China needs a "WTO moment" for its service industry and small and medium-sized enterprises, Dominic Barton, global managing director of management consultancy McKinsey & Co suggested.
"We need a WTO for SMEs and the service industry. But unlike the WTO, I do not think it will come externally. Instead, it will come internally," said the author of a book about China.
China's accession into the World Trade Organization in 2001 is widely believed to have forced many domestic regulatory changes and led the country into becoming more integrated into the global economy, which eventually contributed to the country's double-digit growth in the 2000s.
"We should talk about how to double the size of the service industry, rather than talking about doubling the GDP and GDP per capita," said Barton, referring to the new leadership's goal of doubling China's GDP by 2020.
He said during his stay in China, he noticed the listings book, known as The Yellow Pages, in his hotel room was much thinner compared with the one in Chicago. Because The Yellow Pages mainly lists service jobs, it indicated the country's service industry is underdeveloped.
Barton insisted that SMEs are more likely to be the originators of innovation so boosting their prosperity is crucial to the country's strategy to transform itself into an "innovation-driven" economy.
"The challenge is the economy is still largely State-owned-enterprise-oriented. But it's very hard for big companies to innovate. Usually innovations come from small companies, or what we call 'attackers'. Look at Google or Paypal. They were attackers when they were small institutions," he said.
"Another component of innovation, although controversial, is the complete freedom to do whatever you want," he said. "Of course, there are always norms. But I argue that in China the conceived reality is people are put in a small box, while in the US the box is larger," he added.
Barton said in China a lot of college graduate jobs are related to SOEs, which are not very entrepreneurial. By comparison, countries at a similar development level, such as Turkey, are much more entrepreneurial.
"Turkey is one of the most entrepreneurial societies on Earth, where SMEs have a much bigger share of the economy. When their students leave college, everyone want to be an entrepreneur," he said.
A recent report by McKinsey warned that by 2020 there will be a shortage of 8 million university-educated workers and a shortage of 16 million in vocationally trained workers. If China does not bridge the gap by 2020, the opportunity cost could be as much as $250 billion - about 2.3 percent of GDP then.
The sectors that will most need skilled workers will be services and advanced manufacturing, according to the report. This means that if China cannot produce enough qualified talented people, the industries that will suffer most will be services and advanced manufacturing, the very industries that the country aims to develop.
Barton said that in order to address the issue, efforts should be made within the education system and that a school-industry-community ecosystem should be established.
"Today a lot of universities are producing students who are not qualified for jobs in areas such as healthcare or big data analysis. Sometimes students are overqualified or they may be qualified but not in fields that meet employers' requirements," Barton said.
He said the country's education system, which routinely emphasizes learning by rote and high-stakes exam-taking, does not foster the mental agility, innovative flair and problem-solving abilities the 21st-century economy needs, which is why 16.4 percent of Chinese college graduates could not find jobs, while the national unemployment rate is less than 5 percent.
He also called for an ecosystem in which universities, industries and communities can collaborate. In this ecosystem, universities' research work should correspond to industry's needs and students should be given practical training.
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