Academic journal article Asia - Pacific Issues

Can a Growing Services Sector Renew Asia's Economic Growth?

Academic journal article Asia - Pacific Issues

Can a Growing Services Sector Renew Asia's Economic Growth?

Article excerpt

Asia's Path to Economic Growth

Asia's sustained rapid growth has been fueled, to a large extent, by export-oriented industrialization. High savings and investment rates, in some cases augmented by large inflows of foreign investment, have facilitated a rapid buildup of the physical-capital stock. Openness to foreign technology has further expanded the capacity of these economies to make and export goods. The manufacturing sectors of the region are woven together into a regional production network in which different economies specialize in different parts of the production process, further boosting productive efficiency and the region's role as a global manufacturing hub. Reallocation of labor from low-productivity agriculture to high-productivity manufacturing has supported the region's sustained rapid growth. For the last half-century, this labor-intensive, export-oriented, manufacturingbased growth paradigm has delivered the best of both worlds - economic growth with jobs-for Asia.

In many Asian economies the manufacturing sector is now maturing, however, and its productivity has reached high levels. As economies approach the current technological frontier, easy opportunities for catch-up dissipate and increases in labor productivity slow.1 As this process unfolds the manufacturing sector's capacity to generate employment attenuates. The waning ability of the manufacturing sector to generate jobs underscores the necessity of vitalizing services industries, which tend to be even more laborintensive, to maintain the growth of employment.

International considerations. Strengthening the services sector also has a diplomatic rationale. While Asia's economies have, for decades, grown faster than those of the rest of the world, the continuing reverberations from the global financial and economic crisis of 2008-2009 have clouded the region's prospects. Although the crisis centered on advanced Western economies, and not Asia, these Western economies still absorb a large share of Asia's manufactured exports and Asia has been adversely affected by the West's slow recovery.2 The post-crisis growth slowdown in the advanced economies means that domestic Asian demand - and hence services which cater largely to domestic demand - must contribute more to Asia's future growth.

Services-sector development is thus a component of rebalancing growth away from an excessive reliance on exports. Advanced economies have, from a global perspective, a comparative advantage in modern services such as business services. Liberalizing imports of such services can be beneficial not only to Asian economies but will also contribute to reducing imbalances in global trade. When the manufactured-export engine is stalling, igniting the services engine can help offset the loss of growth.3

Domestic incentives. The imperative to strengthen the services sector is reinforced by domestic political considerations. Many Asian economies are experiencing rapid growth of their elderly populations-and older citizens typically consume fewer manufactured goods and more services than younger populations. To the extent that many of these services are either provided by or financially underwritten by the public sector, improvements in services-sector efficiency will have a positive impact on government budgets.

A dynamic services sector can contribute to Asia's quest for more-inclusive growth, bringing broader swathes of the population into the economic-growth process and spreading more widely the fruits of such growth. Relative to manufacturing, services tend to be more labor intensive and there is statistical evidence that growth of the services sector is associated with poverty reduction.4 Growth in the services sector therefore makes a contribution to inclusive growth and political stability.

Is Asia up to the task? The case for raising productivity in the services sector is overwhelming. Achieving such gains, however, will be difficult. …

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