Empirical Results

Tables 5.5 and 5.6 present the empirical results of using gross private savings ratio and TFP growth as the dependent variable, respectively.

Here, the economies are classified by the relative criterion. In these two tables, columns (1) to (5) present the empirical results of different model

Table 5.5: Manufacturing Employment Share and Gross Private Savings Ratio: Relative Criterion

Dep: Gross private savings ratio

(GPSR) (1) (2) (3) (4) (5)

Manufacturing employment share 0.37***

(0.001) 0.36***

(0.002) 0.40***

(0.002) 0.47**

(0.017) 0.37*

(0.080)

GPSR, 1st lag 0.54***

(0.000) 0.51***

(0.000) 0.50***

(0.000) 0.46***

(0.000) 0.38***

(0.000)

GPSR, 2nd lag 0.02

(0.684) 0.02

(0.631) 0.02

(0.614) –0.11

(0.129) –0.17**

(0.027)

GPSR, 3rd lag 0.07*

(0.058) log GDP per capita, 1st lag –4.70

(0.443) –4.44

(0.488) –6.38

(0.333) –0.59

(0.939) –3.08 (0.705) log GDP per capita, 2nd lag 7.04

(0.249) 6.15

(0.344) 7.48

(0.261) –1.52

(0.858) 7.86 (0.505)

log GDP per capita, 3rd lag –9.63

(0.225)

Inflation rate (%) –0.04**

(0.028) –0.06**

(0.032) –0.08**

(0.018) 0.07

(0.267) 0.08 (0.199)

Chinn–Ito index –0.63

(0.494) –0.96

(0.340) –1.30

(0.225) –1.14

(0.345) –1.04 (0.388) Deposit money banks’ assets to

GDP (%) 0.00

(0.804) 0.02

(0.441) 0.01

(0.749) 0.05*

(0.058) 0.07**

(0.015) Domestic credit to private sector

(% of GDP) –0.03***

(0.003) –0.03***

(0.009) –0.03**

(0.010) –0.02

(0.128) –0.02*

(0.068)

Real interest rate (%) –0.03

(0.409) –0.04

(0.349) 0.10

(0.228) 0.13 (0.126)

Dependency ratio (%) 0.14

(0.234) 0.18

(0.347) 0.13 (0.505)

Urban population (% of total) 0.02

(0.888) 0.50**

(0.011) 0.46**

(0.029) Public health and education

expenditure to GDP (%) –0.11

(0.675) –0.05 (0.861)

Constant –14.93

(0.245) –10.61

(0.487) –18.28

(0.290) –28.26

(0.495) 4.73 (0.916)

Country fixed-effect yES yES yES yES yES

year fixed-effect yES yES yES yES yES

observations 497 453 453 262 251

R-squared 0.87 0.87 0.87 0.94 0.94

Adj. R-squared 0.84 0.85 0.85 0.92 0.92

Dep = dependent variable, GDP = gross domestic product, log = logarithm.

Note: ***, **, * denote statistical significance at 1%, 5%, and 10%, respectively. Calculated p-values are shown in parentheses.

Source: Authors. See section 5.2.1.

Table 5.6: Manufacturing Employment Share and Total Factor Productivity Growth: Relative Criterion

Dep: TFP growth rate (1) (2) (3) (4) (5)

Manufacturing

employment share 0.24**

(0.046) 0.22*

(0.087) 0.25*

(0.059) 0.26*

(0.053) 0.27**

(0.046) TFP growth rate, 1st lag 0.18***

(0.000) 0.18***

(0.000) 0.17***

(0.001) 0.17***

(0.000) 0.16***

(0.002)

TFP growth rate, 2nd lag 0.01

(0.918) log GDP per capita, 1st lag –21.09***

(0.004) –21.38***

(0.007) –22.99***

(0.006) –24.08***

(0.004) –21.91**

(0.011) log GDP per capita, 2nd lag 12.01*

(0.093) 11.25

(0.145) 13.60*

(0.094) 15.02*

(0.068) 0.65 (0.958)

log GDP per capita, 3rd lag 12.65

(0.110)

log population –2.80

(0.506) –4.70

(0.332) –8.00

(0.130) –5.54

(0.425) –5.52 (0.436) Investment ratio of GDP 0.04

(0.435) 0.05

(0.409) 0.02

(0.720) 0.04

(0.567) 0.06 (0.308)

Real interest rate (%) 0.00

(0.872) 0.00

(0.854) –0.00

(0.256) –0.00 (0.273) Deposit money banks’ assets

to GDP (%) –0.05**

(0.028) –0.03

(0.167) –0.03 (0.203)

Inflation rate (%) –0.16

(0.885) –0.33 (0.767)

Chinn–Ito index –0.02

(0.103) –0.02 (0.135) Domestic credit to

private sector (% of GDP) 0.00

(0.127) 0.00 (0.166) Urban population

(% of total) –0.05

(0.626) –0.09 (0.399)

Constant 127.18

(0.108) 167.36*

(0.065) 217.31**

(0.026) 175.08

(0.165) 173.26 (0.178)

Country fixed-effect yES yES yES yES yES

year fixed-effect yES yES yES yES yES

observations 668 589 572 564 549

R-squared 0.26 0.28 0.28 0.30 0.30

Adj. R-squared 0.17 0.18 0.18 0.19 0.19

Dep = Dependent variable, GDP = gross domestic product, log = logarithm, TFP = total factor productivity.

Note: ***, **, * denote statistical significance at 1%, 5%, and 10%, respectively. Calculated p-values are shown in parentheses.

Source: Authors. See section 5.2.1.

specifications by within-estimator. The difference between models (1) to (4) is that we control different sets of control variables in the regression.

In model (5), we add extra lag of the dependent variable based on model (4) to control for the persistence of the data. Those changes in model specifications have slight effects on the estimated magnitude and significance of the manufacturing employment share. Based on Tables 5.5 and 5.6, a 10% level increase in manufacturing employment share in the total economy is likely to lead to a 4% increase in gross private savings ratio, and a 2.5% increase in TFP growth. When we redo the regressions using absolute criterion classification, the results shown in Tables 5.7 and 5.8 reveal similar conclusions.

All these empirical results have confirmed our hypothesis on the underlying mechanisms of manufacturing development. As a matter of fact, many East Asian economies that promote industrialization are also accompanied by high saving ratios and rapid growth rates. Although culture and relative price differences also contribute to various levels of the saving ratio or even growth across economies, the emergence of the manufacturing sector could also lead to significant shifts by boosting the demand for capital, as well as increasing the investment return.

5.4  |  Conclusion

In this chapter, we highlight the influences of manufacturing development for middle-income economies. To begin with, we investigate the substantial externalities of manufacturing sector development on other sectors during the middle-income stage. Moreover, we test the underlying mechanisms through which the manufacturing sector contributes to economic growth. We find that manufacturing development not only increases the incentive to save, but also promotes technological accumulation.

Table 5.7: Manufacturing Employment Share and Gross Private Savings Ratio: Absolute Criterion

Dep: Gross private savings ratio

(GPSR) (1) (2) (3) (4) (5)

Manufacturing employment share 0.56***

(0.000) 0.53***

(0.000) 0.51***

(0.000) 0.44***

(0.000) 0.37***

(0.000)

GPSR, 1st lag –0.01

(0.848) –0.00

(0.983) –0.01

(0.824) –0.09

(0.184) –0.17**

(0.034)

GPSR, 2nd lag 0.06

(0.117)

GPSR, 3rd lag –0.55

(0.932) –0.07

(0.991) –1.99

(0.764) 2.82

(0.718) 0.12 (0.988) log GDP per capita, 1st lag 2.16

(0.739) 1.87

(0.778) 1.88

(0.780) –3.78

(0.654) 4.69 (0.689)

log GDP per capita, 2nd lag –6.95

(0.392) log GDP per capita, 3rd lag 0.23*

(0.088) 0.27*

(0.063) 0.27*

(0.081) 0.44**

(0.029) 0.38*

(0.082)

Inflation rate (%) –0.01

(0.122) –0.05*

(0.072) –0.08**

(0.013) 0.07

(0.252) 0.06 (0.275)

Chinn–Ito index –0.09

(0.924) –0.58

(0.590) –0.89

(0.427) –1.74

(0.155) –1.98 (0.107) Deposit money banks’ assets

to GDP (%) 0.02

(0.516) 0.02

(0.519) 0.00

(0.870) 0.03

(0.304) 0.04 (0.229) Domestic credit to private sector

(% of GDP) –0.01

(0.294) –0.02

(0.105) –0.03*

(0.080) –0.00

(0.778) –0.00 (0.798)

Real interest rate (%) –0.05

(0.109) –0.08**

(0.021) 0.10

(0.234) 0.09 (0.300)

Dependency ratio (%) 0.30**

(0.027) 0.29

(0.172) 0.29 (0.187)

Urban population (% of total) 0.13

(0.359) 0.52***

(0.009) 0.51**

(0.019) Public health and education

expenditure to GDP (%) –0.15

(0.578) –0.04 (0.883)

Constant –8.80

(0.566) –11.52

(0.487) –28.91

(0.126) –46.61

(0.267) –33.64 (0.478)

Country fixed-effect yES yES yES yES yES

year fixed-effect yES yES yES yES yES

observations 449 430 430 249 238

R-squared 0.88 0.88 0.89 0.94 0.94

Adj. R-squared 0.86 0.86 0.86 0.92 0.92

Dep = Dependent variable, GDP = gross domestic product, log = logarithm.

Notes: ***, **, * denote statistical significance at 1%, 5%, and 10%, respectively. Calculated p-values are shown in parentheses.

Source: Authors. See section 5.2.1.

our empirical findings in this chapter not only have substantial policy implications but also provide a set of facts that may serve as a guide to the further development of economic growth theory. The most important policy implication drawn from our work is the necessary industrial policy for middle-income economies. Since the early 1980s, however, there has been a noticeable slowdown of industrial development in many developing countries, particularly in Latin America and sub-Saharan Africa. over the past decade and a half, many African countries have suffered sustained deindustrialization of manufacturing capacity, and they remain the least industrialized in the world (Lall and Stewart 1996). It seems that governments in developing economies should come up with an effective strategy to prevent a country from premature deindustrialization (Rodrik 2016), especially in the era of globalization. When the manufacturing sector, the engine of growth for developing countries, weakens, aggregate productivity is likely to decline.

Therefore, in our view, the poor performance of manufacturing and the relatively strong performance of services in some developing economies may not be a good sign for maintaining sustainable long-term economic growth.

Moreover, our empirical findings on sectoral differences between

manufacturing and the services sector may also be of use for economic growth theory. Despite the prevalence of one-sector neoclassical theory (Barro and Sala-i-Martin 2004; Blanchard and Fischer 1989), many studies try to extend those basic growth models to multi-sector ones (Herrendorf, Rogerson, and Valentinyi 2013; Herrendorf and Valentinyi 2006; Zhang 2011) to investigate the theoretical effects of structural change and sectoral differences. However, in addition to the discussions on the existence and uniqueness of the

equilibrium in the multi-sector model, how to incorporate different sectors and their interactions into the model remains the vital question. our empirical findings on the unique characteristics of the manufacturing sector during the middle-income stage should shed some light on future economic modeling.

Table 5.8: Manufacturing Employment Share and Total Factor Productivity Growth: Absolute Criterion

Dep: TFP growth rate (1) (2) (3) (4) (5)

Manufacturing

employment share 0.22*

(0.093) 0.23

(0.113) 0.25*

(0.097) 0.30*

(0.056) 0.36**

(0.024) TFP growth rate, 1st lag 0.18***

(0.000) 0.18***

(0.000) 0.17***

(0.001) 0.18***

(0.000) 0.15***

(0.004)

TFP growth rate, 2nd lag 0.01

(0.862) log GDP per capita, 1st lag –25.42***

(0.001) –25.97***

(0.002) –27.58***

(0.001) –29.81***

(0.001) –24.99***

(0.005) log GDP per capita, 2nd lag 17.41**

(0.020) 17.12**

(0.032) 19.38**

(0.021) 22.07***

(0.009) –0.24 (0.985)

log GDP per capita, 3rd lag 19.13**

(0.020)

log population 3.47

(0.525) 3.31

(0.573) –0.05

(0.994) 3.40

(0.683) 6.52 (0.449) Investment ratio of GDP 0.06

(0.303) 0.08

(0.172) 0.05

(0.395) 0.07

(0.255) 0.10 (0.117)

Real interest rate (%) –0.00

(0.997) –0.00

(0.989) –0.00

(0.700) –0.00 (0.179) Deposit money banks’ assets

to GDP (%) –0.05**

(0.027) –0.04

(0.124) –0.02 (0.409)

Inflation rate (%) 0.83

(0.482) 1.01 (0.395)

Chinn–Ito index –0.03*

(0.053) –0.03**

(0.043) Domestic credit to

private sector (% of GDP) 0.00

(0.425) 0.00 (0.127)

Urban population (% of total) –0.06

(0.619) –0.15 (0.220)

Constant 10.12

(0.921) 18.75

(0.865) 71.20

(0.559) 10.77

(0.943) –51.46 (0.742)

Country fixed-effect yES yES yES yES yES

year fixed-effect yES yES yES yES yES

observations 611 553 536 529 511

R-squared 0.28 0.29 0.30 0.32 0.33

Adj. R-squared 0.18 0.19 0.20 0.21 0.22

Dep = Dependent variable, GDP = gross domestic product, log = logarithm, TFP = total factor productivity.

Notes: ***, **, * denote statistical significance at 1%, 5%, and 10%, respectively. Calculated p-values are shown in parentheses.

Source: Authors. See Section 5.2.1.

References

Acemoglu, D., and V. Guerrieri. 2008. Capital Deepening and Nonbalanced Economic Growth. Journal of Political Economy 116(3): 467–498.

Acemoglu, D., S. Johnson, and J. A. Robinson. 2005. Institutions as a Fundamental Cause of Long-Run Growth. In The Handbook of Economic Growth, edited by P. Aghion and S. N. Durlauf. Amsterdam: Elsevier North-Holland.

Acemoglu, D., S. Naidu, P. Restrepo, and J. A. Robinson. 2015. Democracy Does Cause Growth. NBER Working Paper 20004. Cambridge, MA:

National Bureau of Economic Research.

Aghion, P., D. Comin, P. Howitt, and I. Tecu. 2016. When Does Domestic Savings Matter for Economic Growth? IMF Economic Review 64(3):

381–407.

Amirapu, A., and A. Subramanian. 2015. Manufacturing or Services?

An Indian Illustration of a Development Dilemma. CGD Working Paper 409. Washington, DC: Center for Global Development.

Arellano, M., and S. Bond. 1991. Some Tests of Specification for Panel Data:

Monte Carlo Evidence and an Application to Employment Equations.

Review of Economic Studies 58(2): 277–297.

Arrow, K. 1962. The Economic Implications of Learning by Doing. Review of Economic Studies 29: 155–173.

Attanasio, o. P., L. Picci, and A. E. Scorcu. 2000. Saving, Growth, and Investment: A Macroeconomic Analysis Using a Panel of Countries.

The Review of Economics and Statistics 82(2): 182–211.

Barro, R. J. 1991. Economic Growth in a Cross Section of Countries.

The Quarterly Journal of Economics 106(2): 407–443.

Barro, R. J., and X. I. Sala-i-Martin. 2004. Economic Growth, Second Edition:

Cambridge, MA: The MIT Press.

Baumol, W. J. 1967. Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis. The American Economic Review 57(3): 415–426.

———. 2001. Paradox of the Services: Exploding Costs, Persistent Demand.

In The Growth of Service Industries: The Paradox of Exploding Costs and Persistent Demand, edited by T. Ten-Raa and R. Schettkat. Cheltenham, United Kingdom: Edwar Elgar.

Baumol, W. J., and W. G. Bowen. 1965. on the Performing Arts: The Anatomy of Their Economic Problems. The American Economic Review 55(1/2):

495–502.

Bernanke, B. S. 1984. Permanent Income, Liquidity, and Expenditure on Automobiles: Evidence from Panel Data. Quarterly Journal of Economics 99(3): 587–614.

Blanchard, o., and S. Fischer. 1989. Lectures on Macroeconomics: Cambridge, MA: The MIT Press.

Bluestone, B., and B. Harrison. 1982. The Deindustrialization of America.

New york, Ny: Basic Books.

Boucekkine, R., F. de Río, and o. Licandro. 2003. Embodied Technological Change, Learning-by-Doing and the Productivity Slowdown.

Scandinavian Journal of Economics 105(1): 87–97.

Buera, F. J., and J. P. Kaboski. 2012. The Rise of the Service Economy.

American Economic Review 102(6): 2540–2569.

Caselli, F., G. Esquivel, and F. Lefort. 1996. Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics. Journal of Economic Growth 1(3): 363–389.

Chakravarty, S., and A. Mitra. 2009. Is Industry Still the Engine of Growth?

An Econometric Study of the organized Sector Employment in India.

Journal of Policy Modeling 31: 22–35.

Chenery, H., and H. Elkington. 1980. Structural Change and Development Policy. oxford, United Kingdom: oxford University Press.

Clark, C. 1940. Conditions of Economic Progress. London: Macmillan Publishers.

Cornwall, J. 1976. Diffusion, Convergence and Kaldor’s Laws. The Economic Journal 86(342): 307–314.

Cruz, M. 2015. Premature De-industrialisation: Theory, Evidence and Policy Recommendations in the Mexican Case. Cambridge Journal of Economics 39: 113–137.

Dasgupta, S., and A. Singh. 2005. Will Services Be the New Engine of Indian Economic Growth? Development and Change 36(6): 1035–1057.

———. 2006. Manufacturing, Services and Premature Deindustrialization in Developing Countries: A Kaldorian Analysis. WIDER Working Paper 049.

Helsinki: World Institute for Development Economic Research (UNU–WIDER).

Fagerberg, J., and B. Verspagen. 1999. Modern Capitalism in the 1970s and 1980s. In Growth, Employment and Inflation, edited by M. Setterfield.

Basingstoke, United Kingdom: MacMillan.

Feldstein, M., and C. Horioka. 1980. Domestic Saving and International Capital Flows. Economic Journal 90(358): 314–329.

Fixler, D. J., and D. Siegel. 1999. outsourcing and Productivity Growth in Services. Structural Change and Economic Dynamics 10(2): 177–194.

Friedman, M. 1957. The Permanent Income Hypothesis: A Theory of the Consumption Function. Newhaven, CT: Princeton University Press.

Fuchs, V. R. 1981. Economic Growth and the Rise of Service Employment.

In Towards an Explanation of Economic Growth, edited by H. Giersch.

Tubingen, Germany: J.C.B. Mohr (Paul Siebeck).

Gollin, D., R. Jedwab, and D. Vollrath. 2016. Urbanization With and Without Industrialization. Journal of Economic Growth 21: 35–70.

Greenwood, J., Z. Hercowitz., and P. Krusell. 1997. Long-Run Implications of Investment-Specific Technological Change. The American Economic Review 87(3): 342–362.

Greenwood, J., and A. Seshadri. 2005. Technological Progress and Economic Transformation. In Handbook of Economic Growth, Vol. 1, edited by P. Aghion and S. Durlauf. Amsterdam: Elsevier North-Holland.

Gregorio, J. D. 1992. Economic Growth in Latin America. Journal of Development Economics 39(1): 59–84.

Guerrieri, P., and V. Meliciani. 2005. Technology and International Competitiveness: The Interdependence between Manufacturing and Producer Services. Structural Change and Economic Dynamics 16(4):

489–502.

Hall, R. E. 1978. Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence. Journal of Political Economy 85(6):

971–987.

Hall, R. E., and F. S. Mishkin. 1982. The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Household.

Econometrica 50(2): 461–481.

Hausmann, R., J. Hwang, and D. Rodrik. 2007. What you Export Matters.

Journal of Economic Growth 12: 1–25.

Helpman, E., and G. M. Grossman. 1991. Innovation and Growth in the Global Economy. Cambridge, MA: The MIT Press.

Herrendorf, B., R. Rogerson, and A. Valentinyi. 2013. Growth and Structural Transformation. Handbook of Economic Growth.

Herrendorf, B., and A. Valentinyi. 2006. on the Stability of the Two-Sector Neoclassical Growth Model with Externalities. Journal of Economic Dynamics and Control, 30(8): 1339–1361.

Imbs, J., and R. Wacziarg. 2003. Stages of Diversification. American Economic Review 93(1): 63–86.

Jones, B. F., and B. A. olken. 2005. Do Leaders Matter? National Leadership and Growth Since World War II. The Quarterly Journal of Economics 120(3): 835–864.

Jovanovic, B., and P. L. Rousseau. 2002. Moore’s Law and Learning by Doing.

Review of Economic Dynamics 5: 346–375.

Ju, J., J. y. Lin, and y. Wang. 2015. Endowment Structures, Industrial Dynamics, and Economic Growth. Journal of Monetary Economics 76:

244–263.

Kaldor, N. 1957. A Model of Economic Growth. Economic Journal 67(268):

591–624.

Kose, M. A., E. Prasad, K. Rogoff, and S.–J. Wei. 2009. Financial Globalization:

A Reappraisal. IMF Staff Papers 56: 8–62.

Kuznets, S. 1957. Quantitative Aspects of the Economic Growth of Nations:

II. Industrial Distribution of National Product and Labor Force.

Economic Development and Cultural Change 5(4): 1–111.

Lall, S., and F. Stewart. 1996. Trade and Industrial Policy in Africa.

Development 2: 64–67.

Lavopa, A., and A. Szirmai. 2014. Structural Modernization and Development Traps: An Empirical Approach. UNU–MERIT Working Papers

ISSN 1871–9872. Maastricht, The Netherlands: The United Nations University–Maastricht Economic and Social Research Institute on Innovation and Technology.

Lavopa, A. M. 2015. Structural Transformation and Economic Development.

Can Development Traps be Avoided? Maastricht University Doctoral Thesis.

Lee, K. y. 2005. India in an Asian Renaissance. Keynote Speech by Minister Mentor Lee Kuan yew at the official opening of the Lee Kuan yew School of Public Policy, Singapore, Shangri-La Hotel, 4 April 2005.

Singapore Government Press Release. http://www.nas.gov.sg/

archivesonline/speeches/view-html?filename=2005112101.htm.

Lee, J.-W., and W. J. McKibbin. 2014. Service Sector Productivity and Economic Growth in Asia. ADBI Working Paper 490. Tokyo:

Asian Development Bank Institute.

Loko, B., and M. A. Diouf. 2009. Revisiting the Determinants of Productivity Growth: What’s New? IMF Working Paper 09/225. Washington, DC:

International Monetary Fund.

Maroto-Sánchez, A., and J. R. Cuadrado-Roura. 2009. Is Growth of Services an obstacle to Productivity Growth? A Comparative Analysis.

Structural Change and Economic Dynamics 20: 254–265.

Mishel, L. R. 1989. The Late Great Debate on Deindustrialization. Challenge 32(1): 35–43.

Modigliani, F. 1966. The Life Cycle Hypothesis of Saving, the Demand for Wealth and the Supply of Capital. Social Research 33(2): 160–217.

Naudé, W., and A. Szirmai. 2012. The Importance of Manufacturing in Economic Development: Past, Present and Future Perspectives.

UNU–MERIT Working Papers ISSN 1871-9872. Maastricht,

The Netherlands: The United Nations University–Maastricht Economic and Social Research Institute on Innovation and Technology.

Nickell, S. 1981. Biases in Dynamic Models with Fixed Effects. Econometrica 49: 1417–1426.

Palma, J. G. 2005. Four Sources of Deindustrialization and a New Concept of the Dutch Disease: Stanford, CA: Stanford University Press.

Park, S.-H., and K. S. Chan. 1989. A Cross-Country Input–output Analysis of Intersectoral Relationships between Manufacturing and Services and their Employment Implications. World Development 17(2): 199–212.

Pellegrini, G. 2007. The Baumol Gap Revisited. An Econometric Analysis of the Productivity Differential between U. K. Manufacturing and Service Firms, 1982–1989. Labor 7(2): 143–157.

Pesaran, M. H., and R. Smith. 1995. Estimating Long-Run Relationships from Dynamic Heterogeneous Panels. Journal of Econometrics 68(1): 79–113.

Phelps, E. S. 1962. The New View of Investment: A Neoclassical Analysis.

The Quarterly Journal of Economics 76(4): 548–567.

Prasad, E. S., R. G. Rajan, and A. Subramanian. 2007. Foreign Capital and Economic Growth. Brookings Papers on Economic Activity 1: 153–230.

Pugno, M. 2006. The Service Paradox and Endogenous Economic Growth.

Structural Change and Economic Dynamics 17: 99–115.

Rodrik, D. 2013. Unconditional Convergence in Manufacturing. The Quarterly Journal of Economics 128(1): 165–204.

———. 2016. Premature Deindustrialization. Journal of Economic Growth 21(1): 1–33.

Romer, P. M. 1986. Increasing Returns and Long-Run Growth. Journal of Political Economy 94(5): 1002–1037.

Rowthorn, R., and K. Coutts. 2004. De-industrialisation and the Balance of Payments in Advanced Economies. Cambridge Journal of Economics 28(5): 767–790.

Rowthorn, R., and R. Ramaswamy. 1999. Growth, Trade, and Deindustrialization. IMF Staff Papers 46(1): 18–41.

Rowthorn, R. E. 1987. De-Industrialization Foreign Trade: Cambridge, United Kingdom: Cambridge University Press.

Su, D., and y. yao. 2016. Manufacturing as the Key Engine of Economic Growth for Middle-Income Economies. ADBI Working Paper 573.

Tokyo: Asian Development Bank Institute.

Szirmai, A. 2012. Industrialisation as an Engine of Growth in Developing Countries, 1950–2005. Structural Change and Economic Dynamics 23:

406–420.

Szirmai, A., and B. Verspagen. 2015. Manufacturing and Economic Growth in Developing Countries, 1950–2005. Structural Change and

Economic Dynamics 34: 46–59.

Tregenna, F. 2009. Characterising Deindustrialisation: An Analysis of Changes in Manufacturing Employment and output Internationally. Cambridge Journal of Economics 33: 433–466.

Zhang, J. S. 2011. The Analytical Solution of Balanced Growth of Non-linear Dynamic Multi-sector Economic Model. Economic Modelling 28:

410–421.

173

Service Sector Growth and the Middle-Income Trap:

The Case of the People’s Republic of China

Yanrui Wu

6.1  |  Introduction

Unprecedentedly high economic growth for several decades has earned the People’s Republic of China (PRC) upper-middle-income status with per capita gross domestic product (GDP) exceeding $8,000 in 2016. However, this growth has been largely driven by capital accumulation and the expansion of export-oriented manufacturing (World Bank 2013). With the rising cost of labor and the continuing appreciation of the yuan, the PRC economy is at a crossroads, heading to a new path of growth. In particular, services have been identified as the key source of growth, as echoed in a keynote speech by the PRC’s Premier Li Keqiang.¹ What role has the service sector played in the PRC’s growth process? Will service growth help the PRC economy avoid the so-called middle-income trap and hence join the high-income country club in the coming years? These are some of the questions we explore in this chapter.

Studies of the PRC’s service industry have been constrained by a lack of and inaccurate information. For a long time, PRC firms have played the role of multiple agencies. They are not only producers but also providers of services to their employees and their family members. Apart from productive activities,

1 “Making the Service Sector the New Engine for Sustainable Economic and Social Development,”

Keynote speech at the 2nd China Beijing International Fair for Trade in Services and the Global Services Forum Beijing Summit, 29 May 2013.

for example, PRC firms under the old centrally planned economic system had to build and manage hospitals, schools, grocery shops, and so on.

This has made it complicated to account for services in the PRC economy.

During the pre-reform era, the PRC’s system of national accounts followed Soviet practice. Large segments of the service sector such as services provided by firms were classified as “nonproductive” activities and hence excluded from the official service sector statistics. Though the situation has changed considerably since the introduction of economic reforms, the official statistical system is still subjected to the influence of the practice under the old

regime. over time, the PRC government has made major efforts to improve data collection and standardize the country’s system of national accounts.

For example, the first census of the service sector was conducted during 1991–1992 (NTICo 1995). This was followed by two nationwide economic censuses conducted in 2004 and 2008, respectively (NECo 2006, 2010).

As a result, periodic revisions of the PRC’s national accounts have been released. In particular, the service sector value added was revised upward by 16.8% following the country’s first-ever national economic census in 2004.

Some scholars argued that there are still errors in the official statistics (Xu and Ljungwall 2008; Zhang and Zhu 2015). While efforts have been made to check the sources and consistency of data used in this study, the correction of official statistics through rigorous exercises is beyond the scope of this study.² Readers should bear in mind this caveat when the conclusions of this chapter are interpreted.

The rest of the chapter begins with an investigation of the role of services in the PRC economy in Section 6.2. This is followed by a discussion of trade and foreign investment in the service industry in the PRC (Section 6.3).

Section 6.4 examines the PRC’s service economies from an international perspective. Subsequently, service sector growth and its implications for the PRC’s avoidance of the middle-income trap are explored in Section 6.5.

The final section concludes the chapter.

2 For more general discussion about the quality of the PRC statistics, readers may refer to Wu (2000), Rawski (2001), and Holz (2014).

6.2  |  The Role of Services in the PRC Economy

Since the launch of the economic reform program in 1978, the PRC has undergone rapid industrialization. A casual traveler to the PRC can easily observe the transformation of the PRC’s society and the economy as a result of recent industrialization. What is less visible is the equally rapid growth of the country’s service sector. Figure 6.1 shows the evolution of output shares in the economy’s three sectors—agriculture, industry, and services. The industrial sector consists of manufacturing, construction, and utilities which together account for about 40%–50% of the PRC’s GDP. Starting at a low base, services in the PRC surpassed agriculture in 1985 and overtook the industrial sector in 2013. According to the latest statistics, the PRC’s GDP grew by 6.7%

while services achieved a growth rate of 7.8% in 2016 (NBS 2017).

Figure 6.1:  GDP Shares in Three Sectors, 1978–2016 (Current Prices)

0.0 0.1 0.2 0.3 0.4 0.5 0.6

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Agriculture

Services Industry

GDP = gross domestic product.

Note: The values on the y-axis are ratios of sectoral GDP shares.

Source: Author’s own calculation using data from National Bureau of Statistics (various years, 2017).