Managing the Middle-Income Transition

Managing the Middle-Income Transition

Challenges Facing the People’s Republic of China

Edited by Juhzon Zhuang, Paul Vandenberg and Yiping Huang

The growth model of the People’s Republic of China has been based on high investments, exports, low-cost advantage, and government interventions. This model has successfully transformed the country from a low-income to an upper middle-income economy. However, the model has generated contradictions that could undermine future growth. Making the transition to high income requires greater reliance on efficiency and productivity improvement, innovation, and market competition. This book examines the challenges faced by the People’s Republic of China in sustaining robust growth, and policy options for making a successful transition to a high-income economy to avoid getting caught in the middle-income trap.

Chapter 13: Striving for a strong services sector

Jianguo Xu

Subjects: asian studies, asian development, asian economics, asian politics and policy, asian social policy, development studies, asian development, development economics, economics and finance, asian economics, development economics, politics and public policy, asian politics, social policy and sociology, social policy in emerging countries

Extract

A strong services sector not only directly contributes to economic growth, but also helps develop other sectors, creates jobs, and improves quality of life. This is in part because services are more labor-and human capital-intensive than primary and secondary industries. Services improve the efficiency of other sectors, reducing costs and improving productivity. Services such as education, health care, scientific services, and arts and entertainment are also essential inputs to human capital formation. For the People’s Republic of China (PRC), developing the services sector will be crucial for achieving high-income status and avoiding the middle-income trap. The share of services in the PRC’s gross domestic product (GDP) is still low. In 2012, services accounted for just 44.6 percent of GDP, much lower than the 68.5 percent for Brazil, 60.1 percent for the Russian Federation, and 56.3 percent for India, the other three BRIC countries. Indeed, the PRC’s services share is lower than the average of upper-middle-income countries (54.4 percent)—the group to which the PRC belongs (Table 13.1). The PRC’s services sector is underdeveloped even if statistical underestimation (at about 4 percentage points) is taken into consideration. India’s per capita income is just one-third that of the PRC, yet its services share in GDP is 11.7 percentage points higher.

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