Abstract

There are some general and regular facts in economic growth. In addition to the famous Kaldor’s facts (Kaldor, 1957), economists have also observed the ubiquitous phenomenon of structural transformation in economic growth. Structural transformation refers to the reallocation of economic activity across the broad sectors of agriculture, industry and services. Income levels and economic structure are highly related. The economic activity of low-income countries is concentrated in the agricultural sector and that of high-income countries concentrated in the services, while middle-income countries see their economic activity shifting from the agricultural sector to the industrial sector. The process of a low-income country developing into a rich one is also the process of structural transformation from agriculture-based to industry-based and then to services-based.

China’s rapid economic growth over the past 30 years is a typical process from relying on agriculture to the booming of industry. Since the global financial crisis in 2008, China’s economic growth has shown a declining trend, and in particular, its industrial growth has lagged behind GDP growth. Several questions hence arise: (1) Whether China’s economy is experiencing the structural transformation from industry to services as high-income countries did, or whether the eclipsed industrial growth over the past few years is only temporary? (2) Given the timing of structural transformation and economic slowdown, is there a causal relationship between the two, or is it a mere coincidence? (3) If China’s economy economy has entered a typical period of structural transformation, what challenges will it face in the future, and what measures should it take to meet the challenges?

Through reviewing the international experience and theory of structural transformation and analyzing the status quo of China, this article comes to the following conclusions. (1) After crossing a certain threshold of per capita income, an economy will experience structural transformation from industry to services, driven by preferences for capital-intensive services and the higher productivity of industry compared to services. (2) Evidence on per capita income, value added, and share in employment and consumption shows that China’s economy is now undergoing a typical industry-to-services structural transformation, and the 2008-2010 period marked the turning point. (3) Structural transformation under market forces will affect growth rate amid changes in aggregate productivity, capital accumulation and labor time, among others. In addition, policies and measures that run counter to economic transformation will aggravate the distortion in resource allocation, undermine total factor productivity, and exacerbate economic downturn. (4) From the perspective of maintaining high economic growth, the key to coping with the structural transformation pressure is to unleash the development potential of the capital-intensive services sector, which depends on the adjustments to policies concerning the services sector and the improvements in public services. The development of capital-intensive services and the upgrading of manufacturing are complementary to each other. (5) The decisive factor underlying policy adjustments and improvements in public services is slow variable: the transformation of government and public values from materialism to post-materialism and the subsequent redistribution of political rights. If the government can make a timely shift toward post-materialism, it can form synergy with the market to maintain high growth momentum and achieve structural transformation.

This paper includes five sections. The first section discusses, based on international experience, whether there is a universal income threshold of structural transformation and what forces drive structural transformation; the second analyzes whether China is experiencing industry-to-services structural transformation; the third probes into what challenges structural transformation will bring to China’s economic growth; the fourth sheds light on the countermeasures; and the fifth part is conclusions. Given that international research on structural transformation is abundant but there are few studies on China’s structural transformation, the first section mainly introduces others studies, and the other sections are just preliminary research with a view to attracting more academic attention to this issue.