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First draft 9/17/03

Impact of Service Sector Liberalization on Employment and Output: A CGE Analysis Shantong LI, Yan WANG and Fan ZHAI

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The greatest improvement in the productive powers of labor, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seems to have been the effects of the division of labor. Adam Smith, 1776 The Wealth of Nations Abstract A major challenge for the post-WTO China is to create jobs for millions of displaced workers and farmers, to ensure growth and social stability. This paper addresses this concern by first reviewing the international experience on service sector expansion, examining the current challenges and discussing the potential benefits of services trade. We then employ a CGE model designed specifically for this paper and simulate the potential impact of service sector liberalization on employment and output. Our analysis suggests that service sector liberalization could produces substantial benefits for China in terms of economic growth and consumer welfare. With successful reforms, service sector could become an important driving force of China's economic growth in the coming ten years. Along with the service liberalization, some labor force would move from a narrowly defined service sector to other sectors such as automobile, construction and water. Even though the employment adjustment is smaller as compared to output adjustment, it would bring about certain adjustment cost. This highlights the importance of implementing complementary policy measures to reduce strains in labor market during the process of further liberalization.

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Shantong LI, Director General, Development Research Center of the State Council, China; Yan WANG, Senior Economist, The World Bank; and Fan ZHAI, also with the Development Research Center. This paper is prepared for the Senior Policy Seminar on “China’s Service Sector in the Post-WTO Era,” (September 2003) jointly organized by the National Development and Reform Commission and The World Bank. We thank Will Martin for comments, and Bintao Wang for his excellent input and research assistance. The views expressed here are entirely those of the authors and should not be attributed to the institutions they are affiliated with.

First draft 9/17/03

1. Introduction and International Experience A key structural transformation in the industrial countries is the growing importance of the service sector. In high- income countries, on average, services constitute nearly twothirds of total Gross Domestic Product (GDP). Among low- and middle- income countries, they account for a smaller share—54 percent—but still the majority of output. In East Asia, the services sector on average is about the same size as the industrial sector, at 41 percent of GDP. One of the driving forces behind this trend is continued deepening of division of labor, with associated technical innovations and institut ional development. Initially many of the supporting functions such as distributional and logistic services were functions of firms. In order to achieve greater efficiency under the pressure of competition, firms had to be come more specialized in their main products, and they contracted out a series of other functions, which later become the specialize service providers. The growing of producer related services was due to the need of deepening division of labor and specialization for higher productivitie s. Second, as income level rises, consumers demand higher quality personal services related to leisure, personal and childcare, and financial and legal services. Third, individuals and societies demand basic social services such as education and health, and this demand grows rapidly as the demand for higher skilled labor grows. Rapid expansion of the service sector is a natural part of deepening trade, specialization, and marketization. Conversely, the expansion of trade also facilitates the development of the service sector. Historically, service industries have been at the heart of economic growth, stimulating and facilitating production for the market rather than simply for selfsufficiency (Riddle, 1986). If governments wish to make full use of their countries’ development potentials they would need to consider the expansion of service sector domestically, and the expansion of service trade internationally. The objective of this paper is to review international experiences, examine the factors behind the lagging service sector in China, and build a CGE model which may facilitate the process of designing a strategy for services sector trade and development. A brief review of the previous literature has revealed the following characteristics. First, the service sector has the ability to create jobs since many of the subsectors in services are labor-intensive. Since the end of the nineteenth century there has been an expansion of employment in the service sector in the industrial economies (Singelmann, 1978). This shift towards service employment began in the United States during the 1930s, followed closely by the United Kingdom and France (Figure 1). By 1998, 75 per cent of employment in the United States was in services. The United States is the most ‘tertiarized’ economy and society in the world.(See figure 1. OECD data, 2001). Bulk of the new employment is likely to be generated, not in the manufacturing sector of newly 2

First draft 9/17/03 developing countries, but in the tertiary sector. This does not mean that there will be no new factory jobs, but rather, for every additional hundred workers in manufacturing, a substantial multiple of this number will be added to the labor force in commerce, construction, transportation, and services. (Galenson, 1963) Figure 1. Service Sector Employment in Total Employment, 1890-1998

Figure 1: Service sector employment as a percentage of total employment in developed market economics, 1890-1998 80 70 France

60

Germany

50

Japan

40

United Kingdom United States

30 20 10 0 1890

1950

1960

1970

1980

1992

1998

Note: (a)1890-1970 data, Ott, 1987; (b) 1980-1992 data, OECD Labor Force Statistics; (c) 1998 data, OECD 2001, Services: Statistics on Value Added and Employment. Source: Updated based on Illeris (1996) The Service Economy: A Geographical Approach, 3, Table 1.1, Chichester: John Wiley.

Second, the service sector as an engine of growth. The service sector has an important role in improving production efficiency and promoting technical progress, in addition to directly satisfying consumer needs. More rapid development of producer services are associated with deepening division of labor and specialization, which are sources of productivity growth. Therefore, producer services can be considered an engine of growth. Elfring(1989) found out, in all OECD countries employment growth in producer services was about twice as high as the average for the entire service sector. 2 Rapid development of the service sector have widely shared benefits in the society. 2

Elfring(1989) divided services into 4 categories: Producer Services(whose output is purchased mainly by enterprises, such as business and professional services, financial services, insurance services and real estate services, etc.), Distributive Services(which involve the distribution of commodities and information and transportation of persons, such as retail trade, wholesale trade, transport services and communications, etc.), Personal Services(which are mainly determined by individual consumer demand, such as hotels, bars and restaurants, recreation and amusements, domestic services, repair services, barber and beauty services, laundry and cleaning services, etc.) and Social Services(which differs from previous ones by its non-market

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First draft 9/17/03 •

First, deepened specialization has led to output expansion and efficiency gains. Through “contracting out” industrial firms could reduce the cost of a function formerly performed internally. The introduction of low-cost and high-quality producer services normally results in an economy-wide transformation of production, business organization, distribution and consumption patterns.



Second, the expansion of employment can spread to activities dominated by lowwage job but also to areas with high-paying jobs such as information technology and health services. Specialization of producer services opens up the market to small- and medium-sized firms, which previously were unable to obtain these services without great cost.



In addition, service sector is less sensitive to recessions than the industrial sector. Elfring found, during recessions the increase of service employment share outstripped the other sectors during expansionary periods.

Third, liberalization in service trade will generate sizable gains . GATS defines four modes of supply for service trade: cross-border trade (mode 1), consumption abroad (mode 2), commercial presence (mode 3) and the temporary movement of natural persons (mode 4). The gains come from several sources according to recent studies: •

Standard gains from trade, including specialization. Developing countries have clear comparative advantages in many labor- intensive sectors such as tourism and construction. Liberalizing trade in services would allow more specialization and scale economy due to expanded market size.



Gains from services as intermediate inputs. Liberalizing the services is likely to expand the market for intermediate services (such as transportation and telecom), lower prices and improve the quality of services. Thus, developing countries can better exploit the comparative advantages they do have by exporting more goods in non-service sectors.



Gains from FDI as a means of trade. In many cases, import of services take the form of commercial presence, i.e., foreign direct investment. This import through FDI brings with them inflow of physical capital, human capital and technology–factors important for development and growth. (Hodge 2002, Mattoo 2002)

Recent experience with regulatory reform in OECD countries shows that liberalization in services industries and utilities resulted in significant gains in sectoral productivity, cost reductions and growth of output. For example, total factor productivity (TFP) in the electricity and telecommunication industries in Germany, France and Spain has increased by 40 percent due to their recent regulatory reform. In Japan the scope of TFP increases remains relatively high in he distribution sector. In general, the increases of TFP for the studied OECD countries is ranged from 1.5 percent to 3.5 percent, except for the United characteristics, for example, government proper, health services, educational services and miscellaneous social services).

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First draft 9/17/03 States. The potential for reform- induced productivity increases is estimated to be less in the United States, as significant reform have already occurred in this country and sectoral labor and capital productivity are generally higher there than in the other countries. (OECD, 1997)

2. China’s service sector: a comparative analysis 2.1 China’s service sector lags behind other countries. China’s has experienced rapid development in its service sector since the beginning of its reforms and openness. The share of service sector value added in GDP rose from 21.4% in 1980 to 31.3% in 1990 and further rose to 33.7% in 2002. In the 1990s, however, China’s service industry failed to develop proportionately with the growth of the national economy. The service sector value added only increased by a small margin. As mentioned above, the service sector value added accounted for 31.3% of the GDP in 1990, the share only hovered around 33.7% in 2002. In constant price, the share of the service sector value added in GDP actually declined in this period. It was 31.3% in 1990 and went down to 28.3% in 2002(see table 2.1). On the other hand, there was strong growth in the contribution of industrial value added to GDP, increasing from 41.6% in 1990 to 58.2% in 2002. At the same time, the proportion of agricultural value added in the GDP decreased rapidly. Table 2.1

Growth Rate of GDP and Industries (%)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 average

GDP 3.8 9.2 14.2 13.5 12.6 10.5 9.6 8.8 7.8 7.1 8.0 7.3 8.0 9.3

Primary Industry 7.3 2.4 4.7 4.7 4.0 5.0 5.1 3.5 3.5 2.8 2.4 2.8 2.9 3.9

Secondary Industry 3.2 13.9 21.2 19.9 18.4 13.9 12.1 10.5 8.9 8.1 9.4 8.7 9.9 12.0

Tertiary Industry 2.3 8.8 12.4 10.7 9.6 8.4 7.9 9.1 8.3 7.5 8.1 7.4 7.3 8.4

Source: « China Statistics Yearbook (2002)» and« China Statistics Abstract (2003)» .

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First draft 9/17/03 Table 2.2 China: Composition of GDP, 1981-2002

1981 1983 1987 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Agriculture Industry Current Price 1990 Price Current Price 1990 Price 31.8 36.2 46.4 39.0 33.0 36.0 44.6 37.4 26.8 28.6 43.9 40.6 27.1 27.0 41.6 41.6 24.5 25.4 42.1 43.4 21.8 23.2 43.9 46.0 19.9 21.4 47.4 48.6 20.2 19.9 47.9 51.0 20.5 18.9 48.8 52.6 20.4 18.1 49.5 53.8 19.1 17.2 50.0 54.6 18.6 16.6 49.3 55.2 17.6 15.8 49.4 55.7 16.4 15.0 50.2 56.5 15.2 14.3 51.5 57.2 14.5 13.5 51.7 58.2

Service Current Price 1990 Price 21.8 24.8 22.4 26.6 29.3 30.8 31.3 31.3 33.4 31.2 34.3 30.7 32.7 30.0 31.9 29.1 30.7 28.5 30.1 28.1 30.9 28.2 32.1 28.3 33.0 28.5 33.4 28.5 33.6 28.5 33.7 28.3

Source: China Statistics Yearbook (2002) and China Statistics Abstract (2003). The annual decline of the service inputs used per unit of the whole economy output value in the 1990s is also reflected in individual economic sectors. According to our calculation using input-output table, for example, the intermediate input of service industry (1990 constant price) per unit output of food processing industry decreased from 0.128 in 1990 to 0.031 in 1995, while for chemical industry it decreased from 0.090 to around 0.045. International comparison shows that the service sector in China is lagging behind industrial and developing countries. In 2002, the service industry made up 33.7% of China’s GDP, less than half of the figure in the United States (70%). This result is not a surprise because China’s GDP per capita is much lower than United States (China ’s GDP per capita was US$890 and US$4260 respectively according to current exchange rate and PPP price in 2001). International experiences indicate that, with the increase in average income, demand for service will increase, so does the proportion of the service sector in GDP. However, the service sector share in China is also lower than other developing countries with similar income levels. In 2001, for instance, the shares of service industry in the economies of Jordan, Jamaica, Morocco, Philippines, Indonesia and India were higher than that of China (see Table 2.3). Respectively they were: 73% in Jordan (with per capita GDP of US$1750 and US$4080 by current exchange rate and PPP rate respectively), 63% in Jamaica (US$2720 and US$3650), 53% in Morocco (US$1180 and US$3690), 54% in Philippines (US$1050 and US$4360), 37% in Indonesia (US$680 and US$2940), and 48% in India (US$460 and US$2450).

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First draft 9/17/03 Table 2.3 Comparison with Selected Developing Countries (2001)

India Indonesia Sri- Lanka

Jamaica Morocco Egypt Albania

Jordan Ukraine China

Per capita GDP (US$, official exchange rate)

Per Capita GDP (US$, PPP)

Service share in GDP( %)

460 680 830 2720 1180 1530 1230 1750 720 890 1050

2450 2940 3560 3650 3690 3790 3880 4080 4150 4260 4360

48 37 55 63 53 49 24 73 45 33 54

Philippines Source: World Development Report 2003, World Bank.

The share of China ’s service industry is underestimated according to the general tertiary industrial survey conducted by the State Statistical Bureau (SSB) in 1993-1995. The survey found out that the service industry was seriously underestimated. After the survey, SSB undertook major adjustments in the historic data on service industry. However, it is still inadequate for the following reasons. First, it is likely that the social services provided by the state-owned enterprises were not put under the category of service industry completely. Second, a sound continuous statistical system for service sector has not been established in China and there have been large statistical error of omissions. For example, statistics and surveys are poor on emerging services such as computer software, Internet, lawyers, accountants, etc. The range of the statistics on traditional service sectors is also inadequate. Third, there is a strong correlation between income and service sector output. In the case that income may be understated, output value of services is likely to be underestimated. Fourth, the general surveys on industry and agriculture in China had indicated that there existed overestimation in both industrial and agricultural output survey values. If an upward adjustment is made, the share services in GDP could go up to 38% of the GDP by adding all the industrial share of growth in GDP (5.7 percentage points) in the 1990s to service sector. Still it is much lower than countries with similar development level. Therefore, we contend that that the low level of development in China’s service sector is caused mainly by economic factor. 2.2 Developing service sector is an important way to create job opportunities The service sector consists of different industries with varying degree of labor absorption and requirements for the quality of workers. Thus we need to analyze the composition of the service sector, its impact on employment growth as well as the composition of employment in various sectors.

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First draft 9/17/03 Experience from OECD countries has revealed the following stylized facts: First, the service sector has a huge potential for employment creation. In 1998, the service industries in OECD countries made up an average 67.6% of the national employment. Second, the traditional service industries provide larger share of employment. In 1988, the total employment share of the first and second categories of service sector was 25.2%, accounting for 40.3% of the total employment in service sector. In 1998, these two categories have a total employment share of 26.5%, accounting for 39.2% of the total employment in service industry. Third, even though each industry in service sector contributes to the employment growth in a certain degree, the employment in knowledge- intensive modern service industry grows faster than that in traditional service industry. On average, all service sectors’ employment share in OECD countries increased in the period of 1988-1998, but with the third category of service sector growing at the biggest margin. The second fastest growing sector was the fifth category. Although the first category of service sector continued to take the largest share of employment, its changes were smaller than that in the third and fifth category. And there was basically no growth in the other two categories of service sectors. Table 2.4 shows that the average share of employment in the third category of service sector increased by 1.6 percentage point from 9.4% in 1988 to 11% in 1998. The share of the fifth category increased by 1.3 percentage point from 18% in 1988 to 19.3% in 1998. The changes in the share of other service industries were much smaller. Table 2.4 Sectoral Share of Services in Total Employment in OECD Countries Wholesale, retail trade, restaurants and hotels (1) Transportation, storage, and communication( 2) Finance, insurance, real estate and business services( 3) Public administration and defense (4) Education, health care, social assistance and others( 5) Total

1988 19.2 6.4 9.4 10.6 18.0 63.6

1998 20.1 6.4 11.0 10.8 19.3 67.6

Change 0.9 0 1.6 0.2 1.3

Notes: Total employment (all activities) = 100. Source: Services: Statistics on Value Added and Employment, OECD, Paris, 2000.

Since the start of reforms, the employment share of China’s service industry has grown by 15.5 percentage point from 13.1% in 1980 to 28.6% in 2002. Since 1990, employment in service sector has been growing at a higher rate than the total employment. However, the pace of growth in the service industry has tended to slow down. Judging from the increase of employment share, the average growth was 0.7 percentage point in the period of 1980-2002, and the growth was only 0.4 percentage point in the period of 1997-2002. Similar with developed countries, employment growth is not evenly distributed across various sub-sectors (see Table 2.5). In 2002, most of the employment was concentrated in other service sectors, making up 8.47% of total employment. The second largest job creator was wholesale, retail trade and restaurant service, making up 6.74%. The third

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First draft 9/17/03 was transport, storage, post and telecommunication, making up about 2.82%. The smallest labor absorber was real estate industry, making up 0.16%. In the period of 19802002, the other service sectors’ employment grew by the biggest margin with a rate of 7.08%. The second fastest growth was seen in wholesale and retail trade and restaurant service with a increase of 3.52%. The third was transport, storage, post and telecommunication. The rest of the service sectors’ employment increased lower than 0.83%, or even decreased. The employment growth in China’s service industry has been on one hand related to the growing demand for services as a result of rapid economic growth, and on the other hand related to the economic restructuring. For example, the growth of other service sectors has been closed related to the restructuring of government functions. In the current statistical system, other service sectors include the enterprise management agencies (i.e. the administrative companies performing administrative management functions and adopting accounting system designed for administrative and public institutions). The relatively large growth in their employment share was most probably the result of separating part of the service functions from the government. Table 2.5 Sectoral Composition of Services Employment in China (%) 1980

1985

1990

1995

2000

2001

2002

0.44

0.40

0.31

0.20

0.15

0.14

0.13

1.90

2.56

2.45

2.85

2.81

2.79

2.82

3.22

4.62

4.38

6.31

6.50

6.49

6.74

0.23 0.09

0.28 0.07

0.34 0.07

0.41 0.12

0.45 0.14

0.46 0.15

0.46 0.16

Social services

0.65

0.80

0.93

1.03

1.28

1.34

1.48

Health services, sports and social welfare

0.92

0.94

0.84

0.65

0.68

0.68

0.67

2.71

2.55

2.28

2.17

2.17

2.15

2.12

0.27

0.29

0.27

0.27

0.24

0.23

0.22

1.24

1.60

1.69

1.53

1.53

1.51

1.46

Other 1.39 2.64 2.78 Source: calculated based on “2002 China Statistic Yearbook”

6.59

7.83

8.01

8.47

Geological prospecting and water conservancy Transportation, warehousing, post and telecommunication Wholesale, retail trade and restaurants Finance and insurance Real estate

Education, culture and arts, radio, film and television Scientific research and general technical services Public administration

The classification of China ’s service industry is different from that of OECD countries. Nevertheless, by comparing Table 2.5 and 2.4, we can see that there are still large potentials for further employment expansion in almost every industry of China ’s service sector. For example, in transport, storage, post and telecommunication, in which we have similar statistical approach with OECD countries, the employment share in OECD countries was 6.4% (1998) while it was 2.82% in China (2002). The gap was 3.58 percentage point. In OECD countries, the employment share for wholesale, retail, restaurant and hotel services was 20.1% on average (1998). In China, since hotel services 9

First draft 9/17/03 are not separated from other social services, it is hard to estimate the accurate share of employment in wholesale, retail, restaurant and hotel services. But it is certain that its figure is much lower than the average level of OECD countries. Even if we assume the social services are composed entirely of hotel industry, the employment share for wholesale, retail, catering and hotel services in China would only be 8.22% (2002). There is still a 11.88 percentage point gap as compared to OECD countries’ level in 1998. The development of some knowledge-intensive services in China is even less sufficient. In OECD countries, the share of employment in finance, insurance, real estates and business services is above 10.0% (1998), while in China, the share is less than 2% (2002). The gap is more than 8 percentage point. Looking at the relationship between the employment growth in service sector and the economic growth in China, we see that, in years when GDP growth was fast, the growth in tertiary industry and labor movements from the primary industry was relatively fast. But this is only a correlation, not a causality. There could well be a two-way causality and that is, when policies allow more rapid labor moving from the primary to the secondary and tertiary industries, GDP grows faster.

Table 2.6. China: GDP Growth and Composition of employment

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Economic Growth Rate ( % ) GDP Primary Secondary Tertiary 9.2 2.4 13.9 8.8 14.2 4.7 21.2 12.4 13.5 4.7 19.9 10.7 12.6 4.0 18.4 9.6 10.5 5.0 13.9 8.4 9.6 5.1 12.1 7.9 8.8 3.5 10.5 9.1 7.8 3.5 8.9 8.3 7.1 2.8 8.1 7.7 8.0 2.4 9.6 7.8 7.0 2.8 8.7 7.4

Employment Growth Rate( % ) Total Primary Secondary Tertiary 1.4 0.7 1.6 3.5 1.2 -0.9 2.6 6.0 1.2 -2.4 4.5 8.4 1.2 -2.5 2.6 9.8 1.1 -2.8 2.5 9.0 1.3 -2.0 3.5 6.2 1.1 -0.1 1.9 2.6 0.5 0.3 -0.3 1.7 0.9 1.5 -1.2 1.6 0.8 0.6 -1.4 3.0 2.6 2.6 1.7 3.4

In addition, by observing the changing trend in the structure of China’s service sector, it can also be found that, the growth of employment share of labor- intensive service industry is likely to be constrained by the slowing-down in the demand for services. As shown in Figure 2, in recent years, there has been a stagnated growth and even a decline in the employment share of the labor-intensive service sectors such as transport, storage, posts and telecommunications, as well as wholesale, retail and catering services. Since labor- intensive service sectors do not require special skills, a considerable part of the decline may be explained by insufficient demand for these services.

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First draft 9/17/03

Figure 2. Change of Employment Share of Transportation and Commerce (19802000) 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00

1980

1982

1984

1986

1988

1990

transportation

1992

1994

1996

1998

2000

commerce

2.3 Main factors affecting the development of service industry The analyses above indicate that there is a need for a more rapid expansion of the service sector by means of reform and liberalization—which means opening the sector for domestic and foreign competition. Developing service sector is not only a solution of resolving employment problems, but also an inherent requirement of China’s modernization. It’s a prerequisite to promoting the industrial structure upgrading, improving the international competitiveness of manufacturing industry, advancing market-oriented reforms and meeting the growing material and cultural needs of the people. The development of service sector is also a requirement in the procedure of adapting to a global environment with a rapid growth in service trade after China’s accession to WTO. The main factors affecting the development of service sector include: (1) Conceptual and ideology issues. Over a long period of time, many areas of service sector have been regarded as “non-productive” activities in China. Some services which should be commercial or market practices, have been run as public good and

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First draft 9/17/03 social welfare. The ideology issues have led to over-reliance on the government investment in many service sectors, with inadequate attention to private sector development, competition and decentralization. (2) Lack of competition and low level of marketization. Many service sectors in China are characterized by widespread monopoly or oligopoly. There’re numerous restrictions to market access by the private sector (domestic or foreign), resulting in an insufficient competition. For example, there have been strict restrictions over market access in the sectors such as banking, telecommunications, civil aviation, and railways; and restrictions on non-state capital and foreign capital are especially strict. The low level of marketization is also represented by the fact that the government undertakes services functions that should be run by the private sector. Many intermediary agencies such as stock brokerage are actually affiliated with the government. This impaired the intermediaries’ ability to do business in an independent way, thus affected their reputation as well as their market expansion. (3) Low level of urbanization. Increased urbanization can create demands for the development of service sector, while the scale and structure of development of service sector also depends on the level of urbanization, and the scale and structures of cities. The small scale of China’s service industry has been determined by its special national conditions featur ing an overwhelming rural population and very low level of urbanization. (4) Inadequate human resources. A large number of specialized personnel is needed in the development of modern service industry, particularly in the knowledge- intensive service industries (multi- mode distribution, logistics, E-commerce, computer software, research and development, technical testing, market service, corporate management service, etc.). Due to the long-standing restrictions on the development of service sector in China, insufficient attention has been paid to the training of qualified people in service sectors and there has been severe shortage of those high-skill talents. In sum, one of the important causes for China’s lagging service sector development was the lack of competition and low level of marketization. To develop this sector, it is crucial to open this sector for domestic and foreign competition, which will lead to deepened market-oriented reforms, structural transformation, and productivity gains. In other words, liberalizing service trade will create opportunities for a more rapid expansion of the service sector (including service export), which will facilitate growth and poverty reduction. China’s strong commitment to opening its service sector through its GATS agreement, has reflected this firm believe that China needs to open its service sectors, not just for the sake of joining WTO, but also for its own development, job creation, and poverty reduction.

3. Modeling service liberalization 3.1 The CGE Model for China To quantify the possible ongoing impact of service sector liberalization in China, we employ a recursive dynamic computable general equilibrium model for Chinese economy. 12

First draft 9/17/03 The model has its intellectual roots in the group of single-country, applied general equilibrium models used over the past two decades to analyze the impact of trade policy reform (Dervis, de Melo and Robinson, 1982; Shoven and Whalley, 1992; de Melo and Tarr, 1992). But some special treatments of service sectors and labor markets are introduced in the model to reflect some major features of Chinese economy3 . The model includes 2 representative households and 46 production sectors. Ho useholds are grouped by region, i.e. rural and urban. Within 46 sectors, there are 3 utility sector and 13 services sectors. The detailed disaggregation of service sector makes it possible to model the impact of liberalization in special service sector. Nine of service sectors are characterized by imperfect competition market structure. They are 1) transportation, 2) telecommunication, 3) post service, 4) finance, 5) insurance, 6) real estate, 7) tourism, 8) civil and social service, 9) education, cultural and health service. We assume firms in these sectors are Cournot oligopolists, with entry barriers assuring price markups over average cost. All other sectors are assumed to have a competitive market structure, firms in these sectors select output levels such that marginal cost at those output levels equals the given market price. Production in each of the sectors of the economy is modeled using nested constant elasticity of substitution functions, and constant returns to scale is assumed. Output is determined from the combination of non-service intermediate inputs and a composite bundle composed of service input and value added. Typically, the level of substitution at this level is very low. Non-service intermediate inputs are assumed to be demanded in fixed quantities with respect to aggregate non-service intermediate demand, i.e. the Leontief specification. The service-value added bundle is decomposed into an unskilled labor aggregate on the one hand, and a capital-skilled labor-service bundle on the other. The aggregated unskilled al bor is further decomposed into unskilled labor and semiskilled labor, and they are further decomposed into urban labor and rural labor. The capital-skilled labor-service bundle is disaggregated into demand for capital-skilled labor bundle, and demand for a service aggregate. The capital-skilled labor bundle is further decomposed into capital demand and demand for skilled labor. Typically, here we assume a very low level of substitution between capital and skilled in non-service sectors, and zero substitution in service sectors. This specification reflects the complementarity of capital and skilled labor in the production of service. The service aggregate is disaggregated into 9 service inputs through a Leontief technology. Household are endowed with three types of labor: skilled, semi- skilled and unskilled. These are distinguished by educational attainment of the worker with semi-skilled workers having a middle- or high school education, and skilled workers having an educational attainment beyond high school . Households are also endowed with profits from family-owned agriculture and non-agriculture enterprises, property income and transfers. Agricultural profits represent returns to family labor, land and capital. However, the off- farm labor supply decision is a function of the combined return to labor and land in agriculture, owing to the absence of an effectively functioning land market in many rural areas. 3

The specification on labor market and rural-urban migration in this model is same with the model used in Zhai, Hertel and Wang (2003).

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First draft 9/17/03 Households consume goods and services according to a preference structure determined by the Extended Linear Expenditure System (ELES). Through specification of a subsistence quantity of each good or service, this expenditure function generates nonhomothetic demands – whereby the larger the relative importance of subsistence consumption (e.g., it would be high for rice, and low for automobiles) the more incomeinelastic the household’s demand for that good. Trade is modeled using the Armington assumption for import demand, and a constant elasticity of transformation for export supply. Thus, Chinese products are assumed to be differentiated from foreign products, and exports from China are treated as different products from those sold on the domestic market. The small country assumption is assumed for imports and so world import prices are exogenous in terms of foreign currency. Exports are demanded according to constant-elasticity demand curves, the price-elasticities of which are high but less than infinite. Therefore the terms of trade for China are endogenous in our simulation. All commodity and non- labor factor markets are assumed to clear through prices. With the exception of the farm/non- farm labor supply decision, labor is assumed to be mobile across sectors, but rural- urban migration is subjected to the direct and indirect transactions costs, so the unskilled and semi-skilled rural wages are equated to the comparable urban wages, less transactions costs. Capital is assumed to be fully mobile across sector. The model has a simple recursive dynamic structure. Dynamics in the model originate from accumulation of productive factors and productivity changes. The model is benchmarked on China’s 1997 Social Accounting Matrix and is solved for subsequent years from 1998 to 2010. 3.2

Simulation design for service liberalization

Differentiated with trade in goods, trade in service is not solely a cross-border phenomenon. GATS defines four modes of supply for service trade and among the four modes, commercial presence, i.e. the direct investment for the purpose of delivering services, is the dominant mode for most service trade, except for transport and tourism service. Restriction for foreign investment may impact service trade far more directly than tariffs or other borders barriers. Furthermore, in developing countries like China, the service sector is highly regulated and there is a large state presence in many key service sectors. This rigid regulatory environment has limited competition and innovation, which, in turn, limits the role and constructive effects that service industries can play in development of a dynamic economy. An integral pro-competitive regulatory reform is usually a pre-condition for service liberalization in developing countries. Generally, the regulatory reform associated with liberalization has two major dimensions: (1) Liberalizing prices and access to markets which had previously been restricted by legal and regulatory barriers; (2) Returning to the private sector activities that had been run directly by the government. Recent experiences in OECD countries show that these measures could promote

14

First draft 9/17/03 competition, reduce misallocation of resource, stimulate innovation, lower cost and boost efficiency. (OECD, 1997; Productivity Commission, 1999) Since service liberalization involves complex policy and institutional changes, we cannot capture all aspects of the issue at hand. Specifically, we incorporated four important aspects to model the effects of service liberalization in this paper: −

Halving the barriers to services trade



Promoting the competition in service sector



Increasing of foreign investment resulted from reduction of barriers to foreign investment in service sectors



Productivity gain in service sector induced by service liberalization

Following Francois and Spinanger (2002) and Dominique (2001), we model the reduction of barrier of service trade by reducing the iceberg type trading cost. They are nonrevenue generating costs in service trade, which allows for trade to expand if these costs are reduced. (See also Stern 2002. ) Service liberalization, along with domestic regulatory reform, could bring about a more competitive market structure. To reflect this effect, we assume the entry barriers of the services sectors with imperfect competition market structure will be phased out from 2003-2010 during the liberalization. Along with the decline of entry barriers, the number of firms in these sectors would increase and their markup ratio would decline. In 2010, we allow for the free entry and exit, which implying zero profits. The liberalization scenario also assumes the inflow of FDI to the liberalized sectors will increase due to the reduction of barriers to foreign investment, and the elimination of domestic entry barriers. It is assumed that in the year of 2010 FDI will increase at an amount of 10 percent of investment in liberalized sectors relative to base case. Empirical evidences shows that regulatory reforms in the service sector have led to substantial productivity increases. In OECD countries, the increases of TFP ranged from 1.5 percent to 3.5 percent, except for the United States. The potential for reform- induced productivity increases is estimated to be less in the United States, as significant reform have already occurred in this country and sectoral labor and capital productivity are generally higher there than in the other countries. (OECD, 1997) Given the highly distorted domestic regulation system and substantial productivity gap between China’s service sector and its international craft brother, we could expect the a large productivity gain from China’s service sector liberalization. In the liberalization scenarios we assume that the TFP growth in service sector will be 2 percentage point higher than base case during the period of 2003-2010, which result in an 16 percent TFP increase in these sector in 2010.

15

First draft 9/17/03 3.3. Base Case Scenario We establish a base case scenario firstly, which determines a reference growth trajectory in absence of policy reforms and serve as a benchmark for policy evaluation. Table 1 summarizes the results in base case. In the base case, GDP grows at an average rate of about 7.5%. Economic growth is sourced from the labor force growth, more capital accumulation and productivity growth. Population will reach 1.37 billion in 2010, with a commensurate increase in the labor force which grows at about 0.9%/year. In contrast, the capital stock grows at 8-9% annual rate, leading to substantial capital deepening. Total factor productivity represents the difference between the GDP projections and the growth rate supported by the accumulation of labor and capital. This is around 3.7% in the projections period. The baseline scenario also shows a substantial increase in openness of the economy, relative to 1997, with exports’ share in GDP rising by 3.2 percentage points and imports share in GDP rising by about 7.5 percentage points. The current account surplus declines over the baseline period – to about 30% of its 1997 level. The baseline scenario also shows a substantial structural transformation. Table 3.1 shows a reduced share of agriculture and a remarkably increased share of the service sector. By the year of 2010, the share of agricultural value-added in GDP will go down by 8 percentage points, the share of the tertiary industry (including construction and service) will rise by 9.7 percentage points. The tertiary sector would account for nearly 45 percent of GDP in the year of 2010. There are two major driving forces for the rapid growth of the service sector: the rising demand of the service consumption of households and the growing dependence of the production activities on the service intermediate input. The change in the employment structure is relatively smaller than that of output. The share of the agricultural labor force will reduce 10 percentage points by the year 2010. Both service and industrial sectors would absorb the labor force transferred from agricultural sectors. However, agricultural sector will still occupy nearly 300 million laborers, about 42% of the total labor force. Compared with the share of the agricultural value-added of 11.5 percent, there will still be heavy pressures from the agricultural labor force that tend to shift to other sectors. Table 3.1 Summary of Baseline Calibration 1997 Exogenous specified variables: GDP Growth Rate(%) Population (Million) 1236.3 Urban 369.9 Rural 866.4 Labor force (Million) 609.2 Urban 177.1 Rural 432.1 Calibrated results: Growth rate ( %t) Total absorption Labor force

1998 –2000

2001-2005

2006-2010

7.6 1268.0 397.0 871.0 628.9 192.1 436.8

7.7 1315.0 447.0 868.0 658.5 219.3 439.1

7.3 1369.0 500.0 869.0 682.5 245.3 437.2

10.6 1.15

8.5 0.96

7.7 0.76

16

First draft 9/17/03 Capital stock TFP

10.0 3.3

9.5 3.7

8.3 3.8

Ratio to GDP(%) Private consumption Investment Export Import

44.4 32.9 21.8 16.4

46.1 33.9 23.8 20.4

48.2 33.2 24.4 22.6

49.4 32.4 25.0 24.0

Share of value-added (%) Agriculture Industry Construction Service

19.5 45.7 6.6 28.2

17.2 45.1 6.9 30.8

14.1 44.7 6.5 34.7

11.5 44.1 6.2 38.2

Share of employment (%) Agriculture Industry Construction Service

52.0 23.1 6.5 18.5

49.3 23.3 7.3 20.1

45.4 24.5 7.7 22.4

41.8 25.9 7.7 24.5

Data source: Author’s calculation.

3.4. Effects of Service Liberalization Aggregate results: Table 3.2 column (2) reports the main macroeconomic indicators under the scenario of service liberalization. They are deviations from the base case in the year of 2010. The results show that service liberalization will boost economic efficiency significantly. In 2010, the output measured by real GDP will increase 3.7 percent compared with base case. The average annual growth rate of GDP will increase by 0.48 percentage point relative to base case for the period of 2003-2010. 4 The welfare gains represented by Hicksian equivalent variations (EV) are larger compare to GDP, which is 827 billion yuan at 1997 price and around 4.2 percent of GDP in 2010. Consumer price index would decrease 2.9 percent 5 and real private consumption would increase 6.8 percent, indicating the significant benefits to consumers from the service liberalization. Real Investment increases by 3.8 percent. Because the small share of service trade in total trade, the impact of reform in service sector on trade is quite small. But the increased inflow of FDI following service liberalization will influence trade balance, as a result, exports would rise by only 0.7 percent while imports would increase 5.4 percent.

4

It is possible that the market access aspect of GATS would generate efficiency gains due to specialization, not directly related to international trade or competition. 5 All price changes are relative to the numeraire, which is price of foreign exchange in this model.

17

First draft 9/17/03

Table 3.2 Major macroeconomic effects, 2010 Liberalization (% change relative to base case)

Tourism boom (% change relative to liberalization case)

GDP

3.7

0.45

EV ( % of GDP) Private consumption Investment

4.2 6.8 3.8

0.45 0.43 0.76

Exports Imports Households income

0.7 5.4

0.61 0.61

Urban Rural Factor price

7.4 5.8

0.67 0.00

Unskilled labor Semi-skilled labor Skilled labor

3.4 4.7 6.5

0.00 0.00 0.00

-1.2 -1.8

1.15 0.06

-9.5 1.9 -2.9

0.10 0.11 0.06

Investment goods Employment Unskilled labor

0.9 0.0 0.0

0.06 0.34 0.29

Semi-skilled labor Skilled labor

0.0 0.0

0.34 0.44

Capital GDP deflator Price index for: Service sector Non-service sector CPI

Source: model simulation results

The liberalization in service sector is in favor of both urban and rural households. But the gains of urban households is slightly higher than rural households, because urban households consume more service than rural households and most employee in service sector are urban residents. Since service sector is relatively more skill- intensive, its liberalization would raise the wage of skilled labor by 6.5%, higher than that of unskilled labor and semi-skilled labor. This sheds light that fact that the shortage of skilled labor would be an important supply-side constraint to the development of service sector in China. Competition pressure and efficiency improvement would reduce the prices of service significantly. The aggregate price of service sector will decrease by 9.2 percent. CPI will decrease 2.9 percent and the price of investment goods will be increase, because there is more service contents in consume goods than investment goods. The relative prices between investment goods and consumer goods accounts for the less growth in real investment relative to real consumption. 18

First draft 9/17/03 Sectoral and employment results: Table 3.3 columns (2)-(3) provide the sectoral results on output and employment. At the industry level, service sector liberalization will raise the level of output in almost all service sectors. In particular, the highly regulated service sectors, such as telecommunication, finance, insurance and real estate, would experience significant expansion in output. While less regulated sectors, such as commerce and restaurant, only have modest boost in their outputs. Because government spending accounts for a large proportion of the demand for education and health and it is fixed at the baseline level, the output expansion in education and health sector is also modest. For same reason, the output of public administration is almost unchanged under the service liberalization scenario. One may surprise that the output expansion in tourism sector would be extremely large, reaching 64.4%. There are two reasons for it. Firstly, the price decline in reformed service sectors could boom their exports. Since tourism is an important service export sector and its export accounts for 60% of output in 1997 according to the input-output table, the booming of service export would induce a sharp increase in tourism output. Secondly, tourism sector uses itself as intermediate input more than other service sectors do. The rise in demand of tourism would have a strong multiplier effect, resulting in relatively large output expansion. In general, the benefits of lower service price to cost reduction of downstream industries could spread throughout the economy. But our simulation results show that this effect is relatively small, since the service intermediate input still account for relatively small share in total costs of industrial goods. On the whole, the output of agriculture and industry are almost unchanged during the service liberalization. So the liberalization in service sector mainly favor of the sector directly subjected to reform. The more FDI inflow induced from service liberalization would bring about the real appreciation. The would have an adversary impact on export-oriented manufacturing sectors, such as textiles, apparel, and electronics, Their production would contract, while some manufacturing sectors with high domestic market orientation could expand as a result of increased domestic activity and household spending. Since the purpose of this paper is to investigate the medium-term structural impact of service liberalization, we assumed that all labor forces are employed and the wage is endogenously adjusted to clear the labor market. To assess the effects on employment, we look at the reallocation of labor force across sector induced from service liberalization. The results reported in table 3.3 show that the total employment in service sectors would decline by 2.2% - or 3.9 million. The job losses in service sectors would be offset by the increased employment in agriculture (1.60 million), industry (0.58 million) and construction sector (1.73 million). Obviously, the productivity improvement in service sector results in the loss of its employment, even this could be offset to some extent by the booming of demand. For the detailed sub-sectors within industry, the pattern of changes in sectoral employment generally follows that in sectoral output. Within service sector, the employment would rise in sectors with large output expansion, such as transportation, tele-communication, finance, insurance, real estate and tourism. While in other service

19

First draft 9/17/03 sectors the employment would drop. The commerce sector, which is the largest service sector in China in terms of both value-added and employment, would also experience the largest decline in employment, and contribute a lot to the employment loss in total service sector. Table 3.3 Effects on sectoral output and employment, 2010 Liberalization (% change with baseline)

Agriculture Industry Coal and Oil Metal mining Quarrying Food Beverage Tobacco Textiles Apparel Leather Sawmills & Furniture Paper Printing Social activity prod. Refine petroleum Chemical Medicine Rubber & Plastics Build Material Iron & Steel NonFerProd Metal products Machinery Special equipment Automobile Other transport equip. Electrical Mach inery Electronic Instrument Other manufactures Electricity Gas Water Construction Service Transportation Post Tele-communication

Output 0.8 1.1 1.1 0.4 2.6 1.0 3.0 1.9 -3.0 -3.0 -3.5 2.7 1.5 4.2 -0.1 3.5 0.3 3.2 -0.1 3.6 1.9 1.2 2.9 2.1 1.9 3.4 2.5 2.6 -2.4 1.5 0.7 2.6 2.6 3.3 4.0 9.0 11.3 8.1 16.5

Employment 0.5 0.3 0.7 -0.3 1.8 0.0 2.0 1.2 -3.8 -3.3 -4.2 1.8 0.9 3.6 -0.8 2.4 -0.7 2.1 -1.0 2.6 0.9 0.0 1.3 1.2 1.0 2.6 1.9 1.6 -3.2 -0.1 0.3 1.7 2.4 2.7 3.1 -2.2 1.2 -1.8 6.0

20

Tourism boom (% change with liberalization case) Output Employment 0.2 0.2 0.3 0.3 0.4 0.4 0.3 0.3 0.5 0.4 0.3 0.2 0.3 0.3 0.3 0.3 0.0 -0.1 0.1 0.1 0.0 -0.1 0.4 0.4 0.3 0.3 0.3 0.3 0.2 0.2 0.6 0.5 0.2 0.2 0.2 0.2 0.2 0.2 0.6 0.5 0.4 0.4 0.3 0.2 0.4 0.3 0.4 0.4 0.5 0.5 0.5 0.5 0.5 0.5 0.4 0.3 0.1 0.1 -0.4 -0.4 0.3 0.2 0.4 0.4 0.6 0.6 0.5 0.5 0.7 0.7 0.8 0.5 1.2 1.0 0.3 0.3 0.4 0.4

First draft 9/17/03 Liberalization (% change with baseline)

Commerce Restaurant Finance Insurance Real Estate Tourism Civil Service Education, health etc. Public Administration

Output 4.7 5.8 15.2 12.7 24.0 64.4 9.8 5.0 0.8

Employment -5.3 -4.2 3.4 1.5 11.9 48.6 0.1 -4.2 -0.3

Tourism boom (% change with liberalization case) Output Employment 0.3 0.2 0.7 0.7 0.5 0.5 0.5 0.5 0.4 0.4 23.3 23.1 0.8 0.7 0.3 0.2 0.1 0.0

Source: model simulation results

3.4. Impacts of Foreign Tourism Boom Foreign tourism is a typical service trade though consumption abroad. Since 1980s, China has become more and more popular tourist destinations and the tourism has been an important and integral part of the Chinese economy. To model the impact of foreign tourism boom, we introduce a 30% increase in the foreign tourist demand in 2010 in the previous service liberalization scenario. But here we adopt a different closure rule in labor market by assuming the wage is fixed at the level of service liberalization scenario and the unemployment rate is endogenous. Table 3.2 column (3) summaries the aggregate simulation results. The increase in the foreign tourism demand will stimulate more output and employment. The GDP and employment will increase by 0.45% and 0.34% respectively. Investment increases by a larger amount than consumption, because corporate sector would enjoy more retained earning sourced from the rising capital return. Booth exports and imports would increase by 0.61%. Foreign tourism boom would have slightly pressure on the domestic price, which will increase by 0.1%. Urban households obtain all welfare gain, because laborers of tourism sector are mainly urban residents. Since foreign tourism plays an important role in China’s tourism, its expansion would induce a 23.3% increase of tourism output. Almost all sectors would benefits from the expansion of tourism. This spreading effect is relatively evenly distributed across sectors, except for some important upstream sectors of tourism, such as transportation, restaurant and civil service (including hotel service), which would experience more output increase. Employment in tourism would increase by 23.1%, roughly 128 thousands. Along with the boom of foreign tourism, service and construction sectors would be the major sources for employment creation. They employment would increase by 5% and 7% respectively and they together would provide additional 1.25 million jobs.

4. Conclusion This paper first examines the current issues in the development of China’s service sector, and discuss the potential benefits of services trade. One important cause for China’s

21

First draft 9/17/03 lagging service sector development was the lack of competition and low levels of marketization. To develop this sector, it is crucial to open this sector for domestic and foreign competition, which will lead to deepened market-oriented reforms, structural transformation, and productivity gains. In other words, liberalizing service trade will create opportunities for a more rapid expansion of the service sector (including service export), which will facilitate growth and poverty reduction. We then employ a CGE model designed specifically for this paper and simulate the potential impact of service sector liberalization on employment and output. Our analysis based on simulations suggests that service sector liberalization could produces substantial benefits for China in terms of economic growth and consumer welfare. With a successful reform, service sector could become an important driving force of China's economic growth in the coming ten years. However, the employment adjustment induced by service sector liberalization is smaller as compared to output adjustment. During the process of service liberalization, service sector would experience slight employment loss, mainly due to the productivity improvement in service sector. Although the job loss could be offset by the expansion of labor demand in non-service sectors, and eventually, by the booming of aggregate demand in the long run, the structural adjustment would involve certain adjustment costs. This highlights the importance of implementing complementary policy measures to reduce strains in labor market during the process of further liberalization. These complementary policy measures may include those aiming at increasing the flexibility of labor market, increasing labor mobility across sectors, increasing investment in human capital, as well as establishing a good social security system. References: Adlung; Carzeniga; Hoekman; Kono; Mattoo; and Tuthill 2002, “The GATS: Key Features and Sectors.” in Hoekman, Bernard, Aaditya Mattoo, and Philip English, 2002 eds. Development, Trade and the WTO: a Handbook. The World Bank, Washington DC. Bryson, J.R. and Daniels, P.W. (1998) “Introduction: Understanding the rise and role of service activities and employment in the global economy: an introduction to the academic literature”, The International Library of Critical Writings in Economics, An Elgar Reference Collection, Cheltenham, UK. Northampton, MA, USA. Elfring, Tom (1988), “Service Sector Employment in Advanced Economies: Acomparative Analysis of Its Implications for Economic Growth”, Gower, Aldershot. Elfring, Tom(1989), “New Evidence on the Expansion of Service Employment in Advanced Economies”, Review of Income and Wealth, Series 35, Number 4, December 1989. Galenson, Walter (1963), “Economic Development and the Sectoral Expansion of Employment”, International Labor Review. Greenfield, H. I.(1966) “Manpower and the Growth of Producer Services”, Columbia University Press, New York.

22

First draft 9/17/03 Hoekman, Bernard, Aaditya Mattoo, and Philip English, 2002 eds. Development, Trade and the WTO: a Handbook. The World Bank, Washington DC. Hodge, James. 2002. “Liberalization of Trade in Services in Developing Countries,” in Hoekman, Bernard, Aaditya Mattoo, and Philip English, 2002 eds. Development, Trade and the WTO: a Handbook. The World Bank, Washington DC. Illeris S.(1996) “The Service Economy: A Geographical Approach”, 3, Table 1.1, Chichester: John Wiley. Keppler, Horst; Mund, Horst; Seeba Ewold (1987) “The Role of Services in the Economy and External Trade of ACP Countries” Gottingen: Schwartz???

Konan, D. and K. Maskus (2001), “Quantifying the Impact of Service Liberalization in a Developing Country”. Mimeo. Lee, C. H. (1984) “The service sector, regional specialization , and economic growth in the Victorian economy” Journal of Historical Geography, 10, 2 (1984)139-155 Mattoo, Aaditya, (August 1998) “Financial Services and the WTO: Liberalization Commitments of the Developing ad Transition Economies”. Mattoo, Aaditya, (December, 2002) “China’s Accession to the World Trade Organization—The Services Dimension”. Working Paper, No. 2932. Washington DC: World Bank OECD(1996), Service: Statistics on Value Added and Employment, Paris OECD (1997), The OECD Report on Regulatory Reform, Paris OECD(2001), Service: Statistics on Value Added and Employment, Paris Productivity Commission (1999), Impact of Competition Policy Reforms on Rural and Regional Australia, Report no. 8, AusInfo, Canberra. Riddle, Dorothy I. (1986) “Service-led Growth: The Role of the Service Sector in World Development”. Praeger, Westport, Connecticut Singelmann, Joachim(1978) “The sectoral transformation of the labor force in seven industrialized countries, 1920-1970”, American Journal of Sociology, 83, 1224-34 (Chapter 21, Volume I); Stern, Robert M. 2002. “Quantifying Barriers to Trade in Services,” in in Hoekman, Bernard, Aaditya Mattoo, and Philip English, 2002 eds. Development, Trade and the WTO: a Handbook. The World Bank, Washington DC. World Bank Notes(2000) “China: Services Sector Development and Competitiveness”. A Policy Note drafted by E.C. Hwa, unpublished.

Annexes of Tables and Charts

23

First draft 9/17/03

Chart 2: Percent of Service Sector in GDP in 2001 80 Panama St. Lucia Jordan

Services Value added (% of GDP)

70

Antigua and Barbuda Barbados

Cape Verde Latvia Grenada Mexico UruguayEstonia Costa Rica

Benin

Argentina Portugal Slovak Republic South Africa Mauritius

France UK Belgium Sweden Italy Singapore Germany Austria

Spain Finland

60 Czech Republic Russia Trinidad and Tobago Belarus

50

Denmark

Puerto Rico

Korea, Rep.

India Ukraine Malaysia

40 Algeria China 30

20

Albania Angola Turkmenistan Sierra Leone 0

5000

10000

15000

20000

GDP per capita, PPP (current international $)

Source: World Development Indicator 2003

24

25000

30000

35000

First draft 9/17/03

Chart 3: Service Sector Employment in 1999 Hong Kong, China

80 Peru

Barbados Columbia Mauritius

Employment in Services (% of total employment)

70

Australia Sweden Singapore UK France

Israel Macau,China

Switzerland

New Zealand

Austria

Panama Kenya 60

Morocco

Russia

50 Azerbaijan 40

Spain

Korea, Rep.

Estonia Hungary Costa Rica Czech Rep Slovenia Croatia

Puerto Rico Canada Norway

Finland Germany Japan Italy

Ireland

Portugal

Slovenia

Malaysia Philippines Bulgaria Honduras

Argentina Uzbekistan Turkey Thailand Pakistan Romania

30

China 20

Jamaica Mongolia

10 0

5000

10000

15000

20000

25000

30000

GDP per capita, PPP (current international $)

Source: World Development Indicator 2003. China’s data on employment in Services in 1999 is absent in WDI, the data in the figure is adopted from China Statistical Yearbook 2001.

25

US

First draft 9/17/03

Table A1: Employment Growth by Sector, 1960-98 (Average annual compound growth rate) 1960-73 Services Total France 2.1 0.7 Japan 3.7 1.6 Netherlands 2.4 1.0 Sweden 2.6 0.7 United Kingdom 1.3 0.3 United States 2.6 1.9 Average 2.3 0.9

1973-85 Services Total 1.5 -0.1 2.0 0.7 1.9 0.5 1.9 0.6 1.1 -0.3 2.6 1.9 1.7 0.5

1985-98 Services Total 1.1 0.1 1.5 0.8 2.6 2.1 0.3 -0.4 1.9 0.8 2.5 1.8 1.6 0.8

Source: (a) 1960-1985 data, derived from Tables in Appendix D in Elfring, Service Sector Employment in Advanced Economies: A comparative Analysis of Its Implications for Economic (b) 1985-1998 data, OECD, Services: Statistics on Value Added and Employment (1996) (2001)

26

First draft 9/17/03

Table A2: Service Employment by Subsector as a Percentage of Total Employment (Percentage) France

Germany*

Italy

Japan Netherlands*

United Kingdom

United States

Average

1989 Motor, wholesale and retail trade, Restaurants and hotels; transport and communication

22.12

23.35

26.50 22.98

26.56

26.91

29.02

25.35

16.20 13.37 2.83

16.79 14.08 2.71

20.29 17.46 15.65 4.64

19.82 17.34 2.48

21.14

24.38 23.05 1.34

19.44 16.70 2.80

5.92 4.08 1.83

6.56 4.54 2.03

5.51 4.78 0.74

6.75 5.17 1.58

5.78

4.64 3.14 1.50

5.91 4.34 1.53

Finance, insurance, real estate and business services Finance and insurance services Real estate and business services Real estate services Business services Other services Public administration and defence Education, health, social work related, other community, social and persoanl services

12.66 3.45 9.21 1.30 7.91 29.99 11.42

9.26 3.14 6.12 0.54 5.57 26.41 9.01

9.38 9.69 2.58 3.23 6.81 6.46 0.00 1.39 0.00 5.07 24.20 23.78 6.39 3.25

14.20 0.00 0.00 0.69 0.00 27.33 8.92

14.61

27.16 22.09

14.46 4.79 9.68 1.40 8.28 29.64 9.72

12.04 3.44 7.65 1.06 6.71 26.93 10.11

18.57

17.40

17.81 20.53

18.41

5.06

19.92

16.81

% of services in total employment

64.77

59.02

60.08 56.45

68.10 1998

68.68

73.12

64.32

Motor, wholesale and retail trade, Restaurants and hotels; transport and communication

22.63

24.31

26.39 22.29

25.02

27.63

28.68

25.28

16.49 13.38 3.10

18.71 15.17 3.54

20.33 16.64 15.17 16.64 5.16 0.00

18.94 16.06 2.88

21.93

23.93 22.63 1.31

19.57 16.51 3.20

6.14 4.46 1.68

5.60 4.09 1.51

5.65 4.93 0.71

6.08 4.58 1.50

5.70

4.75 3.41 1.34

5.71 4.40 1.31

14.87 3.26 11.62 1.42 10.20 33.06 11.73

12.68 3.36 9.33 0.89 8.44 29.44 8.38

11.98 10.23 2.76 2.98 9.22 7.25 0.93 1.60 8.29 5.65 25.81 28.02 6.04 3.17

19.42 3.99 15.44 0.87 14.57 27.83 6.89

18.06

28.60 23.06

16.78 4.55 12.22 1.31 10.91 30.47 8.13

14.86 3.48 10.85 1.17 9.68 29.03 9.63

21.33

21.06

19.76 24.85

5.76

5.54

22.33

17.23

% of services in total employment 70.56 66.44 * Germany and Netherlands' 1989 data is absent, 1990 data is used instead. Source: OECD(2001), Services--Statistics on Value Added and Employment.

64.18 60.54

72.27

74.29

75.93

69.17

Motor, wholesale and retail trade, restaurants and hotels Motor, wholesale and retail trade Restaurants and hotels Transport and storage and Communication Transport and storage Communication

Motor, wholesale and retail trade, restaurants and hotels Motor, wholesale and retail trade Restaurants and hotels Transport and storage and Communication Transport and storage Communication Finance, insurance, real estate and business services Finance and insurance services Real estate and business services Real estate services Business services Other services Public administration and defense Education, health, social work related, community, social and personal services

6.21 0.00 0.00

6.05 4.92 1.14

other

27

First draft 9/17/03

Table A3: Service Sector: China and Countries with Similar GDP per capita Services, etc., GDP per capita, value added (% of PPP (current GDP) international $) India 48.42 2840 Indonesia 37.11 2940 Azerbaijan 36.34 3090 Sri Lanka 53.82 3180 Ecuador 56.27 3280 Syrian Arab Republic 49.58 3280 Egypt, Arab Rep. 50.15 3520 Morocco 53.27 3600 Jamaica 62.81 3720 Philippines 53.57 3840 Jordan 73.17 3870 China 33.62 4020 Ukraine 44.36 4350 Guatemala 57.92 4400 Peru 61.58 4570 Guyana 40.42 4690 Paraguay 53.56 5210 Source: World Development Indicators (2003) Country

WB21569 L:\04Bankfinance\ServicesLibin China9-17-03.doc September 17, 2003 12:23 PM

Table A.4: Share of Producer Services in Total Employment, 1985 (Percentages)

Producer services Business/professional services Financial services Insurance services Real estate services

France

Germany

Japan

8.5 5.0 2.1 1.0 0.3

7.2 3.2 2.4 1.2 0.4

9.6 5.8 1.9 1.1 0.8

Netherlands Sweden

10.5 6.3 2.3 1.2 0.7

6.4 3.6 1.4 0.5 0.9

United Kingdom

United States

Average

9.5 5.2 2.3 1.4 0.6

12.6 6.8 2.5 1.8 1.6

9.2 5.1 2.1 1.2 0.8

Source: Derived from Tables in Appendix D in Elfring, Service Sector Employment in Advanced Economies: A comparative Analysis of Its Implications for Economic Growth, Gower, Aldershot, 1988

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