Global Services- Trends, Policy Issues And Prospects By Tarun Das

Chapter 2 Services Production and Services Trade in Asia 2.1 Services Production Services encompass a wide range of activities such as financial services, transport, trade, hotels, storage, real estate, travel, telecommunications, government and community services, computer services, professional services such as legal, health, education, engineering services etc. Many of these services are tradable such as financial services, telecommunications, shipping and civil aviation, computer and professional services. While service sectors account for a major share of output and employment in developed countries, their share is also increasing in the developing countries. Table-2.1 presents some economic and social development indicators and the size of the economy for selected countries in Asia in 2000. Table-2.2 presents average annual growth rates of overall and sectoral GDP in 1990s for these countries. Table-2.3 presents sectoral shares of agriculture, industry, manufacturing and services in GDP in 1990 and 2000 in these countries. It is observed from these tables that: 

In general the growth rate of services sector had been higher than that of agriculture and overall GDP during 1990s for almost all regions and all individual countries in Asia (Table-2.2). Between 1990 and 2000, growth of world services output was 2.9%, double that of agriculture which was only 1.4%, and was higher than overall GDP growth rate at 2.7 per cent.



During 1990s, South Asia achieved the highest growth rate of services value added at 7.1 per cent per annum, followed by the East Asia and Pacific at 6.4 per cent and the Middle East and North Africa at 4.5 per cent. In Europe and Central Asia, services production increased by an average growth rate of 1.6 per cent per annum, while there was significant decline of agricultural, industrial and overall value added.



Consequently, the share of services production in GDP increased for most of the countries in 1990s (Table-2.3). The contribution of the service sector to world gross domestic product was 64% in the year 2000, compared to 57% in 1990.  Higher growth rate of services production and its increasing share in GDP during 1990s hold good for all regions and countries irrespective of vast differences in the economic size and the level of economic and social development (Table-2.1).

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Sectoral shares in GDP indicate mixed trends over time among regions and countries (Table-2.3). 

In almost all the regions and Asian countries (except a few like Mongolia and Myanmar) the share of agriculture in GDP declined in 1990s.



For newly industrialized countries (NIEs), which have dominant share of the services sector in GDP, shares of industry and manufacturing either remained unchanged or declined and shares of services increased further in 1990s. Only in the Korean republic, the share of manufacturing in GDP increased from 29 per cent in 1990 to 31 per cent in 2000 and that of agriculture declined from 9 per cent to 5 per cent over the same period.



In East Asia and Pacific as a whole, the shares of industry, manufacturing and services increased in 1990s at the cost of agriculture whose share declined by 7 percentage points.



As regards individual countries in the Southeast Asia, only Myanmar, Philippines and Vietnam experienced a decline of share of manufacturing in 1990s. There was also substantial increase in the share of industry in overall GDP in 1990s in all countries except in Myanmar and Philippines (Table-2.3).



In all the countries of South Asia, the share of services in GDP improved, while the share of agricultural declined in 1990s. As regards industrial share, it increased in all the countries except in Pakistan in 1990s.



In India the services sectors registered significant increase in their share in GDP in 1990s at the cost of both agriculture and industry. Presently, services account for more than 50 per cent of GDP in India.

According to the WTO report (2002): •

Services now account for approximately 50 per cent or more of output in the following developing country regions: Low and Middle Income countries, Europe and Central Asia, Latin America and Caribbean, Middle East and North Africa, South Asia and Sub-Saharan Africa.

•

Between 1990 and 2000, the growth of exports of commercial services for developing countries (9%) exceeded that for developed countries (5.5%). The 49 least developed countries also experienced particularly strong export growth of commercial services (6.3%).

•

25 developing countries depend on the export of commercial services for more than half their total export revenues.

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Table-2.1 Basic Economic Indicators of selected Asian countries in 2000 Country

Population million 2000

Area '000 sq.km. 2000

GNP GNP PPP GNP PPP GNP US$ billion per capita US$ billion Per capita (US $) (US $) 2000 2000 2000 2000

Adult Literacy (%) 2000

Life Expectancy (years) 2000

79 72 76 75

80 73 78 76

69 64

70 67

53 64 52 71 59 66 69 68

54 66 54 72 60 69 69 69 61 61 63 68 58 63 73

Newly Industrializing Economies (NIEs) Hong Kong

7

1

176

25920

174

25590

Korea,Republic

47

99

421

8910

818

17300

Singapore

4

1

99

24740

100

24910

Taiwan,China

22

36

280

12670

..

..

China & Mongolia China

1262

9598

1063

840

4951

3920

Mongolia

2

1567

0.9

390

4

1760

Cambodia

12

181

3

260

17

1440

Indonesia

210

1905

120

570

596

2830

Lao, PDR

5

237

1.5

290

8

1540

Malaysia

23

330

79

3380

194

8330

Myanmar

48

677

..

..

..

..

Philippines

76

300

79

1040

319

4220

Thailand

61

513

122

2000

384

6320

Vietnam

79

332

30

390

157

2000

South-East Asia

South Asia Bangladesh

131

144

48

370

209

1590

Bhutan

0.8

47

0.5

590

1.2

1440

1016

3287

455

450

2375

2340

Maldives

0.3

0.3

0.5

1960

1.2

4240

Nepal

23

147

6

240

32

1370

Pakistan

138

796

61

440

257

1860

Sri Lanka

19

66

16

850

67

3460

58 48 62 63 55 60 72

3436

27080

80

81

65 68 68 69 66 61 52 77 67

64 69 69 70 68 63 47 78 66

India

East Asia Japan

127

378

4519

35620

World Low & middle income East Asia & Pacific

5154 1855

101491 16385

6315 1962

1230 1060

19980 7609

3910 4130

Europe & Central Asia

474

Latin America & Carib.

516

24217

953

2010

3140

6670

20459

1895

3670

3624

Mid. East & N.Africa

7080

295

11023

618

2090

1545

5270

South Asia

1355

5140

595

440

2984

2240

Sub-Saharan Africa

659

24297

310

470

1044

1600

High Income

903

32315

24994

27680

24793

27770

World

6057

133806

31309

5170

44459

7410

Note: (a) Two dots (..) stand for "Data not available" Sources : Das (2003)

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Table-2.2 Growth of output in selected Asian countries in 1980-1990 and 1990-2000 Country

GDP growth per annum 1980-1990

GDP growth Agriculture Industry per annum Growth pa Growth pa 1990-2000 1990-2000 1990-2000 Newly Industrializing Economies (NIEs)

Manufacture Growth pa 1990-2000

Services growth pa 1990-2000

Hong Kong

6.9

4.0

..

..

..

..

Korea,Republic

8.9

5.7

2.0

6.3

7.5

5.7

Singapore

6.7

7.8

-1.6

7.9

7.1

7.8

Taiwan,China

8.8

6.1

0.5

5.3

5.5

7.0

China & Mongolia China

10.1

10.3

4.1

13.7

13.4

9.0

Mongolia

5.4

1.0

3.2

-0.5

..

0.1

South-East Asia Cambodia

n.a.

4.8

1.9

8.3

8.2

6.9

Indonesia

6.1

4.2

2.1

5.2

6.7

4.0

Lao, PDR

3.7

6.5

4.9

11.0

11.7

6.5

Malaysia

5.3

7.0

0.3

8.6

9.8

7.2

Myanmar

0.6

6.6

5.3

10.1

7.0

6.8

Philippines

1.0

3.3

1.6

3.3

3.0

4.0

Thailand

7.6

4.2

2.1

5.3

6.4

3.7

Vietnam

4.6

7.9

4.8

12.1

..

7.7

South Asia Bangladesh

4.3

4.8

2.9

7.3

7.2

4.5

Bhutan

7.5

6.2

10.2

10.5

2.5

5.7

India

5.8

6.0

3.0

6.4

7.0

8.0

Maldives

12.1

6.6

10.3

10.5

2.4

7.2

Nepal

4.6

4.9

2.5

7.2

9.2

6.2

Pakistan

6.3

3.7

4.4

3.9

3.5

4.4

Sri Lanka

4.0

5.3

1.9

7.0

8.1

6.0

-3.2

-0.4

0.5

2.5

East Asia Japan

4.1

1.3

Low & middle income

3.5

3.5

2.2

3.7

5.7

4.1

East Asia & Pacific

7.9

7.2

3.1

9.3

9.9

6.4

Europe & Central Asia

..

-1.5

-2.3

-3.8

..

1.6

Latin America & Carib.

1.7

3.3

2.3

3.3

2.6

3.4

Mid. East & N.Africa

2.0

3.0

2.6

0.9

3.8

4.5

South Asia

5.6

5.6

3.1

6.2

6.6

7.1

Sub-Saharan Africa

1.6

2.5

2.8

1.6

1.6

2.6

High Income

3.3

2.5

0.0

0.7

..

..

World

3.3

2.7

1.4

1.5

..

2.9

World

Note: (a) Two dots (..) stand for "Data not available" Source: Das (2003)

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Table 2. 3: Structure of output in selected Asian countries in 1990 and 2000 Country

GDP billion US$ 1990

GDP billion US$ 2000

Agriculture % of GDP 1990

2000

Industry % of GDP 1990

Newly Industrializing Economies (NIEs) 163 0 0 25

Manufacture % of GDP

2000

1990

Services % of GDP

2000

1990

2000

Hong Kong

75

14

18

6

74

85

Korea, Rep

253

457

9

5

43

43

29

31

48

53

Singapore

37

92

0

0

34

34

27

26

65

66

Taiwan,China

158

279

3

2

40

35

30

24

57

63

China and Mongolia China

355

1080

27

16

42

51

33

35

31

33

Mangolia

..

1

17

33

30

19

..

5

52

48

Cambodia

1

3

56

37

11

20

5

6

33

42

Indonesia

114

153

20

17

38

47

18

26

42

36

Lao, PDR

1

2

61

53

15

23

10

17

24

24

Malaysia

44

90

15

11

42

45

24

33

43

44

Myanmar

..

..

57

60

11

9

8

7

32

33

Philippines

44

75

22

16

34

31

25

23

44

53

Thailand

85

122

12

10

37

40

27

32

50

49

Vietnam

6

31

37

24

23

37

19

18

40

39

South-East Asia

South Asia Bangladesh

30

47

29

25

21

24

13

15

50

51

Bhutan

0.3

0.4

38

33

28

32

20

20

34

35

India

317

457

31

25

28

27

17

16

41

48

Maldives

0.3

0.4

18

10

14

15

..

..

68

75

Nepal

4

5

52

40

16

22

6

10

32

37

Pakistan

40

62

26

26

25

23

17

15

49

51

Sri Lanka

8

16

26

20

26

27

15

17

48

53

1

39

32

27

22

58

66

East Asia Japan

3052

4842

2 World

Low & middle income

4404

6561

16

12

38

35

23

23

46

54

East Asia & Pacific

927

2059

20

13

40

46

28

32

40

41

Europe & Central Asia

1253

942

17

10

44

35

..

..

39

57

Latin America & Carib.

1133

2001

9

7

36

29

23

21

55

64

Mid. East & N.Africa

401

660

15

14

39

37

12

14

47

48

South Asia

405

597

31

25

27

26

17

16

43

49

Sub-Saharan Africa

298

323

18

17

34

30

17

14

48

53

High Income

17414

24927

..

..

..

..

..

..

..

..

World

21817

31493

7

5

36

31

..

22

57

64

Note: (a) Two dots (..) stand for "Data not available" Source: Das (2003)

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2.2 Globalisation and its Impact on International Trade Globalisation can be defined as the ongoing economic, technological, social and political integration of the world that began after the Second World War (ADB 2001). There are several dimensions to this dynamic process such as increased internationalisation of economic markets as reflected by movements of goods, persons, capital and various services across countries. There are also institutional and social changes that are taking place within geographical boundaries of different states. There are also changes in international economic and political relations. The negotiations under WTO has facilitated the progress of globalisation, which in turn has helped rising world economic growth and reduction of poverty through increased flows of goods, services and investment. Globalisation has helped world trade to surge from 23 per cent of world GDP in 1960 to 32.5 per cent in 1991 and further to 41 per cent in 2000 (Table 2.4). The major contributing factors for this growth are summarised below: (i)

Effective tariff rates and non-tariff barriers (NTBs) have been reduced significantly during 1990s (Table 2.5) and by 80-90 per cent since the Second World War.

(ii)

Costs of ocean shipping, air transport and telecommunications have dropped significantly in last 50 years (Table 2.6).

(iii)

Outsourcing has increased substantially in automobiles and electronics. However, in 1990s foreign affiliates are being established to have the advantage of domestic sourcing and backward linkages in automobiles, IT and food processing.

(iv)

There had been significant advancement is research and technology leading to explosive growth in knowledge-based industries.

(v)

As most of the East and Southeast countries adopted export-oriented strategy, share of exports in their GDP recorded substantial increase. Countries in East Asia had, in general, large shares of manufacturing exports in total merchandised exports (Table 2.7). Table-2.4 Total Merchandise trade (percent of world GDP)

1960 1970 1980 1991 1996 World 23.1 25.2 41.9 32.5 37.2 Industrial 15.7 18.7 28.5 23.2 24.7 countries Developing 7.5 6.5 13.4 9.3 12.5 countries Source: Asian Development outlook 2001, ADB, manila.

6

1997 38.9 25.5

1998 38.8 26.2

1999 38.8 26.2

2000 41.2 30.4

13.4

12.6

12.6

10.7

Table 2.5 Mean tariff rates and non-tariff barriers in selected countries Country

Mean tariff rate (%)

India

1990 84.1

World import-weighted Mean tariff (per cent) 1990 1999 93.6 28.0

1999 34.3

Bangladesh 123.2 22.4 125.5 China 44.9 33.4 46.5 Indonesia 27.1 11.8 27.4 S. Korea 18.6 7.8 17.8 Malaysia 17.6 12.0 14.4 Nepal 18.3 13.5 21 Pakistan 53 50.0 n.a. Philippines 28 9.3 28.8 Sri Lanka 27.5 19.1 22.2 Taiwan 10.9 6.7 12.2 Thailand 41.7 47.3 42,4 Source: World Development Indicators 1997, 1999, 2000, 2001/02.

18.5 18.5 14.3 7.0 9.4 17.8 n.a. 8.5 19.8 6.5 43.7

% of tariff lines under NTBs Recent year 5.2 n.a. 11.2 2 n.a. 2.4 0.5 17.3 n.a. 4 n.a. 4.2

Table 2.6 Trend of transport, communications and computers cost in 1960-2000 Year

Ocean freight 1920=100

Average revenue per PKM on air (in 1990 US$)

Cost of 3-minute Price of computers telephone call, relative to GDP New York -London (2000=100) (in 2000 US$) 1960 28 0.24 60.42 186,900 1970 29 0.16 41.61 19,998 1980 25 0.10 6.32 2,794 1990 30 0.11 4.37 728 2000 27 0.08 0.40 100 Source: World Economic Outlook, May 1997, World Bank, updated to 2000, U.S. Commerce Department, Bureau of Economic Analysis. Table 2.7 Share of manufacture exports in total exports in Asian countries (percent) Country Hong Kong, China Korea Singapore Taipei, China China, PR Indonesia Malaysia Philippines Thailand India Pakistan Sri Lanka

1975 98 82 52 81 n.a. n.a. 31 22 24 51 52 11

1985 98 92 54 91 49 14 32 62 43 58 67 34

1990 99 94 74 94 74 38 56 73 65 75 77 62

7

1995 95 93 80 93 81 53 65 76 73 75 85 73

2000 95 91 86 95 88 54 80 41 74 76 84 75

2.3 Services exports Services are the fastest growing component of the global economy, and trade and foreign investment in services had grown at a faster speed than that in goods in the last decade. More efficient services in finance, telecommunications, transportation and professional services improve the overall performance of the economy with their broad linkage effects. Developing countries can gain significantly from further liberalisation of trade and foreign investment in services. In 1997 global service sector output was valued at $6.6 trillion or 61 per cent of global output of goods and services. Although the developed countries accounted for threefourths of world services output, the contribution of services also increased significantly in developing countries. The growth of service sector output and employment has been accompanied by increased globalisation. Both foreign direct investment and trade in services have grown considerably. Today, service sector accounts for 40 per cent of the global FDI stock estimated at $30 billion, and 50 per cent of the world FDI flows, the bulk of which is concentrated in developed countries. Service exports have been the fastest growing components of world trade over the last 15 years. During 1985-1999 the compound annual growth rate for services exports on the basis of balance of payments, which covers primarily cross-border supply and consumption abroad, was over 9 per cent per annum, compared with 8.2 per cent per annum for merchandised exports. As a result, services trade more than trebled in volume in 15 years to $1.4 trillion in 2000 and accounts for 25 per cent of all cross border trade. Developing countries have witnessed the fastest increase (about four folds) in service exports and consequently have increased their share in world service trade from 14 per cent in 1985-89 to 18 per cent in 1995-98. Europe and Central Asia and East Asia and the Pacific increased their service exports six times, South Asia and Latin America and Caribbean kept up with the world growth, and Sub Saharan Africa and Middle East and North America lagged behind. During last two decades, there has been significant decline in the share of transport services in total services exports from around one third to one fifth which may partly reflect a decline in the relative prices of transport services. While the 1980s witnessed the relative importance of travel from 25 per cent in service exports in 1980 to 33 per cent in 1990, the 1990s witnessed a significant increase in the share of other services. Among the other services, royalties and license fees account for 12%, financial services 10%, construction 7%, insurance 5%, communications 5%, computer and information 5%, personal, cultural and recreational services 3%, and other businesses 53%.

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Table 2.8 Composition of developing country exports (per cent) in 1998-2000 Regions All developing countries East Asia South Asia

Manufacturing 56 72 60

Percentage Share in total exports Non-oil Oil Services commodities

13 3 0

16 12 20

15 13 20

Total 100 100 100

2.3 Impact of services trade on the economy Efficient services contribute to improved economic performance in many ways. An efficient and well-regulated financial sector leads to an efficient transformation of savings to investment and ensure that resources are deployed where they have the highest returns. Benefits also arise from increased financial product variety and better risk sharing in the economy. In the case of telecommunications, improved efficiency generates economy-wide benefits as telecommunications are vital inputs for dissemination and diffusion of knowledge and information. Similarly, transport services contribute to the efficient distribution of goods within a country and in global trade. Software development is the foundation of the modern information-based economy. Education and health services are necessary in building up the stock of human capital, a key factor long run growth performance. Ideally, we would seek to measure the impact of liberalization in each of these sectors. Although these are the more prominent services, there are other crucial business services such as accounting and legal services. Goods liberalization in the absence of services liberalization may lead to high transactions cost which in turn could result in negative effective protection for goods. Collier and Gunning (1999) consider high transaction costs as the most significant impediment to economic growth in Africa. According to Summers (1999), the single most important innovation in the history of the American capital markets was the idea of generally accepted accounting principles. There are a number of studies on the impact of services trade liberalization. Although each of these studies uses a different scenario to project the gains from liberalization, all show that the economic gains from services liberalization greatly exceed the gains from merchandise trade liberalization. Moreover, each of the studies shows that developing countries would be major beneficiaries of such liberalization. The key issue is whether the link between liberalization of services and economic growth is expected to be different from that between goods liberalization and growth. It is recognised that liberalization of the services sector in which a country has a comparative disadvantage, will also lead to increased scale of activity in the goods sector. This will strengthen the growth impact of liberalization.

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Levine (1997) examines the link between financial services and economic growth and identifies five major functions of the financial systems which help in minimizing transactions costs and improving the allocation of real resources. These functions include facilitating the trading of risk, allocating capital productive uses, monitoring managers, mobilizing savings through the use of innovative financial instruments and easing the exchange of goods and services. Francois and Schuknecht (1999) regress the growth of per capita real GDP on a measure of the general degree of openness in trade, certain macroeconomic variables and a concentration ratio for the financial sector. They find a strong positive relationship between growth and financial sector competition. If the resource allocation effects of trade policy changes promote sectors or activities that generate more long-run growth, the impact is positive, and negative otherwise. For example, if services trade liberalization shifts resources into manufacturing and away from agriculture, this will have a positive impact on long run growth if manufacturing generates greater positive externalities or creates knowledge. It is not unrealistic to assume that certain services industries, like certain goods industries, possess growth generating characteristics. In sectors like telecommunications, software, financial services and transport, there is considerable scope for learning by doing, knowledge generation, expanding product variety, and upgrading product quality. Then, what is it that really distinguishes trade in services from trade in goods? For a number of services such as softwares, there is no difference: trade is conducted in the same manner as trade in goods. But for many other services, from local phone calls to transportation, the simultaneity of production and consumption implies that there should not be any barriers to the flow of services, and there should be enhanced competition for both domestic and foreign suppliers and domestic producers. A number of empirical cross-country studies by Dollar (1992), Sachs and Warner (1995), Edwards (1993) and Coe et. Al. (1997) suggest that the impact of liberalization of trade in goods on the long run rate of economic growth is positive, although a recent study by Rodriguez and Rodrik (1999) questions the robustness of the results. The comparable analysis depicting the impact of liberalization in services trade on economic growth is more sparse. If liberalizing trade in goods, which typically accounts for less than half of GDP in most countries, and even less than a third of output in the industrial economies, can affect economy wide growth, then there should be comparable gains from liberalizing services that are becoming increasingly tradable and that account for a large and growing share of GDP in most developing countries. Matto et.al. (1999) analysed static and dynamic effects of services on economic growth. First, it explains how the impact of liberalization of service sectors on output growth differs from that of liberalization of trade in goods. Second, it suggests a measure of the openness for two key service sectors, basic telecommunications and financial services. Finally, these openness measures are used in cross-country regression euations to test whether the openness of the policy regime in services has an impact on long run economic growth. Two broad conclusions are drawn from these studies. First, services

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liberalization is different from trade in goods because the former involves factor mobility and leads to scale effects that are distinctive. Second, there is some econometric evidence to suggest that openness in services has a positive impact on the long run growth performance. The estimates suggest that countries with fully open telecom and financial services sectors grow up to 1.5 percentage points faster than other countries. More recently studies by the World Bank as reported in the "Global Economic Prospects for Developing Countries" (2001) indicate that: •

Liberalization of services in developing countries could provide as much as $6 trillion in additional income in the developing world between 2005-2015.

•

Services underpin economic development efforts, according to the Bank, because more efficient provision of services in finance, telecommunications, transportation and professional business services have broad linkage effects. The Bank stresses the importance of effective governmental management of liberalization programmes, including the elimination of barriers to entry for new competitors, regulatory policies and removal of export restrictions. Bank estimates suggest that countries that have fully liberalized trade and investment in finance and telecommunications grew on average 1.5% fast than other countries over the past decade. Practices such as cargo reservation, limits on provision of port services and collective rate setting among shipping lines can increase freight rates by up to 25% on certain routes, the Bank says. Inefficient container services in Brazil have raised the price of customs services, warehousing, inland transport and port services to twice the global average. Liberalization of services under the General Agreement on Trade and Services can, according to the Bank, accelerate and lend credibility to domestic policies as well as increasing access to markets in industrial countries. Gains from a cut of 33 per cent in barriers to services trade should raise global economic welfare by $389.6 billion, which exceeds their estimated gains from manufactures liberalization of $210.7 billion.

• • • • • •

2.4 ICT Revolution and New Economy The process of globalisation, which has been facilitated greatly by the development in information and communications technology (ICT) has reinforced the growth of ICT and is leading to the growth of new economy called knowledge based economy. Prompt and decisive economic reform could maximise IT's effectiveness in boosting productivity throughout the economy and raising the GDP growth, exports, employment and living standards. The IT sector has tremendous potential to lower the cost of business, create new products, deliver services more quickly and increase transparency and efficiency of public institutions. The ICT revolution is multifaceted encompassing a wide range of areas such as computer hardware and software, high speed transmission of information by relay stations, 11

satellites and fibre optical cable, and digitisation of information not only by words and data but also by sound and video, and generating new business applications such as computer aided designs (CAD) and teleworking. These technological advances resulted in explosive growth of the use of mobile phones, fax machines, Internet and E-mail, Ecommerce and business. The US economy is the leading exponent of these trends. The ICT has revolutionalised the whole economy with innovations in products in financial and other services, shorter product cycles, improved business environment and greater competition through reduction of distance, time and cost. It is often argued that the advancement of ICT has created the so-called “digital divide” wherein benefits reach only rich households. This criticism may not be true as the advancement of ICT has led to significant fall in transactions cost and tariff rates for telephones, fax, E-mail etc. in many developing countries as in India and thereby has enhanced accession by people in large. Combined with growth of Internet, ICT has the potential to reduce costs and increase efficiency. Retailing over the Internet known as business to consumer (B2C), business to business (B2B) and consumer to consumer (C2C) has led to significant reduction of transaction cost and improvement in quality of products. Although presently only a small fraction of B2B and C2C transactions take place on Internet, there is tremendous scope for potential savings and cost reductions through B2B and C2C operations on Internet. ICT has revolutionalised operations in banking, finance and industry in USA and Singapore and is being increasingly used by many developing countries in Asia such as Hong Kong, Taipei and Korea. In Europe, the use of the Internet is not as widespread as in the USA, but Europe is well developed in ICT use for banking and other financial services. In varying degrees, China, India and ASEAN-4 have experience in production and exports of electronics in which they have comparative advantage. The rate of diffusion of ICT to the developing countries has been rapid compared to earlier all purpose technological change. Just after a decade of the start of IT revolution, developing countries (with 85 per cent of the world’s population) account for 10 per cent of world Internet connections in 2000. Though from a low base, IT expenditure increased throughout 1990s for all developing countries and for many of them at a faster rate than that for developed economies (Table 2.9). Investment spending slowed when economic conditions were unfavourable as in Indonesia in late 1990s, but expenditures continued to grow resulting in a substantial increase of personal computers and telephone lines per capita which in turn led to widespread use of Internet. Strong growth and investment friendly policies enhance the rate of IT adoption, which in turn has long-term beneficial effects on growth. There exists a “vicious circle” among growth, urbanisation, education, favourable policies and information technology reinforcing each other. In general, countries with relatively high growth rates, greater urbanisation and conducive policy environment have expanded their use of cell phones and Internet connections at a faster pace than others. High levels of human capital are strongly correlated with the adoption of IT. Since new technology is embodied in new equipment, high investment rates speed up adoption as in the case of Korea and Malaysia.

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A policy regime opens to imports and foreign direct investment also induces adoption of new technologies in general and computers in particular. However, some of the poorest countries have also achieved higher ratios of Internet users to telephone than advanced economies implying that the latent demand for access to IT is even strong in poor countries. The critical issue for these countries is how to use IT more productively for accelerating the pace of development. Information technology presents the attractive possibility of “leapfrogging in technology advancement”. For example, countries with old-fashioned mechanical telephone systems can bypass the analog electronic era and go straight to advanced digital technologies. Leapfrogging leads to better IT system with lower transaction cost. Bangladesh’s Grameen Bank, pioneer in the area of micro-finance, has provided cell phones and Internet access in the rural areas. Table 2.9 Indicators of Information technology Use in Selected Countries Country

IT/ GDP ratio (%)

IT per capita (US$)

Personal computers per 100 people Change 2000 1990-00

Telephone lines Per100 people Change 2000 1990-00

Change 1992-99 Developing countries

1999

Growth 1992-99

1999

Argentina Brazil Chile China India Indonesia Korea Malaysia Mexico Philippine s South Africa

1.0 2.3 1.1 3.0 1.8 -0.3 -0.5 2.1 5.2 0.9

3.4 5.8 5.7 4.9 3.5 1.4 4.4 5.5 1.0 2.7

78.0 199.4 121.8 465.7 220.8 7.0 53.8 61.8 30.6 82.6

294.3 267.4 321.0 37.9 15.4 13.7 521.5 168.4 231.8 33.6

4.4 4.1 7.5 1.6 0.5 0.9 15.3 9.7 4.3 1.6

5.1 4.4 8.6 1.6 0.5 1.0 19.0 10.5 5.1 1.9

12.0 8.4 15.5 8.0 2.6 2.5 15.4 12.2 6.0 2.9

21.3 14.9 22.1 8.6 3.2 3.1 46.4 21.1 12.5 3.9

1.8

7.2

49.5

240.6

5.5

6.2

3.2

12.5

Advanced countries

Canada 1.6 5.3 31.6 1808.7 28.3 39.0 11.1 67.6 Denmark 1.0 4.5 45.3 2540.3 31.6 43.1 13.8 70.5 France 0.8 3.8 27.5 1706.6 23.4 30.5 8.5 58.0 Germany 0.9 4.1 29.4 1699.9 23.4 33.6 16.0 60.1 U.K. 0.7 4.7 52.0 1979.5 23.0 33.8 12.6 56.7 U.S.A. 0.9 5.2 57.9 2792.1 36.8 58.5 12.8 67.3 Source: World Economic Outlook , International Monetary Fund, October 2001. The ICT sector has made increasing contribution to world trade growth during 1990s (Table 2.10). The share of ICT exports in total exports more than doubled in East Asia from 14 per cent in 1990 to 32 per cent in 1999. The contribution of ICT exports to 13

export value growth in 1998-99 in USA was as high as 98 per cent, followed by East Asia (85 per cent). With the growing importance of the ICT sector in economic output and international trade, the characteristics of business cycle has changed. For example, in the semiconductor sector, recoveries in the 1990s occurred within six to nine months. Table 2.10: Contribution of ICT exports to total exports and exports value growth in selected countries and regions 1990-1999 (per cent) Country or Region

Share of ICT export in total merchandise exports 1990 1999

Contribution of ICT exports to export value growth 1990-1999 1998-1999

Europe 4.7 8.1 14.2 United States 11.0 16.0 22.7 Japan 14.0 17.0 23.5 East Asia 14.0 31.7 49.3 n.m. stands for not meaningful. European merchandise export growth in negative, but ICT exports grew by 5.6 per cent in value terms. Source: The Global Development Finance 2001, World Bank.

n.m. 97.7 15.6 84.6 1999 was

At the core of ICT revolution are advances in material science leading to increases in the power of semiconductors resulting in rapid decline of semiconductor prices. In recent years, East and Southeast Asian countries have made significant progress in production and exports of electronics. Electronics products can be broadly divided into three broad groups viz. industrial electronics (mainly microchip testing equipment), electronics component and parts (mainly semiconductors and microprocessors) and consumer electronics (predominantly computers). Table 2.11 presents the shares of electronics in total exports in selected countries in East and Southeast Asia. It is observed that in these countries, except for China and Indonesia, electronics account for one third of total exports (in Thailand, Hong Kong and Korea) to two thirds of total exports (in Singapore and Philippines) with Malaysia and Taipei in the middle range. In seven out of nine countries, at least two-thirds of electronics exports comprise electronic components and parts. Only China and Indonesia have high share (85 per cent) of consumer electronics, while Hong Kong, Korea, Singapore and Taipei have 10 to 18 per cent shares in industrial electronics. Thailand is roughly split between consumer electronics and electronics components. The electronics industry has been hard hit by the recent global slowdown with semiconductor prices falling sharply in all major markets. ASEAN members and the NIEs have been heavily exposed to recent fluctuations in electronics industry. Indeed, industrial production in these economies had been more volatile than in the large industrial economies in the past decade due to fluctuations of world semiconductor prices and sales and the increasing concentration of Asian production in electronics.

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Table 2.11 Sectoral distribution of electronics exports in 1999-2000 (per cent) Economy

Share of electronics exports in total exports

Share in electronics exports Industrial Electronics Consumer electronics Components Electronics And parts

Singapore 64 10 89 1 Philippines 61 0 66 33 Malaysia 58 2 70 28 Taipei, China 46 15 80 5 Korea 38 18 78 4 Thailand 36 0 43 57 Hong Kong 33 12 70 18 China 24 0 15 85 Indonesia 14 0 15 85 Source: Asian Development Outlook 2001, Asian Development Bank, and Manila. The IMF has begun cross-country study on the impact of IT-related capital deepening on labour productivity growth in China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand. Estimates of IT capital stocks indicate that the ratios of IT capital stocks to GDP are largest in the USA and NIEs followed by ASEAN-4 countries and then China. Within IT, the stock of telecommunications capital is the largest, followed by IT hardware and then IT software. Results also show that the contribution of IT-related capital deepening to labour productivity growth increased significantly in emerging Asia during 1990s. IT sector exports now account for 30 per cent of total exports equivalent to 10 per cent of GDP for the Asian region as a whole, and to 20 per cent of GDP in the smaller regional economies. For most countries in the region, however, electronics production and exports include a high proportion ranging between 50 to 75 per cent of imported intermediate inputs, mainly sourced from the region. The size of IT sectors exports relative to GDP varies from 25 per cent of GDP in Malaysia to 1 per cent of GDP for Hong Kong (excluding re-exports).

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