Download The Impacts of Political and Administrative Factors on Service

The Impacts of Political and Administrative Factors on Service
Economy in China: A Cross City Analysis
Guang Zhang (Xiamen University)
Tang Jinxu (New York University)
Abstract
The Chinese economy is characterized by relative underdevelopment of the
services sector. This paper attempts to identify political as well as economic
determinants behind the underdevelopment of the service economy in China by
explaining the variation of the services sector as a share of GDP across Chinese cities.
It is found that the variation is shaped mainly by political factors, while economic
factors play only a secondary role. Two political and administrative factors are crucial:
administrative rank of city and the city-managing-county system (CMCS). Both are
unique from an international comparative perspective. Few other countries than China
classify clearly their cities by administrative rank. Specifically, four municipalities,
Beijing, Tianjin, Shanghai, and Chongqing, are cities under the direct control of the
central government, thus having a provincial status. Over 280 cities are at the
prefecture level, and nearly 370 cities at the county level. Under the CMCS, the land
and population falling under the jurisdiction of a city at the prefecture or provincial
level include not only those of the city proper (shixiaqu), but also those of
surrounding counties and/or county-cities. The government of a city at the prefecture
level is responsible for providing various public goods from compulsory education to
health care for residents of the city proper, but not for those of surrounding counties,
who are served by their county and township governments. However, the former
government has the power to manage the counties in two important matters, among
others: appointment of county leading officials and intergovernmental fiscal relations.
With such powers, other things being equal, the government size of the city at the
prefecture or provincial level must be larger than that of the county or county-city, a
matter contributing to the enlargement of service economy. More importantly, the
government of the city at the prefecture or provincial level may use its power to
manage governmental affairs of those counties and county-cities under its jurisdiction.
It could be hypothesized that the higher administrative status a city has, and the more
territory and population of counties and county-cities it manages, the larger share of
GDP of the city proper would come from service industry.
These hypotheses are tested with a cross-city dataset and panel dataset. The
statistical results indicate that other things being equal, the higher a city ranks in
China’s administrative hierarchy, and the more people and land area it administers, the
larger proportion of the city’s GDP derive from the services sector. Market forces like
employment in the private sector and foreign direct investment have much less
explanatory power than the above two political factors. In the cross-city models, the
shares of the services sector in GDP and employment among different cities are
significantly and negatively related to their economic levels measured by per capita
GDP, indicating that the service sector in most Chinese cities fails to achieve a level
comparable with their economic developmental levels.
The findings of this study have important theoretical and policy implications.
Theoretically, it brings in, for the first time (to our best knowledge), political and
administrative factors, thus broadening our understanding of the determinants of the
expansion of service economy. Practically, it suggests that a de-emphasis, if not an
abolishment, of the CMCS, or the hierarchical city system, would do much good for
the development of service economy in China.