Service sector growth in China and India: a comparison.
Subject: Services industry (Growth)
Economic development (India)
Economic development (China)
Economic development (Comparative analysis)
Economic reform (Comparative analysis)
Author: Wu, Yanrui
Pub Date: 03/01/2007
Publication: Name: China: An International Journal Publisher: East Asian Institute, National University of Singapore Audience: Academic Format: Magazine/Journal Subject: Social sciences Copyright: COPYRIGHT 2007 East Asian Institute, National University of Singapore ISSN: 0219-7472
Issue: Date: March, 2007 Source Volume: 5 Source Issue: 1
Topic: Computer Subject: Company growth
Product: Product Code: 7000000 Service Industries; 9008000 Economic Programs-Total Govt; 8515300 Development NAICS Code: 926 Administration of Economic Programs; 5417 Scientific Research and Development Services
Geographic: Geographic Scope: China; India Geographic Name: China; India Geographic Code: 9CHIN China; 9INDI India
Accession Number: 166351075
Full Text: Since the early 1990s, the world has witnessed the spectacular growth of the economies of China and India (averaging 10.2 and 6.2 per cent annually from 1992 to 2005, respectively). (1) Associated with this growth has been the dramatic development of the service sectors in the two Asian giants. (2) However, a comparison of China's and India's economic structures demonstrates that the role of the service sector (or, the tertiary sector as it is known in China) is very different (see Figure 1). In India, the service sector has become the dominant contributor to the Indian economy, accounting for 54.2 per cent of GDP in 2004. (3) The success in this sector is regarded as "India's services revolution". (4) In China, however, the service sector has lagged well behind the manufacturing sector (or the secondary sector, according to Chinese terminology), though its role in the economy improved slightly in the last 15 years. From 1990 to 2004, the service sector as a proportion of China's GDP increased modestly from 34.3 per cent in 1990 to 40.7 per cent in 2004. Why have the two countries taken very different trajectories in developing their service economies? What are the implications for future development in the two Asian giants? Which factors affect demand for services in China and India? These are some of the questions which are investigated in this paper.

[FIGURE 1 OMITTED]

To date there have hardly been any comparative studies of services in China and India. However, several studies have focused on the service sector in the individual countries. For example, Gupta and Mohan both examine productivity in the Indian service sector in comparison with other Asian economies. Chanda discusses service trade in the world, particularly in India, and its implications for the World Trade Organisation (WTO) negotiations in services, while Gordon and Gupta present a detailed study explaining India's service growth in the past decade. (5) Examples of studies on China include Li and Hou who produced an edited volume on China's WTO entry and the implications for the service sector, Jiang who edited a book focusing on growth and structural changes in services with some marginal coverage of international comparison, and Li who conducted a comprehensive investigation of China's service sector. (6) Thus, it is the goal of this study to extend the existing literature by comparing the growth in and demand for services in China and India.

First there is a brief review of developments in the service sector in China and India. This is followed by a discussion of the determinants of the demand for services. Three empirical models are employed to examine the factors affecting demand for services internationally, as well as in China and India. Subsequently, the article discusses the growth outlook for services in the two countries. The final section summarises the findings.

Service Sector Development

Following the conventional classification, an economy is divided into three sectors, that is, agricultural (or primary), manufacturing (or secondary) and service (or tertiary). The agricultural sector consists of farming, forestry, animal husbandry and fisheries. The manufacturing sector is composed of mining, construction and manufacturing. (7) All other economic activities which are not covered by the agricultural or manufacturing sectors are broadly defined as services and hence belong to the service sector. They include services provided for the agricultural sector, activities associated with the supply of water, electricity and gas, transport and communications, wholesale and retail trade, finance and insurance, business and personal services, and community and social services. Services can be broadly distinguished between two types, that is, old and new. The old or traditional services include petty trading, domestic services, catering and hotel services. The new services are generally associated with communications, business and legal practices, culture, research and education. (8) The latter are tradable internationally and hence are also called tradable services.

Service Sector Growth

From 1978 to 2004, the service sectors of China and India achieved high annual growth averaging 10.8 per cent in China and 7.0 per cent in India. (9) The difference in these growth rates matches the difference in the rates of GDP growth in the two countries. During the same period, an average annual growth rate of 9.7 per cent was recorded for the Chinese economy compared to 5.4 per cent for India. (10) At the disaggregate level, the structures of the service sector in China and India are very similar. In both countries, the service sector is still dominated by the traditional or old services, followed by business services (finance, insurance and real estate) and transport and communications (see Table 1). However, the new service sectors are catching up rapidly. From 1999 to 2003, communication services showed the strongest growth in both countries (with an average annual rate of 16.8 per cent in China and 23.9 per cent in India), followed by education (8.6 per cent) and research (11.9 per cent) in India, and real estate (8.8 per cent) and research (8.9 per cent) in China. (11) Though growing rapidly in recent years, research-related services are still relatively small in both countries. Table 1 also shows that, in comparison with other major economies, services in the areas of real estate, health, sports and social welfare in both China and India are relatively weak.

Output and Employment Shares

The development of the service sectors can also be examined by analysing the sectoral shares of output and employment over the national totals in the two countries. Output shares of the service sector in China and India have grown steadily since 1978 as shown in Figure 2. (12) The role of services in the Indian economy is clearly more significant than that in the Chinese economy. Accordingly, since 1990, India's service sector has grown faster (annual growth rate of 7.5 per cent) than the manufacturing sector (6.0 per cent) while the opposite is true in China where the manufacturing sector grew at 12.1 per cent and the service sector, at only 8.4 per cent. (13)

[FIGURE 2 OMITTED]

In contrast, the employment share of India's service sector has grown very slowly according to available statistics covering the period from 1983 to 1999, though the absolute figure was much higher than that in China in the 1980s (see Figure 3). The employment share of China's service sector has, however, been growing steadily since 1978, in particular since the early 1990s. As a result, China's service sector has absorbed relatively much more labour than India's since the mid-1990s. In terms of creating new jobs, services have played a vital role in both economies. For example, during the decade of 1995 to 2004, more than 62 per cent of the new jobs created in China were in the service sector while India's services provided about 54 per cent of new jobs in the country from 1994 to 1999. (14) As both countries must relocate a large pool of rural surplus labour, further employment growth in the service sector will be indispensable.

[FIGURE 3 OMITTED]

Regional Variations

In terms of the level of development of the service sector, there is considerable variation across the regions of both countries. (15) "Regions" here are defined according to the official administrative units, that is, they mean China's provinces, autonomous districts and municipalities and India's union states and territories. Several observations about service development among the regions can be made. First, regional development in services follows the national trend. In general, the service sectors at the regional level in India are on an average more developed than those in China. For example, Beijing has China's most advanced service sector, accounting for 61 per cent of GDP in 2001, while Delhi has India's most advanced service sector with a share of 77 per cent in the same year (see Figures 4 and 5). (16) Second, the service sector tends to be more important among relatively more developed regions in both countries. There is clearly a positive relationship between the level of service sector development and GDP per capita in both Chinese and Indian regions. Finally, the service sector plays a more important role in regions where the level of urbanisation is high, such as in Delhi and Chandigarh in India, and Beijing and Shanghai in China.

[FIGURES 4-5 OMITTED]

Growth in International Perspective

The experience of economic development shows that when a country expands its manufacturing capacity, its agricultural sector declines, and that over time the service sector grows and eventually overtakes the manufacturing sector to become dominant (see Figure 6). For example, the share of services in total GDP in 2003 amounted to 71 per cent in Australia, 72 per cent in the United Kingdom and 75 per cent in the United States. (17) This process of change follows the stages of economic development. However, in comparison with countries at a similar stage of development, China's service sector development is slightly below the average while India's is slightly above it. These are clearly demonstrated in Figure 7 which illustrates service sector GDP shares against per capita income among nations with per capita GDP less than USD2000 in 2003. Information at the disaggregate level also implies that services in China and India are still at the early stage of development which is represented by the dominance of the old services, as well as weakness in real estate, education and research services (see Table 1).

[FIGURES 6-7 OMITTED]

The relative backwardness of services in China is also reflected in the role of service trade. In 2003, China was the world's fourth largest merchandise exporter but its service exports ranked only tenth. (18) The share of service exports over total exports in China (9.6 per cent in 2003) was much smaller than the 28.4 per cent in the United States, 32.4 per cent in the United Kingdom, 22.4 per cent in Australia, 13.9 per cent in Japan and 18.6 per cent in the world as a whole during the same period. (19) Not surprisingly, China is currently a net importer of services. In contrast, India's service exports accounted for 30.9 per cent of total exports in 2003 making the country a net exporter of services according to the World Bank. (20) This is largely due to India's success in information technology (IT) service exports and India's relatively small value of merchandise exports (equivalent to only 12 per cent of China's in 2003). In 2003, India's total merchandise exports ranked 31st in the world but its service exports ranked 20th. (21) In addition, among the service exports in 2003, the share of finance and insurance amounted to only 1.0 and 1.5 per cent in China and India, respectively, while this share was 7.8 per cent in the United States and 22.6 per cent in the United Kingdom in the same year according to the World Bank. (22)

To sum up, the service sector as part of the national economies of China and India achieved substantial growth in recent decades. However, from an international perspective, China and India are outliers, i.e., India's service sector over-performed while China's under-performed. In addition, new services are still weak in both China and India with the exception of India's IT export sector. At the regional level in each country, the pattern of service development is similar to the national trend. In particular, service development seems to be closely related to the level of urbanisation. These features are further explored in the following sections.

Determinants of Growth

The Theory

It is argued that service sector growth is determined by several factors such as production specialisation, income level and urbanisation. (23) These factors are interrelated. As an economy grows, productive activities become more specialised and urbanisation accelerates due to the rising level of income. In the meantime, as a result of the increasing specialisation of production, firms tend to outsource many service activities such as legal, accounting and security services. Some authors call this process "specialisation splintering". (24) The main source of demand for services comes from producers.

At the household level, Engel's law shows that, as income rises, consumption of food and durable goods becomes saturated over time and demand for services such as healthcare, travel, communications and finance increases. Growth in income also boosts demand for away-from-home consumption of food and services.

Furthermore, urbanisation contributes to the growth of the service sector in two ways. Unlike farmers who, to some extent, are self-sufficient in service provision, urban consumers rely oncommercial suppliers to provide most services. They are also more likely to enter the urban informal sector for employment if there are no job opportunities in the formal sector.

Services account for the lion's share of the informal sector. Thus, urban residents are both consumers and suppliers of services. It is expected that the service sector grows as the level of urbanisation increases. This is confirmed by preliminary analysis of both China's and India's regional data in the preceding section.

In addition, the participation of women in the workforce has an impact on service demand as well. More women in the workforce can lead to an increase in demand for services, ranging from babysitting and catering to tuition and beauty treatments. Furthermore, regulatory policies also affect the development of the service sector. A good example is the rapid growth of telecommunications services after deregulation in many countries. (25) This phenomenon can also occur in other areas such as insurance, banking, health care, etc. Regulatory environments can also affect international trade and foreign investment in services. (26) Finally, apart from the factors discussed above, service sector growth in China and India may also be affected by development strategy and historical experience. (27) Divergence in the latter may contribute to the different role of services in the two countries. For example, India's service industry may have benefitted from the country's early and prolonged linkage with the West, in particular the UK. In the meantime, when the communist government took office in China in 1949, it adopted a biased policy towards the development of heavy industry initially, and labour-intensive manufacturing more recently, while the movement of rural-urban labour was restricted for some four decades and hence entry into the service sector (mainly old services) was very limited. Thus, China's historical development policy was anti-services and this partly explains the underdevelopment of the country's service industry. In the empirical analysis presented in the following section, the factors just discussed are taken into consideration to the extent that quantification is possible.

The Empirics

To examine the determinants of growth in services in China and India, three models are applied to Chinese provincial, Indian state and cross country databases, respectively. The econometric model is expressed as follows:

SER = [alpha] + [summation][[beta].sub.j][X.sub.j] + [epsilon] (1)

where SER and X represent demand for services and a list of factors affecting service demand, respectively. [alpha] and [beta] are coefficients to be estimated. [epsilon] is the standard error term. Equation (1) can be applied to either panel data for the country models or cross-section data for cross-country analysis. For panel data models, several optional models are considered, e.g., without group dummy (the same intercept for all groups), fixed effect (different intercept for each group) and random effect models (intercepts vary by a random error).

SER in equation (1) is measured as the GDP share of services in a country or region. The choice of the variables (X) in the models is dictated by the availability of data. In the three optional models considered here, X includes per capita income (I), urbanisation (U), service export shares in total exports (EX) and the proportion of women in the total non-farming workforce (W). EX and W are not available for the regions of China and India, and are therefore incorporated in the cross-country model only. The Chinese data cover 31 regions and the period 1993 to 2003. The Indian statistics are available for 31 union states and territories out of 35 for nine years (1993-2001). The cross-country database has one year (2003) data for 93 countries. The estimation results are reported in Table 2.

According to Table 2, the estimated coefficients of both per capita income and urbanisation are positive and statistically significant, implying that both variables are important factors affecting the development of the service sector, especially in China and India. In addition, it is found that external demand also has a positive impact on service development among the countries. This partly explains the phenomenal growth of IT service exports in India. The cost of services is shown to have a negative effect but the estimated coefficient is statistically insignificant. Thus, further investigation is needed. The findings here are of course subject to qualifications due to data limitations.

Growth Outlook

Both the Chinese and Indian economies have entered a phase of rapid growth. It is commonly agreed that this growth will last for decades. (28) It is also anticipated that per capita income in both countries will rise over time and that urbanisation will subsequently accelerate. These factors imply that the Chinese and Indian service sectors will expand further. This growth will also be boosted by globalisation. From 2006, China's WTO commitments will allow greater foreign participation in the service sector including telecommunications, banking, insurance, etc. (29) Economic openness will also create more jobs for accountants, lawyers and other financial specialists. (30) Further economic liberalisation and deregulation in India will ensure sustained growth, including growth in services. Both China and India will also benefit from the WTO's General Agreement on Trade in Services (GATS). (31) Therefore, the growth prospect for services in both countries is bright and will be associated with the following features.

Service sector growth in China will continue while the manufacturing sector remains dominant. Both sectors will show some gain in terms of both GDP and employment shares at the expense of agriculture. According to one set of forecasts, the GDP shares of the agricultural, manufacturing and service sectors in 2020 will be 5.0, 45.8 and 49.2 per cent, respectively, while the employment shares will be 34.2, 22.4 and 43.4 per cent, respectively. (32) By then, China's service sector will be larger than the manufacturing sector. However, China will still have a long way to catch up with the advanced economies in the world. For instance, the service sector in 1997 accounted for 58 per cent of total GDP in Japan, 64 per cent in the US, 53 per cent in Germany and 60 per cent in the UK, while the employment shares were, respectively, 62 per cent in Japan, 74 per cent in the US, 62 per cent in Germany and 72 per cent in the UK (see Table 3). In China, the service sector contributes to national economic growth largely through the shift of labour from agriculture into services. (33) This shift of labour will eventually be replaced by the shift from manufacturing to services.

The current growth momentum in India's service sector will continue in the near future. However, growth in the manufacturing sector will be accelerated. This trend is already clearly demonstrated in the latest statistics. From 1994 to 2003, the manufacturing sector grew at an average annual rate of 6.6 per cent, though the growth rate increased to 8.1 and 9.0 per cent during the financial years of 2004-5 and 2005-6, respectively. (34) The consequence of such growth is that the GDP shares of both the manufacturing and service sectors will expand at the cost of agriculture. For example, the GDP share of services was estimated to be 57.6 per cent by the end of the 2004-5 financial year. The dilemma for India at present is that services account for more than a half of GDP but employ less than 30 per cent of the total work force (Table 3). According to the experience of developed economies as cited in the preceding section, these shares should match. A study of the Pacific Basin countries also shows that without concomitant progress in industrialisation, growth in services in terms of both output and employment is not sustainable. (35) The same argument can be applied to India as well. In addition, recent expansion of India's service sector, to some extent, is boosted by the IT service exports but, the IT sector employs mainly educated, urban youth, potentially leaving most of India's population further behind. Furthermore, the numbers employed in India's IT sector are relatively small (under one million) and Konana et al. argue that its rapid growth has not generated sufficient linkages with the rest of the economy. (36) Thus, India will need growth in both services and manufacturing.

Conclusion

It is found that the role of services in both China and India has been rising, with China starting from a lower base. Growth has been driven in both societies mainly by increasing specialisation of production, rising living standards and accelerated urbanisation. There are also some non-economic factors which are difficult to quantify in empirical analysis but have played important roles in service development, including biased development strategies in China, India's early linkage with the West and the recent boom in Indian IT exports. India's service sector is now the dominant contributor to GDP growth but employment absorption is not very high. India's service sector will continue to grow, but the country needs industrialisation even more as millions of rural workers have to be employed. The IT sector is not large enough to significantly affect the growth of the national economy. In comparison with India, China's service sector is lagging behind. Even by international standards, China's service sector is below average and it can be anticipated that services will expand further as Chinese companies outsource their communications, legal and accounting services and as urbanisation accelerates in the coming decades. In addition, the service sector has been the main provider of new jobs in China where there still exists a sizable pool of surplus rural labour.

The first draft was completed while the author was visiting the East Asian Institute, National University of Singapore. The author is grateful to its Director Professor Wang Gungwu, and Research Director Professor John Wong for the generous support provided. He also thanks three anonymous referees, as well as Elspeth Thomson and participants at an EAI seminar for helpful comments and suggestions.

(1) The average growth rates are based on data from the Reserve Bank of India, the Chinese National Bureau of Statistics and China's newly-released economic survey results at [Aug. 2006]. See Reserve Bank of India, "Handbook of Statistics on Indian Economy", 2005, an online database at [Aug. 2006]; and China, National Bureau of Statistics, China's Statistical Yearbook (Beijing: China Statistics Press, various issues).

(2) China conducted a nation-wide economic survey in 2005. The survey results released in January 2006 show that China's GDP in 2004 was underreported by 16.8 per cent. See Jianhong Zhu, "On Economic Aggregate and Structural Changes by the Chief of the National Bureau of Statistics", People's Daily (21 Dec. 2005): 5. The discrepancy was mainly due to underreporting of service sector economic activities. The Chinese Government subsequently revised and released the country's historical GDP statistics back to 1993. See [Aug. 2006]. Where possible, the newly released data are employed in this study.

(3) This is based on a revised estimate by the Reserve Bank of India, 2005.

(4) James Gordon and Poonam Gupta, "Understanding India's Services Revolution", International Monetary Fund Working Paper WP/04/171, 2004.

(5) Chandra Prakash Gupta, "India (1)", in Improving Productivity in Service Sector, Asian Productivity Organisation, Tokyo, 1998; Pratibha Mohan, "India (2)", in Improving Productivity in Service Sector, Asian Productivity Organisation, Tokyo, 1998; Rupa Chanda, Globalisation of Services: India's Opportunities and Constraints (New Delhi: Oxford University Press, 2002); Gordon and Gupta, "Understanding India's Services Revolution".

(6) Shantong Li and Yongzhi Hou, eds., China's WTO Accession and Service Trade (Beijing: Shangwu Press, 2003); Xiaozhuan Jiang, ed., Service Industry in China: Growth and Structure (Beijing: Social Sciences Documentation Publishing House, 2004). Jiangfan Li, ed., The Economic Analysis of China's Tertiary Sector I and II (Guangzhou: Guangdong People's Press, 2004).

(7) Whether services include construction and public utilities is controversial. See Wolfgang Ochel and Manfred Wegner, Service Economies in Europe: Opportunities for Growth (London: Pinter Publishers and Boulder, CO: Westview Press, 1987). According to the Indian classification as well as the World Bank, construction and public utilities are treated as part of services. (See World Bank, World Development Indicators 2005 (Washington, DC: World Bank, 2005.) The Chinese classification excludes construction and public utilities from services. The OECD also excludes construction from services. See OECD, OECD in Figures, 2005 ed., online at [Aug. 2006]. This paper follows the OECD system which includes construction in the manufacturing category.

(8) For a detailed survey of the main service sectors, in particular the new service sectors in China, see Yadong Luo, China's Service Sector: A New Battlefield for International Corporations (Copenhagen: Copenhagen Business School Press, 2001).

(9) India's growth rate is based on the financial years of 1978/9 to 2004/5 (Reserve Bank of India, 2005). The Chinese rate is calculated using data from the Chinese National Bureau of Statistics (various issues) and the recently released economic survey results at [Aug. 2006].

(10) These growth rates are derived using data from the Reserve Bank of India (2005) and the Chinese National Bureau of Statistics (various issues) including the recently released economic survey results at [Aug. 2006].

(11) These rates of growth are calculated using data from the Central Statistical Organisation (CSO) and the Chinese National Bureau of Statistics (various issues) including the recently released economic survey results at [Aug. 2006]. See India, CSO, Ministry of Statistics and Programme Implementation On-line Database, National Accounts Division, 2005 at [Aug. 2006].

(12) China's figures are based on the recently released economic survey results which show that service activities are substantially under-reported.

(13) These growth rates are based on data from the Reserve Bank of India (2005) and the Chinese National Bureau of Statistics (various issues) including the recently released economic survey results at [Aug. 2006].

(14) These numbers are derived from China, National Bureau of Statistics, various issues and Reserve Bank of India, 2005.

(15) Regional variation in China's service development is examined in John Wong and Ruobing Liang, "China's Service Industry (I): Growth and Structural Change", Background Brief, no. 162, East Asian Institute, National University of Singapore, 2003.

(16) The service sectors at the regional level in China are likely to be underreported given the fact that data at the national level are substantially underreported. However, regional revised data are not available yet.

(17) World Bank, World Development Indicators 2005 (Washington, DC: World Bank, 2005).

(18) Ibid.

(19) Ibid.

(20) Ibid.

(21) Ibid.

(22) Ibid.

(23) Nanno Mulder, "The Economic Performance of the Service Sector in Brazil, Mexico and the United States", in Services in the International Economy, ed. Robert M. Stern (Ann Arbor: University of Michigan Press, 2001), Ch. 8, pp. 185-210; and Anita Wolfl, "The Service Economy in OECD Countries", in Enhancing the Performance of the Service Sector (Paris: OECD, 2005).

(24) Jagdish Bhagwati, "Splintering and Disembodiment of Services and Developing Nations", World Economy 7, no. 2 (1984): 133-43.

(25) Jochen Wirtz, "Growth of the Service Sector in Asia", Singapore Management Review 22, no. 2 (2000): 37-54.

(26) Nanno Mulder, "The Economic Performance of the Service Sector in Brazil, Mexico and the United States".

(27) Desai presented an interesting piece comparing the economies of China and India from the perspective of political economy. See Meghnad Desai, "India and China: An Essay in Comparative Political Economy", paper presented at the IMF Conference on India and China, Delhi, Nov. 2003.

(28) D. Wilson and R. Purushothaman, "Dreaming with BRICs: the Path to 2050", Global Economics Paper No. 99, 2003 on the Goldman Sachs website at ; and Shantong Li, Yongzhi Hou, Yunzhong Liu and Jianwu He, "Growth Prospects during 2006-2020", in Economic Growth, Transition and Globalization in China, ed. Yanrui Wu (Cheltenham and Northhampton: Edward Elgar Publishing, 2006).

(29) John Wong and Ruobing Liang, "China's Service Industry (II): Gearing Up for WTO Challenges", Background Brief, no. 163, East Asian Institute, National University of Singapore, 2003.

(30) Yadong Luo, China's Service Sector: A New Battlefield for International Corporations (Copenhagen: Copenhagen Business School Press, 2001).

(31) For detailed discussion of the GATS' impact on service trade, see Li Shantong and Yongzhi Hou, eds., China's WTO Accession and Service Trade (Beijing: Shangwu Press, 2003); and Rupa Chanda, Globalization of Services: India's Opportunities and Constraints (New Delhi: Oxford University Press, 2002).

(32) The output share estimates are based on the recently released economic survey data and forecasts by Li et al. who predicted that the GDP shares of the primary, manufacturing and service sectors in 2020 would be 7.1, 52.5 and 40.4 per cent, respectively. The employment shares are the original forecasts by Li et al. See Shantong Li, Yongzhi Hou, Yunzhong Liu and Jianwu He, "Growth Prospects during 2006-2020".

(33) Duo Qin, "Is the Rising Services Sector in the People's Republic of China Leading to Cost Disease", Asian Development Bank ERD Working Paper No. 50, 2004.

(34) These numbers are estimates by the Central Statistical Organisation quoted in Macroeconomic and Monetary Developments--First Quarter Review 2006-2007, the Reserve Bank of India at .

(35) Se-Hark Park, "Linkages between Industry and Services and Their Implications for Urban Employment Generation in Developing Countries", Journal of Development Economics 30 (1989): 359-79.

(36) Prabhudev Konana, John N. Doggett and Sridhar Balasubramanian, "Advantage China", Frontline 22, no. 6 (Mar. 2005).

Yanrui Wu (yanrui.wu@uwa.edu.au) is Associate Professor in the School of Economics and Commerce at the University of Western Australia. He earned his PhD in economics from the University of Adelaide. His main research interests are economic development, Asian economies and productivity analysis.
Table 1. Composition of Service Sector GDP, 2003 (%)

Service Sectors                  Shares (2003: %)

Service Sectors         China    India    Australia   Korea

Finance and Insurance    16.50    13.27     11.83      15.53

Government and            8.01    10.78      6.06      10.47
Social Organisations

Real Estate               6.07    11.64     29.15      22.34

Wholesale, Retail        23.57    30.39     19.15      17.98

Trade and Catering
Transport,               16.96    19.18     12.11      13.09

Telecommunications
etc.
  Transport and           8.76    10.86
  Storage
  Post and                8.20     8.32
  Telecommunications

Education, Health,       28.87    14.73     21.69      20.59
Research etc.
  Education, Culture      8.71     7.98
  and Arts
  Health, Sports and      2.96     2.14
  Social Welfare
  Scientific Research     2.25     0.89
  and Polytechnic
  Others                 14.95     3.71

Total                   100      100      100         100

Service Sectors              Shares (2003: %)

Service Sectors          Japan       UK          US

Finance and Insurance     9.78     6.89       10.35

Government and            6.72     6.62       10.35
Social Organisations

Real Estate              30.66    32.16       30.92

Wholesale, Retail        18.54    20.81       20.05
Trade and Catering

Transport,                8.91    10.00        7.89
Telecommunications
etc.
  Transport and
  Storage
  Post and
  Telecommunications

Education, Health,       25.40    23.51       20.44
Research etc.
  Education, Culture
  and Arts
  Health, Sports and
  Social Welfare
  Scientific Research
  and Polytechnic
  Others

Total                   100      100      100

                            Growth
Service Sectors         (1999-2003:%)

Service Sectors          China    India

Finance and Insurance     6.32     6.90

Government and            7.99     5.11
Social Organisations

Real Estate               8.75     6.96

Wholesale, Retail         8.02     7.41
Trade and Catering

Transport,
Telecommunications
etc.
  Transport and           4.29     6.75
  Storage
  Post and               16.77    23.89
  Telecommunications

Education, Health,
Research etc.
  Education, Culture      7.92     8.59
  and Arts
  Health, Sports and      7.79     5.62
  Social Welfare
  Scientific Research     8.93    11.94
  and Polytechnic
  Others                  6.32     5.78

Total                     8.15     7.86

Note: China's "others" category may contain items which belong
to the "wholesale, retail trade and catering" group.

Sources: Chinese National Bureau of Statistics (various issues);
OECD, OECD in Figures; and India, Central Statistical Organisation
(CSO), Ministry of Statistics and Programme Implementation On-line
Database.

Table 2. Estimation Results

                         Fixed effect          Random effect

Chinese model
Income per capita      0.00059 (6.20) *       0.00059 (6.32) *
Urbanisation           0.15939 (5.54) *       0.14896 (5.40) *
Intercept             27.94560 (28.74) *
[[bar.R].sup.2]           0.87
Log-likelihood          -732.5
No. of observations        341                    341

Indian model
Income per capita      0.00062 (3.19) *       0.00060 (3.56) *
Urbanisation           0.24797 (4.95) *       0.24620 (5.47) *
Intercept             34.35820 (33.67)
[[bar.R].sup.2]          0.492
Log-likelihood          -848.3
No. of observations        252                    252

International model
Income per capita                 0.00056 (3.45) *
Urbanisation                      0.17346 (2.94) *
Cost                              0.11245 (1.72) **
Service exports                  -23.72770 (-1.11)
Intercept                         38.31050 (11.15) *
[[bar.R].sup.2]                        0.40
No. of observations                      93

Table 3. Service Sector Shares in Selected Economies

                Per            Service Shares
           Capita Gross
             National         GDP        Employment
              Income
            (USD, 2003)   1997   2003   1997   2004

China          1,100       36     40     26     31

India            540       48     53     25     28

Germany       25,270       53     69     62     67

Japan         34,180       58     68     62     67

UK            28,320       60     72     72     76

US            37,870       64     75     74     78

Sources: China's GDP shares are estimates using the recently released
economic survey data. China's employment shares are based on data
from China, National Bureau of Statistics, 2005. The 2004 employment
shares for Germany, Japan, UK and US are from the OECD, 2005. Indian
data are from the Reserve Bank of India, 2005. The 2004 employment
share for India is estimated by assuming the same rate of growth in
the share in 1999 (the latest statistics available). Other statistics
are drawn from the World Bank, 2005 and Hisashi Ono, "Restructuring
Strategy of Japan's Service Sector in the Twenty-First Century", in
Industrial Restructuring in East Asia, ed. Seiichi Masuyama, Donna
Vandenbrink and Chia Siow Yue (Tokyo: Nomura Research Institute,
Tokyo and Singapore: Institute of Southeast Asian Studies, 2001).
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