Interesting IMF working paper here about the relationship between consumer spending and government spending on health and education. The long-term viability of China’s economic system, according to some, is dependent upon Chinese people saving less in order to move away from an export-oriented growth model. With this in mind, it’s taken as an article of faith by numerous China watchers that low levels of social spending are the reason for very low levels of consumption. Descriptive statistics demonstrate that there are differences in urban-rural household savings patterns, though they seem to be correlated primarily with income levels (insofar as the available data is accurate). This paper accounts for income only with the urban-rural division of the samples, and finds that among urban households, substitution will occur only at higher levels of spending (“higher income” in this case being, maybe, 100USD per month). Still, the primary determinant of consumption, I would argue, is income/wealth. Only above a certain threshold will increases in social spending have an effect; it’s visible here due to the division of the sample. Income was probably not considered for their equation due to lack of data availability, though it would be interesting to see the results of a regression using the entire sample and rural/urban as a dummy variable.

… The main finding of this paper is fairly robust. Higher government health spending reduces urban household saving and suggests that broadening coverage of public health care could have an important effect on household precautionary savings. The magnitude of the impact, moreover, is quite large and suggests that each additional yuan in government health spending boosts urban consumption by 2 yuan.

For rural households, with the exception of those in the higher income provinces, there is, however, no evidence of a relationship between government health spending and saving. There was also no evidence that higher government education spending has an impact on either urban or rural saving. This is not entirely surprising, as the precautionary saving motives are likely much higher for health than education…