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

Jianghuai Zheng, Lili Zhang and Yu Wang

MPRA Paper from University Library of Munich, Germany

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.

Keywords: service sector; manufacturing sector; cost disease; labor productivity; economic development (search for similar items in EconPapers)
JEL-codes: O14 (search for similar items in EconPapers)
Date: 2010-07, Revised 2011-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Frontiers of China's Economics 3.6(2011): pp. 416-448

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