The Effects of the Shift to the Service Economy on Inter-Industry Linkages in China

The service industries of China have grown continuously with the development of the Chinese economy as a whole since the adoption of the reform and opening up policies of 1978. The share of service industries of the GDP increased by more than double, from 24.6 percent in 1978 to 52.2 percent in 2018, and exceeded the share of manufacturing industries in 2012. The share of the service industries of total employment also increased from 12.2 percent to 46.3 percent during the same period. However, despite the rise of service industries’ share of the GDP and total employment, the comparison with advanced countries or the other BRICS countries shows that the service orientation of the Chinese economy still remains at a low level. The shift to the service economy brings out various qualitative and structural changes within industries via changes in the interrelationship between services and other sectors - especially manufacturing - in addition to increasing the service industries’ share of value-added or total employment. The industrial structure of a country usually shifts its weight first from the primary industries to manufacturing, and then from manufacturing to service industries. Thus, the inter-industry linkages for industry as a whole tend to strengthen, up to a certain level, but thereafter begin to weaken. It is known that, in general, the production inducement effect of manufacturing is stronger than that of the primary or service industries. Therefore, there is a possibility that the production inducement effect of the whole industry will strengthen as industrialization proceeds but then weaken gradually as income levels rise and the role of services as intermediate goods expands with the shift to the service economy.In this study, I analyze how the shift to the service economy in China, accelerated in the 2000s, has brought structural changes to Chinese industries via the change of inter-industry linkages. I calculate the aggregate linkage measure which shows the effects of shifting to the service economy on the strength of the production inducement effect of the whole industry, and examine the role of imported intermediate inputs in enhancing the level of aggregate linkages. I also analyze the relationship between the degree of the shift to the service economy and the level of aggregate linkages by carrying out a cross-country comparison.The data for the analysis are the Input-Output Database (2018 edition) by OECD, which consists of 64 countries (36 OECD countries plus 28 other countries) and is based on current prices