| Abstract: |
This paper studies structural changes underlying China's remarkable and
unprecedented growth in recent years. While patterns of structural
transformation across China's provinces are broadly in line with international
experience, one important difference is in labor productivity differentials
between services and the rest of the economy. Specifically, the gap between
labor productivity in the rest of the economy and services has widened across
China's provinces as they have moved from low to middle income, which is
contrary to the trend observed in cross-country experience. Evidence from a
panel of China's provinces suggests that credit and labor market frictions
have inhibited labor productivity growth in services relatively more than in
the rest of the economy. Reducing these frictions is essential for achieving
the next stage of China's development, one in which the service sector will
need to play a more prominent role as an engine of growth. The evidence also
suggests that improving labor productivity in services will lift the
consumption share of GDP, thereby advancing the needed rebalancing of domestic
demand in China. |