Toward a Service Economy

Jianguo Xu
Beijing University
2010.05.31

The views expressed in this paper are the views of the author(s) and do not necessarily reflect the views
or policies of the Asian Development Bank (ADB), or its Board of Directors or the governments they
represent. ADB does not guarantee the source, originality, accuracy, completeness or reliability of any
statement, information, data, finding, interpretation, advice, opinion, or view presented, nor does it make
any representation concerning the same.
Outline

 China service sector underdeveloped

 Service economy: theories and empirics

 Service sector in an open economy

 Implications

2
Service share of GDP: An overview

1970 1990 2000 2005 2007

World 52.88 61.41 67.29 68.86 69.27

High 55.01 64.69 70.25 72.47 72.78

Up Middle 49.62 50.96 61.96 58.75 59.65
Low Middle 32.96 45.54 43.72 45.27 45.47
Low -- 41.86 43.78 45.78 46.06

China 24.29 31.54 39.02 40.08 40.37

3
Service share of GDP: Selected countries

1970 1990 2000 2005 2007

USA 61.23 70.09 74.61 76.36 76.86
England 55.04 64.12 71.71 75.93 76.32
France 57.01 68.70 74.26 77.03 77.41
Germany 48.24 61.17 68.48 69.98 68.71
Japan 47.64 57.75 65.82 68.02 69.30
Korean 44.73 49.49 57.31 58.96 60.00
Brazil 49.35 53.21 66.67 65.02 65.97
Argentina 48.08 55.85 67.42 54.99 56.87

India 36.89 43.84 50.46 52.18 52.38

China 24.29 31.54 39.02 40.08 40.37
4
Service share of GDP:
Japan, Korea, India, and China

Japan Korea, Rep. India China

80

70

60

50

40

30

20

10

0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

5
China service sector: 1978-2008

Primary Secondary Tertiary

60

50

40
Share of GDP

30

20

10

0
1978 1983 1988 1993 1998 2003 2008

6
Service share of employment:
Selected countries

1991 1995 2000 2005 2007

USA 71.60 72.90 74.30 77.80 78.00
England 65.60 70.10 72.80 76.20 76.00
France 65.50 68.00 69.50 72.30 73.10
Germany 54.90 60.70 63.70 67.80 67.90
Japan 58.40 60.40 63.10 66.40 66.70
Korean 47.70 54.20 61.20 65.10 66.60
Brazil -- 54.30 59.10 57.90 --
Argentina 66.20 71.90 76.20 75.10 --

China 18.90 24.80 27.50 31.40 32.40

7
Service share of employment:
Japan, Korea, and China

China Japan Korea, Rep.

80

70

60

50

40

30

20

10

0
1980 1985 1990 1995 2000 2005

8
Service economy: Theories

 Higher income elasticity

 Fuchs (1968)
 Kongsamut, Rebelo and Xie (1999)

 Lower productivity growth

 Baumol (1967)
 Fuchs (1968)

 Specialization and division of labor

 Fuchs (1968)
 Riddle (1986)

9
Service economy: Other factors

 Government size
 Administrative monopoly
 Over regulation
 Biased support for large scale industries

 Institutional infrastructure
 Property rights protection
 Contract enforcements

Literature: Amin and Mattoo (2006), Wang, Zhang and Bai (2007)

10
Income
100
90
80
Service share of GDP

70
60
50
40
30
20
10
0
0 5 10 15 20 25 30 35 40 45
GDP per capita (PPP) 1000$

11
Urbanization
100
90
80
Service share of GDP

70
60
50
40
30
20
10
0
0 10 20 30 40 50 60 70 80 90 100
Urban population (% of total)

12
Education
100
90
80
Service share of GDP

70
60
50
40
30
20
10
0
0 10 20 30 40 50 60 70 80 90 100
Level of education

13
Government size
100
90
80
Service share of GDP

70
60
50
40
30
20
10
0
0 10 20 30 40 50 60 70 80 90 100
Scale of government

14
Property rights protection
100
90
80
Service share of GDP

70
60
50
40
30
20
10
0
0 1 2 3 4 5 6 7 8 9 10
Security of property right

15
Law efficiency
100
90
80
Service share of GDP

70
60
50
40
30
20
10
0
-50 -40 -30 -20 -10 0 10 20 30 40 50
Efficiency of law

16
Cost of contract enforcement
100
90
80
Service share of GDP

70
60
50
40
30
20
10
0
0 20 40 60 80 100 120 140 160
Cost of enforcing contracts

17
Outline

 China service sector underdeveloped

 Service economy: theories and empirics

 Service sector in an open economy

 Implications

18
Net export
100
90
80
Service share of GDP

70
60
50
40
30
20
10
0
-50 -40 -30 -20 -10 0 10 20 30 40 50
Net export share of GDP

19
Regression results (2007)

1 2 3 4

Income -0.176 (-1.17) 0.172 (1.52) -0.137 (-0.94) 0.118 (1.00)

Urban -0.007 (-0.12) -0.015 (-0.23) -0.009 (-0.14) 0.091 (1.85)
Education 0.235 (2.84) 0.338 (4.39) 0.241 (3.02) 0.180 (2.89)
Law 0.290 (2.97) 0.298 (3.17) 0.198 (2.67)
Gov -0.188 (-2.84) -0.194 (-3.05) -0.114 (-2.26)
SS1991 0.444 (4.52) 0.454 (4.62) 0.399 (4.17) 0.433 (5.81)
Net Export -0.407 (-8.23)
# of Obs 108 108 108 108

Adj. R2 0.565 0.562 0.597 0.757

20
Regression results (2000-2008)

1 2 3 4

Income -0.195 (-1.49) 0.155 (1.49) -0.161 (-1.26) 0.002 (0.02)

Urban -0.015 (-0.30) -0.025 (-0.49) -0.016 (-0.32) 0.076 (1.75)
Education 0.222 (3.77) 0.300 (5.25) 0.225 (3.93) 0.211 (4.35)
Law 0.269 (3.47) 0.296 (3.89) 0.216 (3.29)
Gov -0.122 (-2.11) -0.150 (-2.72) -0.085 (-1.79)
SS1991 0.440 (5.44) 0.473 (5.73) 0.389 (4.81) 0.432 (6.29)
Net Export -0.381 (-6.87)
# of Obs 122 122 122 122

Adj. R2 0.635 0.612 0.654 0.752

21
Implications

 Institutional infrastructure
 Law enforcement

 Price instruments
 Domestic price (deregulation)
 International price (exchange rate flexibility)

 Government size
 ?
 Deregulation (health, education, finance)

22
Benefits of service sector development

 Income distribution
 “Stimulate” consumption

 Job creation
 8% growth?

 Pollution

 Sustainable growth

23