Service Industry, Economic Growth

There has been considerable market discussion about the slowdown in economic growth following the pandemic. Looking at the industries, the slowdown in the growth of the tertiary sector is the main reason for the post-pandemic deceleration. When discussing ways to increase the potential economic growth rate, people tend to focus on the manufacturing industry rather than the service industry. Terms like "industrial hollowing out" and "Baumol's disease" (where manufacturing productivity advances quickly while service productivity advances slowly) make people somewhat "wary" while welcoming the development of the service industry.

However, it seems that the time has come to re-examine the importance of the service industry: on one hand, looking at the gap with the global technological frontier, the productivity of China's emerging service industry has a greater potential for improvement compared to the manufacturing industry. The development of technologies such as IT has gradually "cured" Baumol's disease, and breakthroughs in AI may open up a new path for the enhancement of service industry productivity, indicating a broad development prospect for the new quality productive forces in the service industry. On the other hand, in the future, China will gradually shift from material consumption to service consumption, and more employment opportunities will rely on the absorption of the service industry, making the role of the service industry in driving domestic demand more prominent.

Advertisement

After joining the WTO, the manufacturing industry provided strong momentum for China's economic takeoff. Compared to the manufacturing industry, the service industry, which has a larger gap from the technological frontier, more entry restrictions, and lower openness, is like an untapped gold mine. In the current context where the manufacturing industry faces challenges such as trade uncertainty and declining capacity utilization rates, the service industry is expected to play a more significant role in driving economic growth.

In recent years, the growth of China's service industry has shown a slowing trend, which also reflects that there are still bottlenecks in the development of the service industry, mainly manifested in three aspects: First, there are some entry restrictions in the service industry sector, and there is room for improvement in the level of marketization, especially in some service industries with a shortage of supply that need to attract more social capital participation; Second, the degree of opening up to the outside world in the service industry can be further deepened, and production efficiency can be improved through competition and learning in the process of opening up; Third, the equalization of public services needs to be accelerated to promote population aggregation and further development of urban service industries.

There has been considerable market discussion about the slowdown in economic growth following the pandemic. Compared with the fourth quarter of 2019, the GDP in the first quarter of 2023 decreased by 0.5 percentage points year-on-year, and the GDP of the primary, secondary, and tertiary industries changed by -0.1, 1.0, and -1.9 percentage points year-on-year, respectively. It can be seen that the slowdown in the growth of the tertiary industry is the main reason for the post-pandemic deceleration.

When discussing ways to increase the potential economic growth rate, people tend to focus on the manufacturing industry rather than the service industry. Terms like "industrial hollowing out" and "Baumol's disease" make people somewhat "wary" while welcoming the development of the service industry. However, it seems that the time has come to re-examine the importance of the service industry: First, the utilization rate of industrial capacity has declined, and China's manufacturing technology is closer to the technological frontier than the service industry, which has a greater potential for productivity improvement; Second, technological progress in IT and other areas has to some extent "cured" Baumol's disease, and breakthroughs in AI technology may open up another path for technological progress in the service industry; Finally, China is at a node where it is transitioning from material consumption to service consumption, and more employment opportunities will rely on the absorption of the service industry, making the role of the service industry in driving domestic demand more prominent in the future.

1. The potential for the service industry to "take over" economic growth is substantial

1.1 The prospects for the new quality productive forces in the service industry are broad"In general terms, new quality productive forces are innovation-led, breaking away from traditional economic growth patterns and paths of productive force development. They are characterized by high technology, high efficiency, and high quality, aligning with the new development concept as an advanced state of productive forces. They are driven by revolutionary technological breakthroughs, innovative allocation of production factors, and in-depth transformation and upgrading of industries. Their essence lies in the enhancement of workers, tools of labor, and objects of labor, along with their optimized combination, with a significant increase in total factor productivity as the core indicator. The characteristic is innovation, the key lies in quality excellence, and the essence is advanced productive forces." Currently, there is significant room for improvement in the productivity of China's service industry.

From an international comparison perspective, there is a certain gap between the productivity of China's service industry and that of developed economies. Looking at the labor productivity of the service industry in major economies, the United States has a clear leading advantage, with its service industry labor productivity reaching $127,800 per person in 2021. In addition, France and Germany also have relatively high levels of service industry labor productivity, reaching $82,800 and $73,900 per person in 2022, respectively. Among developed Asian economies, Japan and South Korea's service industry labor productivity in 2022 were $64,400 and $49,600 per person, respectively. Although China's service industry labor productivity has been steadily increasing, the absolute level still has a certain gap compared to developed economies. In 2022, China's service industry labor productivity was recorded at $25,600 per person (this article specifically refers to Mainland China), which is 20.0% of the United States' service industry labor productivity in 2021, and the ratios compared to the service industry labor productivity of Germany, Japan, and South Korea in 2022 were 20.0%, 34.6%, 39.7%, and 51.6%, respectively. Looking at the time series dimension, the gap in service industry labor productivity between China and developed economies still shows an expanding trend. The ratios of China's service industry labor productivity to that of the United States, Germany, and South Korea in 2021 decreased by 1.9, 0.9, and 6.1 percentage points compared to 2015, respectively.

Further, from the perspective of different types of service industries, the gap between China's service industry labor productivity and that of developed economies is mainly reflected in emerging service industries. Guo Kaiming (2023) classified public services, real estate, construction, education, health, and cultural entertainment as traditional service industries, and finance, business services, wholesale and retail, transportation and warehousing, information and communication industries as emerging service industries, and calculated the labor productivity of different industries in global economies. The results show that in 2017, the labor productivity of China's traditional service industries was comparable to that of high-income economies and was already higher than that of the United States and G7 economies. However, in emerging service industries, there is a significant gap between China and developed economies, only 32.3% and 40.1% of the average levels of the United States and G7 economies, respectively.

From the perspective of inter-industry comparison, although the labor productivity of China's manufacturing and service industries is both approaching the technological frontier level, the gap between the service industry and the technological frontier level is relatively larger compared to manufacturing. According to the estimation by Sasaki et al. (2021), by 2035, the gap between China's service industry labor productivity and the technological frontier will be more than 10 percentage points higher than that of manufacturing. It can be seen that there is a greater room for improvement in China's service industry labor productivity.

Due to the difficulty of achieving automated and standardized output methods in the service industry, the growth of service industry productivity is relatively lagging compared to manufacturing during the process of production technology progress. The reduction in labor demand in manufacturing will cause labor to continue to flow to the service industry, and the increase in the proportion of the service industry will lower the overall economic productivity growth level. This phenomenon is known as "Baumol's disease" (Baumol, 1967). Due to the existence of "Baumol's disease," some views still have concerns about the development of the service industry, believing that economic development should pay more attention to manufacturing. However, many scholars also point out that "Baumol's disease" does not need to be overly worried about. Lu Ming (2024) pointed out that what "Baumol's disease" depicts is just the difference in characteristics between manufacturing and service industries. Essentially, it is not because the service industry hinders technological progress, but because service work is difficult to be replaced by capital, and more labor can only be invested to produce to meet the growing service demand. More importantly, in the era of the digital economy, the development of modern service industries may gradually "cure" "Baumol's disease." Triplett & Bosworth (2003) found that after IT technology was widely applied after 1995, the growth rate of the U.S. service industry productivity was comparable to the overall growth rate, and the labor productivity growth of the information service sector was faster than that of the goods production sector. Wei Zuolei and Liu Haiyan (2019) also pointed out using China's data that the rise in the proportion of the service industry does not necessarily reduce economic growth speed, and the rise in the level of human capital in the service industry will make it play a more positive role in economic growth. In recent years, with breakthrough progress in artificial intelligence, artificial intelligence will also be more widely applied in the service industry in the future, and the production efficiency of the service industry may usher in a larger increase, playing a more important role in driving overall productivity growth.

With the support of digital technology development, the development of modern service industries will not only bring about an increase in the efficiency of the service industry itself but also benefit the transformation and upgrading of China's manufacturing industry. As the importance of the integration of production and services in modern industrial development continues to strengthen, the development of high-tech service industries is also conducive to promoting the high-quality development of manufacturing. A considerable number of studies have shown that the development of productive service industries represented by business services, scientific and technological services, information services, transportation and warehousing, and other industries will promote the transformation and upgrading of China's manufacturing industry (Liu Yi et al., 2017; Han Feng and Yang Ligao, 2020). In addition, the climb of China's manufacturing industry to the high end of the global value chain is also inseparable from the support of the service industry. R&D, design, branding, sales, and other service links are important sources of product added value, and the development of science and technology and information service industries is the foundation for the transformation and upgrading of China's manufacturing industry to digital intelligence.

1.2 The role of the service industry in driving domestic demand is becoming more prominent.While emphasizing the development prospects and importance of modern service industries in the digital economy era, it is also necessary to pay attention to the development of traditional service industries related to daily life. As the level of economic growth improves, service industries related to daily life will play a more important role in consumption growth. Looking at the change path of the U.S. consumption expenditure structure, when the U.S. per capita GDP calculated in constant prices exceeds $12,000, the proportion of services in U.S. personal consumption expenditure shows a rapid upward trend and gradually surpasses non-durable goods consumption to become the largest part of personal consumption expenditure. The U.S. experience shows that as people's material consumption needs are gradually met, the proportion of goods consumption in personal consumption expenditure will gradually decrease, and people's consumption needs will gradually shift from material consumption to service consumption. According to World Bank data, China's per capita GDP calculated in constant prices in 2022 was $11,600, and China may be entering a period of rapid growth in service consumption demand. As of the third quarter of 2022, the proportion of service consumption in China's residents' consumption was 52.3%, still a certain gap from the U.S. level of 66.7% in 2023, which may indicate that there is still a large growth space for service consumption among China's residents.

At the same time, service industries related to daily life are the main reservoir for absorbing employment. According to employment population data in China's population census, the proportion of employment population in service industries related to daily life in 2020 was 29.4%, while the employment proportions in high-tech service industries and manufacturing were 7.2% and 18.1%, respectively. From 2010 to 2020, the increase in the employment proportion of service industries related to daily life was also the most significant, with the increase in employment proportions of service industries related to daily life, high-tech service industries, and manufacturing being 11.5, 3.0, and 1.2 percentage points, respectively. In the future, with the further development of digital technologies such as artificial intelligence, high-tech services may experience a similar process of declining labor demand as manufacturing, at which point the importance of traditional service industries in absorbing employment will be further highlighted.

After joining the WTO, the rapid development of manufacturing provided strong momentum for China's economic takeoff. As China's economic development enters a new stage, the economic growth rate has been steadily declining. At present, affected by trade friction risks, insufficient domestic effective demand, and overcapacity in some industries, China's manufacturing industry faces many challenges, and the growth engine of manufacturing faces certain challenges. As another pillar industry in the national economy, the role of the service industry in driving China's economic growth cannot be ignored. According to the analysis in the previous text, China's service industry still has a large development space and potential: on the one hand, compared with the manufacturing industry, China's emerging service industry has a larger room for improvement in productivity compared to the global frontier, and the breakthrough of AI technology may open up a path for the service industry to overcome the "Baumol disease," and the new quality of productivity in the service industry has a broad development prospect; on the other hand, in the future, China will gradually shift from material consumption to service consumption, and劳动者 employment will increasingly rely on the absorption of service industries related to daily life, and the role of the service industry in driving domestic demand will be more prominent in the future. Compared with manufacturing, the service industry, which has a larger gap from the technological frontier, more access restrictions, and a lower degree of openness, is like an undeveloped gold mine. At present, when manufacturing faces many growth challenges, the service industry has the space and potential to "take over" manufacturing and become an important engine for China's economic growth in the future.

II. There are signs of slowing down in the development of the service industry

As an important part of the national economy, the service industry plays an important role in promoting economic growth. Looking at the common development laws of developed economies, the importance of the service industry in the economic structure will gradually increase with the improvement of the level of economic development. China's service industry has also continuously grown and strengthened during the rapid development of China's economy. In 2011, the service industry became the industrial sector with the highest proportion of employment absorption, in 2012, the added value of the service industry exceeded the secondary industry for the first time, and in 2015, the proportion of added value in GDP exceeded 50%. The rapid development of the service industry has played an important role in promoting China's economic growth and expanding the scale of employment.

However, in recent years, there have been signs of slowing down in the growth of China's service industry. After experiencing a high-speed growth of 11.2% from 2000 to 2009, the GDP of China's tertiary industry has gradually stepped down. The average annual growth rate from 2010 to 2019 was 8.4%, and from 2020 to 2023, it dropped to 4.8%. Looking at the proportion of the service industry, since 2018, the proportion of the tertiary industry in China's GDP has been stable between 53.0% and 55.0%. After 2018, the increase in the proportion of employed personnel in the tertiary industry has also been relatively slow, with 48.1% recorded in 2023, only 2 percentage points higher than in 2018. The Development and Reform Commission had set development goals for China's service industry in the "Service Industry Innovation and Development Outline (2017-2025)" released in 2017: by 2025, the proportion of the added value of the service industry in GDP will be increased to 60%, and the proportion of employed population will be increased to 55% of the total employed population in society. However, looking at the current development situation of China's service industry, there is still a certain gap compared to the planned target, and the scale growth of China's service industry needs to be accelerated.Compared to the international level, China's service industry still has significant room for development.

Looking at the scale of development, the proportion of China's service industry in GDP is not as high as that of developed economies at the same historical period. Zhong Yuejun and others (2020) fitted the historical data of per capita income levels and the proportion of service industry value added in GDP of 10 developed countries, and compared it with China's data. They found that compared with the same period of per capita income level in developed countries' history, the proportion of China's service industry value added in GDP is significantly lower, and this gap is more than 10 percentage points.

From the comparison of the proportion of value added in the main service industry between China and the United States, there is room for improvement in the proportion of China's high-tech service industry in GDP. In 2021, the proportion of GDP in the United States for scientific and technical services, business services, and rental industries reached 12.2%, while China's proportion for these industries was 5.8%, with a gap of 6.4 percentage points from the United States, which is the largest gap in GDP proportion between the two countries in all service industries. In addition, although China has achieved relatively fast growth in the information transmission, computer services, and software industry in recent years, the proportion of GDP for this industry increased from 2.5% in 2015 to 3.9% in 2021, but it is still 3.5 percentage points lower than that of the United States.

The slowdown in the growth of China's service industry in recent years also reflects that there are still some constraints in the current development process of China's service industry. To fully exert the potential of the service industry to "take over" economic growth, it is necessary to increase policy attention to the development of the service industry, solve the blockages in the development of the service industry, and promote the accelerated development of China's service industry.

III. Policy recommendations for accelerating the development of the service industry

At present, there are mainly two blockages in the development of China's service industry: First, there are some access restrictions in the service industry sector, and there is room for improvement in the degree of marketization, especially some service industries with tight supply need to attract more social capital to participate; Second, the degree of opening to the outside world can be further deepened, and production efficiency can be improved through competition and learning in the process of opening up. Third, China has a large scale of floating population. If the level of equalization of public services is further improved, it will help to tap the potential of service consumption of the floating population.

From the perspective of marketization, compared with the manufacturing industry, China's service industry has more access restrictions. According to the "Negative List for Market Access (2022 Edition)" released by the National Development and Reform Commission, there are 20 items in the manufacturing industry that require permission for access, while there are 62 items in the service industry that require permission for access. In addition, there are still hidden barriers such as "apparent release but actual non-release, nominal release but actual non-release" in the process of social capital actually entering the service industry [3], which further weakens the enthusiasm of social capital to enter the service industry. Before 2021, the proportion of private investment in the tertiary industry in China increased slowly, and after 2021, there was a significant decline. Considering the impact of the real estate industry, we further look at three细分 service industries: education, health, and culture, sports and entertainment. Although the government has introduced a number of policies to support and encourage social capital to enter the fields of education and medical care in recent years, the proportion of private investment in the education and health industries has not increased, and in 2023, it decreased by 2.7 and 3.1 percentage points respectively compared to 2021. In the culture, sports and entertainment industry with a higher degree of marketization, the growth of the proportion of private investment in recent years has also been slow, and in 2023, it only increased by 1 percentage point compared to 2018. It can be seen that the degree of social capital entering the service industry is still insufficient, and the potential of social capital to participate in the development of the service industry needs to be released. To this end, it is recommended to improve the degree of marketization of the service industry, especially some service industries with tight supply, such as medical care and elderly care, which need to attract more social capital to participate. Strengthen policy support for social capital to enter service industries with tight supply, increase the supply of land for service facilities and tax preferences, and support enterprises entering through financial interest subsidies, risk compensation, investment subsidies, and other means. Further reduce the threshold for social organizations to enter the service industry, allow investors of private non-enterprise organizations to obtain certain benefits during operation, and allow them to expand their revenue range by opening branches.From the perspective of opening up to the outside world, China's service industry has relatively more restrictions on the access of foreign capital. According to the "Special Administrative Measures for the Access of Foreign Investment (Negative List) (2021 Edition)", the manufacturing industry has basically achieved full openness, but there are still 23 special regulatory measures against foreign capital in various fields such as retail and wholesale, medical care, business, telecommunications, education, culture, sports, etc., most of which are prohibitive measures. To further reduce the restrictions of the service industry on social capital, it is recommended to benchmark the CPTPP's access requirements and institutional rules for the service industry, and to improve the level of openness and marketization of China's service industry. While expanding the institutional openness and promoting the improvement of the business environment for the service industry, it can also lay the foundation for China to expand its high-standard free trade area network facing the world. From the current gap of China's service industry in docking with the CPTPP rules, China's service industry needs to further improve the level of openness in the future by reducing access restrictions, standardizing and refining the content of the negative list, improving the fairness and transparency of industry supervision, and promoting the marketization of the service industry (Quan Yi, 2021; Li Jiguang and Zhang Juan, 2023).

From the perspective of service industry demand, the floating population finds it difficult to equally enjoy urban public services, which affects the further development of the service industry. The service industry relies on close interactions between people, so population aggregation has a significant role in promoting the development of the service industry, especially affecting residents' consumption of services (Zhong Yuejun et al., 2020). However, urban public services to a certain extent have unequal phenomena. On the one hand, it affects the willingness of the population to settle in cities for a long time, which is not conducive to improving the degree of population aggregation; on the other hand, it also makes the floating population need to save more income, reducing the willingness of the floating population to consume services. Therefore, to accelerate the development of China's service industry, it is necessary to further improve the level of equalization of residents' enjoyment of public services. To this end, it is recommended to transform the basis of public service provision from household registration to the registration system of habitual residence, and the population without household registration is entitled to enjoy equal public services with the local household population; the scale of public service investment should be linked to the scale of the habitual resident population. In areas with a large influx of floating population, the scale of public service investment such as guaranteed housing and medical care should be correspondingly expanded to ensure that the floating working population can also conveniently enjoy public service resources.