China's human capital investment

human capital

ChinaEconomicReview16(2005)50

–70

China’shumancapitalinvestment

JamesJ.HECKMAN*,1

DepartmentofEconomics,TheUniversityofChicago,1126East59thSt.,ChicagoIL60637,UnitedStates

Abstract

ThispaperdiscusseshumancapitalinvestmentinChina.China’scurrentpoliciesfavorphysicalcapitalinvestmentoverschoolingandurbanhumancapitalinvestmentoverruralhumancapitalinvestment.Currentmigrationpoliciesdiscriminateagainstchildrenofmigrants.Amorebalancedinvestmentstrategyacrossruralandurbanregionsandtypesofcapitalisappropriate.Privatefundingforeducationthroughtuitionandfeesshouldbeencouragedandcansupplementgovernmentfundingandmakeschoolsmorefinanciallyself-sufficient.However,ifthispolicyisenacted,capitalmarketsforfinancingeducationneedtobedevelopedtoavoiddiscouragingstudentsfrompoorfamiliesfromattendingschool.

D2004ElsevierInc.Allrightsreserved.

Keywords:Humancapital;Economicgrowth;Migration

1.Introduction

In1995,China,atalllevelsofgovernment,spentabout2.5%ofitsGDPoninvestmentinschooling.2Atthesametime,roughly30%ofitsGDPwasdevotedtophysicalinvestment.IntheUnitedStates,thosefigureswere5.4%and17%,respectively.InSouthKorea,theywere3.7%and30%.SeeTable1foracomparisonofChinawithothercountriesinitsgovernmentalexpenditureofGDPoneducation.Chinawasbelowaverage

*Tel.:+17737020634;fax:17737028490.E-mailaddress:jjh@uchicago.edu.1

HeckmanisHenrySchultzDistinguishedServiceProfessorofEconomicsattheUniversityofChicagoandaSeniorFellowoftheAmericanBarFoundation.

2

SeeUNESCO,StatisticalYearbook(NewYork:UNESCO,1999).1043-951X/$-seefrontmatterD2004ElsevierInc.Allrightsreserved.doi:10.1016/j.chieco.2004.06.012

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J.J.Heckman/ChinaEconomicReview16(2005)50–70

Table1

PublicexpendituresoneducationasapercentageofGNPin1995World

China

PhilippinesThailandIndiaMalaysiaSingaporePakistanTurkey

SouthKoreaEgyptMexicoBrazilArgentinaUnitedStatesJapanCanadaGermany

RussianFederationPolandHungary

Source:UNESCO(1999).

a

Datawereonlyavailablefor1994.

5.22.534.13.34.732.82.23.74.84.95.13.8a5.4a3.6a6.9a4.83.55.25.3

51

evenamongitspeersinitsexpenditureoninvestmentinpeople.Recenttrendsingovernmentalhumancapitalinvestmentarefavorable,buttheinvestmentproportionisstilllowbyworldstandards,risingto3.3%in2002(seeTable2).Morethan45%ofGDPwasinvestedinphysicalcapitalin2002.Eventhedramaticgrowthinprivatespendingon

Table2

GovernmentappropriationforeducationasapercentageofGDPin100millionYuanYear199119921993199419951996199719981999200020012002

Governmentappropriationsforeducation618729868117514121672186320332287256330573491

GDP21,61826,63834,63446,75958,47867,88574,46378,34582,06889,46897,315104,791

EducationalexpenditureaspercentageofGDP2.9%2.7%2.5%2.5%2.4%2.5%2.5%2.6%2.8%2.9%3.1%3.3%

Source:ChinaStatisticalYearbook2003.

human capital

52J.J.Heckman/ChinaEconomicReview16(2005)50–70

educationinthepast10years,whileencouraging(seeTables3and4),isnotenoughtofullyredresstheimbalance.

China’sratioofannualinvestmentinphysicalcapitaltohumancapitalismuchhigherthanthatinmostcountries.Thisimbalancemightbewarrantediftheeconomicrateofreturntophysicalcapitalweremuchgreaterthantheeconomicrateofreturntohumancapital.Below,IsummarizeevidencethatindicatesthatthetruerateofreturntoeducationandskillformationisveryhighandthattheimbalanceinhumancapitalinvestmentrelativetophysicalcapitalinvestmentissymptomaticofaseriousdistortionincurrentpolicythatretardseconomicdevelopmentinChina.Conventionalmethodsforcomputingratesofreturntohumancapitalthatareusefulinlessregulatedlabormarkets,andarefrequentlyappliedtothestudyoftheChineselabormarket,giveamisleadingestimateofthetruesocialrateofreturntohumancapital.Othermethodsmustbeusedtoestimatethetruesocialreturn.

Abasicresultofeconomicsisthatresourcesshouldflowtotheirmostproductiveuse.Apolicythatequalizesreturnsacrossallinvestmenttypesandacrossallregionsincreaseseconomicgrowth.CurrentChinesepolicytendstoignorethisfundamentalrulenotonlybypromotingphysicalcapitalinvestmentoverhumancapitalinvestment,butalsobyrestrictingtheflowofresourcesacrossregionsandinvestingineducationatdifferentratesindifferentregionsandbyinvestinginphysicalcapitalinanimbalancedfashion.ThesepoliciesreducetheeconomicgrowthofChinaandpromoteinequality,bothintheshortrunandinthelongrun.

Inthispaper,Ifirstpresentthepotentialbenefitsthatflowfrominvestmentinhumancapital.Then,IdiscusstheempiricalevidenceontherateofreturntoeducationinChinaandevidenceonregionalandgeographicimbalancesinexpenditureonhumancapitalinvestment.IthenconsideralternativepolicyreformsthatwouldfosterskillacquisitionandenableChinatoharvestthebenefitsofinvestmentinbothphysicalandhumancapital.Imakesevenpoints.(1)Thebenefitsofhumancapitalinvestmentaresubstantial.(2)ThecurrentlevelofinvestmentinhumancapitalinChinaislowcomparedtowhatis

Table3

Governmentandtotalfundsdevotedtoeducationin100millionYuanYear199119921993199419951996199719981999200020012002

Total731.5867.01059.91488.81878.02262.32531.72949.13349.03849.14637.75480.0

Governmentappropriationsforeducation617.8728.8867.81174.71411.51671.71862.52032.52287.22562.63057.03491.4

%84.584.181.978.975.273.973.668.968.366.665.963.7

Source:ChinaStatisticalYearbook2003,andChinaEducationalFinanceStatisticalYearbook2003.

human capital

J.J.Heckman/ChinaEconomicReview16(2005)50–70

Table4

TotalexpendituresoneducationasapercentageofGDPin100millionYuanYear199119921993199419951996199719981999200020012002

Totaleducationfundsa7328671060148918782262253229493349384946385480

GDP21,61826,63834,63446,75958,47867,88574,46378,34582,06889,46897,315104,791

53

%3.43.33.13.23.23.33.43.84.14.34.85.2

Source:ChinaStatisticalYearbook2003,andChinaEducationalFinanceStatisticalYearbook2003.

a

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