By staff reporter Zhang Hong

From Caijing Online

Widely agreed, it is time for China to select the next leading growth power after the export playing that role for almost three decades, as all of China’s major oversea markets are captured by the global financial crisis. The choice is simple -- boasting a population of 1.4 billion, China has an undoubted enormous consumer potential as the industrialization and urbanization go along. Service industry, as international experiences suggest, is where the hope lies in.

China’s service sector expanded rapidly in the past 30 years, with the ratio against the GDP standing at 40 percent currently after peaking at 41.5 percent in 2002, compared to only 34.2 percent in 1997 -- the five years after the Asian financial crisis saw a boom of China’s service sector, re-confirming the hypothesis that the service sector’s contribution to the economic growth would effectively increase during the downward session of an economic cycle. If that is the case, it could be predicted that China’s service sector will further grow in terms of the share of GDP in the years to come, as the industrial sector (including mining, manufacture and construction) begins to slow down.

But put in a global spectrum, China only falls in the low-income category with regard to the status of service industry development. According to a World Bank report, in 1995, service sector’s percentage of the GDP averaged at 35 percent among low-income countries, while that was 52 percent and 66 percent for middle- and high-income countries, respectively.

A common path could be generalized from the economic history: in the initial phase of development, the incremental income is mainly used to meet the basic needs; as basic needs are easily covered, the additional income is saved as “precautionary saving” for the sake of future education, health care, housing and pension; after these needs can be secured, the service industry becomes the main engine for the economic growth.

So where is the threshold marking the upgrading from a low-income to a middle-income economy? One suggested answer is when the GDP per capita reaches US$ 3,000.

Referring to the US economy with a service sector responsible for 66.4 percent of the 2007 GDP (76 percent if taking into account the taxation from the service sector), two significant growing period of its service sector could be traced: The first was between 1953 and 1961 when the share of the service sector in the economy (excluding the public sector) grew from 52.2 percent to 57.5 percent; the second started in 1979, with the annual growing pace of 0.75 percentage points and reaching 71.4 percent in 1992. And during the first period, the US GDP per capita was just between US$ 2,600 and US$ 3,000 (at current price).

Similarly, in South Korea and Taiwan, their service industries flourished as their GDP per capita passed the milestone of US$3,000 in 1987 and 1984 respectively. In the case of South Korea, the percentage of the service sector in the private economy soared to 57.6 percent in 2007 from 47.5 percent in 1988, whereas it had been lingering at around 40 percent in the previous 20 years. Taiwan’s service sector never took up more than half of the GDP between 1951 and 1981, but after its GDP per capita surpassed the above-mentioned standard, its service sector expanded in such an aggressive manner that it counted over 70 percent of the GDP in 2001.

China’s GDP per capita was US$ 2,490 in 2007, and may well get close to the critical line of US$3,000 by the end of 2008, given the rapid nominal GDP growth and the appreciation of yuan. It would be thankful should China follow the common path of the U.S., South Korea and Taiwan, because a fast-growing service sector would create jobs and help whether through the global recession.

The development of service industry has wide advantages. Not only can it boost consumption, but induce investment; it would help balance the economic structure against over-leaning to the real estate and auto industries; more importantly, the typically environment-friendly service industry could improve people’s living quality without imposing more pressure onto the environment.

A service-driven economy might not be able to achieve a double-digit growth rate as the export-driven economy did, but it is indeed more sustainable. And the booming of the service industry will not squeeze out the manufacture, but rather serve as an important supplement of the growing power.

For the sake of the long-term development of the service industry, it is advisable for the Chinese government to consider a development plan for the next 20-30 years. Particularly, it needs to open the access to the market, lower the barrier for the private capital to enter the service sector, and create a favorable policy condition for the service industries, such as financial service, health care, education, commercial service and information service, to comfortably grow.