Video: Gauging economic change in China

As China's economy has grown, so have its service and private sectors. It is yet unknown if economic reforms-moving to lighter, greener industry-will take hold.

Interview Transcript

What is the scale of change?

Most of us are aware of the enormous scale of change in China's economy over the last three decades. For example, average of 10% growth during this time, the economy now being about forty times larger than it was in 1978 when reform and opening began. Another example would be China's engagement with the world economically. So in the beginning, in 1978, accounting for about 0% of global FDI inflows and now around 10%. These are parts of the narrative that we're all broadly familiar with, I'd say. But one thing that is changing that hasn't gotten as much attention is the rise of the service sector in China. So services were perhaps somewhat neglected under the planned economy and by 1994 had actually risen to become the largest share of employment. And by 2013 the largest share of both real growth and output. So a lot of us need to recalibrate the way we look at China because there has of course been a traditional focus on both heavy and light industry and increasingly that's going to need to be a focus on services.

What has fueled the change?

Given these enormous changes over the last three decades, an actual question is "well why?" Why has China been so successful economically? If we look at the data in these long term trends, it's quite clear that one of the largest factors have been changes in productivity and those have been fueled primarily by changes in ownership within the economy. So while state-owned enterprises or other state entities once accounted for close to 100% of employment, revenues, and just any measure of economic activity essentially, that's fallen now, in 2013, to around 20-30% of economic activity, depending on how you measure it. This change has been quite important because of course state-owned enterprises within the Chinese economy generally are about a third to a fifth as efficient as their private sector counterparts by sector. So the big story has really been productivity growth and the reason for the productivity growth is not necessarily because of highly proactive economic policies but rather opening policies that allow the private sector to come in and do what it does best.

How is the current economic reform progressing?

In the fall of 2013, China's central leadership issued a list of reform targets to be accomplished sometime over the next 7-10 years. And the reason that these were issued are really to reflect that China needs to continue to change just as it has changed in the past. To shift more towards, for example, light industry from heavy industry; more towards services as a key driver of growth and employment; and towards environmentally sustainable and consumer friendly practices in general. Now it's been about a year since that's happened and while the list is very ambitious, there's been quite a bit of skepticism by outsiders about sort of what can really be achieved or what will be achieved given that we've seen sort of limited movement in the time since then. However if we look at reform in the past in China, after these very successful periods -- the early '80s and the mid '90s -- when there was a lot of change both policy-wise and non-policy-wise within the economy, it should be apparent that it might be a bit too early to call failure on China's reform program. We do have some very promising signs. There's policy architecture being set up in the place of, for example, budget change, environmental law, expectations for financial markets reform sometime in the next two years. So at the moment, the pace is consistent with an ambitious reform program and really what we're going to have to do is be patient for the next year or two to see if there's really going to be substance that follows.

Brian Jackson, Senior Economist, China, IHS Economics