Developing the Services Sector as Engine of Growth for Asia: An Overview

Marcus Noland, Donghyun Park, Gemma Bolotaulo Estrada
2012 Social Science Research Network  
The maturing of the manufacturing sector in many Asian countries, combined with the relative backwardness of its services sector, has made services sector development a top priority for developing Asia. Our central objective is to broadly survey and analyze the current landscape of the region's services sector so as to assess its potential to serve as an engine for inclusive economic growth. Our analysis indicates that services are already an important source of output, growth, and jobs in the
more » ... h, and jobs in the region. However, its productivity greatly lags that of the advanced economies, which implies ample room for further growth. The impact of services sector on poverty reduction is less clear but we do find some limited evidence of a poverty reduction effect. One key challenge for all Asian countries is to improve the quality of services sector data. Overall, while services sector development is a long and challenging process, creating more competitive services markets by removing a wide range of internal and external policy distortions is vital for improving services sector productivity. As important as such policy reforms are, complementary investments in physical infrastructure and human capital will also be necessary to achieve a strong services sector. JEL Codes: L8, O14, O40, O47 IntroductIon: Why does developIng AsIA need to strengthen Its servIces sector? An integral part of the economic growth and development process is structural transformation. The structure of output and employment changes as a country grows and develops. A well-known stylized fact is that the share of agriculture in output and employment falls and the share of manufacturing and services correspondingly rises during the industrialization process. Beyond a certain point, as the manufacturing sector matures, productivity growth in manufacturing offsets employment growth, and the employment share of services continues to increase while the employment share of manufacturing begins to decline. In some highly open countries in East and Southeast Asia, comparative advantage is strongly concentrated in manufacturing, and the manufacturing share of output itself may peak and decline as the economy eventually rebalances in response to rising income and domestic demand, which has a larger services component, increases in importance. In many Asian countries, especially in East and Southeast Asia, the industrialization process has gone on for quite some time. In those countries, the scope for further growth of the manufacturing sector is increasingly limited. While export-oriented industrialization has transformed East and Southeast Asia into the factory of the world, the region's record in the services sector has been much less impressive. Asia does have some well-known success stories, such as India's emergence as the world's leading information and communications technology-business process outsourcing (ICT-BPO) exporter (see, for example, Dossani 2010). The Philippines is also emerging as a major ICT-BPO hub. However, even in those countries, some tradable services industries rather than the entire services sector are performing well. Overall, there is a general perception that in Asia the productivity of a weak services sector lags a strong, internationally competitive manufacturing sector. And in some cases, where there are strong service sectors, there are concerns that they are effectively enclaves with weak backwards and forwards linkages to the rest of the economy. This matters considerably for economic growth since low productivity growth in the services sector can retard economy-wide productivity growth. The growing tradability of services and consequent emergence of global supply chains in services, for example in health care, presents new growth opportunities for a region which is heavily involved in the global supply chain in manufacturing. There are a number of inter-related factors which further strengthen the case for a more vibrant Asian services sector at this point in time. For one, while Asia has grown faster than the rest of the world for decades, the global financial and economic crisis of 2008-09 has cast a dark cloud over its future growth prospects. The crisis originated in the advanced economies and hit those economies harder than the developing countries. As a result, the post-crisis recovery has been noticeably weaker in the advanced economies. Furthermore, in the euro area, recovery has been dealt another big blow by the ongoing sovereign debt crisis. The bottom line is that advanced economies are likely to experience a slowdown relative to the pre-global crisis period. This has significant adverse ramifications for Asia's export and 1. It is true that technological progress, for example in information and communications technology (ICT), is making services more tradable, but overall services remain less tradable than goods.
doi:10.2139/ssrn.2159442 fatcat:vhwfjtbogbbfjjuuupy4v2thma