Since reform and opening-up in 1978, the servicesector has become the largest industry in China’s economy. Compared withdeveloped countries, however, China’s service sector, especially modernservices, remains rather undeveloped in terms of its aggregate size andinternal industrial structure. The underlying reason is that the internationalOEM model under an export-oriented strategy created both technology spilloversand crowding-out effects on domestic service firms. With the deepening global division of work, such amarket crowding-out effect is outweighing the technology spillover effect. Thispaper suggests that China’s service sector must shift towards a domesticconsumption-based strategy, utilize domestic and foreign production factors,and promote service sector innovation and development in differentiatedmonopolistic competition.
reform and opening-up, service sector,export-oriented, domestic consumption-oriented
JEL classification code: O14
Over the past four decades of reform and opening-up, China’s economic aggregate and per capita income have increasedsubstantially. The service sector, which used to be the smallest sector inChina’s economy at the beginning of reform and opening-up, has now become China’slargest industry. To some extent, this is consistent with the trend towards aservice-based economy when developed countries transitioned from the mid- and late-stages of industrialization to thepost-industrialization stage. However, the question is what are the manifestations of such a trend in China? Isit in line with China’s future development path? At the critical juncture ofChina’s growth transition, these questions require science-based answers. This paper takes stock of China’s service sectordevelopment over the past four decades of reform and opening-up, identifies a domesticconsumption-based strategy for service sector development, and explains how sucha strategy works and why it matters.
1. History of China’s Service Sector Development SinceReform and Opening-up
1.1 Overall Size of China’s Service Sector
1.1.1 Substantial growth of service sector value-added
Since reform and opening-up in 1978, some service sectors that used to besubject to restrictions during China’s planned economy era have been encouragedand therefore have developed by leaps and bounds. According to statistics,China’s service sector value-added increased from 90.5 billion yuan in 1978 to42.7 trillion yuan in 2015, up 18.1%on an annual average basis, which was far above the growth rate of China’s GDPduring the same period. Service sectorvalue-added as a share in China’s GDP rose from 24.6% in 1978 to 50.2% in 2015,crossing the 50% mark for the first time after surpassing the share ofsecondary industry in 2013. In 2017, this percentage further rose to 51.6%,unveiling China’s service-based economy era. Duringthis period, China’s service sectorvalue-added as a share in GDP increased by 1.9 percentage points each year withan accelerating pace of growth over recent years.
1.1.2 Job creation potentials of the service sectorto be fully unleashed
International experience shows that with increasing per capita GDP andurbanization, the service sector will become acrucial source of jobs (Xia, 2008). After 1978, as employment in primaryindustry as a share in total employment decreased, employment in secondaryindustry as a share in total employment initially increased and thenstabilized, and employment in the service sector also increased rapidly.However, the potential of the service sector in creating jobs is yet to to be fully unleashed. In 2015, the numberof people employed in China’s service sector was as high as 337.57 million, anincrease of 5.9 times over the 48.9 million people employed in that sector in1978. In 2016, employment in China’s service sector only accounted for 43.5% ofits total employment, far below the worldaverage. According to World Bank data, this percentage was as high as 81.3% and69.6% in the US and Japan, respectively, in 2016. For Brazil and Bulgaria, thispercentage was 63.3% and 63.6%, respectively. Notably, the employment growth of China’s service sector hasbeen slowing over recent years.
1.2 Industrial Structure of Service Sector Development
1.2.1 Specialization boosted productivity
Before 1978, China adopted a national strategy toprioritize the development of the material production sectors, particularly the heavy and chemical industries.As a result, the service sector was underdeveloped, incomplete and oftensubordinated to the material production sectors. For instance, many SOEs ranemployee canteens, kindergartens, andother services. After China’s market-oriented reforms began in 1978, thesesupportive services were separated and became independent businesses. In thismanner, China’s service sector developed from scratch and expanded rapidly, andspecialization and economies of scale boosted productivity. According to NBS database, China’s service sector productivity increased from18.51 million yuan/10,000 persons in 1978 to 1.138 billion yuan/10,000 personsin 2016, up 11.4% on an annual average basis. Sincethe eruption of the global financial crisis in 2008, China’s servicesector productivity has been rising at an accelerating pace.
1.2.2 Sector heterogeneity led to uneven development
As alarge sector, the service sector encompasses varioussubsectors with different levels of technology (Huang, 2000), and is thus heterogeneous. Table 1 describes theproductivity levels of service subsectors in China since 1991. As can be seen from the table, the real estatesector and the household services, repair, andother services sector had the highest productivity, averaging 10.25 billionyuan and 12.9 billion yuan/10,000 persons, respectively, over the 2011-2015period, and 8.54 billion yuan and 8.1 billion yuan/10,000 persons, respectively,over the 2006-2010 period, which were all far above those of other subsectors.Specifically, the education sector had the least productivity, averaging 580million yuan and 1.13 billion yuan/10,000 persons over the 2006-2010 and2011-2015 periods, respectively. Further observation of Table 1 suggests thatapart from the education sector, other least productive sectors include public administration,social security and social organizations, health and social work, waterconservancy, environmental and public infrastructure management, scientificresearch and technical services, and other services of a public goods nature. The lack of productivity may have to do withBaumol’s (1967) “cost disease” of the service sector, and also reflects a severe shortage of public service supply inChina that needs to be enhanced.
This paper defines the service sector by the Chineseindustry classification standard, i.e. tertiary industry based on the GDPaccounting system.
Based on Fuchs’s (1968)study, a typical characteristic of the service-based economy is that theservice sector’s output value exceeds total output value by more than half.
Data is from the NBSdatabase. Without special explanation, the same below.