Social Sciences in China, 2021

Vol. 42, No. 1, 2021

Supply-Side Structural Reform in the Service Industry and Escaping the Middle Income Trap

(Abstract)

Zhang Jianhua and Cheng Wen

The internal consumption and production structure of the service industry that now dominates the Chinese economy needs to be optimized. Introducing supply-side structural reform to improve the in-depth integration of advanced manufacturing and the modern service industry and promoting a strong domestic market is the key to escaping the middle income trap. We use 1950-2010 data from 45 non-oil-exporting economies representing the structural evolution of the service industry worldwide to compare Asian economies that have passed through the middle income trap with Latin American counterparts that remain stuck in the trap, and thence proceed to construct a matched model that covers the consumption and production service industries and their supply of human capital, with the aim of identifying the formative mechanisms and conditions for escaping the middle income trap through upgrading the structure of the service industry. Substantially developing the production service sector, raising the supply of public services so as to cultivate the quantity and quality of human capital, and matching senior-level human capital with knowledge-intensive service industries will propel the upgrading and transformation of China’s economic structure toward high-quality development.

Keywords: production service industries, consumption service industries, middle income trap, supply-side structural reform