Efficiency and Fairness of Resources Allocation by the Governmental Administrations in China / Sheng Hong

A Research on

Efficiency and Fairness of Resources Allocation

by the Governmental Administrations in China

Sheng Hong Qian Pu

Abstract

Currently, governmental administrations play a dominant role in China. The methodology that the administrations adapts for resource allocation now deviates from the typical procedures of allocation by public choices. The will of the administrative departments predominates the decisions of resource allocation, which showcases a tendency to lean towards their own interests.
This report is to present researches in three fields of interest, namely education, health care, and land. All three sectors can be categorized as private goods with partial public goods properties. Therefore, the market mechanism should be the basic institution for resource allocation in these sectors. Non-market institutions, including administrative measures, should only be allowed to supplement the market failures as a complimentary approach.
In China, it should be noted that the structure of the government is still flawed. There is a lack of legal bond and constraint from legislative entities on the scale and conduct of resource allocation by administrative departments, as well as a lack of control on the executive department by legislative entities. As a result, the range, scale, and conduct of resource allocation by administrative departments surpasses its reasonable extent.
Resource allocation by administrative departments has the following advantages: (1) high mobilization capabilities to allocate resources; (2) guarantee to concentrate resources of the entire society on one specific critical goal; (3) supplement market failures by allocating the limited government resources in order to achieve a positive interaction between the market and the government.
The disadvantages of resource allocation by administrative departments are as follows: (1) the administrative departments lack the capability to handle the information generated in a decentralized manner during the specific transactions; (2) as there is no market signal to benchmark when the administrative departments are allocating resources, no positive feedbacks are received from market signal as incentives; (3) the hierarchical structure of the administrative departments promotes a priority for the superior administrations during resource allocation, which they in turn have access to better and more resources; (4) the centralized decision-making process lacks civil perspectives and attention to details; (5) the administrative departments feature unequal submissive relationship between the superiors and the inferiors as a rule of operation; (6) the invisible rule that stipulates the administrative leader as the “smartest mind” limits the possibility for better decision-making as internal intelligence resources are not best employed; (7) the singular goal evaluation system risks compromising other goals for social benefits; (8) the administrative departments, in general, are nearsighted and short-term benefit oriented, which can result in inefficiencies of resource allocation; (9) Correction mechanism is lacking.
In China’s practice, there are direct and indirect ways to allocate resources by administrative departments. The former involves direct resource allocation by the administrative departments or state-owned-enterprises (SOE); and the latter involves setting up entry barriers and price regulations.
The proper scope of resource allocation by administrative departments include public goods, quasi-public goods, and remedies for market failures. A loss of efficiency may occur when administrative departments go beyond this sphere. When administrative departments are allocating resources where the market mechanism functions, it disrupts the market equilibrium and causes a loss in economic efficiency.
Rawls’s first principle of justice regards the liberty of everyone’s maximum equality; and Rawls’s second principle of justice stipulates that if inequality must be accepted, the lean should be towards the disadvantaged group. We will adopt these two principles to review the fairness of resource allocation by administrative departments.
The standards for evaluating the fairness of direct financial resource allocation by administrative departments are as follows:
Generally speaking, the fair and just financial resource distribution should be equal distribution where the Gini Coefficient for financial resource distribution should be zero. If such distribution cannot be achieved, then a low Gini Coefficient, 0.1, for instance, can be tolerated. However, it should be stressed that in this case, Rawls’s second principle of justice should be adopted, and the financial distribution should be tilted towards the group with the lowest income. The extent to which the financial resources should be distributed to this group shall not change the current income structure, that is the subsidies to the poorest shall not make their income exceed that of the less poor.
Typically, legitimate entry regulations consist of entry barriers brought forth by natural monopoly, or existing entry barriers to guarantee the qualification of the current practitioners. Otherwise, entry barriers normally lead to stagnation of competition and decrease of supply, which deprives consumers of the benefit from competition, low prices and convenience from abundant supply. Hence, such entry barriers are not fair by nature.
During price regulation in either natural and oligarchy monopoly, deviation from the principles of setting average cost pricing, multi-part pricing or Ramsay pricing would cause loss of benefit for the consumers regardless if the price is higher or lower as aforementioned. This is especially true for the low income families and the less advantaged.
The criterion we use to review the fairness of regulation on commodities is whether the regulation reduces information asymmetry and damages to consumers.
In China, the resources of education, health care, and land are mostly allocated by, or indirectly influenced by the conduct of the administrative departments. In terms of education and health care, the main forms of resource allocation by administrative departments are: (1) through various administrative regulations, including entry barriers, price regulations, personnel regulations, which control the distribution of social resources; (2) resource allocation according to the class and type of ownership within the industry through industrial and financial policies.
The main forms of land resource allocation by administrative departments include: limiting purpose of land use through planning, monopolizing the primary land market, implementing quota for land use and applying a dual track system for land allocation.
Research shows that the total amount of supply and demand in education, health care, and land is out of balance. Educational resources are in short supply. Total admission rate for secondary education is at 81%, and merely 25.9% for post-secondary education.
There is a severe lack of medical resources. Between 1978 and 2012, the comparable demand increased by 3500%, while there was only an increase in the number of hospitals by 137%, and certified (assistant) doctors by 167%.
For lands, from 2004 to 2013, average annual urban population growth rate was 3.4% while the average annual urban construction area increase was 5.2%. With the latter growing at a 53% faster rate, land resources has been developed highly wastefully.
Studies show that the distribution structure of land resources is distorted. Due to regulations on industrial land price and competition for investment between regions, the industrial land price is much lower compared to that of commercial service land and residential land. This not only leads to the invasion into agricultural land, but also a decrease in commercial and residential infrastructure out of construction land.
The distribution of public land including land for government use is mainly dependent on designation by administrative departments. This has led to more waste of land resources, and also less land for commercial use and residential use.
Considering that about a quarter of the residential land is used for low-income housing, which squeezes the ratio of residential and commercial lands to be less than 30% or even 25% of land in the property market. This then contributes to the sheer high prices of land for commercial and residential purposes.
Studies also suggest that the resource allocation in these three sectors are rather more unfair. Financial resources should be allocated manually and fairly among individuals. If a certain level of unfairness is unavoidable, then the resource distribution should be tilted towards the less advantaged group. However, financial resource distribution in the three sectors of discussion are distributed more to the well-off and privileged, especially for education and health care resources.
In terms of regional distribution, resources are inclined to concentrate in administrative power centers. Putting the number of “211” colleges to the population of the respective provinces and autonomous regions, the ratio is seen to be the highest for Beijing with 1.11 colleges per million people, followed by Shanghai with 0.38. The Province of Henan is the lowest at 0.016 colleges per million people, 1/69th of Beijing.
The chance of admission is also a form of education resource allocation. In 2012, the ratio for Tier One colleges for Beijing, Tianjin, and Shanghai is respectively 5.2, 4.7, and 4.2. This ratio sets Sichuan, which has the lowest chance of admission as the basis of reference, meaning the students from the these three places are 5.2 times, 4.7 times, and 4.2 times more likely to be admitted by Tier One colleges of that in Sichuan.
In 2012, the net admission rate of the National Matriculation Examination was 30%; while that of Beijing exceeded 60%, and that of Guizhou Province was only 25.5%.
In 2012, the city with the most first class hospitals was Beijing with 2.5 first class hospitals per million people. The lowest were Henan Province, Anhui Province, and Hebei Province with 0.59 first class hospitals per million people. There are also 3,374 certified doctors per million people in Beijing, 3.6 times the number of doctors of the Tibet Autonomous region, which sits the lowest.
The level of medical resources for rural residents per capita, including medical technicians and certified (assistant) doctors, was only half of that of urban areas. The difference is even greater for the number of nurses per capita for rural areas was 30% of that of the urban areas.
After adjusting the average income and filtering the gap between people’s average income across provinces, the financial subsidies to students per capita still greatly varies across provinces with an obvious tilt towards administrative centers. According to Rawls’s second principle of justice, with technical design, we used “relative loss and return index” to demonstrate this phenomenon. The two figures below show the relative loss and return index for financial subsidies from elementary schools to colleges. As seen in the figures, Beijing, Shanghai and Tianjin all have “extremely unfair advantages”.

Relative Return and Loss Index for Financial Resource Allocation among Elementary Schools and Middle Schools across Provinces

Relative Return and Loss Index for Financial Resource Allocation among High Schools and Secondary Schools across Provinces

According to the standards of this report, the fairness of financial resource distribution for elementary schools, middle schools, and high schools is “poor”, with elementary schools being the worst. The fairness of financial resource distribution for high school education is “intermediate.”
In terms of average medical subsidies, the figure for Beijing is RMB 921 per person, and lowest figure is for Henan Province with RMB 103.
As the cities with the highest income level, Beijing, Shanghai and Tianjin are also the most advantageous in terms of average medical subsidies per capita received. In the current financial resource distribution system, Beijing and Shanghai are the “largely unfair receivers of subsidies”, while Henan, Hebei, Jiangxi, Guizhou and Heilongjiang Provinces would be labeled as the “largely unfair receivers of losses”.
The fairness index of financial resource distribution system in the healthcare sector is 0.413. Fairness is “poor”.
Over the years, large portions of the fiscal input in the healthcare sector have been provided to urban than rural regions. Per capita, the level of fiscal input in the healthcare sector for urban areas is three to four times that of the rural areas.
While there is evident tilt towards administrative centers in terms of education resource allocation across regions, there is also apparent unfairness in resource allocation among different groups of population within the same regions. According to some researches, the higher class (medium to high level managerial professionals and technicians) receive more quality education resources in key urban middle schools than the middle to lower class (labourers, farmers, displaced workers, unemployed and homemakers). In terms of receiving higher level education, the generational output rate (i.e., the proportion of the decendants of a given working class receiving higher level education in the total population of full time professionals within the same class) of executives of the state and the society, managers, private business owners, and vocational technicians, is 2-6 times that of the average value. The generational output rate of the higher class can be up to 14 times that of the lower class.
The difference of medical resource allocation among groups is reflected in the health care system. Staff and personnel of the party, government and social enterprises enjoy public-funded health care paid by the financial funds, while other citizens enroll in various forms of medical insurances paid by themselves and their employers. According to Mr. YIN Dakui, former Deputy Minister of Ministry of Health, 80% of all the funds for healthcare are spent on the 8.5 million party and government officials.
The national public expenditure on health care was RMB 365.74 billion for the year 2012. Comparing the extent of coverage, medical subsidies to civil servants averages RMB 1,142 per capita, RMB 169 per capita to the rural subsidized, and RMB 213 per capita for urber residents.
On duty and retired civil servants lead in income levels among other groups, yet bear the lowest medical expenditure of all. For instance, the expenditure burden rate for on duty civil servants in Beijing is about 8-10%, while it is 36-43% for company employees, and 30-80% for farmers.
In the current institution where the local government deprived land from farmers who have no right to refuse, the farmers with land seized not only receive no compensation, nor receive stable alternative job offers. From 1996 to 2012, some 64.92 million rural residents’ land has been taken. As the compensation for such land was only worth 2-10% of the market value, and the difficulty to get re-employed is high, the livelihood of farmers with seized lands was lowered enormously.
After the residential housing institutional reform in 1998, the administrative departments stressed the development of economic housing, or budget housing, and they stipulated that such houses could be constructed by central party and government departments and be provided to officials. Party and government departments of lower levels followed suits. 36 million sets of budget houses were proposed by former Premier Wen Jiabao. In a conservative estimate, with 60% of such housing units provided to officials and employees of SOEs, some RMB 4.86 trillion would be transferred to the class who drafted this policy in the name of construction and provision of economic houses.
In light of the inefficiency and unjustness of institutional resource allocation, citizens have been compensating this error in various forms, such as migration through the National Matriculation Examination, incomplete rights houses, seeking medical treatment in big cities, and offering monetary gifts. Yet, such behaviors are mostly suppressed by the administrative departments. Therefore, it is clear that there still exist severe mismatch and misallocation of resources in the three sectors this report concerns.
From the constitutional level, reasons must be given and approved by the legislature if the executive departments try to intervene and regulate in the resource allocation of education, health care, and land resources. Market institution should be the main reference of resource allocation. Limits and supervision must be conducted by the legislature upon the executive branch. And the Rawls’s second principle of justice should be followed where the financial resources are allocated. The executive branch should be held accountable if this principle is violated.

Content

Abstract 2
Chapter1 Administrative department as a mechanism of resource allocation 14
I. The basic resource allocation mechanisms 14
II. The economical and technical characteristics of the three sectors and their proper resource allocation mechanisms 15
1. Economic and technical characteristics of education 16
2. Economic and technical characteristics of medical care 17
3. Economic and technical characteristics of land allocation 18
III. Characteristics of market system and administrative departments in resource allocation 19
1. Market system 19
2. Administrative departments 19
IV. The scope and modes of resource allocation by administrative departments 21
1. Appropriate scope of resource allocation by administrative departments 21
2. Current study of allocation of resources led by administrative departments in China: overstepping and non-presence 22
Chapter2 The evaluation criteria for efficiency and fairness on resource allocation led by the administrative departments 23
I. The efficiency evaluation criteria for resource allocation led by the administrative departments 23
1. The efficiency evaluation criteria for the scope of resource allocation by the administrative departments 23
2. Efficiency loss due to overstepping of the administrative departments 23
3. The efficiency evaluation criteria of allocating resources among individuals by administrative departments 25
4. The efficiency evaluation on the regulating behavior by the administrative departments 25
II. The fairness evaluation criteria of resource allocation by administrative departments 26
1. Rawls’ principles of justice 26
2. The fairness evaluation of directly allocating public financial resources by administrative departments 27
3. The fairness evaluation criteria of entry regulation 28
4. The fairness evaluation criteria of price regulation 28
5. The fairness evaluation criteria of product regulation 28
6. The fairness index of public financial resource allocation 29
Chapter3 Applying rent seeking theory to analyze resource allocation by the administrative departments 33
I. Concept of rent and its extension 33
II. The theory of rent dissipation and its generalization 35
III. Rent retention 39
IV. Rent seeking 41
V. The fairness evaluation criteria of rent setting, rent retention and rent seeking 42
VI. Applying the rent seeking theory to analyze allocation of resources by administrative departments 42
Chapter4 The efficiency and fairness of educational resource allocation by the administrative departments 44
I. The specific mechanism and content of the educational resource allocation by administrative departments 44
1. The basic resource allocation mechanism of the education system 44
2. Educational resource allocation and deployment mechanism of public and private education 52
3. Allocation and deployment of basic educational resources 56
4. Allocation and deployment mechanism of higher education resources 62
5. Summary 69
II. Strategic countermeasures and corresponding games against resource misallocation in the field of education 70
1. Strategic countermeasures against resource misallocation in the field of basic education – fight for quality services in basic education 70
2. Countermeasures of resource misallocation in the field of higher education – NCEE (National College Entrance Examination) migration 72
3. Foot voting – studying abroad 73
III. The administrative departments’ countermeasure against the strategic behavior in the field of education 74
1. Cracking down NCEE (National College Entrance Examination) movers 74
2. Restraining the “school selection fever” 74
IV. The consequences of education resource allocation by administration departments 77
1. Total inflow of investment and structural distribution 77
2. Spatial allocation of educational resources 81
3. Allocation of state financial funds in the field of education 86
4. Resource allocation among different groups 95
5. Prevalent phenomenon of rent-seeking 101
6. Rent seeking in education leads to social opposition and political tension 105
7. Summary 107
Chapter5 Efficiency and fairness allocation of medical resources by administrative departments 109
I. The mechanism of medical resource deployment by administrative departments and its content 109
1. The allocation of social resources in medical field 109
2. The mechanism of resource allocation and deployment in medical industry 120
3. The mechanism of medical resource allocation and deployment among different social groups 123
4. Summary 126
II. Strategic response to the misallocation of resources and the corresponding game process in the field of medical care 126
1. Seeking medical treatment in large cities / advanced hospitals 126
2. Hospital ticket scalpers 127
3. Red packets, kickbacks and moonlighting 128
III. Countermeasures of administrative departments against the strategic behaviors in the field of healthcare 131
1. Investigation and treatment on receiving red envelops 131
2. Investigation and treatment on “moonlighting” 131
3. Cracking down on unlicensed medical practice 132
IV. Results of resource allocation by administrative departments in the field of healthcare 133
1. The quantity allocation 133
2. The spatial allocation of healthcare resources 134
3. The justice of financial fund allocation in the field of healthcare 137
Chapter6 Efficiency and justice of land resource allocation by the administrative departments 152
I. The specific mechanisms of land resource allocation by the administrative departments and its contents 152
1. Direct allocation of land resources by the administrative departments – Planning 152
2. Direct allocation of land resources by administrative departments – examination and approval on projects 153
3. Regulations on usage and transaction: the conversion of collective land into construction land must go through governmental expropriation 153
4. Cultivated land protection: examination and approval on the conversion of agricultural land and quota restraints 154
5. Supply system of construction land 156
6. Price regulation 159
7. Regulation on plot ratio 162
8. Affordable housing: quantity regulation, price regulation, buyer regulation 162
9. Summary 163
II. Strategic behaviors in the field of land and the cost resources 163
1. Rent dissipation coming from direct allocation and regulation of administrative departments 163
2. Strategic behaviors of local governments against the central government 165
3. Strategic behaviors of peasants against administrative departments 169
4. Strategic behaviors of real estate developers against administrative departments 176
III. The administrative departments countermeasures to combat various strategic behaviors in the land sector 177
1. The central government’s countermeasures to suppress illegal activities of the local governments 177
2. The administrative departments suppressing the strategic behaviors by the private individuals 178
3. Measures of central government: strengthening construction of affordable housing 183
4. Regulations leading to more regulations 184
IV. Results of land resource allocation by administrative departments. 185
1. Impact on total quantity of land allocation 185
2. Impact on the structure of land allocation 187
3. Land allocation among people 198
4. Severe corruption in the land rent-seeking 203
5. “Small property right housing” and “Urban village” property 210
6. Summary 210
Chapter7 Basic conclusions and reform suggestions 215
I. The evaluation of overall efficiency 215
1. The institutional evaluation: regulation on market for private goods is inefficient 215
2. The evaluation of results: total quantity imbalance and structural distortion 215
II. Evaluation of fairness: unfairness of motivation and unfairness of results 217
1. Unfairness of resource allocation among different areas 217
2. The unfairness of resource allocation among different groups 218
III. Analysis of specific phenomena 220
1. Price regulation due to entry regulation 220
2. Fairness inspection of admission quota of the National College Entrance Examination 222
3. Legal analysis on the Self-benefiting behavior on resource allocation of administrative departments 222
4. Summary 230
IV. Basic conclusions 230
V. Reform suggestions 231
1. Basic principles of reform 231
2. Reform suggestions in the educational field 232
3. Reform suggestions in medical care field 233
4. Reform suggestions in land field 234