The world’s factory is turning into an economy driven by services. China’s services sector officially eclipsed its industrial sector in size in the first quarter of 2013 and services already comprise roughly half of Asia’s GDP and 45 per cent of the region’s labour force.
This is a trend that will shape Asia’s future. Consumption patterns won’t resemble the West’s overnight. Nor will manufacturing cease. But Asia will benefit from three important side-effects of service-sector growth.
First, it is less volatile than industrial growth, which should help reduce the violent cyclicality that the region has suffered. Second, services are more labour-intensive than industry – which should help absorb labour flows resulting from urbanisation. Lastly, services growth tends be more inclusive and gender-balanced – a key factor for future regional stability.
Asia’s services exports have exploded over the past decade - with the total, excluding Japan, reaching USD800 billion a year
Services’ contribution to growth has increased for most countries in Asia. Korea has lagged in spite of being one of the region’s wealthier economies but India and the Philippines – two of the poorer countries – have very strong services sectors, despite not experiencing the manufacturing boom seen in East Asia. Both India and the Philippines have flourishing and modern sectors dealing in information and communications technology, and business-process outsourcing.
But as a whole, Asia still has a long way to go as it reaches for high-productivity services industries. Modern services occupy only an estimated 8 per cent to 12 per cent of GDP compared to 17 per cent to 25 per cent in Organisation for Economic Co-operation and Development countries. Services and greater well-being tend to come together. GDP per head should increase with the development of services and the share of wealth should be better distributed. While industrial growth provides the greatest returns to the owners of capital, services allow a greater percentage of the population to take advantage of higher value-added activities.
That the services sector will increase in size is practically a given. What matters most is how productive this dominant sector is. The good news is that labour productivity growth for services seems to be increasing and has been more stable than industry productivity.
Asia’s services exports have exploded over the past decade – with the total, excluding Japan, reaching USD800 billion a year. But a closer look reveals that the average growth rate was slower in the 2007-2012 period compared with 2001-2006, probably because of the many barriers that services trade faces. The region’s policymakers have their work cut out. Liberalising trade in services is one way to increase productivity, as are streamlining regulations and reforming the tax code. Only then can the region truly take advantage of the full range of benefits offered by this important transformation.
This research was first published on 29 August 2013.