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 : tarundas@mail.nic.in

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: tarundas@mail.nic.in

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 export-
oriented 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 market-
friendly 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 Area GNP GNP PPP GNP PPP GNP Adult Life
Million '000 US$ billion Per capita US$ billion Per capita Literacy Expectancy
sq.km. (US $) (US $) (%) (Years)
2000 2000 2000 2000 2000 2000 2000 2000
Low & middle income 5154 101491 6315 1230 19980 3910 65 64
East Asia & Pacific 1855 16385 1962 1060 7609 4130 68 69
Europe & Central Asia 474 24217 953 2010 3140 6670 68 69
Latin America & Carib. 516 20459 1895 3670 3624 7080 69 70
Mid. East & N.Africa 295 11023 618 2090 1545 5270 66 68
South Asia 1355 5140 595 440 2984 2240 61 63
Sub-Saharan Africa 659 24297 310 470 1044 1600 52 47
High Income 903 32315 24994 27680 24793 27770 77 78
World 6057 133806 31309 5170 44459 7410 67 66
Notes: (a) Two dots (..) stand for "Data not available"
Source: Das (2003)

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

Country GDP growth GDP growth Agriculture Industry Manufacture Services

Per annum Per annum Growth pa Growth pa Growth pa Growth pa
1980-1990 1990-2000 1990-2000 1990-2000 1990-2000 1990-2000
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
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 Industry Manufacture Services

% of GDP % of GDP % of GDP % of GDP

1990 2000 1990 2000 1990 2000 1990 2000 1990 2000
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
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 1975 1985 1990 1995 2000

Hong Kong, China 98 98 99 95 95
Korea 82 92 94 93 91
Singapore 52 54 74 80 86
Taipei, China 81 91 94 93 95
China, PR n.a. 49 74 81 88
Indonesia n.a. 14 38 53 54
Malaysia 31 32 56 65 80
Philippines 22 62 73 76 41
Thailand 24 43 65 73 74
India 51 58 75 75 76
Pakistan 52 67 77 85 84
Sri Lanka 11 34 62 73 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 1985-
2000 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 1995-
2000. 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

Regions Percentage Share in total exports
Manu- Oil Non-oil Services Total
facturing commodities
All developing countries 56 13 16 15 100
East Asia 72 3 12 13 100
South Asia 60 0 20 20 100

Table-7 Contribution of ICT exports to total exports (%)

Country or Share of ICT export in total Contribution of ICT exports
Region 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.

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

Economy Share of Share in electronics exports

electronics Industrial Electronics Consumer
exports in total electronics Components Electronics
exports 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 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 co-
financing 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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