health protection; (ii) a national essential drug system; (iii) better basic medical service delivery; (iv) more equal basic public health services; and (v) reform of public hospitals. To support the reform on these five priorities, the government plans to spend 850 billion yuan in 2009-2011, although the details, including on financing arrangements, are not yet know.

The government aims for universal access of basic public health (PH) services. The government will increase its financing of PH through fully financing the recurrent cost and capital investment for designated public health institutions and purchasing of the PH service. The basic package financed by the government will be defined and will be expanded gradually. The plan has proposed government PH funding of at least 15 yuan per capita in 2009 and 20 yuan in 2010. This will entail a spending of 22 billion yuan per year.

In "lower level" service delivery, the focus will be on revitalizing rural health services and building up community health service delivery systems. This includes building Community health centers (CHC), township health centers (THC), county hospitals and village clinics and training of health professionals working at the lower level. The central government will take on considerably more responsibility for the financing of lower level service providers. For CHC and THC, the government will finance or subsidize facility construction, equipment, staff salary and recurrent cost of the public health service. The profit markup of selling drugs will be abolished, although the financial implications still need to be worked out.

In the area of health protection, the focus is on scaling up the current schemes and improving the management. Enrollment rate is targeted at 90 percent by 2010 and the government subsidy to URBMI and NRCMS will be increased to 120 yuan per person by 2010, from 80 yuan now. This will imply roughly 120 billion yuan per year. The government's subsidy to the MA program is expected to increase to RMB 6 billion per year. The government also subsidizes the BMI premium for the employees and retirees from bankrupted enterprises or enterprises with hardship, requiring RMB 30-50 billion per year.

The national health reform plan is clearly moving in the right direction with the right focus. The government's commitment to universal access to basic health care is encouraging. The five work priorities are also rightly identified. The plan has an appropriate focus on ensuring access to health services, reducing inequity in access between regions and between cities and the countryside, and better targeting towards basic services and disadvantaged population groups such as farmers, low-income urban residents, and senior citizens. In implementing the reform plan, several important issues need to be dealt with, including on the implementation approaches and incentive structures.

The government needs to ensure sufficient funding for the reform. Out of the total RMB 850 billion spending plan, about RMB 330 billion will be from the central government and the remainder is meant to come from local governments. This will pose major challenges for local governments in poor areas, where spending on health is constrained by weak revenues. The current slowdown may accentuate these pressures. There might be a need for the central government to focus its support to cash-strapped provinces and counties or to establish a central solidarity fund at the provincial level or even the national level to cross-finance the reform at the local level.

A rigorous monitoring and evaluation (M&E) system is of great importance. Considering the large financial commitment, the scope, the complexity and the depth of the forthcoming national reform, a rigorous M&E system is necessary to monitor progress, measure results, and evaluate the impact to ensure that the reform meets its intended objectives. China has a welcome tradition of doing pilots before introducing any significant policy reforms. However, there is a strong need also for evaluation of policies that is prospective, rigorous and well designed, to inform what worked and what did not. The current health reform needs to be closely monitored and its impact on out-of-pocket costs, poverty, quality of health care, and health status improvement should be evaluated so that any issues which emerge can be solved in a timely fashion.

1/ The details of the plan are yet to be published. The final reform plan is expected to be formally released in late March after the National People's Congress's annual meeting.

Notes:

8. According to an official estimate, this should lead to a rise in rural income of 110 billion yuan. That would be about 3.6 percent of rural disposable income.

9. http://siteresources.worldbank.org/CHINAEXTN/Resources/318949-1121421890573/China_11th_Five_Year_Plan_main_report_en.pdf

10. President Hu Jintao, in a speech to the Communist Party of China (CPC) Central Committee Political Bureau on February 24, stressed that in response to the global crisis, the government should "maintain the policy of giving top priority to increasing domestic demand while stabilizing external demand," calling for "more powerful and efficient measures to increase domestic demand, consumer demand in particular."

11. While SOE dividend payments to the government (the main shareholder) have been introduced in 2008, the share of profit paid is modest for most, with estimates suggesting an average of 7-8 percent.

12. This assumes a fiscal multiplier of 1.

13. For instance, the car industry plan contains subsidies for auto makers that upgrade their technology and develop alternative-energy vehicles, a reduction in the consumption tax for small (energy friendly) cars, and subsidies for farmers who opt to replace three-wheeled vehicles or outdated trucks with new, small vehicles.

14. These are people on minimum living allowance (62.8 million), unemployed or receiving assistance from local governments (5.3 million) or the central government (6.4 million). Rural people received 100 yuan per capita and urban people 150 yuan per capita.

15. Policies towards the textile sector also include preferential loans and exempting the import tax on inputs.

16. Nicholas Lardy, presentation at World Bank-MOF Policy Seminar in Beijing, January 9, 2009.