——Analysis Based on the Input & Output Table ofChina from 1987 to 2002

By Li Shantong, Department of Development Strategy and Regional Economy of DRC & Gao Chuansheng (Tsinghua University)

Research Report 034, 2007

Producer services have become the focus of current industrial international competition and major value-added and profit point in the global value chains (GVC). The enhancement of their development will be the important orientation for facilitating China's economy transition and upgrading. On the one hand, some problems China's economy has encountered, such as the change of extensive growth and lack of key technology and world-famous brands in industry, have to be solved through the development and upgrading of producer services; on the other hand, the current economy development pattern dominated by manufacturing industry without the support of a complete and functional producer services system, has been challenged by difficulties regarding the transition and upgrading. Unfortunately, relevant studies remain superficial due to the lack of standard statistics. In this context, based on the input & output table of China from 1987 to 2002, this article defines the specific connotation of producer services in China, evaluates its development level and actual growth rate, and further analyzes its internal structure, in an attempt to provide basic principles to boost the transition and upgrading of China's economy.

I. Connotation and Approach of Producer Services and Two Forms

1. Connotation of producer services

Producer services (herein after mentioned as PS), opposite to consumer services that directly satisfy the ultimate consumption needs, are a category of services based on service functions¹, referring to "those services allocated for other commodity producers and service providers as the intermediate input" (Grubel &Walker, 1989), satisfying their needs for the intermediate use of services.

2. Two different approaches of producer services

Synthesizing research results of domestic and foreign scholars, we divide producer services into two different approaches: (1) in a narrow sense, where the term "producer services" are most frequently used, it refers to those services provided for the primary, secondary and tertiary industries as an intermediate input, namely, the "producers" that PS aimed at refer to all industries, including service industry itself. The PS data defined in this sense can be obtained from the first quadrant of the input & output diagram, namely, the horizontal part used for various industries as an intermediate input; (2) in a broad sense, all services not dedicated to satisfy the ultimate consumption needs of consumers are producer services, where the "producers" being satisfied include not only all industries, but also government, non-governmental organizations and foreign bodies. The PS data in this sense has to be obtained from the first and second quadrant of the input & output diagram, namely, the horizontal difference of the total output of service industry minus the ultimate consumption part of residents.

3. Two forms of producer services

Furthermore, there are two forms of producer services: one is the non-independent form that has not been marketized but interiorized in industries or (governmental or non-governmental) bodies, the other is the independent form that has undergone the process of externalization and marketization, namely, the PS industry, or the aggregation of market-based PS providers. Both forms have the "producer services" as the essential content.

II. The Definition of Producer Services Industry in China

Scholars and government departments disagree on how to define producer services. Yet we still have to gain an insight on what should be included in the PS industry in China. We often meet two problems when defining the scope of producer services: 1. With regard to industry, a large majority of industries provide consumer services and producer services at the same time, raising the confusion that which category they belong to; and 2. Some Chinese scholars simply copy the definition made by their foreign counterparts. For example, typical producer services outside China generally include financing, insurance, real estate and business services (herein after mentioned as FIRE). Some domestic scholars also regard real estate as one of the producer services, which contradicts the unique reality of China, where real estate mainly satisfies the habitation needs of residents currently, rather than the producer needs for business offices and factories in developed countries. Furthermore, real estate in developed countries is mainly used for rent, accounting for a high percentage of investment needs; while renting house to live has not been the mainstream in China. Further evidences will be offered in the following analysis.

1. The way to define PS industry

To define the connotation of producer services is the first step to decide whether a trade belongs to PS industry or not. If the provision of services is to satisfy the commodity and service producers' intermediate needs for services, it could fall into the category of PS industry. Scientific research and different kinds of technical services are examples. If relevant data fail to support this, they must be wrong. Secondly, if a trade provides both producer and consumer services, it is necessary to judge which one is predominant. In this article, two indices are introduced, namely "the intermediate use rate" and "the non-resident ultimate consumption rate", and the analysis of input/output is also employed for this purpose.

The intermediate use rate means the percentage taken up by the output invested on the intermediate use of the primary, secondary and tertiary industries among the total output of all industries. The non-resident ultimate consumption rate refers to the percentage taken up by the output used for the ultimate consumption of those other than residents. To sum up the foregoing, "the intermediate use rate" is appropriate for the definition of the PS industry in its narrow sense, while "the non-resident ultimate consumption rate" is useful to define that in a broad sense. The indices average is adopted as the elaborate criterion – the PS industry has an index higher than the average, and the consumer services industry is below the average. Please see Table 1 for detailed figures about China.

2. "The intermediate use rate" and China's PS industry in its narrow sense

Defined by "the intermediate use rate", the PS industry output takes up 48.87% of service industries in China. That is to say, 48.87% of the output of service industries is employed for the intermediate input of three industries. Among them, most industries have an intermediate use rate higher than the average. Exceptions are limited to those industries with obvious consumer features, such as urban public transportation, restaurants, real estate, tourism, resident services and other services, education, sanitation, social security and welfare, culture, arts, and broadcasting, movies and TV, sports, and entertainment. The real estate industry has an intermediate use rate as low as 28.23%, offering convincing evidence to the argument mentioned above.

Nevertheless, for the reasons like data gathering and the current situation of the expenditure subject in China, the intermediate use rates calculated for some industries, such as scientific research, professional technology and other technical services, management of environmental resources and public establishment, public management and social organization and etc., are not suitable to decide which category they should belong to, thus "the non-resident ultimate consumption rate" is helpful.

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* A phase research result of "Interactive Relationship between Producer Services and Manufacturing Upgrading in China", a major project of CIDEG2006 of Tsinghua University, with Researcher Li Shantong in charge of the project.

This function-based classification system was invented by Greenfield in 1966 and then developed respectively by Browning & Singelmann in 1975 and Singelmann in 1978.