Role Of Services In Asian Economies By Tarun Das

Role of Services Production and Trade in Asian Economies- Problems and prospects Dr. Tarun Das, Economic Adviser, Ministry of Finance Room 34-A North Block, new Delhi-110001. TeleFax: (011) 2309-3552 EMAIL : [email protected] Abstract Despite serious financial crisis in East Asia in 1997-1999, Asian economies showed remarkable economic vigor and dynamism in 1990s by outperforming other developing regions and industrial countries. Asian economies are typical examples of “catch-up type” and “virtuous circle” of economic development. Services contribute to economic development in many ways and are the fastest growing component of output, trade and investment in Asia, irrespective of vast differences in economic size and the level of economic and social development in individual countries. Services now account for more than 50% of GDP in all regions except East Asia and Pacific. Global services trade more than trebled in 15 years to reach $1.4 trillion in 2000 and accounted for 25% of all cross border trade. 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, but Sub Saharan Africa and Middle East and North America lagged behind. Asian economies including India are going through a phase of economic liberalisation, which provides a solid foundation for international cooperation. Countries should maintain their ‘open door policy’ in external trade and investment in both goods and services to achieve sustained growth with cost sharing and distribution benefits. Economic and political cooperation in Asia can be strengthened through harmonization of policies at the national, bilateral and regional levels.

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Role of Services Production and Trade in Asian Economies- Problems and prospects Dr. Tarun Das, Economic Adviser, Ministry of Finance Room 34-A North Block, new Delhi-110001. TeleFax: (011) 2309-3552 EMAIL: [email protected] 1 Introduction Asian economies display a number of contrasts (Table-1). Asia includes two most populous countries of the world viz. China and India, and also small economies like Bhutan and Maldives with population less than a million and city-states like Singapore. It includes the world’s three largest economies (viz. Japan, China and India) in terms of PPP-adjusted GDP after USA. It also includes some of the poorest countries of the world– Bangladesh, Cambodia, Mongolia, Nepal and Vietnam. Social development indicators differ widely in the region. Despite serious financial crisis in East Asia in 1997-1999, Asian economies showed remarkable economic vigor and dynamism in 1990s by outperforming other developing regions and industrial countries (Table-2). Asian developing countries outpaced other developing regions and industrialised countries in industrial growth by 5 percentage points. The continued robust growth in Asia was attributable to widespread policy reforms in industry, trade and financial sectors and continued inflows of foreign capital. Most of the best performers in 1990s were in Asia. China’s growth was spectacular with real GDP growth at 10.3% a year and real per capita income at 9.2% in 1990s. Building on past investments in human, physical and institutional capital, high growth resulted from comprehensive reforms in agriculture and external trade, redirection of savings to the provinces, removal of price controls, revamping of the tax and financial systems, and conversion of economic zones into attractive manufacturing platforms for exports. The mechanism that contributed high growth in Asia can be summarised as exportoriented investment-led growth supported by low production costs. Investments and exports together made a higher contribution to growth in Asia than in other regions. Asia achieved high economic growth by introducing capital and technology from advanced countries, while enjoying the benefits of the huge markets in these advanced countries. Asian economies are typical examples of “catch-up type” economic growth. Rapid growth in intra-Asian trade was accompanied by rising FDI. The traditional focus of foreign investment by Asian companies in financial and real sectors was augmented by rapid growth in investment in manufacturing, particularly in automobiles and electronics in South-East Asia. The changing pattern of capital flows was due to partly low labour cost and partly higher value added and more technology-intensive activities.

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The process of rapid growth in output and intra-regional trade and investment in Asia is sometimes referred to as a “virtuous circle” of economic development. Foreign capital inflows were the result of favourable policy environment, trade expansion and sustained industrialisation and high growth. This process gradually helped to internalise Asian growth and to reduce Asia’s vulnerability to external shocks. South Asia achieved an average growth rate of 5.6% a year in 1990s, which was regarded as a “lost decade” for many other regions of the world. But, South Asia is characterised by widespread poverty, unemployment and low levels of living. While accounting for a fifth of the world’s population, South Asia is home to half the world’s poor. It has lower life expectancy than any other region except Africa, high infant mortality rates, high malnutrition and low literacy rates (except Maldives and Sri Lanka). Two themes characterised the development approach of the Asian economies: a strong economic role for the private sector and relatively outward-looking development policy. Broad lessons of development from the past decade are that countries with more marketfriendly policies and outward-looking strategies do better both in generating growth and reducing poverty. While there was general focus on the need of reforms, the pace had been uneven due to mainly political economy issues. Recent progress was most visible in privatisation and reforms in industrial, trade, external, fiscal and financial sectors. 2 Role of Service Sector in Asia Services encompass a wide range of activities such as education, health, financial, trade, hotels, tourism, real estate, transport, communications, software, legal and accounting, government and community services, many of which are tradable. Services contribute to economic growth in many ways. An efficient financial sector leads to mobilization of savings and investment. ICT provides vital inputs for dissemination and diffusion of knowledge and information. Transport services contribute to both internal and external trade. Education and health services build up human capital for sustained growth. Accounting and legal services provide crucial business services. Services are the fastest growing component of the global output, trade and investment. In 2000 global services output valued at $20.2 trillion accounted for 64% of global GDP. Although developed countries accounted for three-fourths of world services output, contribution of services in developing countries also increased significantly. The growth of service sector output and employment was accompanied by increased globalisation. Today, service sector accounts for 40% of the global FDI stock estimated at $30 billion, and 50% of the world FDI flows, the bulk of which is concentrated in developed countries. 

In general, the growth rate of services was higher than that of agriculture and overall GDP in 1990s for almost all regions in Asia (Table-2). Growth of world services output at 2.9% in 1990s was double that of agriculture at 1.4%, and higher than overall GDP growth rate at 2.7%.

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In 1990s, South Asia achieved the highest growth rate of services at 7.1% per annum, followed by East Asia and Pacific at 6.4% and Middle East and North Africa at 4.5%. In Europe and Central Asia, services production increased by 1.6% per annum with significant decline of agricultural, industrial and overall output.  Share of services in GDP increased for all regions except Sub-Saharan Africa in 1990s (Table-3). Services contribution to world GDP increased from 57% in 1990 to 64% in 2000.  Higher growth rate of services production and its increasing share in GDP in 1990s hold good for all regions and countries irrespective of vast differences in the economic size and the level of economic and social development. Services now account for more than 50% of GDP in all regions except East Asia and Pacific.  In almost all Asian countries (except a few like Mongolia and Myanmar) agricultural share in GDP declined in 1990s.  For newly industrialized countries, which had dominant share of services in GDP, industry and manufacturing shares either remained unchanged or declined and services shares increased further in 1990s.  In East Asia and Pacific, industry, manufacturing and services shares increased in 1990s at the cost of agriculture whose share declined by 7 percentage points.  Within Southeast Asia, only Myanmar, Philippines and Vietnam experienced a decline of manufacturing share in 1990s. There was substantial increase in industry share in GDP in 1990s in all countries except in Myanmar and Philippines.  Within South Asia, services share in GDP improved, while agricultural share declined in 1990s. Industrial share increased in all countries except Pakistan in 1990s.  In India, services registered significant increase in share in GDP in 1990s at the cost of both agriculture and industry, and presently account for 52% of GDP. 

Table-1 Basic Economic Indicators of regions in 2000 Country

Population Million 2000

Area '000 sq.km. 2000

Low & middle income East Asia & Pacific

5154 1855

101491 16385

Europe & Central Asia

474

Latin America & Carib.

516

Mid. East & N.Africa South Asia Sub-Saharan Africa

GNP GNP PPP GNP PPP GNP US$ billion Per capita US$ billion Per capita (US $) (US $) 2000 2000 2000 2000 6315 1962

1230 1060

19980 7609

3910 4130

24217

953

2010

3140

6670

20459

1895

3670

3624

7080

295

11023

618

2090

1545

5270

1355

5140

595

440

2984

2240

659

24297

310

470

1044

1600

High Income

903

32315

24994

27680

24793

27770

World

6057

133806

31309

5170

44459

7410

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

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Adult Literacy (%) 2000

Life Expectancy (Years) 2000

65 68 68 69 66 61 52 77 67

64 69 69 70 68 63 47 78 66

Table-2 Growth of output in selected Asian countries in 1980-1990 and 1990-2000 Country

GDP growth Per annum 1980-1990 3.5 7.9

GDP growth Per annum 1990-2000 3.5 7.2

Agriculture Growth pa 1990-2000 2.2 3.1

Industry Growth pa 1990-2000 3.7 9.3

Manufacture Growth pa 1990-2000 5.7 9.9

Services Growth pa 1990-2000 4.1 6.4

Europe & Central Asia

..

-1.5

-2.3

Latin America & Carib.

1.7

3.3

2.3

-3.8

..

1.6

3.3

2.6

Mid. East & N.Africa

2.0

3.0

3.4

2.6

0.9

3.8

South Asia

5.6

4.5

5.6

3.1

6.2

6.6

Sub-Saharan Africa

7.1

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

Low & middle income East Asia & Pacific

Notes and source as in Table-1. Table -3: Structure of output in selected Asian countries in 1990 and 2000 Country

GDP (billion US$)

Agriculture % of GDP 2000

Industry % of GDP

1990

2000

1990

1990

2000

Low & middle income East Asia & Pacific

4404 927

6561 2059

16 20

12 13

38 40

35 46

Europe & Central Asia

1253

942

17

10

44

35

Latin America & Carib.

1133

2001

9

7

36

29

Mid. East & N.Africa

401

660

15

14

39

37

South Asia

405

597

31

25

27

Sub-Saharan Africa

298

323

18

17

High Income

17414

24927

..

World

21817

31493

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Manufacture % of GDP 1990 23 28

2000

Services % of GDP 1990

2000

23 32

46 40

54 41

..

..

39

57

23

21

55

64

12

14

47

48

26

17

16

43

49

34

30

17

14

48

53

..

..

..

..

..

..

..

5

36

31

..

22

57

64

Notes and source as in Table-1.

3 Asian external trade Most of the East and Southeast Asian countries adopted export-oriented strategy and their exports/GDP ratios recorded substantial increase in 1990s. Asian countries had, in general, large shares of manufacturing in merchandised exports (Table-4). Growth of trade was attributable to the following factors: (i) Effective tariff rates and non-tariff barriers (NTBs) were reduced significantly in 1990s (Table-5) and by 80-90 % since the Second World War. (ii) Charges for ocean shipping, air transport and telecommunications dropped drastically in recent years. (iii) Outsourcing increased substantially in automobiles, electronics and information technology. In 1990s foreign affiliates were established to reap the advantage of domestic sourcing and backward linkages in automobiles, IT and food processing. (iv) There was significant advancement in research and technology leading to explosive growth in knowledge-based industries. (v) Services exports also increased substantially under WTO agreements.

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Table-4 Share of manufacture exports in total exports in Asian countries (%) 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

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

Table-5 Mean tariff rates and non-tariff barriers in selected Asian countries Country

World import-weighted % of tariff lines Mean tariff (%) under NTBs 1990 1999 2000 India 93.6 28.0 5.2 Bangladesh 125.5 18.5 n.a. China 46.5 18.5 11.2 Indonesia 27.4 14.3 2 S. Korea 17.8 7.0 n.a. Malaysia 14.4 9.4 2.4 Nepal 21 17.8 0.5 Pakistan n.a. n.a. 17.3 Philippines 28.8 8.5 n.a. Sri Lanka 22.2 19.8 4 Taiwan 12.2 6.5 n.a. Thailand 42,4 43.7 4.2 Source: World Development Indicators 1997, 1999, 2001/02.

4 Services exports At present service exports are the fastest growing components of world trade. In 19852000 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 annum, compared with 8.2% per annum for merchandised exports. As a result, services trade more than trebled in 15 years to $1.4 trillion in 2000 and accounts for 25% of all cross border trade. Developing countries witnessed the fastest increase (four folds) in services exports and increased their share in world services trade from 14% in 1985-1989 to 18% in 19952000. 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.

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In 1980-2000 there was significant decline in the share of transport services in total services exports from 33% to 20% due to decline of relative prices of transport services. While share of travel increased from 25% in service exports in 1980 to 33% in 1990, there was a significant increase in shares of other services in 1990s. Among the other services in 1990s, royalties and license fees accounted 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%. 5 ICT Revolutions and New Economy The process of globalisation, which was facilitated by the development in information and communications technology (ICT) reinforced the growth of ICT and led to the growth of knowledge based economy. ICT resulted in explosive growth of the use of mobile phones, fax machines, Internet, E-mail, E-commerce, E-banking and E-business and led to innovative financial products, shorter product cycles, and reduction of distance, time and transactions cost. It is often argued that the ICT advancement created the so-called “digital divide” wherein benefits reach only rich people. This criticism is not true as the ICT development led to significant fall in tariff rates for telephones, fax, E-mail etc. and enhanced accession by common man in many developing countries as in India. There exists a “vicious circle” among growth, urbanisation, education and ICT reinforcing each other. 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 ICT 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-6 Composition of developing country exports (%) in 1998-2000 Percentage Share in total exports ManuOil Non-oil Services facturing commodities All developing countries 56 13 16 15 East Asia 72 3 12 13 South Asia 60 0 20 20 Regions

Total 100 100 100

Table-7 Contribution of ICT exports to total exports (%) Share of ICT export in total Contribution of ICT exports merchandise exports to export value growth 1990 1999 1990-1999 1998-1999 Europe 4.7 8.1 14.2 Negative United States 11.0 16.0 22.7 97.7 Japan 14.0 17.0 23.5 15.6 East Asia 14.0 31.7 49.3 84.6 Source: The Global Development Finance 2001, World Bank. Country or Region

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Table-8 Sectoral distribution of electronics exports in 1999-2000 (%) Economy

Share of electronics exports in total exports

Share in electronics exports Industrial electronics

Electronics Components And parts Singapore 64 10 89 Philippines 61 0 66 Malaysia 58 2 70 Taipei, China 46 15 80 Korea 38 18 78 Thailand 36 0 43 Hong Kong 33 12 70 China 24 0 15 Indonesia 14 0 15 Source: Asian Development Outlook 2001, Asian Development Bank, and Manila.

Consumer Electronics 1 33 28 5 4 57 18 85 85

The ICT sector made increasing contribution to world trade in 1990s (Table-7). The share of ICT exports in total exports more than doubled in East Asia from 14% in 1990 to 32% in 1999. The contribution of ICT exports to export value growth in 1998-99 in USA was as high as 98% followed by East Asia (85 %). ICT revolution was reinforced by advances in material science leading to rapid growth of semiconductors and decline of semiconductor prices. Except for China and Indonesia, electronics accounted 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 (Table-8). ICT exports now account for 30% of total exports equivalent to 10% of GDP in Asian region. However, for most Asian countries, electronics production and exports depend highly on imported intermediate inputs mainly sourced from the region. The size of ICT exports relative to GDP varies from 1% of GDP for Hong Kong (excluding re-exports) to 25% of GDP in Malaysia. 6. Concluding observations Structural reforms supported by the IMF and other funding agencies helped Asian economies to recover quickly from the contagion effects of the recent East Asian crisis. But the crisis highlighted that there remain serious obstacles to sustained development, particularly inadequacy of infrastructure investment in the region. As the region’s needs are large, domestic private sector and foreign investment will have to complement each other in developing and modernising infrastructure base. In turn, governments need to strengthen the regulatory and legal set-up to attract and secure such investment. The need for competent management is also emerging as a major issue in Asia. Effective institutions are essential in pollution control, management of pension, insurance and provident funds and traffic management, planning and deregulation.

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Asian economies including India are going through a phase of economic liberalisation, which provides a solid foundation for international cooperation. Countries should continue to maintain their ‘open door policy’ in external trade and investment in both goods and services to achieve sustained growth with cost sharing and distribution benefits. Economic and political cooperation in Asia can be strengthened by the following measures: • • • • • • • •

Since all countries are trying to attract foreign investment, loss of resources through fiscal incentives could be avoided through harmonization of policies at the national, bilateral, regional and global levels. At the national level, instead of competing for foreign capital, appropriate measures can be taken to encourage domestic savings and return of flight capital. Host countries can attract more foreign investment if closer transport and communications linkages are established with neighbouring countries. At the global level, countries should cooperate to modernize financial systems and ICT to cope with increased goods, services and capital flows and smuggling. Another important cooperation is the sharing of information, which can reduce transaction costs and help to tackle drug trafficking and money laundering. Huge investment required for infrastructure development needs regional pooling of resources (financial, physical and human) to obtain the best possible leverage. National governments and regional business organisations must facilitate cooperation among enterprises for building up internal strength of industries. Multilateral financial institutions may strengthen their catalytic role through cofinancing and guarantee to encourage private participation in development process, particularly for physical and social infrastructure.

The prospects for an improved world-trading environment for both goods and services have been enhanced with the formation of the World Trade Organisation (WTO). But there are still legitimate concerns in a number of areas. There is a view that the gradual nature of reforms did not adequately cover investment issues, and much remains to be done to reduce tariff and non-tariff barriers to trade in services and agriculture. Some developing countries fear that new obstacles in the name of “social conditionalities and environment protection” might take the place of old regulatory regime.

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REFERENCES Das, Tarun (2002) Implications of Globalisation on Industrial Diversification Process and Improved Competitiveness of Manufacturing in ESCAP Countries pp.ix+1-86, ESCAP, Bangkok, ST/ESCAP/2197, March 2002. Das, Tarun (2003a) Promoting Resource-Based Export Oriented Industries in Asia and Pacific, ESCAP, United Nations, Bangkok, pp.1-120, January 2003. Das, Tarun (2003b) Economic Reforms in India- Rationale, Scope, Progress and Unfinished Agenda, Planning department, Bank of Maharashtra, Pune, February 2003. Das, Tarun, Ashis Saha, Rajaram Dasgupta and Rohit Parmer (2003) Papers and Proceedings of the Seminar on Construction of an Index of Services Production, National Institute for Bank Management, Pune. Deardorff, Alan V. (2001) International provision of trade services, trade and fragmentation, Review of International Economics, Vol.9 (2), pp.233-248, 2001, Pattnaik, R.K., Ashok Sahoo and S.C. Dhall (2003) Methodological issues and growth linkages of trade in services: Indian perspectives, in Tarun Das et.al (2003). WTO (2001) Assessment of Services Liberalisation: Potentially relevant consideration and criteria, S/CSS/W/117, 15 November 2001.

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