Services are often seen as slow to innovate, tough to trade, and hard to reform. A combination of technological change and policy reform, however, is transforming services into the most dynamic part of many economies. In East Asia and Pacific (EAP), a region associated with manufacturing-led growth, services are already driving development.
Over the last decade, the share of services in economic activity and employment increased significantly. In fact, services account for nearly 50 percent of jobs in the region, up from 42 percent a decade ago, and the contribution of the services sector to aggregate labor productivity growth has been higher than the contribution of manufacturing in all major economies in the region (Figure 1).
Figure 1: Services are now the biggest contributors to aggregate productivity growth
Services Source: Services Unbound, Figure O.1
Services currently represent the most dynamic elements of international trade and foreign direct investment in the EAP region (Figure 2). Moreover, services tend to employ relatively more women, and more so as the level of development increases.
Figure 2: Services outpaced manufacturing in terms of growth of trade and FDI
Source: Services Unbound, Figure O.2
Services Unbound proposes a framework to depict services-led development (Figure 3). Changes in technology and policy reforms within services are leading to structural change across and within sectors. The result is higher productivity in services sectors and in the other sectors that use those services, as well as increased demand for the sophisticated skills that complement the new technologies. The same combination of services policy reform and technological diffusion is also improving education, health, and finance to equip people to take advantage of these new opportunities. However, fully unleashing the virtuous cycle between opportunity and capacity that constitutes development, will require deeper reform.
Figure 3: The virtuous cycle of opportunity and capacity: An organizing framework
Source: Services Unbound, Figure O.4
The report presents evidence for these arguments. First, new firm-level analysis reveals that in the Philippines, the average services firm has about a third more data and software assets per worker than its manufacturing counterpart, and the adoption of digital technologies is associated with higher productivity and value added within firms.
Second, new firm-level evidence for Viet Nam reveals that the reduction in restrictions on transportation, finance, and business sectors over the period 2008¨C16 was associated with a 2.9 percent annualized increase in value added per worker in these sectors. Furthermore, the liberalization in services was associated with a 3.1 percent annualized increase in labor productivity of the manufacturing enterprises that use services inputs, benefiting small and medium private enterprises most significantly (Figure 4).
Third, new jobs created in digital services require greater skills than those in traditional services, as indicated by new microlevel evidence from Indonesia.
Figure 4: In Viet Nam, services liberalizations between 2008 and 2016 increased firms¡¯ labor productivity in both services and downstream manufacturing firms
Source: Services Unbound, Figure O.6
Lastly, the use of new digital technologies and reforms in education and health services could help address the skills deficit as well as the inequality of access and quality across the region, and it could equip more EAP citizens to engage productively in the new digital economy (as illustrated on the right branch of Figure 3).
The role of policy
To unleash the virtuous cycle between opportunity and capacity, and to ensure inclusive and sustainable services development, three pairs of policy actions are considered.
First, countries must pursue both liberalization and regulation. New data reveal that services trade liberalization is still unfinished business. Despite past reforms, many countries still have relatively restrictive regimes for services (Figure 5).
Second, governments need to work with the private sector in building the infrastructure and skills needed to take advantage of emerging opportunities.
Third, unilateral domestic reforms must be complemented with cooperative international action to address services market failures that have a transborder dimension.
Figure 5: Most EAP countries restrict services trade more than countries at comparable level of development
Source: Services Unbound, Figure O.9
Looking ahead, pursuing policy strategies that are attuned to the interplay between opportunity and capacity will be highly important for development. As illustrated in Figure 6, favoring the development of opportunities without the accompanying increased capacities could lead to potential shortages. Developing capacities in the absence of opportunities could generate potential underutilizations. Only pursuing balanced policies in which the enhancement of endowments shapes comparative advantage, and the evolution of comparative advantage incentivizes the enhancement of endowments, could generate a virtuous cycle that powers development.
Figure 6: The need for a balance development of opportunities and capacities
Source: Services Unbound, Figure O.11