China - New skills for economic development : the employment and training implications of enterprise reform

Report No. 11 785-CHA China New Skills for Economic Development The Employment and Training Imphications of Enterprise Reform November 24, 1993 Human Resource Operations Division China and Mongolia Department East Asia and Pacific Regional Office FOR OFFICIAL USE ONLY MICROGRAPHICS Report No: 11785 CHA Type: SEC Document of the World Bank This document has a.restricted distribution and may be used by recipients only in the performanc-e of their official duties. Its contents may not otherwise be aisclosed'without World Bank authorization  CURRENCY EQUIVALENTS (As of July 1993) Currency unit = Yuan (Y) $1.00= Y 5.70 Y 1.00 = $ 0.18 FISCAL YEAR January 1 - December 31 ACADEMIC YEAR September 1 - August 30 ABBREVIATIONS AND ACRONYMS COE Collectively owned enterprise ENTC Enterprise training center ETC Employment training center LSC Labor service company MOL Ministry of Labor SEdC State Education Commission SOE State-owned enterprise STS Secondary technical school SVS Secondary vocational school SWS Skilled workers school TVE Township and village enterprise UI Unemployment insurance VTET Vocational and technical education and training  FOR OMCAL USE ONLY CONTENTS Executive Summary ............................. v 1 Itroducton .......t...................... 1 2 Enterprise Reform and Surplus Labor . 3 A. Enterprise Reform and Accompanying Reforms. 3 B. Estimates of Surplus Labor. 7 3 Employment Trends and Employment Service Operations. . 15 A. Labor Force and Employment Trends .15 B. Employment Service Operations ......................... 18 4 Structure and Efficiency of Institutionalized Inservice Training ........ 22 A. Institutions and Types of Activities ....................... 22 B. Enrollment Level, Course Length, and Student Profile .... ....... 25 C. Faculty Profile, Teaching Hours, and Teacher/Student Ratio .... ..... 28 D. Industrial Input, Course Content, and Theory and Practice Mix ...... 30 E. Teaching Materials, Teaching Methodology, Equipment, and Workshops ..... 33 F. Cost and Financing .................. 37 G. Planning and Management Framework and Links with Industry.44 5 Institutional Issues and Recommendations ...................... 46 A. Low Internal Efficiency .............................. 46 B. Severe Resource Limitations ........................... 46 C. Teacher Qualification ................................ 47 D. Instructional Material and Curriculum ...................... 48 Ihe report is based on the findings of a mission to China in October 1992 comprising K. Ogawa (Economist and Mission Leader, EA2CH), G. Howell (Vocational Training Specialist, SAIPH), R. McGough (Industrial Training Specialist, ASTPH), D. Hou (Operations Officer, EA2CH), J. K. Lee (Vocational Training Specialist, Consultant), and T. P. Leung (Vocational Educator, Consultant). Peer reviewers were S. Cochrane (PHN), R. Drysdale (SASVP), and A. Van Adams (ESP). The Acting Division Chief is Halsey Beemer (EA2HR) and the Department Director is Shahid Javed Burki (EA2). This document has a restricted distribution and may be used by recipi.-i only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorzation.  - ii - 5 Institutional Issues and Recommendations (cont'd) E. Teaching Methodology ............................... 49 F. Management, Planning, and Coordination Mechanism .... ........ 49 G. External Efficiency Issues ............................. 50 6 Employment and Retraining Strategies in Other Countries .... ....... 53 A. Labor Market and Employment Policies .................... 53 B. National Labor Market Poiicies to Assist Industrial Restructuring .54 C. National Training Funds .57 D. Conclusions .............,,.,,,.,.......... 59 7 Issues and Options for Employment and Retraining in China .... ...... 61 A. Industrial Adjustment ................................ 61 B. Management Education ............................... 61 C. Functional Flexibility of Labor .......................... 62 D. Development of the Tertiary Secntor ....................... 63 E. Technical Testing and Certification ....................... 64 F. Development of a Local Framework for Retraining Surplus Workers . . 64 G. Suggested Areas for Additional Preparatory Studies .66 ANNXES 1. Preservice VTET-Institutions, Issues, and Recent Developments .... ..... 67 2. Enterprise Training Institutions in Dalian, 1991 .................... 71 3. Enterprises Listed by Reference Numbers in Tables 2.1 and 2.2 .... ...... 72 4. Proprietary Schools ...................................... 73 5. Training Institutions Visited by the Mission ....................... 75 6. Education and Training Requirements for Lower-Level Jobs in the Tertiary Sector ........................................ 76 7. Employment and Retraining of Displaced Workers: The Case of Canada .... 78 8. Skill Training in Township and Village Enterprises .................. 86 Statistical Appendix .88 Referens ............................................. 96 TABLES IN TEXT 2.1 Dalian: Enterprise Estimates of Surplus Labor ................... 9 2.2 'Wuhan: Enterprise Estimates of Surplus Labor and Aggregated Totals for Dalian and Wuhan .10  - iii - TABLES IN TEXr (cont'd) 3.1 Employment by Sectors, Selected Countries, 1988 ................. 15 3.2 Urban Employment by Ownership Pattern, 1980-92 .16 3.3 Urban Employment by Type of Industry, 1980-95 .16 3.4 Source of New Recruits for the SOE Sector, 1986-91 ........... . ... 17 3.5 Net Increase in SOE Labor Force, 1986-91 .17 3.6 Dalian: Premiums and Expenditure of Unemployment Insurance Fund, 1986-91 .20 4.1 Year-End Enrollment for Training Institutions in Dalian, 1991 .25 4.2 Year-End Enrollment for Training Institutions in Wuhan, 1991 .25 4.3 Year-End Enrollment by Course Length, Dalian (1991) .26 4.4 Year-End Enrollment by Course Length, Wuhan (1991) .26 4.5 Sources for Enrollment by Type of Training Institution, Dalian (1991) 27 4.6 Average Number of Faculty by Training Institution, Dalian (1991) .28 4.7 Average Number of Faculty by Training Institution, Wuhan (1991) .28 4.8 Faculty Profile by Educational Background and Type of Training Institution, Dalian (1991) ..... .. .......................... 29 4.9 Faculty Profile by Educational Background and Type of Training Institution, Wuhan (1991) ........ 29 4.10 Teaching Load of the Training Institutions Visited by Mission, 1992 .30 4.11 Teacher to Student Ratio of Training Institutions Visit'1 by Mission, 1992 . . 31 4.12 Time Spent on Practice Training, Aviation Industry, 1991 .33 4.13 Evaluation of Adequacy of Time Spent on Theory and Practice, 1991 .33 4.14 Recurrent Cost per Student for Inservice Training in the Iron and Steel Industry, 1991 .37 4.15 Recurrent Cost (Exclusive of Personnel Expenditures) per Student from Major Types of Work in the Aviation Industry .38 4.16 Main Sources of Funds, by Training Institutions, 1992 .44 BOxES IN TEXT 2.1 Local Policy for Surplus Workers: The Case of Dalian .12 2.2 Transitional Economies and the Implications for Labor and Wage Issues ... 13 4.1 Xi Gang Employment Training Center and Dalian Occupational Technology Training School .34 4.2 Dalian Locomotive Drivers School .39 4.3 Dalian Shipyard Enterprise Training Center .41 4.4 Inservice Training in the Aviation Industry .42  - v - EXECuIVrE SUMMARY i. China's economic reform has reached a stage where many of the relatively straightforward changes have been implemented. What remain to be addressed are the more complex issues, one of them being enterprise reform. Enterprise reform is "the area where all other reforms-price, fiscal, finance, investment, plananing, and labor and trade-come together. "1/ Although enterprise reform has been a priority topic for several years, the performance *e state-owned enterprises (SOEs) has continued to deteriorate, with one third of the industrial SOEs generating losses. These losses are a significant drain on the government's budget and the banking sector. ii. One of the several obstacles to accelerating enterprise reform is the existence of a large number of surplus workers in SOEs. By some estimates, about one quarter of the labor in SOEs is redundant. To date, enterprises are constrained from laying off their surplus workers because of their traditional responsibilities, such as providing housing, social security, and until recently, subsidized foodstuffs. There are at present no alternative institutions providing income maintenance, housing services, medical care, and other basic social services to unemployed workers. However, as these responsibilities of a social nature are transferred out of the enterprise sector through successful reforms in housing, social security and wage systems, enterprises will gradually acquire more discretion to eliminate surplus workers through retirement, voluntary separation, and layoffs. In that event, it is crucial that the younger laid-off workers have, or have access to, opportunities to acquire skills qualifying them to find alternative employment. Workers remaining in the enterprise will also need improved vocational training because they will have to continuously update their skill levels to keep up with the requirements of industrial restructuring. Enterprise Reform, Accompanying Reforms, and Surplus Labor ii. The current policy regarding the disposition of surplus workers still emphasizes maintaining social stability. In implementing reform measures, therefore, local governments must carefully monitor the socially affordable level of unemployment in light of the strength of the local economy. Government policymakers recognize that this is inefficient, but the social security system is not yet adequately developed to handle significantly larger open unemployment rates. iv. Reforms in labor and wage areas are encouraging policies with more incentives to improve efficiency and increase labor mobility. These include a contract labor system, abolition ofjob assignment by the state, and reforms in the wage system that strengthen the links between performance and wage determination. It is expected that these reforms will bring about an increased demand for quality training programs, in contrast to the passive, supply-driven programs of the past. Social security reform at present focusses on: (a) relieving the individual enterprises of their social security responsibilities by making these services available outside the enterprises; (b) enlarging the social security premium pool to district- and municipal-wide 1-/ China: CoIwMry Economic Memorandum-Reform and the Role of the Plait in the 1990s, Report No. 10199-CHA, June 1992, Washington, D.C., World Bank, p. 103.  - vi - pooling thereby reducing the risk to individual enterprises; and (c) expand coverage to all workers and all enterprises. v. Employment Services. Localities and industries in developed countries affected by dislocation offer many examples to illustrate that training is a key intervention in making it easier for redundant workers to find new jobs and shortening the time they remain unemployed.ZI Hovwever, what is equally clear from these cases is that first, training must be taken in conjunction with other employment services such as screening, counseling, a job search and placement service, income maintenance, and financial counseling. Second, there must be participation in training from industries that are potential future employers, and a partnership among government, industries, and workers (typically trade unions in the case of many industrialized countries). vi. The types of employment services currently offered by labor authorities in China consist of the following: * Employment facilitation services that include registration of job seekers and vacancies, labor maket information, vocational guidance, career counseling, and employment projections. * Vocationaltraining, usually given at employment training centers. The proceeds of the unemployment insurance fund can be used to train unemployed workers, and the Ministry of Labor (MOL) now requires that 15 percent of the fund be used for this purpose. a AAdministration of the unemployment insurance system, which covers unemployment relief, medical care, survivor's pension, retraining, provision of start-up capital for those seeking self-employment and occasional creation of temporary employment. - Overseeing employment service enterprises, which are collectively owned enterprises established to provide employment to job-waiting youths. Since to date the bulk of the responsibility for placing surplus workers falls on the enterprises, the scope of the public employment service system has been limited to the small number of workers who are laid off, and therefore it is difficult to judge the effectiveness of the system. If in the future, a higher open unemployment rate is adopted or becomes inevitable, this system will have to play a larger and more active role in placement. At the same time, the need for comprehensive income support and reemployment policies (on labor market information, counseling and placement services, and retraining programs) will also become increasingly compelling. ZI See W. H. Kohlberg (ed.), The Dislocated Worker: Preparing Ameica 's Work Force for New Jobs, Chapters 7 and 9 and K. Hollenbeck, et al. (ed.), lhe Displaced Workers: Implications for Edcional and Training Institutions, for examples.  - vii - Isavice Vocational T.alnint Institutions vii. There are three main types of institutions that carry out inservice training in China today: training departments or centers attached to enterprises (hereafter referred to as ent3rprise tradning centers" or "ENTCsU), skilled workers schools (SWSs), and employment training cunters (EFCs). viii. The ENTCs are owned and managed by enterprises, and operate specifically to meet the llabot wairing uieed- of hu- )arent enterprise. This sole-Clent relationship allows them to be cosely in tune wiithie ..eds of .i ente rprise, fonrmally thrAugh the enterprise's worker education committee, which provides overall guidance. Most large enterprises and some of the medium-sized enterprises have their own ENTCs. The main advantages of such an arrangement are that the ENTC is assured of a steady flow of financial resources from its parent enterprise, and that it can use the enterprise's facilities for practice training and its skilled staff as instructors. lx. The primary function of the SWS is residential preservice training for upper secondary students, but many SWSs also run inservice training programs for midlevel and senior technicians. They are under the general administration of the Ministry of Labor, and are managed by technical ministries or bureaus, local labor bureaus, or enterprises. Their client base is either a single enterprise or a group of enterprises in a single industry with which the school is linked through the local technical bureau. They have close links, in terns of financing and curricula, with employers and technical bureaus. The SWSs offer the most structured programs of the three in terms of course content and organization and have the largest share of long-term inservice courses. Some SWSs have a management committee consisting of enterprise managers and municipal officials which serves as a forum that helps convey the requests of the enterprises and overall policy direction of the municipality. x. In contrast to the ENTC and SWS, the ETC has no formal organizational or financial affiuiation with enterprises. The ETCs are typically run by the local labor authorities, frequently through a labor service company (LSC) which runs the ETC as one component of the package of employment services it provides. The ETC courses cater to the training and skill needs of the locality (district or municipality). Their student body is more diversified than the other institutions and includes unemployed youths, workers from township and village enterprises, and surplus workers. Except for receiving some initial capital for its establishment, the ETC must finance its operations by itself, mainly through student fees. The supervising labor bureau or the LSC has continuing meetings with managers and training officials of the main enterprises in the districts to discuss what training to conduct and what types of workers should participate. The ETCs are best positioned to provide short, intensive, and specific training courses for service sector jobs and have the flexibility to adapt course content quickly to market needs. They have neither the experience nor the resources to move into higher cost technologies. xi. The issues and recommendations that arise out of the review of the three types of training institutions are described below: * Low Internal Effciency. Utilization of workshops and laboratories is generally low, mostly because of the lack of appropriate equipment, a shortage of consumable materials used in practice training, and shortcomings in curricula  - viii - design and instructional management. Instructional staff have very low teaching loads, both as stipulated by regulation and in practice. Many of the institutions visited have significant excess capacity. * Severe Resource AUmitations. Tbis is one of the most critical factors contributing to low internal efficiency. The limitations are particularly severe for the purchase of instructional materials, consumable materials for practice training, tools and equipment. It is not easy to find a solution to this issue, because vocational training is by nature substantially more costly than general education, and the training institutions depend on their sponsoring government bureaus or enterprises for resources. The ENTCs are in the most advantageous position as long as the parent enterprise is financially viable. Other means to generate resources include increasing the costs recovered from enterprises sending their workers to the training institution and from the students. As wage reform deepens and workers see (and reap) the merit of improving their skills, they are expected to become more willing to finance the training themselves. On the other hand, wage reform will also lead to significant increases in staff salary, particularly salaries of those teaching specialized skills in demand, and thus the share of personnel expenses in total recurrent costs is unlikely to decline. * Teaching Staff. While the academic training of the teachers is in general satisfactory, many teachers lack adequate industrial experience. In addition, their teaching, techniques consist predominantly of lectures and some demonstration, and they are not familiar with other pragmatic and effective techniques suitable for vocational training, such as audiovisual and computer- based teaching techniques, simulation technology, and use of performance-based objectives. As the curricula and teaching materials are revised to make use of these techniques, the teachers should also receive training in these areas. - Instructional Material, Curriculum, and Teaching Methods. The quality of inservice delivery is being adversely affected by lack of curricula and instructional material prepared specifically for inservice programs. Based on the incorrect assumption that the content of inservice courses is basically the same as that of preservice courses and inservice students have the same characteristics as preservice students, inservice programs frequently use bits and pieces of preservice curricula and textbooks. In China, preservice programs are typically three-year residential programs offered to students coming straight from lower secondary school, while the inservice programs are offered to older enterprise workers with substantial work experience. It is recommended that in the short run, curriculum and textbooks be developed specifically for inservice programs, taking into account the course duration and student characteristics. In the longer run, development of a training system that is textbook-free, time-free and competency-based-such as the DACUM approach, which develops a curriculum through extensive use of modules-should be considered. * Improving External Efficiency. External efficiency appears high, as attested by the high percentage of graduates who are placed in jobs, and the evidence of a continuing exchange of views among the training institutions, employers, and  - ix - government. However, this could simply be a reflection of an absolute shortage of most types of skilled labor and of inservice training slots, or the government's erstwhile policy on full employment. When a more open labor market develops, wages are decontrolled, and managers have a better understanding of the operational costs and benefits of creating a skilled work force, more conventional measures of external efficiency could be applied. In the meantime, it is important to ensure that mechanisms to encourage and demonstrate good training, and to engage local managers in determining and applying training policy, are put in place. * Management, Planning, and Coordination Mechanism. Each type oftra;ning institution has formal and informal li ks with the enterprise, industry, or district it serves. These links facilitate communication between individual institutions and employers or government regarding course content, policy, labor market needs, etc. However, on a sectorwide basis, there is much scope for strengthening management, planning, and coordination mechanisms. Given the tendency of individual training institutions to act as isolated entities serving only the sponsoring enterprise, technical bureau, or district, there is a notable lack of sectorwide coordination between employers and government and the three different types of training institutions (thus there is no complete local database of allocation of training places). Expansion of "coordinating conimittees," which currently already exist in some municipalities such as Dalian, to enlarge their membership and mandate to form a "consultative committee' is suggested. The membership would consist of representatives from enterprises as well as government and training institutions. The purpose would be to (i) jointly formulate policies and programs on vocational training; (ii) identify local common training priorities in new and advanced technologies; (iii) identify common institutional training equipment, facilities, and programs needed locally; (iv) establish criteria within national guidelines to set up and activate a local common training fund; (v) authorize and evaluate expenditures from the fund; (vi) determine local arrangements for applying national skill test and certificate systems; and (vii) provide advice and publicity to promote efficient training and retraining. xii. As enterprise and price reforms deepen and the hard budget constraint starts to bite, enterprises and training institutions will become more conscious of the low utilization rates of their facilities and equipment. The likely outcome would be for training centers to try to provide the complementary inputs (consumable materials, etc) so that the utilization rate improves (and increase the rate of cost recovery to cover the cosEs of these inputs), lease the facilities and equipment to other entities when they are not being used, or shut down training centers that prove too inefficient to maintain (i.e., those for which there is insufficient demand). Utilization rates overall are therefore likely to improve. At the same time, access to external training institutions by workers of small or loss-making enterprises which no longer find it profitable to operate their own ENTC should be ensured. Wage reform and increased labor mobility will make it more costly and difficult for the training centers to find and retain high quality teaching staff, leading them to be more efficient in the use of this input. At the same time, however, there is also the danger that as enterprises increasingly come under pressure to become financially viable, they may be reluctant to train workers who can then leave the enterprise before it can recoup the costs. Effective government policies and funding as well as  -x - industrial programs to encourage investment in human resource improvement to counter this trend need to be considered. The need to improve instructional material, curriculum and teaching methods, and to train teaching staff in their use remains regardless of the pace of enterprise reform. However, the case to strengthen the planning and coordination mechanism would become stronger, since as enterprises gain more autonomy over their activities, opportunities for contact between govermment and industries become fewer, and without coordination there is a risk that different entities could be duplicating efforts in the field of vocational training where scale economies make such duplication inefficient. Employment and Retraining Strategies in Other Countries xiii. A review of how different countries have adopted different labor market and employment policies to address industrial restructuring issues, and of the national funding mechanisms for inservice training in China and the underlying policy aims offers a range of examples from which China can adapt policies and practices to suit its economic, social, and labor force characteristics. The review also offers observations on the elements or arrangements in retraining and skill upgrading programs that have made some more successful than others. As a result, it is possible to focus on factors that will be important in successfully addressing the need to retrain surplus workers in China. These are briefly descr;bed below. * The future functional flexibility of labor, which is crucial to responding to changing organizational and technological needs, is best established on the basis of articulateness, numeracy, and literacy achieved through good basic education, and is rarely enhanced by training at the secondary level in specific vocational. skills. * Successful industrial restructuring need not imply large-scale layoffs: Japan provides evidence of successful redeployment of labor, and sustained or enhanced productivity within a continuing employment relationship, although this is likely to depend on government support, and on skillful management of product diversification, enterprise mergers, operational rationalization, and productivity enhancement. * Adequate advance notice of lay-offs, and counseling and placement services have been the most successful elements of job relocation programs in some western industrialized countries. * Retraining and job placement programs are most successful when the releasing and recruiting enterprises are the prime agents in implementing the transitional programs, supported, if appropriate, by government incentives and assistance. * Where employer commitment is high, because of either traditional employment obligations, or a sense of corporate social responsibility, successful job change programs can be implemented within enterprises, or by mutual agreement between enterprises, often with minimal government support. * Once a specific new job has been identified, enterprise-based training programs, provided on-the-job are the most effective, and preferred, way to train experienced workers, especially older ones.  - xi - * Appropriate training facilities that are external to the enterprise may be increasing!y useful in teaching specialized skills related to advanced technologies, especially for small enterprises with limited resources. * Government retraining programs are unlikely to attract candidates, or to equip trainees for employment, unless payment of benefits is conditional on enrollment, specific employers and jobs are foreseen, and the training given is practical and active. * Training programs for self-employment, or small enterprise development, should be offered as part of a job creation package, including a suitable regulatory framework, counseling, extension service:,, and access to credit. xiv. Financing Mechanism. The current regulation in China of requiring enterprises to devote the equivalent of 1.5 percent of the payroll to inservice training is in principle a sound basis for having enterprises defray their own training costs. However, the criteria for disbursement are not clear, inspection regarding actual use appears lax, and technical guidance on optimal utilization of the funds does not appear to be available to enterprises. Experience from other countrie. indicates that management of such a fund is best made as autonomous as consistent with proper control, and its managing body should include representatives of government, industry, workers, and academia to reflect different interests and perspectives. xv. Other options that should be made available in.clude contracting for professional training advisory services, pooling training funds at the local level for enterprises that do not wi.ah to conduct training, and providing centralized help for enterprises that lack their own training facilities. These options have varying degrees of attractiveness to government and to enterprise. However, without the commitment of employers and workers' representatives, training funds will not be well spent. 3&sues and Options for Employment and Retraining in China xvi. Issues and factors that China should take into consideration in designing its strategy foi employment and retraining programs are: * Improving the education of enterprise managers so that they can meet the challenge of making strategic operational decisions in a more market-oriented economy. This means training which encompasses the financial, marketing, and personnel functions within a strategic framework in addition to the traditional production function. So far, the limited scope of enterprise reform has not required managers to make accurate, productivity-based assessments of the full extent of labor surplus. Nor have managers been under any operational pressure to make plans for staff deployment, versatility, and training. They will need training to assess skilled labor requirements and to determine recruitment and training policy in a more open labor market economy. These are important management skills not generally hitherto needed by SOE managers in China. * Promoting fnctional flexibility of labor, which will become increasingly important as industrial restructuring demands adjustments. A major contributory factor in sustaining industrial productivity, for instance in Japan, is the  - xii - availability within the enterprise of skilled workers who can be reassigned in response to market and other pressures. The government can promote a climate which encourages, rather than impedes, the inevitable labor adjustments by supporting the continual updating of workers' skills by enterprises and appropriate external training institutions. Development ofthe tertiary sector, which is expected to generate a large number of jobs. The government hopes a significant part of surplus labor might move into this sector. Tertiary sector jobs are not confined to peripheral personal services, but require the highest level of skill of any sector. Such areaw include banking, financial management consulting computing, and communications, as well as support services provided within manufacturing enterprises exposed to automation and other technological advances. The profile of workers currently defined as surplus in SOEs, however, does not conform to the skill needs of the tertiary sector except for simple manual skills. Thus, the more likely outcome is that the new jobs in the tertiary sector will increasingly be filled by labor market entrants while most of the surplus industrial workers would be reabsorbed into enterprises or shed by planned attrition. The mission saw training programs for some lower-level tertiary sector skills conducted at the training institutions visited. An initial evaluation of these courses indicates there is much scope for improvement in curricula, textbooks, faculty, and practice facilities. * An appropriate role for technical testing and certification. With greater labor mobility, there will be a demand for a ready system to test and recognize the skills of unknown job applicants. However, too rigid a system often tends to exclude uncertified, but otherwise qualified, candidates. It is essential that any skill testing system be designed to support, not restrict, the hiring discretion of enterprises. xvii. This review describes a framework for retraining surplus workers that is suitable for municipalities in China. Four elements are important for its success: * Formulation of Local Training Policy. This should be undertaken with the joint participation of enterprises, government, and spokesmen for social and workers' interests, through a committee along the lines suggested in para. xi (management, p:anning, and coordination). * Management Education. This would consist of local consultative and training seminars for enterprise managers to improve their awareness of labor-related productivity issues, explore the local labor and training implications of enterprise reform, and share information about training options in both institutions and enterprises, and on and off the job. * New and Advanced Training Facilities. Despite the surplus of low-skilled labor, there is a serious shortage of skills needed to cope with new and advanced technologies. Improved training activities in advanced skills and technologies should be est4olished, preferably at a strategic common center in the city, and made accessible to individuals and enterprises. Decisions on technologies,  -xiii - curricula, and operating arrangements would be entrusted to the joint cc inittee referred to above. * "Job Changing Retraining Package." The joint committee could decide on the use of local training funds to facilitate job transfers. Innovative uses might include training and technical support for small entrepreneurs or the self- employed, who want to use lump-sum severance pay to start businesses; payments to those changing jobs for use in obtaining new qualifications, or for enrolling in fee-charging programs; and payment to private providers of training in priority skills. xviii. Finally, there are particular areas where either current policy options in China need to be explored and articulated in greater depth, or information is deficient or nonexistent. These areas should be studied fiirther by: * Assessing educational and training improvements, in the form of facilities, equipment, programs, and curricula, needed to meet the accelerating demand for advanced technological and tertiary sector skills; * Determining the feasibility of establishing national or local funds to support worker training and retraining programs, including determining appropriate sources of funding, setting criteria for disbursement to institutions, enterprises, and individual workers, and monitoring the use of funds; * Reviewing the available current scale and content of management training facilities, and estimates of future requirements for training programs, facilities, and curricula; and * Assessing the current labor market policies, services, and information systems, and measures to improve their operation, as a basis for determining policy and allocating resources. These four elements-improved training facilities, systematized funding, management commitment and competence, and a functioning labor market-will likely be decisive in any successfil national policy to retraining workers. This policy in turn will be a significant determinant of the pace and productivity of the enterprise reform program, its stability and sustinability, and hence future economic and social progress in China.  1. RODUCTION L1. China's economic reform has reached a stage where many of the relatively saraightforward reforms have been implemented. What remain to be addressed are the more complex issues. One such area is the reform of the state-owned enterprises, an area "where all other reforms-price, fiscal, finance, investment, planning, and labor and trade-come together.l/ For reforms in one area to be effective, changes in other areas are needed, and reforms in one area will in turn have repercussions on others. 1.2 The Bank's strategy for supporting China in its enterprise reform process consists of assistance in both policy formulation and in operations. The policy issues on which the Bank is offering advice through economic and sector work and other fora to facilitate this process include labor and wages, housing and social security, increased market competitiveness, and improved legal and regulatory frameworks. On the operational side, the Bank is working with specific provinces, municipalities, and subsectors which not only conform with national policy, but are also advanced or innovative in their approaches toward reform in these policy areas. Operations that contain elements of reform include the Tianjin Industrial Development Project, the Grain Distribution and Marketing Project, the Housing and Social Security Reform Project, and the Shenyang Industry Engineering Project; the latter two of which are under preparation. 1.3 This sector report provides a backdrop for a proposed project on vocational taining and labor market development which complements the Bank's other efforts in promoting enterprise reform. Its emphasis is on reviewing and evaluating the current situation of inservice training in China-including the availability and quality of retraining programs to promote a more efficient deployment of labor to facilitate enterprise reform. The report is confined to reviewing the inservice segment of vocational and technical education training (VTET) which is more directly linked than preservice training to enterprise reform and redeployment of urban workers in state-owned enterprises (SOEs). It therefore complements rather than replaces the sector study of preservice vocational and technical education published in 1987.2/ 1.4 The Bank's strategy in the education and training sector consists of a two- pronged approach. In basic education, the strategy is in line with the Bank's emphasis on alleviating poverty and the Chinese Government's policy of popularizing nine-year compulsory education. The geographic focus has been on poor and remote areas since compulsory education has already been achieved in most urban areas, but continues to lag in the poorer areas. In I/ MChina. Counry Economic Memorandum-Reform and the Role of the Plan in the 1990s, Report No. 10199-CHA, June 1992, Washington, D.C., World Bank, p. 103. ZI See Sector Report: Technical/Vocational Education for China's Development, Report No. 6789-CHA, Washington, D.C., World Bank, August 1987, and Annex I of the present report for recent developments in presemce VTET.  -2- vocational training, the Bank is focusing on urban areas, in particular developed municipalities, because such cities are likely to be more advanced in their policies regarding employment and services, and have more reform-oriented enterprises. This characteristic is an important consideration in selecting the geographic location of assistance since retraining taken in isolation will not be effective as an intervention measure in creating jobs or in placing displaced workers. Aside from the importance of the general economic situation of a locality, other measures (such as availability of employment services and unemployment insurance schemes) are indispensable as elements of the intervention package. Bank assistance for higher education, teacher trmning, and development of teaching material involves working closely with the central government because of the importance of national policy development, and with local governments or institutions implementing the program under central leadership. 1.5 This report is a product of a single mission to China. In addition to meeting with central government officials, the mission spent much of its time in the municipalities of Dalian and Wuhan, interviewing government officials, training institution staff, and enterprise managers; and visiting training institutions. The two municipalities were chosen for their somewhat different characteristics: Dalian is a dynamic coastal city which has taken advantage of the open door and reform policies, resulting in a high rate of exports and many joint ventures. Wuhan is a large inland city with a large number of SOEs in heavy industry. Several considerations led to the adoption of the case study approach using the two municipalities. First, the bulk of the responsibility for implementing retraining and finding productive employment for surplus workers falls on local governments, training institutions, and industries, and thus focus at the municipal level is appropriate in the case of China. Second, the nmicipalities have a concentration of urban SOE workers-the segment of the work force wheic the surplus labor issue is most serious and yet most difficult to resolve. Third, both cities are 'separate-plan municipalities' which have a higher degree of autonomy in policy initiatives and financing than other municipalities, and this enables us to observe how national policies and guidelines are translated into action a& the local level. Moreover, there are relatively few nationwide statistics on inservice training because this is an activity that involves many training institutions and enterprises, which in turn report to a large number of different ministries at the central level. Information collected in the municipalities partially compensates for lack of national data.  -3 - 2. ENTERPRISE REFORM AND SURPLUS LABOR A. ENRRISE REFORM Am ACCOMPANYG REFORMS Reasons for Ineffidency 2.1 The reasons for the SOEs' inefficiency are historical and numerous. Much has to do with the legacy of central planning with its planned allocation of inputs and outputs, the distorted price system (of both commodities and labor), and allocation of credit without due consideration given to rate of return on capital. One of the several obstacles to accelerating enterprise reform is the inefficient deployment of labor in SOEs, including a large number of surplus employees. Chronic overstaffing is a function of China's post-Liberation labor and wage policy, which has consistently pursued low levels of open unemployment and intentionally avoided the overurbanization problems seen in many developing countries.j/ As a result, underemployment is prevalent. By some estimates, about one quarter of the labor force in SOEs is redundant. On the other hand, the skills of the existing workforce in enterprises are inadequate to keep pace with technological advance and other changes in the external environment. 2.2 To date, enterprises are constrained from deploying their workforce in a more operationally efficient manner and laying off surplus workers because of their traditional social responsibilities toward their workers, such as housing, social security, and until recently, subsidized foodstuff, provided in the form of nonwage benefits. These social responsibilities inhibit enterprise managers from pursuing the purely production-oriented goals of running an enterprise and from firing surplus workers. Moreover, to date, there are no alternative institutions that could provide income support, housing, medical care, and other basic social services for unemployed workers. However, once such institutions are established and social responsibilities are removed from the enterprises, it is likely that enterprise managers would have more discretion to layoff surplus workers.2/ It would then be critical that opportunities be readily available and accessible to younger laid-off workers so that they too can acquire skills qualifying them to find alternative employment. 1/ China: Reforming the Urban Employment and Wage System, Report No. 1)266-CHA, Washington, D.C.: World Bank, June 1992, p. v. ZI Even with increased latitude to fire redundant workers, it is unlikely that this would lead to immediate massive layoffs in China, given the economy's gradualist approach to systemic reforn, the implicit social (as opposed to explicit contractual) obligations of Chinese enterprises toward their employees, and the examples of earlier industial restuctuing i countries such as Germany, Japan, and Korea, which took place without massive layoffs.  -4 - 2.3 In recent years, reforms in the areas of housing and social security, labor and wages, have gradually moved in the direction of converting nonwage benefits into wages so that the provision of these services can be divorced from the enterprises. The social security system is being revised to gradually move away from the current enterprise-based system to a district, municipal, and even provincial system with contributions from the state, enterprises, and individuals, which will enable the individual workers to retain benefits even if they are transferred from one enterprise to another. New unemployment insurance (UI) schemes to broaden the coverage of beneficiaries are also being proposed by the Ministry of Labor (MOL) and the State Council's (former) Production Office, which would facilitate the movement of surplus workers out of SOEs.QI The current scheme is extremely restrictive. The SOE workers are not eligible for unemployment benefits unless job loss is due to bankruptcy, business cutbacks ordered by the government or expiration of the labor contract. Thus only 650,000 persons nationwide received UI benefits during 1986-91.41 Reforms in the housing area aim to gradually sever the link between the work units and households' housing choices, and expand the availability of commercialized housing. Labor and Wage Reforms 2.4 Several key reforms in labor and wage policies in the 1980s have enabled individual enterprises and the labor market to pursue some degree of efficiency and flexibility, rather than security and rigidity: (a) For urban new recruits, since 1986, the system of virtual lifetime employment has been replaced by the labor contract system. As of the end of 1992, about 19 percent of SOE employees were covered by this system (27 percent when confined to industrial SOEs).5/ Selected enterprises choosing to pursue reform more aggressively (reform enterprises