Service Sector as an Engine of Asian Growth

Sean Crowley: Hello and welcome, I'm Sean Crowley from ADB's Department of External Relations. I'm joined today by ADB Principal Economist Donghyun Park. He's here to answer questions on the Asian Development Outlook 2012 Update theme chapter: Services and Asia's Future Growth.

Donghyun Park: Hi Sean, thanks for organizing the live chat and good afternoon to all. Thanks for joining us, and please feel free to ask me any questions about Asia's services sector development.

Sean Crowley: Perhaps we can kick this live chat off by me asking why the emerging services sector is necessary for Asia to continue its current growth trajectory?

Donghyun Park: There are a number of reasons so let me explain them one by one.

Donghyun Park: For one, there is a slowdown in the advanced economies - the US, EU and Japan - and it is unlikely they will fully recover their momentum in the short run. This spells trouble for the region's manufactured exports, so there is a need to rebalance growth toward domestic demand.

Donghyun Park: Since services are more geared toward domestic demand than goods, this means there is a need to promote the development of the services sector.

Donghyun Park: All the more so since in some parts of Asia, especially East Asia, the services sector has lagged the manufacturing sector.

Rina Chandran: Hi, this is Rina Chandran at Bloomberg News. The report said services' contribution to growth has been higher in south Asia - why is that? Higher literacy? Better infrastructure? Policy? and do you see these gains being sustained? Thanks.

Donghyun Park: Actually, there are a number of reasons for why services' contribution to growth has been higher in South Asia than in other parts of Asia, but some of these reflect weaknesses rather than strengths.

Donghyun Park: For example, the failure of India to develop a vibrant manufacturing sector, an East Asia-type manufacturing sector if you will, has created an ample workforce for the country's ICT-BPO services sector.

Donghyun Park: There are also strengths of course. For example, India's large pool of scientists and engineers, and its linguistic advantage as an English speaking country.

Donghyun Park: Growing tradability of services, now that's another powerful motivation for why Asia needs a stronger services sector.

Donghyun Park: Technological progress - for example, ICT - has rendered many types of services much more tradable than before.

Donghyun Park: Countries such as India and Philippines have been able to take advantage of and leverage new opportunities arising out of the growing tradability of services.

Donghyun Park: I don't want to emphasize only the export opportunities though. There are important ways in which importing services can bring huge benefits for Asia as well.

Donghyun Park: For example, business services, which have large spillover effects for the whole economy, is an area in which advanced economies such as US holds a comparative advantage.

Donghyun Park: In the long term, Asia can invest in its own business services and become more competitive. But in the short term, why not import those business services and benefit from the economy-wide productivity improvements they bring?

Sean Crowley: You mentioned the ICT-BPO sector. This is a growth area here in the Philippines. But how large is this sector, and is it making a meaningful contribution to job creation and poverty reduction?

Donghyun Park: Indeed you are absolutely right. The ICT-BPO sector is growing rapidly in the Philippines, and already making a big contribution to the economy and to employment.

Donghyun Park: At the same time, we must be careful not to overstate or exaggerate its potential contribution to the Filipino economy.

Donghyun Park: While exports of ICT-BPO services - e.g. call centers - have been growing very rapidly, there is only limited linkage with the rest of the economy.

Sean Crowley: Please explain what you mean by limited linkages to the rest of the economy.

Donghyun Park: To a large extent, the limited linkages reflect the underdevelopment of other sectors, especially manufacturing.

Donghyun Park: This is also the case in India.

Donghyun Park: Well, information and communication is a universally used input of production.

Donghyun Park: Therefore, if there is a dynamic manufacturing sector, lower information and communications costs would greatly benefit the manufacturing firms.

Ana Roa from Inquirer: Is the growth in the Philippines' service sector enough to generate the needed employment and reduce poverty levels significantly in the country? What should be the priority to achieve inclusive growth in the country?

Donghyun Park: I do not want to downplay the contribution of services to the Philippines's growth or economic performance.

Donghyun Park: But at the same, we have to be realistic. Up to now, in the Philippines as in India, the ICT-BPO services sector remains largely enclave sectors with limited linkages.

Donghyun Park: To answer your question directly, no, the services sector is not enough to generate the needed employment and poverty reduction.

Donghyun Park: The Philippines, and also India by the way, need well-balanced growth and development.

Donghyun Park: with dynamic services AND manufacturing sectors, reinforcing each other.

Donghyun Park: and there are a lot of synergies between manufacturing and services, we must not forget.

Donghyun Park: I also want to make another important point

Donghyun Park: about why services matter, and matter a lot, for Asia's future growth

Donghyun Park: This motivation has everything to do with the central mandate of the Asian Development Bank, which is to

Donghyun Park: reduce poverty in the Asia-Pacific region

Donghyun Park: Our econometric analysis suggests that services sector growth can help to reduce poverty

Donghyun Park: The intuition is quite straightforward

Shishir Belbase from ADB: What about the fair distribution of wealth? I also see this as a major hindrance to poverty reduction in this region despite its growth.

Donghyun Park: Services sector growth can reduce poverty, which is beneficial for reducing inequality, but more than that.

Donghyun Park: if you think about it, capital tends to be concentrated in relatively few hands

Donghyun Park: the wealthy

Donghyun Park: but everybody can work

Donghyun Park: so labor-intensive growth is more beneficial for poverty and inequality reduction than capital-intensive growth

Sean Crowley: Is it dangerous to suggest emerging Asian economies can by-pass industrial development and move straight to a services-based economy?

Donghyun Park: Yes, that kind of thinking is not only misguided, but downright dangerous.

Donghyun Park: The ICT-BPO services boom has taken place in precisely those countries - India and Philippines - which have missed out on Asia's manufacturing boom.

Donghyun Park: Poor infrastructure and other failures prevented export-oriented manufacturing to take root in those countries.

Donghyun Park: But there is clearly a limit to how much and how far services alone can lift up the economy.

Donghyun Park: Again, for larger economies such as India and Philippines, there are no two ways about it.

Donghyun Park: They need a vibrant manufacturing sector, and a vibrant services sector, feeding off each other, and reinforcing each other.

Shishir Belbase from ADB: But, does a country really need to go through a manufacturing boom in this knowledge based day and age?

Donghyun Park: The answer is still yes because high-tech manufacturing is knowledge-based and skill-intensive.

Donghyun Park: So a knowledge economy applies as much to manufacturing and services.

Sean Crowley: You talk about the services sector promoting inclusive growth, but how do marginal, low-wage jobs actually do this?

Donghyun Park: Good question, but we do have to take a step back and look at the alternative to a marginal, low-wage job, which is usually no jobs and hence even more deprivation and human suffering.

Donghyun Park: In fact, for many migrants from countryside to Asian cities, such marginal services jobs are often the stepping stone to a better, richer, more secure future.

Donghyun Park: Having said that, this all relates to the central message of this year's ADO Update theme chapter, which is the need to transform the region's services sector.

Donghyun Park: from a low-wage, low-productivity services sector to a high-wage, high-productivity services sector

Donghyun Park: This will create a lot more high-productivity, high-wage services jobs, which, in turn, would even further magnify the contribution of services to inclusive growth in Asia.

Sean Crowley: Do any more of our live readers have questions they'd like to pitch?

Sean Crowley: Is growth in the services sector good for women’s employment?

Donghyun Park: Yes, services sector is definitely good for female employment. Intuitively, services jobs tend to be physically less exerting than manufacturing jobs.

Migo-Thailand: I think free labor movement would help to reduce poverty and develop services sector, there would be a lot of work for English-speaking workers in Thailand for example, but now the regulation for visas are too strict.

Donghyun Park: And also services jobs tend to be more flexible, in terms of working hours and work-from-home arrangement, so yes, they are generally good for female employment

Donghyun Park: I completely agree with Migo. In fact, this is a good example of how excessive regulations are strangling the growth of services throughout Asia.

Donghyun Park: In fact, regulations and restrictions protect monopolies from domestic and foreign competitors.

Donghyun Park: Thereby stifling competition and innovation in services industries. In most Asian countries, including PRC and India, labor productivity is 10% or less of rich-country levels. A big reason is excessive regulation and restriction of services industries.

Donghyun Park: So those regulations and restrictions have to be loosened up, and loosened up a lot, if Asian services sectors are to become more competitive, efficient and productive.

Sean Crowley: What proportion of Asia’s economy does the services sector currently occupy?

Donghyun Park: In 2010, services accounted for 48.5%, or almost one half, of developing Asia's GDP.

Donghyun Park: In PRC, it is 43% and in India, it is 55%. So services already play a big role in Asian economies.

Donghyun Park: Furthermore, services account for 34% of developing Asia's employment. In short, services account for a large share of jobs and output, and also growth by the way.

Donghyun Park: In PRC, services accounted for over 40% of economic growth in 2000-2010 and in India, even higher, at around two-thirds of growth.

Donghyun Park: So the problem is not so much whether services can play a big role in Asian economies. The sector is already playing a huge role. Rather the central question is --- how can Asian countries lift up the very low productivity of their services industries --- that is the real question.

Sean Crowley: What are the main challenges to the sector’s development in Asia?

Donghyun Park: I already talked about the No.1, heads and shoulders above the rest problem --- excessive government regulation and restriction which protect vested interests --- public and private monopolies --- and harm the broader public interest. But there are two other challenges which loom large.

Donghyun Park: One is human capital. For modern, high value added services, a key ingredient is human capital. It is true that Asia has come a long way in raising its average education level through massive investments in education.

Donghyun Park: But the region still suffers from shortage of high-level skills - e.g. pilots, bankers, and industrial designers - which are a core ingredient of modern services.

Mahesh: Does encouraging services based industry hinder the growth of agriculture based economy?

Donghyun Park: [to earlier question] What is needed is education reform, especially at the university level, which will equip graduates with good skills and high human capital, rather than just a piece of paper at the end of 4 years.

Donghyun Park: [to earlier question] Ramping up the skill base and human capital in this way will help Asia rapidly grow its modern services sector.

Donghyun Park: I don't think that services hinder agriculture in any significant way.

Donghyun Park: Instead, the growth of services is a natural outcome of structural change which happens in any economy.

Donghyun Park: Farmers move out from the countryside to work at factories and shops. This is the structural change from agriculture to manufacturing and services that takes place in any economy, including Asian economies. Indeed the process of structural change, like everything else, happens at a quicker pace in Asia.

Donghyun Park: Some successful Asian industrializers, such as Korea, are at a stage in their structural change process, where they have begun to move into the post-industrial phase, during which phase manufacturing begins to decline but services continues to grow. Of course, agriculture declines throughout.

McRhon Banderlipe I, NUS: Dear Mr. Park, With regards to the rise of service sectors in Asia (I'm very sorry I came in late into this discussion), what is your position of enforcing regulatory mechanisms and if regulation is not viable, what specific measures can these countries use to protect the interests of their labor force?

Mahesh: Yeah..I agree with your point..I see manpower shortage in agriculture industry..as they tend to migrate towards cities for other source of income..this is hindering the growth of agriculture industry...as agriculture used to be main source of economy especially for Asia..are we not moving away from that?

Donghyun Park: Unfortunately, labor protection tends to be weak in urban informal sectors.

Donghyun Park: But at the same time, a lot of jobs in these sectors are services sector jobs. As I said, in this way, services sector contributes to poverty reduction and more inclusive growth.

Donghyun Park: And, as the services sector transforms itself toward a more dynamic, productive sector which generates high-quality, high-wage jobs, it will make an even bigger contribution to inclusive growth.

Donghyun Park: Realistically, there are tough trade-offs between stronger labor protection and more employment --- this is true not just for Asia but for any country --- and how this trade-off is resolved will ultimately depend on country-specific factors and circumstances.

Sean Crowley: Can you give a specific example of deregulation promoting service sector growth?

Donghyun Park: Yes, the example comes from the market for telephone services - telephony, if you will - in India.

Donghyun Park: For fixed telephone lines, which is heavily regulated in India, the penetration rate in India falls far short of PRChina.

Donghyun Park: But for the mobile telephones, the penetration rate - i.e. lines per 100 people - is more or less the same in India and PRChina. You guessed it --- the mobile telephone market is far less regulated than the fixed-line telephone market.

Donghyun Park: Just one example, but a very clear example I think, of the pernicious effect of excessive government regulation and restrictions on services markets.

Sean Crowley: You say in the report that lack of qualified staff is hampering high value services sector growth, what’s the best way of tackling this deficiency?

Donghyun Park: Education reform, especially at the tertiary level, holds the key here. One obvious policy direction is to encourage greater private sector participation in the university market. This promotes competition, which is always a good thing.

Donghyun Park: But there are some options even without private sector participation.

Donghyun Park: For example, earlier this year, the Korean government cut some public funding for underperforming public universities as a way to weed out poor universities and more, generally, to promote greater competition.

Donghyun Park: Korea also has a very good, concrete example of how private sector participation can help improve the quality of universities.

Donghyun Park: POSCO, one of the world's largest steelmakers, was facing a severe shortage of high-level scientists and engineers in the 1980s.

Donghyun Park: To get around the problem, POSCO created its own university --- POSCO Institute of Technology, or POSTECH.

Donghyun Park: POSTECH has now become one of Asia's top universities, certainly in science and engineering.

Donghyun Park: Of course, skills shortage is an economy-wide problem. But it is especially important for modern, high-end services since human capital is a core ingredient of such industries.

Sean Crowley: Thanks very much to all of you who have contributed and participated today. If you have any further questions, please do email. Until the next chat!