Abstract
This paper focuses on the challenges China is confronted with in the context of structural change. It first shows that the service sector in China is ‘relatively small’ compared with other developed and developing countries in their historical context of structural change. Then it discusses – against the background of the experiences of former emerging economies that have, in the meantime, progressed towards ‘developed’ economies – why the service sector in China has to change. Afterwards it analyzes the challenges that China is confronted with in relation to ongoing structural change. Finally it draws some policy implications and then concludes.
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Notes
That is, structural change is here analyzed in the framework of the ‘three-sector-hypothesis’ that has a very long tradition (see, eg, Fisher, 1939, 1952; Clark, 1957; Fourastié, 1949/1969). Alternative descriptions of these three sectors are primary, secondary and tertiary.
This process began after the post-1978 reforms in China; see Wagner (1981), Chow (2007) and Xu (2011) for details on the early period of reform. The first wave of reforms mainly affected the agricultural sector. The second wave of reforms in the 1980s and 1990s primarily concerned the industrial and service sectors, property rights and institutions (see Maddison, 2007b), whereas in the late 1990s and 2000s the banking and finance sector and international economic relations were involved.
See, for example, Xu (2011). In the 1990s, many of these foreign direct investments were implemented in the so-called ‘Special Economic Zones’ (see ibid).
Of course, there is a caveat insofar as one has to be careful with different dates for comparisons, for example, of late 19th and early 20th century Germany to late 20th century China.
One might here also refer to countries in Eastern Europe, some of which have also had a small service sector over a long period of time. These Eastern European countries shared a specific characteristic with China (at least before 1990), namely a communist planning system that has largely determined their structural change process.
There are numerous references hereto in the literature of social and economic history, particularly of the emergence of the social or welfare state in Europe and elsewhere (eg, Eichenhofer, 2007, Kaufmann, 2003, Castles et al. (eds), 2012).
See, eg, Brenner et al. (1991). See also Steckel and Floud (1997), Szreter (1997), Kniivilä (2007), Rosenbloom and Stutes (2008) and Jankowska et al. (2012). Imbalances and volatilities here refer mainly to current account imbalances and ‘price imbalances and volatilities’ incorporated in inflation episodes and asset-price booms and busts.
This might also be seen as a specific background element of ‘Wagner’s Law’ (Wagner, 1892).
These include current account imbalances as well as ‘price imbalances’ such as inflation and asset-price booms. See IMF (2011).
This also has been recognized by the Chinese political leaders. Recently, China’s Premier Wen Jiabao has said that ‘there are structural problems in China’s economy that cause unsteady, unbalanced, uncoordinated and unsustainable development’ (see Time 18 June 2012, p. 37).
The Chinese population is still not educated enough overall to develop a service sector along Western lines (see, eg, OECD, 2011). Higher expenditure on education is necessary for providing complex, knowledge-intensive services. Low levels of education in many parts of China account for inequalities in income distribution between the Eastern urban areas and the Western rural areas. In the latter, knowledge-intensive services lack highly skilled staff. Even in the Eastern parts of China, knowledge-intensive corporate services in areas such as advertising or IT are still underdeveloped (Gallagher et al., 2009).
Since 2003, China’s rural health insurance scheme has risen to 97% (starting from 3% in 2003; see Economist 8 September 2012, p. 20). To date, however, welfare in China has been more like an affirmative action or investment in manpower. However, this should change soon because of the pressures highlighted above in this section.
In fact, the yuan has already been strengthening vis-a-vis the dollar for quite a while now.
See Stijepic and Wagner (2012). This is particularly the case if the social security system is small or less developed. Alternatively, the society will have to provide more social services to the growing number of elderly. China has one of the largest ageing populations of the emerging countries (see Wagner, 2012). However, other Asian countries, like Hong Kong, Singapore and South Korea, also are ageing faster than other countries (see UN Population Division). By 2030, over half of the world’s elderly will live in Asia (excluding Japan).
As will be argued in the section ‘Challenges China is Confronted with in the Context of Ongoing Structural Change’, the shift towards services, and in particular consumer services, will reduce economic growth.
See hereto, eg, Welfens (1999). Nevertheless, there are large differences in patterns and speed of structural change across countries and regions (see, eg, McMillan and Rodrik, 2011). A major driver for such a faster development of structural change, in the case of China, is knowledge externalities incorporated within foreign direct investments (organized in China predominantly as ‘joint ventures’ with domestic enterprises over the past two decades).
These job losses may partly be offset by job creation in the non-tradable sector that, however, is likely to be slower and will evolve only with a time lag (see Guo and N’Diaye, 2009).
On the theory of the correlation between sectoral shocks and unemployment see, for example, Lilien (1982); Brainard and Cutler (1993); Mills et al. (1996); De Loo (2000); Basile et al. (2011).
See also Eichengreen, Park and Shin (2011) on the slowing down of rapidly growing economies like China.
For specifics of the 12th Five-Year Plan, see APCO (2010).
This could also be seen as a lesson from Japan’s experience of the 1980s (see N’Diaye, 2010, pp. 15–16). However, as sometimes argued (see, eg, McKinnon, 2006), an appreciation of the Chinese exchange rate, in turn, might drive the economy toward deflation and a liquidity trap.
In 1978, China was a poor and primarily agrarian economy. Per capita GDP in PPPs was then lower than in India. Only in 1992 did China overtake India in terms of GDP per capita, and in succeeding years widened the gap between the two countries.
The Chinese government under Deng Xiaoping regarded foreign trade as an important source of investment funds and modern technology. Therefore, it relaxed restrictions on commercial flows and legalized foreign investment by permitting and encouraging joint ventures with foreign enterprises.
One has here, however, to take into account that the overall employment share of services in China ‘is highly concentrated in below-average productive sectors such as retail trade and other community and personal services’ (DeVries et al., 2012, p. 219).
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Acknowledgements
My thanks go to Denis Stijepic for his excellent research assistance and to three anonymous referees and the editor, Paul Wachtel, for their comments.
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APPENDIX
APPENDIX
OECD-countries: Employment by sector (%)Data Source: Maddison (1989, p. 20)
Germany: GDP by sector (%), 1950–1990, current pricesData Source: Statistisches Bundesamt
Germany: Employment by sector (%)Data Source: Maddison (1995, p. 39)
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Wagner, H. Challenges to China’s Policy: Structural Change. Comp Econ Stud 55, 721–736 (2013). https://doi.org/10.1057/ces.2013.22
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DOI: https://doi.org/10.1057/ces.2013.22