Model and Char­ac­ter­is­tics of China’s Ser­vice Sec­tor Re­form dur­ing 1978-2016


China Economist - - Articles - LiYongjian(李勇坚),Xi­aJiechang(夏杰长)andLinYu­jing(林瑜璟)

Ab­stract: This paper in­tends to pro­vide an in-depth and com­pre­hen­sive analysis of China’s ser­vice sec­tor re­form dur­ing 1978-2016 and char­ac­ter­ize the model of the ser­vice sec­tor re­form. Due to unique na­tional con­di­tions and devel­op­ment jour­ney, China’s ser­vice sec­tor re­form was car­ried out in the con­text of China’s over­all re­form and open­ing-up pro­gram based on non-in­dus­trial mo­ti­va­tions with a prag­matic ap­proach to im­prove both peo­ple’s liveli­hood and ef­fi­ciency and ad­dress prac­ti­cal prob­lems fac­ing China in var­i­ous stages of its devel­op­ment, putting aside the­o­ret­i­cal con­tro­ver­sies. How to fur­ther im­prove the model of China’s ser­vice sec­tor re­form that came into shape in such a unique his­tor­i­cal con­text and ad­vance ser­vice sec­tor re­form is an im­por­tant yet ar­du­ous task.

Key­words: ser­vice sec­tor, re­form his­tory, model, unique­ness JEL clas­si­fi­ca­tion code: L80, P21

DOI: 1 0.19602/j .chi­nae­conomist.2018.07.02

From 1978 to 2016, the nom­i­nal value added of China’s ser­vice sec­tor in­creased from 86.05 bil­lion yuan to 38.4221 tril­lion yuan, and its share in GDP went up from 23.4% to 51.6%. Ser­vice sec­tor em­ploy­ment ex­panded from 48.9 mil­lion to 336 mil­lion, and its share in to­tal em­ploy­ment rose from 12.2% to 43.5%. Since 2011, the ser­vice sec­tor has ranked first among all in­dus­trial sec­tors in terms of job cre­ation. Since 2013, the ser­vice sec­tor has also ranked first in terms of out­put value. The rapid growth of China’s ser­vice sec­tor prompted us to in­ves­ti­gate its un­der­ly­ing forces. As is well known to all, re­form or in­sti­tu­tional trans­for­ma­tion is the most im­por­tant driver of China’s eco­nomic growth. This paper in­tends to tell two sto­ries about China’s ser­vice sec­tor based on an analysis of ser­vice sec­tor re­forms: first, the model; sec­ond, ser­vice sec­tor re­forms. De­spite the unique­ness of China’s ser­vice sec­tor re­form, it is dif­fi­cult to sum­ma­rize the model given the ser­vice sec­tor’s hetero­gene­ity and frag­mented re­form ini­tia­tives and pro­grams with no over­ar­ch­ing theme. By tak­ing stock of China’s ser­vice sec­tor re­forms, this paper in­tends to cast light on the fea­tures of the model for ser­vice sec­tor re­form and pro­vide an as­sess­ment of the model.

1. Lit­er­a­ture Re­view

De­spite ex­ten­sive stud­ies on China’s re­forms and the ser­vice sec­tor’s ris­ing sta­tus in China1, to our

sur­prise, very few stud­ies have been car­ried out on the topic of China’s ser­vice sec­tor re­forms. Li & Xia (2009) be­lieved that this omis­sion is due to the fol­low­ing rea­sons. First, the ser­vice sec­tor is de­fined us­ing an ex­clu­sion method, i.e. the ser­vice sec­tor is gen­er­ally de­fined by econ­o­mists to in­clude what is not pri­mary in­dus­try or sec­ondary in­dus­try. With­out a con­sis­tent and clear def­i­ni­tion of the ser­vice sec­tor, there is no com­mon­al­ity among var­i­ous sec­tors in the eco­nomic sense, mak­ing it dif­fi­cult to con­duct an over­all as­sess­ment of the ser­vice sec­tor based on a gen­eral eco­nomic ap­proach2. More­over, China’s in­sti­tu­tional change did not fol­low any con­sis­tent pat­tern. For a long time, the ser­vice sec­tor had been widely con­sid­ered by econ­o­mists, in­dus­try prac­ti­tion­ers and gov­ern­ment of­fi­cials as a non-pro­duc­tive sec­tor sup­ple­men­tary to pro­duc­tion in­dus­try as the sole growth driver. This view still has in­flu­ence in China even to­day and is par­tic­u­larly ev­i­dent in China’s in­dus­trial poli­cies re­lated to for­eign cap­i­tal. Third, ser­vice sec­tor re­forms are spo­radic, spe­cific and grad­ual com­pared with rapid in­sti­tu­tional re­forms in agri­cul­tural and in­dus­trial sec­tors. The pat­terns of such a grad­ual process may only be re­vealed over a long time­frame. Th­ese three rea­sons to­gether may ex­plain the lim­ited re­search lit­er­a­ture on ser­vice sec­tor re­form. An­other im­por­tant rea­son is that the the­o­ret­i­cal frame­work of ser­vice-based eco­nomics is not yet fully es­tab­lished. For in­stance, Chi­nese and in­ter­na­tional text­books on ser­vice-based econ­omy are very lim­ited3. An in­com­plete the­o­ret­i­cal frame­work makes it dif­fi­cult to carry out the­o­ret­i­cal re­search on ser­vice sec­tor re­form.

Ex­ist­ing stud­ies on ser­vice sec­tor re­form can be clas­si­fied into two types:

The first type of stud­ies deals with the per­for­mance or stage of ser­vice sec­tor re­form based on the jour­ney of re­form. Xu, Zhao & Yang (1993) con­sid­ered that China’s in­sti­tu­tional re­form fol­lowed the se­quence of pri­mary, sec­ondary and ter­tiary in­dus­tries, i.e. re­form started with agri­cul­ture and then ex­panded to in­dus­try, con­struc­tion, com­merce, and so­cial and eco­nomic sec­tors. In­sti­tu­tional re­forms are in­suf­fi­cient for many sec­tors of the ter­tiary in­dus­try, par­tic­u­larly trans­port, telecom, ma­te­ri­als, cul­ture, ed­u­ca­tion, health­care, sci­ence and tech­nol­ogy and pub­lic and pub­lic wel­fare sec­tors. They also stud­ied how the ser­vice sec­tor sup­ported eco­nomic devel­op­ment and was boosted by ser­vice con­sump­tion. Th­ese stud­ies were of cer­tain rel­e­vance back then. How­ever, they did not re­veal the driv­ing forces be­hind re­form. Li & Xia (2010) sys­tem­at­i­cally re­viewed the mo­men­tum and jour­ney of China’s ser­vice sec­tor devel­op­ment. They be­lieved that the driv­ing forces be­hind China’s ser­vice sec­tor devel­op­ment were dy­namic and evolved from em­ploy­ment pres­sures in the 1980s to fis­cal pres­sures in the 1990s and in­ter­na­tion­al­iza­tion pres­sures af­ter 2000. In some fol­low-up stud­ies, they fur­ther re­fined this view (Li, 2015). Based on the his­tory of ser­vice sec­tor re­form, this paper in­tends to sum­ma­rize the re­form model and deepen pre­vi­ous stud­ies.

The sec­ond type of stud­ies un­rav­els the rea­sons be­hind the un­der­de­vel­op­ment of ser­vices. For in­stance, Ryan Rutkowsi, re­search fel­low with the U.S. Peter­son In­ter­na­tional In­sti­tute of Eco­nomics, be­lieved that a key rea­son be­hind China’s in­suf­fi­cient ser­vice sec­tor devel­op­ment lied in the pro-in­dus­try pol­icy that had been fol­lowed over the years (2015) 4. SOE mo­nop­oly is also an im­por­tant rea­son for the low level of ser­vice sec­tor em­ploy­ment. Open­ing mar­ket ac­cess for the ser­vice sec­tor is con­ducive to im­prov­ing liv­ing stan­dards and pro­duc­tiv­ity. Zhong (2015) be­lieved that in the process of ser­vice sec­tor re­form, not many peo­ple paid much at­ten­tion to change in de­mand, nor was the prin­ci­ple of “putting peo­ple first” ob­served, and this re­stricted ser­vice price and ser­vice sec­tor devel­op­ment. Hence, “putting peo­ple first” and sat­is­fy­ing peo­ple’s needs should be adopted as the ob­jec­tives of ser­vice sec­tor re­form.

Xie & Huang (2015) be­lieved that ser­vice sec­tor reg­u­la­tion had in­hib­ited pro­duc­tiv­ity in man­u­fac­tur­ing and that de­spite the ne­ces­sity of reg­u­la­tion for some sen­si­tive ser­vice sec­tors, un­rea­son­able reg­u­la­tion ex­empted in­dus­try play­ers from com­pe­ti­tion from po­ten­tial for­eign or do­mes­tic ser­vice providers and thus led to in­ef­fi­cien­cies. De­spite dif­fer­ent trade poli­cies, eco­nomic devel­op­ment lev­els and in­dus­try ad­van­tages of var­i­ous coun­tries, the con­clu­sion that re­form of ser­vice sec­tor reg­u­la­tion is con­ducive to man­u­fac­tur­ing pro­duc­tiv­ity is of univer­sal rel­e­vance.

Li (2007) stud­ied the im­pact of in­sti­tu­tional change on China’s ser­vice sec­tor growth. Based on an econo­met­ric ap­proach, his study an­a­lyzed the im­pact of in­sti­tu­tional change on ser­vice sec­tor growth and ar­rived at the con­clu­sion that at least three per­cent­age points of the in­crease in the share of ser­vice sec­tor in GDP in the 1980s could be at­trib­uted to in­sti­tu­tional change. Based on cross-na­tional and cross­sec­tional data, Wang et al. (2007) ex­am­ined the re­la­tion­ship among gov­ern­ment size, rule of law and the share of a coun­try’s ser­vice sec­tor. Based on em­pir­i­cal re­search, they dis­cov­ered that the qual­ity of con­tract main­te­nance sys­tem mea­sured by a coun­try’s rule of law is sig­nif­i­cantly pos­i­tively cor­re­lated with the share of the ser­vice sec­tor and gov­ern­ment size is sig­nif­i­cantly neg­a­tively cor­re­lated with the share of the ser­vice sec­tor. Among them, the rule of law has a greater im­pact on the share of the ser­vice sec­tor in mid­dle- and low-in­come coun­tries. Fur­ther test shows that no sta­tis­ti­cally sig­nif­i­cant im­pact of pri­vate prop­erty pro­tec­tion sys­tem on the ser­vice sec­tor could be found, while gov­ern­ment spend­ing and in­vest­ment both have a neg­a­tive im­pact on the share of the ser­vice sec­tor. Chen (2004) con­cluded that the ser­vice sec­tor has dif­fer­ent re­quire­ments for the in­sti­tu­tional en­vi­ron­ment com­pared with the man­u­fac­tur­ing sec­tor, while the man­u­fac­tur­ing sec­tor’s re­quire­ments for in­for­ma­tion au­then­tic­ity and re­verse choice are dif­fer­ent from those of the ser­vice sec­tor. This is why the man­u­fac­tur­ing sec­tor is able to de­velop rapidly in a rather weak in­sti­tu­tional en­vi­ron­ment. The ser­vice sec­tor has high re­quire­ments on the in­sti­tu­tional en­vi­ron­ment. Em­pir­i­cal stud­ies show that the level of press free­dom and the rule of law (to­gether with the pre­dictabil­ity of con­tract en­force­abil­ity) are pos­i­tively cor­re­lated with the level of ser­vice sec­tor devel­op­ment. Xu (2011) be­lieved that China’s ser­vice sec­tor stag­na­tion is cor­re­lated with Ren­minbi de­pre­ci­a­tion. Ser­vice sec­tor stag­na­tion dur­ing 1992-1996 co­in­cided with Ren­minbi de­pre­ci­a­tion dur­ing 1990-1994. Ser­vice sec­tor stag­na­tion dur­ing 2002-2008 co­in­cided with Ren­minbi de­pre­ci­a­tion dur­ing 2001-2005.

Ren­minbi de­pre­ci­a­tion led to rapid growth in trad­able sec­tors (pri­mar­ily the man­u­fac­tur­ing sec­tor) and rel­a­tive de­cline of the ser­vice sec­tor. On the other hand, it also led to a sharp fall in the flow of re­sources to the ser­vice sec­tor. Jiang & Li (2004) ar­gued that in the 1980s, China’s ser­vice sec­tor ex­pe­ri­enced a com­pen­satory growth stage when growth mo­men­tum de­rived from un­der­sup­ply (Li & Li, 2008). Hu (2015) main­tained that in­sti­tu­tional prob­lems ex­isted in China’s ser­vice sec­tor devel­op­ment for the fol­low­ing rea­sons: (1) glob­al­iza­tion trap, i.e. ex­clu­sion ef­fect against the ser­vice sec­tor; (2) mar­ke­ti­za­tion trap, i.e. se­ri­ous in­ter­nal­iza­tion of the pro­duc­tive ser­vice sec­tor, with ad­min­is­tra­tive and in­sti­tu­tional mo­nop­oly in cer­tain sec­tors; (3) in­dus­tri­al­iza­tion trap, i.e. low-price in­dus­tri­al­iza­tion re­strained de­mand for con­sumer ser­vices, a dis­crim­i­na­tory in­dus­trial pol­icy led to in­suf­fi­cient mo­men­tum for ser­vice sec­tor devel­op­ment, and pref­er­ence and pol­icy guid­ance fa­vor­ing in­dus­try caused a dis­con­nect be­tween in­dus­try and mod­ern ser­vices; and 4) ur­ban­iza­tion trap, i.e. ser­vice sec­tor devel­op­ment was re­strained by its pre­ma­tu­rity at the low-end and im­ma­tu­rity at the high-end, while in­suf­fi­cient pop­u­la­tion den­sity re­sult­ing from ex­panded ur­ban space also re­strained ser­vice sec­tor devel­op­ment. The house­hold regis­tra­tion (“hukou”) sys­tem cre­ated a tremen­dous drag on the ser­vice sec­tor. Wang & Wang (2009) be­lieved that trans­porta­tion, ware­hous­ing and postal ser­vice have no causal re­la­tion­ship with China’s eco­nomic growth, whether in the short or long term, nor does eco­nomic growth con­trib­ute to China’s trans­porta­tion, ware­hous­ing and postal ser­vice devel­op­ment. There­fore, de­mand-driven eco­nomic growth does not con­sti­tute any im­pe­tus for re­form of the ser­vice sec­tor. As men­tioned in the In­tro­duc­tion writ­ten by Li Jiang­fan for A Study on China’s Ser­vice Sec­tor Devel­op­ment Strate­gies au­thored by Wei Zuolei5, China’s ser­vice sec­tor un­der­de­vel­op­ment can be at­trib­uted to the fol­low­ing three rea­sons. First, the ser­vice sec­tor

is clas­si­fied as a “non-pro­duc­tive sec­tor” and thus sub­ject to dis­crim­i­na­tion. Sec­ond, in­ap­pro­pri­ate de

6 vel­op­ment strate­gies. Third, pol­icy mis­take, i.e. the low-price strat­egy, dis­cour­aged ser­vice sec­tor devel­op­ment.

In gen­eral, re­search lit­er­a­ture on ser­vice sec­tor re­form is spo­radic. De­spite a great deal of at­ten­tion to spe­cific mea­sures or poli­cies, lit­tle at­ten­tion has been paid to the gen­eral model of ser­vice sec­tor re­form and devel­op­ment. This paper in­tends to sum­ma­rize the “China model” of ser­vice sec­tor from the his­tory of ser­vice sec­tor re­form.

2. Model of China’s Ser­vice Sec­tor Re­form: Ba­sic Con­cepts and Char­ac­ter­is­tics

There is a great deal of re­search lit­er­a­ture on China’s re­form model. As far as this paper’s topic is con­cerned, we are more in­ter­ested in the model and char­ac­ter­is­tics of ser­vice sec­tor re­form. Why sep­a­rate ser­vice sec­tor re­form from over­all re­form? The rea­son lies in the unique­ness of China’s ser­vice sec­tor re­form. Judg­ing by the re­sults of ex­ist­ing stud­ies, China’s ser­vice sec­tor re­form is dif­fer­ent from in­dus­try and agri­cul­ture in terms of mo­ti­va­tions, path­ways, mech­a­nisms and ef­fects. Li (2015) noted that the mo­ti­va­tions and path­ways of China’s ter­tiary in­dus­try re­forms are sig­nif­i­cantly dif­fer­ent from those of agri­cul­ture and in­dus­try. Dif­fer­ent from in­dus­trial re­forms that aimed to achieve ef­fi­ciency im­prove­ment, rapid growth and catch-up, in­sti­tu­tional re­forms for the ter­tiary in­dus­try were mo­ti­vated by re­al­ity pres­sures rather than ide­al­ist calls. It is those dif­fer­ences in the mo­ti­va­tions, ra­tio­nale and mea­sures of re­form that made China’s ser­vice sec­tor re­form unique.

The model of China’s ser­vice sec­tor re­form is a set of prag­matic mech­a­nisms and paths de­vel­oped in the unique con­text of China’s re­form and open­ing-up. Putting aside the­o­ret­i­cal con­tro­ver­sies, ser­vice sec­tor re­form was guided by non-in­dus­trial ob­jec­tives, started from mar­ginal ar­eas to crit­i­cal ar­eas and evolved with the ex­ter­nal en­vi­ron­ment.

2.1 Re­form Mo­ti­va­tions Driven by Non-In­dus­trial Ob­jec­tives

Dif­fer­ent from in­dus­trial re­form based on ide­al­ism7, ser­vice sec­tor re­form was guided by spe­cific non-in­dus­trial ob­jec­tives that may not have any­thing to do with the ser­vice sec­tor per se. As far as in­dus­trial re­form is con­cerned, both de­cen­tral­iza­tion and mixed-own­er­ship re­forms in­tended to un­lock the ef­fi­ciency po­ten­tials of state- owned in­dus­trial en­ter­prises and demon­strate the su­pe­ri­or­ity of so­cial­ism. This is based on an ideal, i.e. pro­duc­tiv­ity is max­i­mized un­der the so­cial­ist sys­tem.

How­ever, re­form of the ser­vice sec­tor de­vi­ated from this ide­al­ism and fol­lowed spe­cific and re­al­is­tic non-in­dus­trial ob­jec­tives that had lit­tle to do with growth of the ser­vice sec­tor as an in­dus­try. For in­stance, the first wave of ser­vice sec­tor re­form that started since 1978 was car­ried out to ease em­ploy­ment pres­sures (Li, 2015). At the be­gin­ning, the re­form was not in­tended for the ser­vice sec­tor (back then, the con­cept of a “ser­vice sec­tor” was not yet in­tro­duced in China’s na­tional eco­nomic sys­tem). In­stead, mar­ginal re­form of own­er­ship in­ad­ver­tently con­trib­uted to growth of the ser­vice sec­tor as an emerg­ing force. This was not by his­tor­i­cal co­in­ci­dence and ac­tu­ally had its in­evitabil­ity. With its short in­dus­try chains, the ser­vice sec­tor does not com­pete with SOEs for raw ma­te­ri­als, trans­port re­sources and funds, and mar­ginal growth is a rel­a­tively easy path. In the 1990s, China faced se­ri­ous fis­cal pres­sure, which greatly abated thanks to mar­ket-based price re­form and lib­er­al­iza­tion. For in­stance, mar­ket- based re­form of the real es­tate sec­tor not only saved the gov­ern­ment tremen­dous hous­ing sub­si­dies in cities but also cre­ated new sources of rev­enue from land trans­fer. Mar­ket-based re­forms of

health­care and ed­u­ca­tion also helped re­duce gov­ern­ment spend­ing on th­ese sec­tors.

Re­form driven by non-in­dus­trial ob­jec­tives is su­pe­rior to re­form based on ide­al­ism since re­sis­tance against re­form would be smaller if clear ob­jec­tives are fol­lowed. With­out set­ting clear in­dus­trial ob­jec­tives, re­form al­lowed greater room for in­dus­trial devel­op­ment. This is the fun­da­men­tal rea­son why China’s ser­vice sec­tor is the only sec­tor whose share in GDP has kept in­creas­ing af­ter re­form and open­ing-up in 1978. The ori­en­ta­tion of non-in­dus­trial ob­jec­tives meant that re­form could put aside ide­o­log­i­cal ques­tions and em­brace a prag­matic ap­proach.

Re­form would be mis­guided if too much em­pha­sis is placed on non-in­dus­trial ob­jec­tives. Even if a cor­rect di­rec­tion is fol­lowed, re­form would still lead to nowhere if a wrong path is fol­lowed. For in­stance, China’s mar­ket-based real es­tate re­form since the 1990s fol­lowed a mar­ket-based ap­proach, which is with­out doubt cor­rect. But in­stead of cre­at­ing a healthy real es­tate sec­tor, too much im­por­tance was at­tached to the real es­tate sec­tor’s con­tri­bu­tion to the State cof­fer. There­after, the ab­so­lute State mo­nop­oly over land and re­liance on land rev­enues led to the real es­tate sec­tor’s su­per­fi­cial pros­per­ity at the ex­pense of the real econ­omy. Be­hind sky­rock­et­ing hous­ing prices, fi­nan­cial risks are in the mak­ing and pose a threat to China’s eco­nomic health. For an­other ex­am­ple, China’s med­i­cal re­form since the 1990s also more or less failed in the past decade since such re­form was mo­ti­vated by re­duc­ing health­care fis­cal spend­ing rather than im­prov­ing health­care ser­vice. This ap­proach trans­formed China’s pre­vi­ous med­i­cal sys­tem. In the pre-re­form planned econ­omy era, med­i­cal ser­vice was deemed a “non-pro­duc­tive” ser­vice that was not an eco­nomic ac­tiv­ity at all but a pub­lic-in­ter­est un­der­tak­ing. The State en­forced strict plan­ning and man­age­ment over med­i­cal ser­vice and drug prices, which were kept very low. For med­i­cal ser­vice in­sti­tu­tions, their rev­enues from health­care ser­vices and drug sales could not even off­set their op­er­a­tional costs. As a re­sult, med­i­cal ser­vice in­sti­tu­tions had to rely on huge sub­si­dies from the gov­ern­ment. The in­ten­tion of med­i­cal re­form was to in­tro­duce mar­ket-based mech­a­nisms, which in­deed greatly eased gov­ern­ment fis­cal pres­sures. But the lack of ap­pro­pri­ate reg­u­la­tion and over­sight, par­tic­u­larly the im­plicit ap­proval of over-pre­scrip­tion and drug price markup by med­i­cal in­sti­tu­tions, caused cat­a­strophic con­se­quences for the med­i­cal in­dus­try, an in­dus­try with se­ri­ous in­for­ma­tion asym­me­try.

An­other prob­lem with re­form driven by non-in­dus­trial ob­jec­tives is that re­form will grad­u­ally lose mo­men­tum to­wards its more ad­vanced stage. Re­form ini­tia­tives taken in an ear­lier stage of re­form based on non-in­dus­trial ob­jec­tives will also cre­ate vested in­ter­ests that ul­ti­mately will im­pede re­form from deep­en­ing. When non-in­dus­trial ob­jec­tives con­tra­dict with in­dus­trial devel­op­ment, re­form will stag­nate.

2.2 Tran­scend The­o­ret­i­cal Con­tro­ver­sies

At the in­cep­tion of China’s re­form and open­ing-up, the eco­nomic sys­tem was con­sid­ered as be­ing com­ple­men­tary to the po­lit­i­cal sys­tem. Pub­lic own­er­ship and a planned econ­omy were con­sid­ered to be the key el­e­ments of the so­cial­ist sys­tem. There­fore, an im­por­tant ques­tion at the be­gin­ning of re­form was how to over­come ide­o­log­i­cal bar­ri­ers. As Thomas G. Raski(2013) pointed out, dis­cus­sions on so­cial­ist eco­nomic re­forms were gen­er­ally ide­o­log­i­cal. For in­stance, even for ru­ral in­sti­tu­tional re­form, which was con­sid­ered top-down re­form, it only trans­formed the mode of agri­cul­tural pro­duc­tion with­out chang­ing ru­ral col­lec­tive land own­er­ship. In China’s re­form process, grass­roots ef­forts to push for­ward re­form played an im­por­tant role. But in re­al­ity, such grass­roots ef­forts were sup­ported, ei­ther ex­plic­itly or im­plic­itly, by the gov­ern­ment in many cases. In this sense, ide­o­log­i­cal change at top lead­er­ship was vi­tal to China’s re­form. For China’s ser­vice sec­tor re­form, how­ever, the­o­ret­i­cal ar­gu­ments or the cor­rec­tion of clas­si­cal the­o­ries did not dom­i­nate the agenda as was the case for in­dus­trial and agri­cul­tural re­forms8. This is an in­ter­est­ing ques­tion. To some ex­tent, ser­vice sec­tor re­form tran­scended ide­ol­ogy for the fol­low­ing rea­sons:

First, ser­vice sec­tor re­form was not at the cen­ter stage of China’s re­form, par­tic­u­larly dur­ing the 1980s when great the­o­ret­i­cal con­tro­ver­sies ex­isted. As many re­searchers noted, “China’s re­forms from

1978 to the mid-1980s fo­cused on the coun­try­side” 9. Re­forms of the coun­try­side and ur­ban in­dus­trial SOEs took cen­ter stage from the very be­gin­ning and drew a great deal of at­ten­tion. How­ever, ser­vice sec­tor re­form started from vil­lage fair trade and in­di­vid­ual econ­omy and did not cre­ate any sig­nif­i­cant shock to the ad­min­is­tra­tive and own­er­ship sys­tems of the state sec­tor of econ­omy. As a re­sult, ser­vice sec­tor re­form did not take cen­ter stage back then and re­ceived lit­tle at­ten­tion and there­fore did not meet any sig­nif­i­cant bar­rier against in­sti­tu­tional re­forms. On the other hand, th­ese ser­vice sec­tor re­forms ad­dressed prac­ti­cal prob­lems fac­ing peo­ple in their ev­ery­day life, mak­ing it pos­si­ble for the re­forms to be car­ried out de­spite ide­o­log­i­cal con­tro­ver­sies.

Sec­ond, back then, the ser­vice sec­tor did not touch upon sen­si­tive is­sues un­der the planned econ­omy. For in­dus­trial re­form, the in­tro­duc­tion of in­di­vid­ual econ­omy would in­evitably af­fect raw ma­te­rial sup­ply, fixed as­set in­vest­ment plan and sup­ply-de­mand equi­lib­rium. With­out much fixed as­set in­vest­ment, the ser­vice sec­tor does not in­volve ques­tions like al­lo­ca­tion of the means of pro­duc­tion. More­over, ser­vice sec­tor prod­ucts can­not be stored or pro­vided re­motely. There­fore, the ser­vice sec­tor needed to de­velop in close prox­im­ity to con­sumers and would not com­pete with state-owned ser­vice en­ter­prises for raw ma­te­ri­als, con­sumers and mar­kets. Back then, ser­vice sec­tor re­form and devel­op­ment also in­volved ques­tions such as the le­gal­ity of long-range trans­port of goods for sale - it used to be il­le­gal for in­di­vid­u­als and en­ti­ties other than SOEs to trans­port goods for pur­poses of sale with­out a gov­ern­ment per­mit. This ques­tion, how­ever, was not con­tra­dic­tory with China’s ba­sic eco­nomic sys­tem. At a State Coun­cil meet­ing on the­o­ret­i­cal mat­ters held in 1978, econ­o­mist Xue Muqiao pro­posed to vin­di­cate long-range trans­port of goods for sale as a means to in­vig­o­rate the mar­ket. Be­fore re­form and openingup, the ser­vice sec­tor had been in ex­treme un­der­sup­ply (Li, 2015). Mar­ginal in­cre­ment in the ser­vice sec­tor would not shake the planned eco­nomic sys­tem to its root. Rather, it would de­liver con­ve­niences to peo­ple’s ev­ery­day life. Back then, ser­vice sec­tor re­form fol­lowed a very clear path, i.e. with­out chang­ing own­er­ship sys­tems and the in­ven­tory of the planned econ­omy, per­sonal in­ter­ests were rec­og­nized to cre­ate new ser­vice sec­tor in­cre­ments and pro­mote the re­form of in­ven­tory through in­cre­ments to avoid ide­o­log­i­cal is­sues sur­round­ing in­ven­tory re­form.

Third, ser­vice sec­tor re­form pro­ceeded with eas­ier tasks be­fore ad­dress­ing more dif­fi­cult is­sues to avoid the­o­ret­i­cal con­tro­ver­sies. There are nu­mer­ous ser­vices with great in­ter-sec­toral dif­fer­ences. For in­stance, fi­nance, rail­way, telecom, sci­ence and tech­nol­ogy are of great sig­nif­i­cance to the econ­omy, while ed­u­ca­tion and health­care in­volve gov­ern­ment func­tions and im­pact peo­ple’s ev­ery­day life. Restau­rants, re­tail and per­sonal ser­vices re­quire smaller in­vest­ments with a lim­ited im­pact on the econ­omy. In the process of ser­vice sec­tor re­form, it makes sense for re­forms to be car­ried out first for eas­ier sec­tors like re­tail (then ex­tended to whole­sale), restau­rants and house­hold ser­vices to min­i­mize re­sis­tance against re­form, avoid ide­o­log­i­cal con­tro­ver­sies and fa­cil­i­tate re­form.

In a nutshell, China’s ser­vice sec­tor re­form avoided the­o­ret­i­cal con­tro­ver­sies since the be­gin­ning and en­abled all forms of own­er­ship re­lated to re­form path­ways in­clud­ing the in­di­vid­ual econ­omy and pri­vate econ­omy to flour­ish, thus ex­plor­ing a unique path for China’s re­form.

2.3 Phi­los­o­phy of Prag­ma­tism

As can be seen from ex­ist­ing stud­ies, most schol­ars con­sid­ered that China’s re­form it­self in­di­cates a shift in the phi­los­o­phy of top lead­er­ship from moral ideals to prag­matic ra­tio­nal­ity. China’s re­form

was not based on the­o­ret­i­cal as­sump­tions. Rather, it was a prac­ti­cal ex­per­i­ment and started from a few lo­cal­i­ties be­fore rolling out to broader re­gions with twists and turns. For in­stance, China’s ru­ral re­form was the out­come of a top-down re­form phi­los­o­phy based on prag­ma­tism (Xiao, 2004; Ronald H. Coase, Wang, 2013; Wu, 2010). In our view, the prag­matic ap­proach of re­form is man­i­fested more ev­i­dently in the ser­vice sec­tor.

China’s ser­vice sec­tor re­form fol­lowed no spe­cific tar­get model (since the scope of the ser­vice sec­tor was not clearly de­fined at the in­cep­tion of re­form). In var­i­ous stages of re­form, the ser­vice sec­tor was re­garded as an out­let for eas­ing var­i­ous so­cioe­co­nomic pres­sures. In other words, re­form it­self was seen as a means rather than an end, as op­posed to the re­form of in­dus­trial en­ter­prises which was con­sid­ered an end. As dis­cussed pre­vi­ously, whether it was when China de­vel­oped the ser­vice sec­tor to ease em­ploy­ment pres­sures at the in­cep­tion of re­form or to ease fis­cal pres­sures in the 1990s, the re­form was all based on prag­ma­tism.

The prag­matic ap­proach to re­form was also ev­i­dent in the mid-1980s, when the Chi­nese lead­er­ship be­came aware that the ser­vice sec­tor ac­counted for over 60% in GDP for ad­vanced economies. This real­iza­tion deeply in­flu­enced the Chi­nese lead­er­ship, whose agenda was still dom­i­nated by in­dus­tri­al­iza­tion. As a re­sult, the ser­vice sec­tor was in­cluded into na­tional eco­nomic ac­count­ing and iden­ti­fied as a key sec­tor in China’s five-year plan (7th Five-Year Plan) with a tar­get growth rate far above that for in­dus­try and agri­cul­ture. This im­plied that China in­tended to de­velop the ser­vice sec­tor as a means to ease eco­nomic growth pres­sures. To achieve ser­vice sec­tor growth, the ser­vice sec­tor was sep­a­rated from the gov­ern­ment and bro­ken into in­de­pen­dent seg­ments such as fi­nance, telecom, tech­nol­ogy and rail­way.

Since China’s en­try into the WTO in 2001, China’s ser­vice sec­tor started to face in­ter­na­tional com­pe­ti­tion. How to deal with pres­sures from in­ter­na­tion­al­iza­tion be­came an im­por­tant ques­tion that must be ad­dressed in China’s ser­vice sec­tor re­form. Var­i­ous forms of in­sti­tu­tional re­struc­tur­ing to in­crease ser­vice sec­tor com­pet­i­tive­ness be­came a theme of ser­vice sec­tor re­form. Af­ter the 18th CPC Na­tional Congress in 2012, ser­vice sec­tor re­form started to shift its pri­or­ity to im­prov­ing peo­ple’s liveli­hood. Dur­ing this pe­riod, the gov­ern­ment in­tro­duced a host of pol­icy doc­u­ments re­lated to pub­lic wel­fare ser­vices such as health­care ser­vices, sports, and el­derly care.

Dif­fer­ent from in­dus­trial and agri­cul­tural re­forms car­ried out to ful­fill po­lit­i­cal ide­al­ism, ser­vice sec­tor re­form fol­lowed a prag­matic ap­proach since the very be­gin­ning. Such prag­ma­tism re­duced the pres­sure of re­form, while re­form also tended to avoid dif­fi­cult ar­eas. How­ever, such a prag­matic ap­proach also cre­ated ob­sta­cles for fu­ture re­forms, mak­ing it hard for re­forms to deepen. This is why the im­ple­men­ta­tion of ser­vice sec­tor re­forms has be­come so dif­fi­cult to­day (Sun, 2014).

2.4 Based on peo­ple's Liveli­hood and Ef­fi­ciency Ori­en­ta­tion: Dou­ble Stan­dard

Ac­cord­ing to a study by Angus Maddison (1998), China’s ser­vice sec­tor was sub­ject to se­vere re­stric­tions dur­ing 1952-1978. As a re­sult, to­tal em­ploy­ment in re­tail busi­nesses, restau­rants and gro­cery stores de­creased from 9.5 mil­lion to 6.1 mil­lion and em­ploy­ment in re­tail re­duced from 5.5 mil­lion to 1.3 mil­lion de­spite a two-fold in­crease in na­tional pop­u­la­tion. This meant that ser­vice sec­tor sup­ply could not keep up with grow­ing de­mand.

In this con­text, pol­i­cy­mak­ing started to fol­low a pub­lic wel­fare ori­en­ta­tion. By the end of 1978, the State Ad­min­is­tra­tion of In­dus­try and Com­merce (SAIC) held a na­tional vil­lage fair con­fer­ence in Dazhu County of Sichuan Prov­ince to re­ha­bil­i­tate vil­lage fairs, which had been re­stricted in the pre-re­form era. In March 1979, the na­tional con­fer­ence for di­rec­tors of in­dus­try and com­merce ad­min­is­tra­tions was held to dis­cuss is­sues in­clud­ing dereg­u­la­tion of farm­ers mar­kets in cities and con­cluded that “farm­ers mar­ket in cities should, in prin­ci­ple, be dereg­u­lated”. In April, the State Coun­cil ap­proved the SAIC’s Re­port on the Na­tional Con­fer­ence for Di­rec­tors of In­dus­try and Com­merce Ad­min­is­tra­tions. Later, farm­ers mar­kets were opened in var­i­ous medium-sized and large cities. By the end of 1979, the an­nual

turnover of farm­ers mar­kets in 208 cities in China reached 1.2 bil­lion yuan with prod­uct cat­e­gories in­creas­ing from fewer than 60 at the be­gin­ning of the year to over 100 by the end of the year. Th­ese farm­ers mar­kets also of­fered peanuts, fish, shrimp and other prod­ucts that were rare even for the Chi­nese New Year hol­i­day. Al­low­ing farm­ers mar­kets to flour­ish greatly im­proved peo­ple’s liv­ing stan­dards10. A pub­lic wel­fare ori­en­ta­tion was an im­por­tant fea­ture in China’s re­form, which was dif­fer­ent from the former USSR and Eastern Europe that had adopted pri­va­ti­za­tion and mar­ke­ti­za­tion as their re­form ob­jec­tives. As noted by Joseph Stiglitz11, un­like Rus­sia, China never mixed the end (peo­ple’s wel­fare) with the means (pri­va­ti­za­tion and trade lib­er­al­iza­tion). Through re­form, the num­ber of re­tail busi­nesses, restau­rants and ser­vice out­lets per 10, 000 in­hab­i­tants (in towns and cities) in­creased from 13 to 64 dur­ing 1978-1983, and em­ploy­ment in th­ese seg­ments per 10, 000 in­hab­i­tants in­creased from 63 to 163. In 1984, the Min­istry of Trans­port adopted a prag­matic and proac­tive open­ing-up pol­icy to “al­low all state-owned, col­lec­tive and in­di­vid­ual busi­nesses to de­velop and all re­gions, sec­tors and en­ti­ties to work to­gether” with the pur­pose of ex­ten­sively at­tract­ing non-pub­lic el­e­ments to high­way and wa­ter­way trans­port ser­vices, which led to rapid devel­op­ment in th­ese ser­vices.

Ever since its be­gin­ning, ser­vice sec­tor re­form fol­lowed a pub­lic wel­fare ori­en­ta­tion, which was un­like the fo­cus on ef­fi­ciency im­prove­ment for in­dus­trial sec­tors. In in­dus­trial sec­tors, re­form im­proved in­ter­nal man­age­ment and min­i­mized “X- in­ef­fi­ciency” and in­creased over­all in­dus­trial ef­fi­ciency by de­volv­ing power, cre­at­ing in­cen­tives and in­tro­duc­ing com­pe­ti­tion12. This process might cause un­em­ploy­ment. Hence, the re­form es­sen­tially did not fol­low a pub­lic-in­ter­est ori­en­ta­tion. At the be­gin­ning of 1983, a leader of CPC Cen­tral Com­mit­tee Sec­re­tariat called for ex­pand­ing the ru­ral house­hold con­tract sys­tem to ur­ban state-owned in­dus­trial and com­mer­cial sec­tors and im­ple­ment­ing the en­ter­prise con­tract sys­tem for all ur­ban in­dus­trial and com­mer­cial en­ter­prises. In a mat­ter of just two or three months, the con­tract sys­tem was put into place for all state-owned en­ter­prises in China. But it quickly led to chaos in the eco­nomic or­der and price hikes with­out im­prov­ing peo­ple’s liv­ing stan­dards.

2.5 Syn­chrony and Mis­match be­tween Re­form and Open­ing-Up

China’s re­form was car­ried out al­most in tan­dem with open­ing-up. In 1978, the State Coun­cil held a meet­ing on the­o­ret­i­cal mat­ters start­ing July 6 at­tended by over 60 lead­ers of State Coun­cil de­part­ments to speed up for­eign cap­i­tal in­tro­duc­tion and devel­op­ment. The meet­ing re­quired “fur­ther lib­er­at­ing the mind, com­ing up with more ap­proaches and tak­ing bolder and faster steps” (Li, 2015). The meet­ing also adopted the idea of open­ing-up, i.e. make full use of China’s avail­able re­sources to at­tract for­eign cap­i­tal, tech­nol­ogy and equip­ment. On Jan­uary 17, 1979, Com­rade Deng Xiaop­ing said at a meet­ing with five se­nior busi­ness com­mu­nity rep­re­sen­ta­tives in­clud­ing Hu Juewen and Rong Yiren that “in pur­su­ing devel­op­ment, we should open our minds to more ap­proaches. We may uti­lize for­eign cap­i­tal and tech­nol­ogy and wel­come over­seas Chi­nese and Chi­nese de­scen­dants to set up fac­to­ries in China. We may at­tract for­eign cap­i­tal through com­pen­sa­tion trade or joint op­er­a­tion. Th­ese ac­tiv­i­ties should start with sec­tors with rapid cap­i­tal turnover. 13” In 1979, the Na­tional Peo­ple’s Congress for­mu­lated the Law on Chi­nese-For­eign Eq­uity Joint Ven­tures as an ini­tial step in ex­pand­ing China’s open­ing-up.

At the pol­icy level, China pri­mar­ily opened the man­u­fac­tur­ing sec­tor to for­eign in­vest­ment, while the ser­vice sec­tor re­mained less open. But tourism, real es­tate and restau­rants were sub­ject to fewer re­stric­tions. By the end of 1987, the former State Plan­ning Com­mis­sion en­acted the In­terim Reg­u­la­tions on Guid­ance for the At­trac­tion of For­eign In­vest­ment, which clas­si­fied for­eign in­vest­ment projects into

four cat­e­gories: en­cour­aged, per­mit­ted, re­stricted and for­bid­den. This pol­icy doc­u­ment also fo­cused on the man­u­fac­tur­ing sec­tor.

As it turned out, over 1/3 of for­eign in­vest­ments in China dur­ing 1979-1990 went to the ser­vice sec­tor. The rea­son is that ho­tels and tourism ser­vices at­tracted a great deal of for­eign in­vest­ment as China ini­tially opened its door to for­eign in­vestors in the 1980s. Dur­ing 1979-1990, FDI in real es­tate and so­cial ser­vices ac­counted for 60.3% of to­tal FDI in China’s ter­tiary sec­tor14.

China en­acted the Law on Chi­nese-For­eign Joint Co­op­er­a­tive Ven­tures in 1988 and the Law on For­eign-Funded En­ter­prises in 1990, and re­vised the Law on Chi­nese-For­eign Eq­uity Joint Ven­tures. Thus, a com­plete le­gal frame­work for for­eign in­vest­ment came into shape. In the early and mid-1990s, for­eign in­vest­ment flowed into real es­tate in large vol­umes and ac­counted for a sig­nif­i­cant share - as much as 50% in some years. In the en­tire 1990s, real es­tate and so­cial ser­vices ac­counted for 67% of FDI in the ter­tiary sec­tor. In the process of ser­vice sec­tor open­ing-up, there had been con­tro­ver­sies re­gard­ing which sec­tors should be opened up to for­eign cap­i­tal. In July 1992, the State Coun­cil en­acted the Ap­proval on the Use of For­eign Cap­i­tal in Com­mer­cial Re­tail Sec­tor, which ap­proved for­eign re­tail­ers to es­tab­lish Chi­nese-for­eign joint co­op­er­a­tive and eq­uity joint ven­tures in re­tail and im­por­t­ex­port busi­ness. In June 1999, the State Coun­cil pro­mul­gated the Mea­sures for the Pi­lot Pro­gram of For­eign-Funded Com­mer­cial En­ter­prises, which ex­panded the scope of pi­lot cities for Chi­nese-for­eign joint co­op­er­a­tive and eq­uity joint ven­tures to all pro­vin­cial cap­i­tals, au­ton­o­mous re­gions and cities un­der sep­a­rate plan­ning and al­lowed for­eign-funded re­tail en­ter­prises to en­gage in whole­sale busi­ness. This pol­icy led to a mass in­flow of for­eign-funded re­tail en­ter­prises into China and sparked con­tro­ver­sies among schol­ars in the early 21st cen­tury.

As can be seen from the above dis­cus­sion, ser­vice sec­tor open­ing-up and re­form went hand in hand dur­ing 1979-1990 and fo­cused on con­sumer ser­vices. For­eign cap­i­tal also flowed into so­cial ser­vices and tourism, thus ben­e­fit­ing from and re­in­forc­ing re­form.

From 1990 to China’s WTO en­try, no in-depth re­search was car­ried out in the field of ser­vice sec­tor open­ing-up, which made lit­tle progress and fell be­hind re­form. Qual­ity in the use of for­eign cap­i­tal was also poor for the ser­vice sec­tor. This in­di­cates a mis­match be­tween ser­vice sec­tor open­ing-up and re­form, with more head­way made in open­ing-up. For­eign cap­i­tal was en­ti­tled to pol­icy pref­er­ences for tax­a­tion, for­eign ex­change and im­port-ex­port. While th­ese poli­cies helped China at­tract for­eign cap­i­tal, they also put Chi­nese en­ter­prises at a dis­ad­van­tage in com­pet­ing with for­eign coun­ter­parts. Af­ter the WTO en­try, China sub­stan­tially opened up its ser­vice sec­tor in ac­cor­dance with WTO rules. How­ever, China’s ser­vice sec­tor re­form stag­nated and, in many cases, for­eign cap­i­tal was al­lowed ac­cess but pri­vate cap­i­tal faced bar­ri­ers. In this stage, ser­vice sec­tor re­form fell be­hind ser­vice sec­tor open­ing-up.

With­out con­sid­er­ing the in­ter­ac­tive ef­fect be­tween ser­vice sec­tor open­ing-up and re­form, many stud­ies in­ves­ti­gated how lib­er­al­iza­tion of trade in ser­vices con­trib­uted to the econ­omy. Ni­co­letti (2001) be­lieved that em­pir­i­cal stud­ies of var­i­ous coun­tries sug­gested that reg­u­la­tory re­form of the ser­vice sec­tor in OECD coun­tries sig­nif­i­cantly im­proved eco­nomic per­for­mance and liv­ing stan­dards and con­cluded that the dereg­u­la­tion of truck trans­port and lib­er­al­iza­tion of trade in ser­vices brought com­pet­i­tive pres­sures in the U.S. - such pres­sures in­duced pro­duc­tiv­ity growth and in­creased al­lo­ca­tion ef­fi­ciency for com­pa­nies pre­vi­ously sub­ject to reg­u­la­tion. Hoek­man et al. (1997) con­sid­ered that poli­cies to re­strict com­pe­ti­tion in the ser­vice sec­tor had ex­or­bi­tant costs. Xu (2011) pointed out that China’s ser­vice sec­tor un­der­de­vel­op­ment was closely re­lated to two in­ter­rup­tions, which might have re­sulted from growth in the home coun­try’s net ex­port and trade sec­tor due to home cur­rency de­pre­ci­a­tion that in­hib­ited the devel­op­ment of the home coun­try’s non-trad­able sec­tors (the ser­vice sec­tor). Most stud­ies tended to

con­clude that trade lib­er­al­iza­tion had a pos­i­tive ef­fect on ser­vice sec­tor devel­op­ment. But we think oth­er­wise. In our view, given the in­ter­play be­tween ser­vice sec­tor open­ing-up and re­form, the ef­fects on ser­vice sec­tor devel­op­ment are com­pli­cated, and re­form and open­ing-up are equally im­por­tant.

2.6 The­o­ret­i­cal Ba­sis Needs to Fur­ther Deepen

China’s ser­vice sec­tor de­vel­oped rapidly, over­tak­ing in­dus­try to be­come the big­gest eco­nomic sec­tor in 2013 and ac­count­ing for 51.6% in GDP by 2016. But the­o­ret­i­cal re­search on ser­vice sec­tor re­form re­mains in­ad­e­quate in many ways.

From the his­tory of the­o­ret­i­cal evo­lu­tion, we may dis­cover the ba­sic clues of China’s ser­vice sec­tor. From 1978 to the mid-1980s, the con­cept of the ser­vice sec­tor (re­ferred to as the ter­tiary sec­tor at that time) was not even fully es­tab­lished. Hence, the ser­vice sec­tor as a con­cept must be clar­i­fied in or­der to de­velop a the­ory on its re­form. Back then, the ques­tion over “pro­duc­tive la­bor and non-pro­duc­tive la­bor” had to be an­swered to de­velop a clear the­ory of ser­vice-based econ­omy. In clas­si­cal Marx­ist works, ser­vice la­bor is treated as non-pro­duc­tive la­bor. This prob­lem must be solved be­fore ser­vice sec­tor re­form could be deep­ened. Back then, dif­fer­ent views pre­vailed in academia re­gard­ing the scope of ser­vice la­bor. The next ques­tion is how to el­e­vate prac­ti­cal ex­pe­ri­ence into the­o­ret­i­cal con­clu­sions. In terms of guid­ing ide­ol­ogy, China’s re­form is a process of tran­si­tion from ra­tio­nal­ity and hy­poth­e­sis to prac­ti­cal ex­per­i­ments. How to take stock of em­pir­i­cal facts about this process and de­velop a the­o­ret­i­cal pat­tern based on th­ese facts is also a chal­lenge. Lastly, it is also essential to iden­tify the the­o­ret­i­cal ba­sis and jus­ti­fi­ca­tions of China’s ser­vice sec­tor re­form.

3. Unique­ness of the Model for China’s Ser­vice Sec­tor Re­form

The unique­ness of the model for China’s ser­vice sec­tor re­form is man­i­fested in the fol­low­ing as­pects. First, ser­vice sec­tor re­form is dif­fer­ent from China’s in­dus­trial and agri­cul­tural re­forms. Sec­ond, China’s ser­vice sec­tor re­form is dif­fer­ent from re­forms in other coun­tries. Over­all, China’s ser­vice sec­tor re­form is of­ten re­garded as an in­stru­ment for ad­dress­ing prac­ti­cal prob­lems and lacks clear mo­ti­va­tions and tar­gets. This is also an im­por­tant fea­ture of China’s ser­vice sec­tor re­form.

In com­par­i­son with agri­cul­tural and in­dus­trial re­forms, China’s ser­vice sec­tor re­form is fun­da­men­tally dif­fer­ent in its ba­sic philoso­phies, mo­ti­va­tions and ini­tia­tives (see Ta­ble 1).

In­dus­trial re­form started in 1978 with a pri­or­ity to in­crease in­ter­nal man­age­ment ef­fi­ciency of state-

owned in­dus­trial en­ter­prises. De­spite a mul­ti­tude of re­form ini­tia­tives, the theme was to ad­just the al­lo­ca­tion of rights, re­spon­si­bil­i­ties and in­ter­ests among the gov­ern­ment, com­pany in­sid­ers, ex­ec­u­tives and em­ploy­ees and de­volve power to com­pany in­sid­ers. Such de­vo­lu­tion came in three forms: de­volv­ing power, in­creas­ing au­ton­omy and im­ple­ment­ing the con­tract sys­tem. Af­ter 1981, re­form of de­vo­lu­tion evolved into the eco­nomic re­spon­si­bil­ity sys­tem.

Ru­ral re­form also started with the de­vo­lu­tion of power. The Third Plenum of the 11th CPC Cen­tral Com­mit­tee adopted the De­ci­sions on Ac­cel­er­at­ing Agri­cul­tural Devel­op­ment (Draft) in 1978, which clearly stip­u­lated that “ex­cept as oth­er­wise re­quired by law, cooperatives and pro­duc­tion teams can­not be forced to ex­e­cute the com­mands of ad­min­is­tra­tive au­thor­i­ties at any level; in­stead, they should be per­mit­ted to act ac­cord­ing to lo­cal re­al­i­ties un­der the guid­ance of na­tional plan­ning in or­der to pro­tect their au­ton­omy and give play to their ini­tia­tive”. The De­ci­sions be­came an im­por­tant pol­icy jus­ti­fi­ca­tion for ru­ral re­forms that later swept across China. De­spite the ex­ten­sively rec­og­nized role of the house­hold con­tract re­spon­si­bil­ity sys­tem, con­tro­ver­sies still ex­isted among re­searchers15.

In the ser­vice sec­tor, re­form ini­tia­tives were also in­tro­duced for SOEs. Pi­lot pro­grams were car­ried out be­gin­ning in 1978 and 1979 to in­crease au­ton­omy for com­mer­cial en­ter­prises. But the ef­fects of such re­form were min­i­mal. In the late stage, mar­ginal play­ers com­peted with ex­ist­ing eco­nomic en­ti­ties, cre­at­ing pres­sures for the re­form of orig­i­nal el­e­ments in the state sec­tor of econ­omy. Un­der th­ese pres­sures, China cre­ated a mar­ket-based eco­nomic sys­tem, en­cour­aged var­i­ous eco­nomic el­e­ments to com­pete freely with each other, and re­formed the own­er­ship sys­tem of the state sec­tor of econ­omy. This is how China’s ser­vice sec­tor re­form fol­lowed a unique path16.

Since ser­vice sec­tor re­form fol­lowed a prag­matic path, it took on fea­tures dif­fer­ent from in­dus­trial re­form (see Ta­ble 2). Since 1984, in­dus­trial en­ter­prises started to seek break­throughs in price and other mat­ters. But con­tract and leas­ing op­er­a­tions pre­vailed in the men­tal­ity of SOE re­form17. Real price re­form was not car­ried out un­til 1988. But the big-bang re­form that de­vi­ated from re­al­ity in­evitably led to chaos in the price or­der.

Since 1984, achiev­ing rapid devel­op­ment in the ser­vice sec­tor be­came an im­por­tant task of ser­vice sec­tor re­form. Af­ter the es­tab­lish­ment of a sta­tis­ti­cal sys­tem for the ser­vice sec­tor in 1985, the sec­tor re­ceived great at­ten­tion as an im­por­tant sec­tor in the econ­omy. In 1984, the ser­vice sec­tor as a share in GDP sur­passed that of agri­cul­ture for the first time. As a re­sult of th­ese de­vel­op­ments, growth of the

ser­vice sec­tor as an in­dus­trial sec­tor has been given un­prece­dented im­por­tance. When the 7th FiveYear Plan was for­mu­lated in 1983, the cen­tral gov­ern­ment set a tar­get to achieve ser­vice sec­tor growth by over 11%, which was far above the growth tar­gets set for pro­duc­tion in­dus­try and agri­cul­ture. Why did the cen­tral gov­ern­ment place so much ex­pec­ta­tion on ser­vice sec­tor growth? The rea­son lied in the mo­ti­va­tions and mea­sures of ser­vice sec­tor re­form. In this stage, the cen­tral gov­ern­ment fol­lowed a mar­ket-based ap­proach in re­form­ing the ser­vice sec­tor to achieve the growth tar­get. In some seg­ments, gov­ern­ment ad­min­is­tra­tion was sep­a­rated from en­ter­prise op­er­a­tion to es­tab­lish the mar­ket en­tity sta­tus of ser­vice com­pa­nies to spur their devel­op­ment. Th­ese in­cluded vi­tal ser­vice seg­ments such as fi­nance, telecom, real es­tate, cul­ture and sci­ence and tech­nol­ogy. Af­ter 1985, the mar­ket-based ap­proach be­came an im­por­tant di­rec­tion of ser­vice sec­tor re­form. No­tably, an im­por­tant as­pect of mar­ket-based re­form is to sep­a­rate gov­ern­ment ad­min­is­tra­tion from en­ter­prise op­er­a­tion and es­tab­lish mar­ket en­ti­ties. This re­form ap­proach was ev­i­dently dif­fer­ent from the change of op­er­a­tional mech­a­nism for pro­duc­tion in­dus­try.

By the 1990s, China’s ser­vice sec­tor re­form was car­ried out to ease fis­cal pres­sures. This had both sim­i­lar­i­ties and dif­fer­ences with in­dus­trial re­form. In the 1990s, giv­ing sub­si­dies to loss-mak­ing in­dus­trial en­ter­prises caused the gov­ern­ment a great deal of fis­cal pres­sures. Less­en­ing the grow­ing fis­cal pres­sures was one of the ob­jec­tives of the re­form to cre­ate a mod­ern en­ter­prise sys­tem. How­ever, ser­vice sec­tor re­form had greater po­ten­tials in re­duc­ing fis­cal pres­sures fac­ing the Chi­nese gov­ern­ment at that time. Es­sen­tially, this re­form fol­lowed two themes: first, pro­vid­ing mar­ket-based sup­ply for ser­vices such as hous­ing; sec­ond, re­lax­ing price con­trol to re­duce gov­ern­ment sub­si­dies for ser­vices like health­care. Such a re­form ap­proach led to a re­mark­able in­crease in the prices of the ter­tiary in­dus­try. In na­ture, price re­form and mar­ket-based re­form were all car­ried out to ad­dress fis­cal pres­sures. This re­flected dis­tinc­tive util­i­tar­i­an­ism in the model of China’s ser­vice sec­tor re­form.

With China’s WTO en­try af­ter the dawn of the 21st cen­tury, the lack of ser­vice sec­tor com­pet­i­tive­ness be­came in­creas­ingly ev­i­dent. Among var­i­ous fac­tors, the ser­vice sec­tor ad­min­is­tra­tive sys­tem was re­spon­si­ble for caus­ing this prob­lem. In this con­text, ser­vice sec­tor re­form was car­ried out to en­hance com­pet­i­tive­ness in the first decade af­ter the dawn of the 21st cen­tury. In this pe­riod, China’s ser­vice sec­tor com­pet­i­tive­ness swiftly in­creased as a re­sult of mar­ket-based re­form and in­tro­duc­tion of com­pe­ti­tion mech­a­nisms.

The 18th CPC Na­tional Congress adopted the goal of build­ing a moder­ately pros­per­ous so­ci­ety in all re­spects by 2020. To achieve this goal, China needs to com­pen­sate for its short­falls in the devel­op­ment of ed­u­ca­tion, health­care, cul­ture, and tourism, among oth­ers. Th­ese ser­vice seg­ments should live up to their full po­ten­tials in sup­port­ing pub­lic wel­fare through in­sti­tu­tional re­forms. This is an im­por­tant di­rec­tion for ser­vice sec­tor re­form in this stage.

As can be seen from pre­vi­ous analysis, ser­vice sec­tor re­form served as a good in­stru­ment in China’s re­form process to ad­dress ma­jor prob­lems fac­ing China in dif­fer­ent pe­ri­ods of time. De­spite this de­sir­able ef­fect in the early stage, this in­stru­ment pre­sented bar­ri­ers to re­forms as re­forms deep­ened. We must be aware of this pit­fall.

4. Analysis of the Model of Ser­vice Sec­tor Re­form 4.1 Re­mark­able Achieve­ments

4.1.1 Re­form un­leashed rapid growth mo­men­tum for the ser­vice sec­tor

Ac­cord­ing to the Sta­tis­ti­cal Com­mu­nique of Na­tional Eco­nomic and So­cial Devel­op­ment 2016, China’s GDP to­taled 74.41 tril­lion yuan in 2016, up 6.7% YoY. Specif­i­cally, the value-added of the pri­mary in­dus­try came in at 6, 367.1 bil­lion yuan, up 3.3% YoY; the value-added of the sec­ondary in­dus­try reached 29, 623.6 bil­lion yuan, up 6.1% YoY; and the value-added of the ter­tiary in­dus­try reached 38, 422.1 bil­lion yuan, up 7.8% YoY. The value-added of the ter­tiary in­dus­try ac­counted for 51.6%, up 1.4 per­cent­age points YoY, mak­ing 2016 a year with the high­est share of the ser­vice sec­tor in China’s his­tory. By the whole-year av­er­age ex­change rate, the val­ues of the ser­vice sec­tor ex­ceeded 5.5 tril­lion US dol­lars, rank­ing sec­ond in the world. Com­pared with 1978, the share of China’s ser­vice sec­tor in­creased by about 30 per­cent­age points, or 0.75 per­cent­age points on an an­nual av­er­age ba­sis. Among pri­mary, sec­ondary and ter­tiary in­dus­tries, the ser­vice sec­tor is the only sec­tor with a con­tin­u­ously grow­ing share of out­put value. Fol­low­ing com­pa­ra­ble price, the value-added of China’s ser­vice sec­tor rose by about 40 times over the past 38 years, up over 10% on an an­nual av­er­age ba­sis.

4.1.2 The ser­vice sec­tor has be­come a ma­jor em­ployer and so­cial sta­bi­lizer

In 2014, China’s ser­vice sec­tor em­ployed 313.64 mil­lion peo­ple, ac­count­ing for 40.6% of to­tal em­ploy­ment. The ser­vice sec­tor con­tin­ued to be the big­gest em­ployer in China. From a global per­spec­tive, the ser­vice sec­tor ac­counted for 51% of to­tal em­ploy­ment in the world in 2014, or 71% in ad­vanced economies, 44% in mid­dle-in­come coun­tries, and 50% in medium-high in­come coun­tries. Since 2013, China’s ser­vice sec­tor has cre­ated over 10 mil­lion jobs for both new en­trants in the work­force and trans­ferred la­bor from agri­cul­ture and pro­duc­tion in­dus­try. The ser­vice sec­tor not only plays a key part in cre­at­ing jobs but also serves as an in­dis­pens­able so­cial sta­bi­lizer as well.

4.1.3 Ser­vice sec­tor gain­ing a grow­ing share in the world to­tal

By global com­par­i­son, the value-added of the global ser­vice sec­tor stood at 54, 962.2 bil­lion US dol­lars in 2014, while this fig­ure came in at 4, 978.3 bil­lion for China, or 9% of the world to­tal. In the same pe­riod, China ac­counted for 13.3% of world GDP. In com­par­i­son, the share of China’s ser­vice sec­tor was still smaller than the share of China’s GDP in the world to­tal. In terms of long-term growth, China’s ser­vice sec­tor has gained re­mark­able im­prove­ment in its in­ter­na­tional sta­tus. In 1978, China’s ser­vice sec­tor ac­counted for less than 1% of the world to­tal. By 2000, this fig­ure rose to 2%. By 2014, it in­creased to 9%, up seven per­cent­age points over a pe­riod of 40 years, or an in­crease of 0.5 per­cent­age points on an an­nual av­er­age ba­sis.

4.1.4 The ser­vice sec­tor has be­come in­creas­ingly mar­ket-based and at­trac­tive to for­eign cap­i­tal

As China’s ser­vice sec­tor be­comes in­creas­ingly mar­ket-based af­ter over three decades of re­form, most ser­vices have achieved mar­ket- based pric­ing. Among mar­ket en­ti­ties, pri­vate econ­omy and in­di­vid­ual econ­omy have rep­re­sented the ma­jor­ity of ser­vice mar­ket en­ti­ties. With the bank­ing and other fi­nan­cial ser­vices to­wards fully open, the ser­vice sec­tor’s mar­ket ac­cess thresh­old has low­ered, thus in­creas­ing the level of mar­ket-based op­er­a­tion for the ser­vice sec­tor. In terms of for­eign cap­i­tal

in­flow, China sur­passed the United States in terms of ac­tual use of FDI in 2014, be­com­ing the largest FDI des­ti­na­tion in the world. In ad­di­tion to growth in FDI vol­ume, we should also rec­og­nize a struc­tural im­prove­ment. In 2011, China’s ser­vice sec­tor over­took its sec­ondary in­dus­try for the first time in terms of for­eign cap­i­tal uti­liza­tion. In 2014, the ac­tual use of for­eign cap­i­tal in the man­u­fac­tur­ing sec­tor amounted to 245.25 bil­lion yuan (39.94 bil­lion US dol­lars), down 12.3% YoY, ac­count­ing for 33.4% of na­tional to­tal. Ac­tual use of for­eign cap­i­tal in the ser­vice sec­tor amounted to 406.81 bil­lion yuan (66.24 bil­lion US dol­lars), up 12.5% YoY, ac­count­ing for 53.9% of the na­tional to­tal. China es­tab­lished 23, 778 non-fi­nan­cial for­eign-funded en­ter­prises, up 4.4% YoY, in­clud­ing 13, 925 non-fi­nan­cial for­eign-funded en­ter­prises, up 11.12%, ac­count­ing for 58.56%. In 2016, China’s ac­tual uti­liza­tion of for­eign cap­i­tal (FDI) to­taled 813.22 bil­lion yuan, up 4.1% YoY (ex­clud­ing data of bank­ing, se­cu­ri­ties and in­sur­ance ser­vices), and the ser­vice sec­tor ac­counted for 60% of for­eign cap­i­tal uti­liza­tion. This in­di­cates that the pat­tern of China’s for­eign cap­i­tal at­trac­tion has shifted from man­u­fac­tur­ing to the ser­vice sec­tor. It is fair to say that China’s for­eign cap­i­tal uti­liza­tion has en­tered an era of “ser­vice-based econ­omy” in the real sense (Xia & Ni, 2016).

4.2 Con­tin­u­ously Im­prov­ing the Model of Ser­vice Sec­tor Re­form

The model of China’s ser­vice sec­tor re­form is unique in the sense that the re­form fol­lowed no spe­cific tar­get model and phi­los­o­phy, and was in­stead used as an in­stru­ment to solve prac­ti­cal prob­lems. As a re­sult, de­spite the great achieve­ments of China’s ser­vice sec­tor re­form, many prob­lems have also been cre­ated and re­quire con­tin­u­ous im­prove­ment.

4.2.1 Re­form failed to deepen due to in­suf­fi­cient sup­port­ing poli­cies

Since China’s re­form in 1978, ser­vice sec­tor re­form was mainly car­ried out for mar­ginal in­cre­ment. Back then, ser­vice sec­tor growth was mo­ti­vated by the need to cre­ate jobs. In this con­text, the lack of ser­vice sec­tor for­mal­iza­tion re­sulted in poor com­pet­i­tive­ness of ser­vices. From a pol­icy per­spec­tive, the reg­u­la­tory sys­tem failed to be promptly cre­ated due to the in­ad­e­qua­cies of re­form. As noted to the ef­fect by Saich (2004), “on the eve of re­form in 1978, the gov­ern­ment con­trolled al­most all ser­vice sec­tor out­put. Back then, there were no in­de­pen­dent fis­cal and bank­ing sec­tors, as they merely acted as gov­ern­ment cashiers. Shift­ing to­wards fewer ad­min­is­tra­tive in­ter­ven­tions and re­duc­ing di­rect ser­vice sup­ply and man­age­ment would make gover­nance more com­pli­cated and far from be­ing eas­ier. The Chi­nese gov­ern­ment added new reg­u­la­tory roles to its ob­so­lete mo­nop­o­lis­tic func­tion, mak­ing it far more com­plex than be­fore”. While cer­tain poli­cies were is­sued to rec­og­nize the own­er­ship sys­tem af­ter the ser­vice sec­tor grew marginally, how to reg­u­late the ser­vice sec­tor as a new type of pro­duc­tive force be­came a ma­jor ques­tion fac­ing the gov­ern­ment. How­ever, the gov­ern­ment did not promptly come up with any ap­pro­pri­ate so­lu­tion to cre­ate in­sti­tu­tional sys­tems for ser­vice sec­tor devel­op­ment.

4.2.2 Ab­sence of long-term strate­gies led to mis­guided ser­vice sec­tor devel­op­ment

From a long-term per­spec­tive, ser­vice sec­tor re­form was more of­ten used as an in­stru­ment to ad­dress prac­ti­cal prob­lems with­out sys­tem­atic ar­range­ments. This led to the frag­men­ta­tion of re­form. For in­stance, the re­form was not guided by the goal of cre­at­ing a ser­vice sec­tor sys­tem, and lacked a clear un­der­stand­ing of the role of var­i­ous ser­vices in the econ­omy. As a re­sult, some crit­i­cal ser­vices are un­der­de­vel­oped, cre­at­ing po­ten­tial haz­ards to sus­tained eco­nomic devel­op­ment and se­cu­rity. In­suf­fi­cient devel­op­ment of crit­i­cal ser­vices also led to the “law­ful” di­vul­gence of na­tional macroe­co­nomic in­for­ma­tion. Re­gard­ing cor­po­rate fi­nan­cial ser­vices such as au­dit­ing and credit rat­ing, PwC Zhong Tian, Deloitte Touche Tohmatsu, Ernst & Young Hua Ming and KPMG Huazhen more or less mo­nop­o­lize China’s high-end core au­dit­ing ser­vices. U.S. credit rat­ing agen­cies con­trol two thirds of China’s credit rat­ing mar­ket. This has put China at a dis­ad­van­tage in in­ter­na­tional com­pe­ti­tion, pre­vent­ing Chi­nese firms from up­grad­ing from low-end to high-end pro­cesses in the in­dus­trial chain. It has also cre­ated ad­verse im­pacts on the ba­sic se­cu­rity of China’s crit­i­cal in­dus­tries. What is also ab­sent in China’s na­tional devel­op­ment strate­gies is an ap­proach to co­or­di­nate the ser­vice sec­tor with other in­dus­tries and ser­vice sec­tor re­form with other re­forms. For in­stance, China’s pro­ducer ser­vices are not fully linked with the man­u­fac­tur­ing sec­tor. While keep­ing in­no­va­tive and high value-added man­u­fac­tur­ing ac­tiv­i­ties on their home soil, multi­na­tional firms re­lo­cated la­bor-in­ten­sive and repet­i­tive pro­cess­ing, man­u­fac­tur­ing and assem­bly ac­tiv­i­ties to China. Some strate­gic re­sources re­lated to pro­duc­tion (espe­cially soft strate­gic re­sources like brand­ing, cul­ture, tech­nol­ogy and fi­nance) failed to be de­vel­oped do­mes­ti­cally in China. Pro­ducer ser­vices failed to boost China’s man­u­fac­tur­ing sec­tor, and so did un­der­de­vel­oped tech­nol­ogy ser­vices. Take in­no­va­tion for in­stance: China only ranked the 18th most in­no­va­tive coun­try in the world in 2015, which is in­com­pat­i­ble with China’s eco­nomic prow­ess and in­ter­na­tional sta­tus. 4.2.3 Util­i­tar­ian goals caused de­vi­a­tions in ser­vice sec­tor re­form

In the 1990s, China re­formed its ser­vice sec­tor to es­tab­lish mar­ket-based op­er­a­tions and price lib­er­al­iza­tion. But what was ab­sent in the re­form was a process to fos­ter mar­ket en­ti­ties. As a re­sult of this omis­sion, ser­vice com­pa­nies es­sen­tially be­came af­fil­i­ates to gov­ern­ment de­part­ments. In re­sponse to mar­ket-based re­forms in the 1990s and to ease their own fis­cal pres­sures, many gov­ern­ment and Party agen­cies cre­ated for-profit ser­vice busi­nesses to in­crease rev­enues. As shown by re­search lit­er­a­ture at that time, gov­ern­ment and Party agen­cies were in­creas­ingly in­volved in mar­ket-based busi­ness ac­tiv­i­ties in the 1990s, with nu­mer­ous af­fil­i­ated pub­lic in­sti­tu­tions set­ting up for-profit com­pa­nies. Ac­cord­ing to statis­tics, most of the mush­room­ing mar­ket in­ter­me­di­aries were af­fil­i­ates to gov­ern­ment agen­cies. Gov­ern­ment-af­fil­i­ated lo­gis­ti­cal de­part­ments, whose costs like rents were ac­counted for as gov­ern­ment spend­ing, com­peted un­fairly with other mar­ket play­ers. In the po­lit­i­cal en­vi­ron­ment at that time, var­i­ous eco­nomic en­ti­ties also al­lowed oth­ers to op­er­ate in their name in or­der to charge com­mis­sions.

In 1993, a string of rules was in­tro­duced to sep­a­rate gov­ern­ment agen­cies from for-profit busi­nesses, but to lit­tle avail. In the first half of 1993, com­pa­nies es­tab­lished by Party and gov­ern­ment agen­cies ac­counted for 15% of all new com­pa­nies. Dur­ing 1992-1996, for-profit en­ter­prises and in­sti­tu­tions in China’s trade union sys­tem alone in­creased from 8, 952 to 63, 100, with an­nual busi­ness turnover amount­ing to 50.1 bil­lion yuan. Busi­nesses af­fil­i­ated with gov­ern­ment and Party agen­cies rep­re­sented a form of par­a­sitic econ­omy. An­other prob­lem was tax eva­sion un­der the pro­tec­tion of pub­lic power. Al­low­ing pub­lic in­sti­tu­tions to gen­er­ate rev­enues also gave rise to a waste­ful op­er­a­tional mech­a­nism: Au­thor­i­ties will­fully cre­ated ad­di­tional sources of rev­enues to boost their own cof­fers at the ex­pense of dis­pro­por­tion­ate so­cial costs. En­cour­ag­ing gov­ern­ment agen­cies and pub­lic in­sti­tu­tions to gen­er­ate rev­enues served as a buf­fer in the tran­si­tion of the old sys­tem. It was also a byprod­uct in eas­ing gov­ern­ment fis­cal pres­sures at that time.

In ad­di­tion, many pub­lic-in­ter­est de­part­ments were al­lowed to en­gage in com­mer­cial op­er­a­tions un­der the slo­gan of mar­ket-based re­form. Back then, this ar­range­ment was also in­tended to re­duce

re­sis­tance against re­form, fis­cal pres­sures or a re­dun­dant work­force. In fact, th­ese pub­lic- in­ter­est in­sti­tu­tions rarely as­sumed risks in­de­pen­dently in mar­ket com­pe­ti­tion but en­joyed many in­dus­try priv­i­leges, in­clud­ing spe­cial per­mis­sions, in­de­pen­dent pric­ing, risk trans­fer, and tax breaks. In­stead of spurring eco­nomic ef­fi­ciency, their vi­brant devel­op­ment in­creased in­sti­tu­tional fric­tions. 4.2.4 Mis­guided pol­icy-mak­ing harmed com­pet­i­tive­ness and helped mo­nop­oly

How to fos­ter com­pet­i­tive­ness is a big ques­tion. Un­der the pres­sures of in­ter­na­tional com­pe­ti­tion, China’s ser­vice sec­tor re­form must help cre­ate a group of pow­er­ful and com­pet­i­tive mar­ket play­ers that flour­ish on China’s huge mar­ket po­ten­tials. But the de­gree of pol­icy in­te­gra­tion is in­suf­fi­cient when it comes to the fos­ter­ing of mar­ket play­ers. For in­stance, the devel­op­ment of pro­ducer ser­vices re­lies on an in­crease in the de­gree of round­about pro­duc­tion, i.e. the cap­i­tal­iza­tion of pro­duc­tion pro­cesses or pro­duc­tion struc­ture as ar­gued by Friedrich Hayek18. In this sense, the share of the man­u­fac­tur­ing sec­tor’s de­mand for pro­ducer ser­vices is sub­ject to the level of cap­i­tal in­ten­sity in the man­u­fac­tur­ing sec­tor. Greater cap­i­tal in­ten­sity of the man­u­fac­tur­ing sec­tor will lead to a greater share of de­mand for pro­ducer ser­vices. For in­stance, most of China’s cap­i­tal-in­ten­sive man­u­fac­tur­ing ac­tiv­i­ties, not least high-end equip­ment man­u­fac­tur­ing, have to rely on im­ports. In ad­di­tion, ex­ten­sive pol­icy pref­er­ences all sup­port the im­port of cap­i­tal-in­ten­sive high-tech equip­ment. Tar­iff-free treat­ment for equip­ment and ma­chin­ery im­port by pro­cess­ing trade com­pa­nies also en­cour­aged equip­ment im­port. This has also cre­ated bar­ri­ers to the devel­op­ment of pro­ducer ser­vices on China’s home soil.

In fos­ter­ing mar­ket en­ti­ties, it is nec­es­sary to open up do­mes­tic com­pe­ti­tion and in­crease mar­ket vi­brancy, rather than use ad­min­is­tra­tive mo­nop­oly to ar­ti­fi­cially cre­ate a group of big but un­com­pet­i­tive mar­ket en­ti­ties (Xia & Liu, 2017). Ser­vice mo­nop­oly still ex­ists in cer­tain sec­tors in China, such as fi­nance, rail­way and civil avi­a­tion. Cre­at­ing mar­ket en­try bar­ri­ers un­der var­i­ous ex­cuses com­pro­mises ser­vice de­liv­ery and ef­fi­ciency in th­ese ser­vices. De­spite re­forms to re­move ad­min­is­tra­tive mo­nop­oly in some ser­vices, other im­plicit re­stric­tions on com­pe­ti­tion still ex­ist. Al­though state-owned test­ing in­sti­tu­tions have been al­ready de­cou­pled from the gov­ern­ment, for in­stance, pri­vate cap­i­tal still ac­counts for a min­i­mal share in this mar­ket. More­over, gov­ern­ment au­thor­i­ties ar­ti­fi­cially cre­ate mar­ket ac­cess thresh­olds in man­u­fac­tur­ing ser­vices, re­sult­ing in poor ac­ces­si­bil­ity to th­ese ser­vices. De­spite the open­ing of mar­ket ac­cess for en­vi­ron­men­tal ser­vices, im­plicit thresh­olds still re­main. Fi­nanc­ing and leas­ing sec­tors are also sub­ject to ad­min­is­tra­tive li­cens­ing for mar­ket en­try. 4.2.5 Set­backs in mar­ket-based re­forms of pub­lic ser­vices, quasi-pub­lic ser­vices and pub­lic-in­ter­est ser­vices

In­deed, China’s ser­vice sec­tor re­form helped ad­dress ur­gent prob­lems in var­i­ous stages of its devel­op­ment. We should rec­og­nize that China’s ser­vice sec­tor re­form made tremen­dous con­tri­bu­tions to solv­ing China’s em­ploy­ment prob­lems af­ter 1978 and eas­ing fis­cal bur­dens af­ter 1990. How­ever, us­ing ser­vice sec­tor re­form as an in­stru­ment to solve prob­lems with­out hav­ing an over­all pic­ture eas­ily trapped ser­vice sec­tor re­form into a long-term dilemma. For in­stance, China’s hous­ing re­form that started since the 1990s was in­tended to re­duce the bur­den of hous­ing sub­si­dies to ur­ban res­i­dents. How­ever, ex­treme lib­er­al­iza­tion of the real es­tate mar­ket and ab­so­lute gov­ern­ment mo­nop­oly of land en­cour­aged gov­ern­ment at all lev­els to use land rev­enues as a ma­jor source of rev­enue. Re­liance on land rev­enues has be­come an in­ex­tri­ca­ble prob­lem for China to­day. The na­ture of this prob­lem is not the com­mer­cial­iza­tion of the real es­tate in­dus­try per se, but an ar­ti­fi­cially cre­ated short­age due to in­suf­fi­cient land sup­ply un­der the gov­ern­ment’s ab­so­lute mo­nop­oly. As for health re­form, the gov­ern­ment failed to cre­ate a health­care sys­tem af­ter mar­ket-based pi­lot re­form pro­grams in the 1990s. Af­ter the re­form failed, the gov­ern­ment blamed com­mer­cial­iza­tion for such fail­ure and at­tempted to do away with mar­ket-based mech­a­nisms in the health­care sec­tor al­to­gether. Go­ing back to “gov­ern­ment-run health

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