Xia Jiechang: Deepening Reform of the Service Sector Must First Clarify Government Responsibilities
Created On : 2018-08-14    Views : 63

The service sector has become the main driving force of China's economic development. Deepening service sector reform is a key task of China's economic system reform. Li Yongjian and Xia Jiechang, research fellows of the National Academy of Economic Strategy, CASS and Hu Donglan from School of Economics of Hefei University of Technology, recently pointed out in an article published in Public Finance Research that in the 1990s, the market-oriented reform of China's service sector emphasized the role of service sector reform in alleviating fiscal pressure, but failed to clarify government responsibilities, and maintained administrative monopoly for maximizing revenue. As a result, service sector reform failed to fully achieve its objectives.

071000178140 (1).jpg

According to the article, the first problem to be solved in deepening service sector reform is to clarify the government responsibilities. In the 1990s, service sector reform was carried out against the background of the compensatory growth of the service sector, increasing fiscal pressure, increasingly diversified consumer demand, and deepening understanding of the service sector.

At that time, the reform proceeded along two main lines:

The first line was the market-oriented reform of industries funded by national finance (such as housing, education, and healthcare). These industries were originally funded by the government, which resulted in slow supply growth and heavy fiscal burden. The reform methodology was to rapidly increase supply with the help of market forces, so as to meet the needs of the people and shake off fiscal burden.

The second line was to actively advance price reform. During this period, the government conducted service price adjustment and market-oriented service sector reform in sectors such as railway, healthcare, and housing, which contributed to rapid rise in the price of service industries. For example, in terms of transportation, because of the marketization of price and the diversification of investment subjects, the construction of expressways developed rapidly without increase of the corresponding financial input, and the goal of “building 35,000km ‘five vertical and seven horizontal’ national highways”, as set forth in National Trunk Line Construction Planning, was realized and exceeded ahead of time.

Through the reform, the average growth rate of the service sector was far higher than that of GDP, and the proportion of the added value of the service sector increased by 8 percentage points throughout the 1990s, which became one of the fastest rising periods since the reform and opening-up. With the rapid growth, the service sector became the main channel of current new employment. Its employment population surpassed the secondary industry, making the service sector the second largest employment sector. Along with the continuous deepening of the reform, the service ability was greatly improved, solving the problem of shortage of some services in people's lives.

However, in some service industries, government departments had a large number of tangible and intangible assets (e.g. education, healthcare), controlled very important basic elements (e.g. real estate), and owned the licensing right, which prevented the goals of service sector reform from being fully realized.

For example, the objectives of housing reform were identified as "improving residents' housing conditions and developing the real estate industry". According to the actual implementation effect, however, the core concept of housing reform practice in the 1990s was still to reduce the financial pressure on the government in housing expenditure through housing marketization and increase fiscal revenue through the monopoly of the land market.

According to the article, the service sector reform in 1990s gave us four lessons and enlightenments.

First, clarifying government responsibilities is a prerequisite of service sector reform. Under financial pressure, there is ample temptation to induce the government to turn its services that should have been provided free of charge into fee-based services. This requires the government to be decisive in the reform process and resist beneficial temptation.

For instance, housing reform and healthcare reform were hindered because the government found that it could obtain huge benefits through so-called reforms in the reform process, and shifted the short-term objective of relieving financial pressure into a long-term objective, which led to alienation of the reform path and obstruction of the reform.

Second, correct marketization is a long-term mechanism for relieving fiscal pressure and strengthening government responsibilities. The marketization of the service sector includes: 1) establishment of a market-oriented supply system by introducing market players and improving the market competition structure; 2) introducing a competition mechanism by increasing market players, so as to establish a market-oriented price formation mechanism; and 3) establishing a market-oriented government intervention mechanism, such as government subsidy and government supervision.

The article stresses that, "The understanding of marketization is limited to 'abandoning government expenditure responsibility' and 'opening price control’. This is not comprehensive; what's more, many so-called 'market-oriented reforms’ only turn free services into fee-based services, or turn services provided by the government into the services monopolized by the market under the support of the administrative power in the name of marketization. This so-called 'market-oriented reform' is very harmful.”

For instance, in the field of education, the government must actively support new market players, and equally treat public institutions and other institutions in terms of government subsidy; subsidize consumers by issuing education vouchers; establish an independent education quality evaluation mechanism; and discontinue pure "pseudo market-oriented" reforms characterized by "relaxed price control, administrative market monopoly, and high charge”.

Third, dealing with government and market relations is the key to reform. In the 1990s, many documents of the service sector reform explicitly or implicitly allowed the government, government agencies, and public institutions to operate a large number of tertiary industry entities and public welfare institutions to conduct market-oriented operation in the name of reform, resulting in the government's power to intervene in the market in the name of reform. This not only distorts the market competition mechanism, but also builds a channel for the power marketization, which leads to a “wasteful” operation mechanism.

Fourth, dealing with the relationship between long-term reform and short-term reform is the guarantee of reform. Under financial pressure, the pursuit of short-term goals may help form a very strong structure of vested interests, but prevent further reform. This is an area of special vigilance for future reforms.

(The author is the Postgraduate Supervisor of Shanghai Academy)