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03 June 2014
Emerging Asia's retarded service sectors

Emerging Asia's retarded service sectors

China, India and Indonesia suffer from very high restrictions on their trade in services, which are holding back their efforts to improve the lives of their citizens.

Asia's big emerging economies of China, India and Indonesia suffer from very high restrictions on their trade in services, according to a recent OECD study.

These restrictions are often two to three times higher than in the advanced OECD countries. They are an important reason why service sector productivity in these countries is lower than in their manufacturing sectors, and also very much lower than in service sectors in OECD countries.

Overall, these restrictions are holding back efforts to improve the lives of citizens in these countries. World class service sectors cannot be developed if isolated from best international practice and world class inputs.

The OECD has undertaken comprehensive analysis of restrictions on services trade in some 18 sectors in 40 countries, being the 34 OECD member countries and the "BRIICS", Brazil, Russia, India, Indonesia, China and South Africa.

The OECD study examines the effect of regulations, competition barriers, restrictions on foreign investment, and restrictions on the movement of people as service providers. The service sectors covered include telecommunications, computers, transportation, distribution, commercial banking, insurance, and professional services like accounting, legal, architecture and engineering.

Why do services matter?

The services sector accounts for the lion's share of the economy in advanced OECD countries, representing about 80% of employment and 75% of GDP. In other words, to have a high income economy, you must have a highly productive and efficient services sector. While services may only account for 22% of OECD exports, they account for close to half of the value added in exports as they are an important input into manufacturing and agricultural exports.

Even in China, India and Indonesia, which are very much less advanced than the OECD countries, the services sector already accounts for 40-60% of employment and GDP. Thus, to continue climbing the development ladder, from middle to high income status, it is critical for these countries to improve the productivity of their service sectors.

How does Asia rank?

China's score for the services trade restrictiveness index (STRI) is well above the average of the 40 countries, in all the 18 sectors covered (in sharp contrast, the US is only above average in 5 sectors, meaning that overall policy is not very restrictive). The sectors with the highest STRI in China are courier services, broadcasting and air transport, while architecture, engineering and computer services are the least restricted.

Indonesia also has a higher STRI score in all 18 sectors. Its highest scores are for motion pictures, legal services and air transport, while architecture, construction and computer services have the lowest scores.

India is a case apart, in that services have been the country's leading export sector in recent years, especially from its well-renowned IT sector. Against that, India has suffered from a backward manufacturing sector.

Services are responsible for close to 60% the value added of India's exports, more than twice the shares in China and Indonesia. These latter two countries have lowest share of services value added in total exports of all the 40 countries surveyed.

Despite the Indian services success-story, India has a STRI score above average in 10 out of 18 sectors, with very high restrictions in the rail transport, legal, air transport, and insurance sectors. In sum, there is still very much that India can do to exploit the full potential of its services sector.

In conclusion, improving the productivity of the service sector is of critical importance to China, India and Indonesia, as it is a key driver of the economy, and to provide important inputs into manufacturing and agricultural systems.

The importance of the service sector is heightened by the transformation of previously integrated production processes into complex value chains, notably in East Asia. There would be no global value chains without well-functioning transport, logistics, finance, communications and other business and professional services to move goods and coordinate production across the economy.

There is also much greater potential for trade in services today than in the past. Many services which were previously part of the "non-traded" domestic economy -- things like call centers, accounting, legal, software and design services -- are increasingly "off-shored" as tradable services. As India and the Philippines have demonstrated, middle income countries have great potential as exporters of such services. As well as lifting of restrictions to trade, it is necessary to improve human capital and infrastructure to exploit this opportunity.

What are the stakes?

China, India and Indonesia all stand at a crossroads in their development, as they need to find new sources of growth. The advanced OECD countries will not be able to absorb as many Asian exports as in the past, as they have now moved onto a lower growth trajectory following the global financial crisis. Indeed, there is now a growing perception that we have entered a period of secular stagnation.

Removing the vast array of restrictions on services trade could provide an important source of growth for these Asian countries. But doing so, means tackling the many vested interests who benefit from these restrictions.

New political leadership in all three countries, with fresh political capital, provides an opportunity for making such tough decisions on these service restrictions. In this context, China's President Xi Jingping, India's new Prime Minister Narendra Modi and Joko Widodo, Indonesia's likely new President, would do well to look closely at this excellent OECD analysis.

The political importance of this study was evident at its recent launch at OECD Week 2014. Trade ministers from the US, EU, Canada, Mexico and Australia were all in attendance, promoting and endorsing the exercise as a helpful tool for removing restrictions to services trade, including in their own countries.

Author

John West
Executive Director
Asian Century Institute
www.asiancenturyinstitute.com

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Tags: asia, services, productivity, economic growth

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