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The underdevelopment of service industry in China: an empirical study of cities in Yangtze River Delta

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  • Zheng, Jianghuai
  • Zhang, Lili
  • Wang, Yu

Abstract

In contrast to the global average level, we find that service industry in China is underdeveloped. Its development level is rather low compared with not only developed countries at the same level of GDP per capita in the history, but also other similar developing countries at present. We define the phenomenon as “mystery of development deviation” between service industry and overall economy and set up a theoretical model to propose a hypothesis called “manufacturing cost disease” caused by service sector. This paper studies the influence of economic activity density on labor productivity in service industry by using the data of urban agglomerations in Yangtze River delta because of service industry’s concentration in the cities of. The results indicate that increase of labor productivity in service sector is driven by capital investment and “mystery of development deviation" is rooted in “manufacturing cost disease”. Service industry’s output increase exhibits significant characteristics of decreasing returns to scale. Therefore, productivities of both service and manufacturing sectors will remain low and the economy will fall into a complete stagnation, when manufacturing sector is unable to continue expanding. To eliminate this deviation, the pattern of industrialization and urbanization driven by capital investment must be changed. Expansion of producer services is also important, as well as increasing densities of human capital and foreign investment.

Suggested Citation

  • Zheng, Jianghuai & Zhang, Lili & Wang, Yu, 2010. "The underdevelopment of service industry in China: an empirical study of cities in Yangtze River Delta," MPRA Paper 33125, University Library of Munich, Germany, revised Jun 2011.
    • Handle: RePEc:pra:mprapa:33125
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    Cited by:

    1. Michael D. Clemes & Baiding Hu & Xuedong Li, 2016. "Services and economic growth in China: an empirical analysis," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 21(4), pages 612-627, October.

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    More about this item

    Keywords

    service sector; manufacturing sector; cost disease; labor productivity; economic development;
    All these keywords.

    JEL classification:

    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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