On one level, that made sense. Capital-labor substitution is at the heart of modern productivity strategies for manufacturing-based economies. But it left China in a deepening hole, as increasingly deficient in jobs per unit of output, it needed more units of output to absorb its surplus labor. Ultimately, that became more of a problem than a solution. The old manufacturing model, which fueled an unprecedented 20-fold increase in per capita income relative to the early 1990s, also sowed the seeds of excessive resource consumption and environmental degradation.
Services-led growth is, in many ways, the antidote to the "unstable, unbalanced, uncoordinated, and ultimately unsustainable" growth model. Services offer more than just a labor-intensive growth path. Compared to manufacturing, they have much smaller resource and carbon footprints. A services-led model provides China with an environmentally friendlier and ultimately more sustainable economic structure.
It is premature, of course, to conclude that a services-led transformation to slower growth is now at hand. The latest data hint at such a possibility, with the service sector expanding at what would be an annual rate of an 8.3 percent in the first quarter of this year - the third consecutive quarter of acceleration and a half-percentage point faster than the 7.8 percent first-quarter gain recorded by manufacturing and construction.
Not surprisingly, China skeptics are putting a different spin on the latest growth numbers. Fears of a shadow-bank-induced credit bubble now top the list of concerns, reinforcing longstanding concerns that China may succumb to the dreaded "middle-income trap" - a sustained growth slowdown that has ensnared most high-growth emerging economies at the juncture that China has now reached.
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