Engine of Growth for Asia:
D. The Basic Facts
Across the region, the service sector has clearly been on the rise both in terms of output and employment. From about 45% of the average share in 1990, the sector now accounts for 48.5% of gross domestic product (GDP) in developing Asia, but there is some variation (Figure 1.11).4 In East Asia, the sector comprises about 48% of GDP mainly due to the newly industrialized economies (NIEs)—
Hong Kong, China; the Republic of Korea; and Taipei,China—with shares of about 60%–90% (Figure 1.12), but the People’s Republic of China (PRC) has also witnessed a significant rise of roughly 20 percentage points over the past 3 decades. The sector has been less dynamic in Southeast Asia as only in the Philippines and Singapore does it account for more than 50% of GDP. A uniform pattern of a rapidly growing sector can be seen across South Asia most notably in India, Nepal, and Sri Lanka where shares have risen by 15–20 percentage points.
In Central Asia, the surge has been quite dramatic as independence in the 1990s resulted in the rise of new service activities. Owing to their geographic conditions and significant tourism industries, most Pacific countries have maintained large service sectors.
The service sector is a key provider of jobs. The majority of workers are now employed in services in several economies including Kazakhstan, Malaysia, the Maldives, the Philippines, and the NIEs (Figure 1.13). In 1990, only Singapore and Hong Kong, China had service employment shares of over 50% while in Bangladesh, Cambodia, the PRC, and Viet Nam, less than 20% of the workforce was employed in services though since then the shares have risen by about 10–20 percentage points. Despite the rapid rise in India’s sector, the employment share remains low at 27%. This holds true for other South Asian economies particularly Bangladesh, Pakistan, and Sri Lanka where service employment shares are quite low relative to their output.
The service sector is now not only a large part of the economy, it has also been a huge contributor to overall growth. In the past 10 years, the service sector accounted for more than 50% of GDP growth in most economies in Asia (Figure 1.14). Even during the more subdued growth in the 1990s, the sector contributed to most of the growth and was higher in South Asia than in other parts. In India, the Maldives, and Sri Lanka, roughly 60% of the growth from 2000 to 2010 was due to services.
In Southeast Asia, the sector contributed to over 50% of the growth in Indonesia, Malaysia, the Philippines, and Singapore, but in East Asia, particularly in the PRC; the Republic of Korea; and Taipei,China, industry rather than services is still driving overall growth. As noted in ADB (2007), the service sector has played an important role in South Asian countries and in the Philippines where the pace of industrialization has been slow; in fact, the modern service sector drove overall growth in South Asia (Bosworth and Maertens 2010, Ghani 2010).
Figure 1.11
Sector Shares of Gross Domestic Product in Developing Asia by Region
0 20 40 60 80 100
1990 2000 2010
1990 2000 2010
1990 2000 2010
1990 2000 2010
1990 2000 2010
1990 2000 2010
Developing AsiaCentral AsiaEast AsiaSouth AsiaSoutheast AsiaThe Pacific
%
Agriculture Industry Services
Note: Economies covered are those with data around 1990, 2000, and 2010. Central Asia includes Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. East Asia covers the People’s Republic of China; Hong Kong, China; the Republic of Korea; Mongolia; and Taipei,China.
South Asia covers Bangladesh, Bhutan, India, Nepal, Pakistan, and Sri Lanka. Southeast Asia comprises Brunei Darussalam, Indonesia, the Lao People’s Democratic Republic, Malaysia, the Philippines, Singapore, Thailand, and Viet Nam. The Pacific includes Fiji, Kiribati, Papua New Guinea, Solomon Islands, and Tonga.
Sources: Authors’ estimates using data from ADB (2007), Asian Development Outlook database, CEIC Data Company, and the World Bank’s World Development Indicators database (databases accessed 16 April 2012).
Figure 1.12
Service Sector Share of Gross Domestic Product in Developing Asia by Economy
1980 1990 2010
Central AsiaEast AsiaSouth AsiaSoutheast AsiaThe Pacific
%
Lao PDR = Lao People’s Democratic Republic, PRC = People’s Republic of China.
Sources: ADB (2007); Asian Development Outlook database; CEIC Data Company; World Bank. World Development Indicators database (databases accessed 16 April 2012); authors’ estimates.
Figure 1.13
Share of Services in Employment in Developing Asia by Economy
0 30 60 90
Viet Nam India Cambodia Bhutan PRC Bangladesh Pakistan Georgia Thailand Armenia Sri Lanka Indonesia Mongolia Kyrgyz Republic Azerbaijan Philippines Kazakhstan Taipei,China Malaysia Maldives Korea, Republic of Singapore Hong Kong, China Developing Asia
1990 Around 2009
%
PRC = People’s Republic of China.
Note: Latest data refer to 2006 for Cambodia and the Maldives; 2007 for Georgia; 2008 for Armenia, the Kyrgyz Republic, and Pakistan; and 2010 for Bangladesh and India. Initial data refer to 1991 for Bangladesh and Singapore, 1993 for Cambodia and Mongolia, and 1994 for India.
Sources: CEIC Data Company; International Labour Organization. Key Indicators of the Labor Market database (both accessed 16 April 2012); authors’ estimates.
Figure 1.14
Sector Contributions to Annual Gross Domestic Product Growth in Developing Asia by Economy
–9 –6 –3 0 3 6 9 12
Lao PDR = Lao People’s Democratic Republic, PRC = People’s Republic of China.
Note: The contribution of each sector in gross domestic product growth is equal to the real growth of this sector during the period weighted by its share in gross domestic product in the initial year.
Sources: Authors’ estimates based on data from CEIC Data Company and the World Bank’s World Development Indicators database (both accessed 16 April 2012).
The global and regional trends identified in the previous section appear to apply broadly to developing Asia though missing, fragmentary, and insufficiently disaggregated data impede complete documentation. Panel data for developing Asia clearly demonstrate that the growth of services is correlated with a rise in incomes (Figure 1.15) and in educational attainment (Figure 1.16).
Figure 1.15
Log Services to Log Gross Domestic Product Per Capita Relationship in Developing Asia, 1960–Present
Log services value added (constant 2000 $)
Log GDP per capita (constant 2000 $) Armenia 1990–2010
Azerbaijan 1992–2010 Bangladesh 1960–2010 Bhutan 1981–2009
Brunei Darussalam 1989–2007
China, People’s Rep. of 1960–2010 Fiji 1966–2009
GDP = gross domestic product, Lao PDR = Lao People’s Democratic Republic.
Note: Observations include all available observations between 1960 and the present for developing Asian economies.
Sources: World Bank. World Development Indicators database (accessed 24 February 2012); authors’ estimates.
Figure 1.16
Log Services to School Life Expectancy in Developing Asia, 1998–present
Log services value added (2000 $)
15
China, People’s Rep. of 2001–2010 Fiji 2003–2004
GDP = gross domestic product, Lao PDR = Lao People’s Democratic Republic.
Sources: World Bank. World Development Indicators database; UNESCO Statistical Database (both databases accessed 24 February 2012); authors’ estimates.
Developing Asian economies are not, however, consistently above or below an international norm established by regressing the natural logarithm of value added by services against per capita GDP (Figure 1.17). While most developing Asian economies lie above the regression line, i.e., have larger than expected service sectors (Bangladesh; Cambodia; the PRC; Hong Kong, China; India; Indonesia;
Kazakhstan; the Republic of Korea; Malaysia; Nepal; Pakistan; the Philippines;
Singapore; Sri Lanka; Thailand; Uzbekistan; and Viet Nam), a significant number are below the line (Armenia, Azerbaijan, Bhutan, Fiji, Kiribati, the Kyrgyz Republic, the Lao People’s Democratic Republic, the Maldives, Mongolia, Papua New Guinea, Samoa, Solomon Islands, Tajikistan, and Tonga).5
Figure 1.17
Snapshot of Log Services Value Added against Log Gross Domestic Product Per Capita in Developing Asia and the Rest of the World, 2009
ARM
Log services value-added (2000 $)
4 6 8 10 12
Log GDP per capita (2000 $)
Developing Asia Rest of the world
ARM = Armenia; AZE = Azerbaijan; BAN = Bangladesh; BHU = Bhutan; CAM = Cambodia; FIJ = Fiji; GDP = gross domestic product; HKG = Hong Kong, China; IND = India; INO = Indonesia; KAZ = Kazakhstan; KIR = Kiribati;
KOR = Republic of Korea; KGZ = Kyrgyz Republic; LAO = Lao People’s Democratic Republic; MAL = Malaysia;
MLD = Maldives; MON = Mongolia; NEP = Nepal; PAK = Pakistan; PHI = Philippines; PNG = Papua New Guinea;
PRC = People’s Republic of China; SAM = Samoa; SIN = Singapore; SOL = Solomon Islands; SRI = Sri Lanka;
TAJ = Tajikistan; THA = Thailand; TON = Tonga; UZB = Uzbekistan; VAN = Vanuatu; VIE = Viet Nam.
Source: World Bank. World Development Indicators database (accessed 24 February 2012).
A similar analysis can be performed on employment data, albeit with a smaller sample, and once again the performance of developing Asia is mixed with greater than expected employment in services in Hong Kong, China; Malaysia;
the Philippines; and Singapore; and with Indonesia, Kazakhstan, Sri Lanka, and Thailand below the regression line (Figure 1.18). In short, those countries below the international norm in both income and employment tend to be poorer suggesting that developing Asia’s challenges are concentrated in economies in which underperformance implies the greatest social cost.
These aggregate figures do not shed light on critical issues that may have a significant impact on development outcomes for the rest of the economy such as
the extent of backward and forward links from the service sector to the rest of the economy or the diffusion of productivity advances. For example, a country may have a large ICT industry, but it may essentially be an enclave oriented toward the global market that does not enhance the productivity of the rest of the economy.
Another example would be tourism based on natural cultural or historical endowments with little spillover to the rest of the local economy.