Service sector contribution to growth of South Asian economies

Jahangir Bin Alam | Published: June 09, 2018 21:37:09 | Updated: June 11, 2018 21:07:24

The significant contribution of the service sector in economic growth and employment generation in South Asian countries is well-known to all concerned. There is no denying the fact that industrial and export growth of a country irrespective of its development status cannot happen without support from its service sector.

South Asia's growth pattern, and that of India in particular, has attracted global attention because of its success in service exports. The South Asian experience suggests that rapid growth and poverty alleviation well supported by efficient service sector is now possible.

One may ask as to what has contributed to the globalisation of services, technology, trade, and transport? Are services as dynamic as manufacturing? Can services be the driver of sustained growth, job creation, and poverty alleviation? Why have some countries succeeded and others failed to take advantage of the globalisation of services?

Let us examine the role of service sector in development and its contributions to growth, job creation, and poverty reduction with focus on patterns of and developments in service exports and the kind of infrastructure, policies, and institutions necessary for a services-led growth. However, financial services, transportation, power, education and telecommunication sectors would be pivotal for any such growth.

An assessment of recent economic growth in India, Pakistan and Bangladesh -the three largest economies of South Asia-jumped from an average of 5.0 per cent in the 1990's to well above that average in 2000-2008. Currently it hovers around 50 per cent.

Shortly before the onset of global financial crisis in 2008, India's growth rate was a staggering 9.0 per cent while that of Pakistan, Bangladesh and Sri Lanka's was around 7.0 per cent. These growth rates were all the more impressive as those were accompanied by a substantial reduction in poverty. Over a 10-year period, poverty declined 10 percentage points or more in India, Pakistan and Bangladesh. Even Nepal saw a decline of similar magnitude in case of poverty despite relatively weak economic growth following its political imbroglio.

The economic outcomes were remarkable considering that South Asia faced many development conundrums as were faced by the African countries. India, Pakistan, Sri Lanka had large fiscal deficits. Besides, the South Asian countries ranked high on corruption indices and civil commotions. Much of South Asia with Maldives and Bhutan in particular showed syndromes of enclave economies and macro-economic instability. And still, South Asia managed to overcome the constraints. Bangladesh provided exemplary social services by encouraging domestic non-governmental organisations (NGOs). Sri Lanka protected its Western Province from conflict and enabled it to enjoy the rewards of economic liberalisation.

Nepal opened up alternative and more lucrative avenues of income generation by way of human resource exportation. Bangladesh and India did the same. India kept a lid on inflation and interest rates despite the high fiscal deficits. The encouraging outcomes of growth and poverty fuelled optimism in respect of South Asia's economic prospects.

Growth scenarios ranged from the modest claims of meeting the millennium development goals (MDGs) of human and economic development to the more self congratulatory chest-thumping about this being South Asia's century. These, in one hand, translated into the laudable objective of reducing poverty to single digit within a decade, and on the other, to assertions that the ancient wisdom of the region would show a new path of development to the rest of the world.

However, there were some lingering doubts. One was about growing regional inequality associated with the rapid growth during the previous decade. In India, seven states, with per capita gross domestic product (GDP) less than the national average, had income levels half of those of the seven states with higher than national average GDP per capita. Population weighted average per capita GDP in the populous Indian states of Bihar and Uttar Pradesh was about a third of the weighted average for the four southern states of Tamil Nadu, Karnataka, Andhra Pradesh and Kerala.

Even more alarming was the fact that the income gap between the richer and the poorer states was widening; the richer states were growing at twice the rates of the poorer states. In Pakistan's Punjab, poverty incidence in the richer northern districts at 30 per cent was considerably lower than in the poorer southern districts (40 per cent). Furthermore, the significantly lower primary school enrolments in the southern districts (60 per cent) compared to the northern districts (108 per cent) implied that regional income gap was likely to widen further in the coming years.

Poor education outcomes give rise to other reasons to worry about sustaining Asia's growth. South Asia's gross education enrolment rates, average years of schooling, indicators of trainability of workers to enhance economy-wide productivity and international competitiveness are considerably lower than the East Asian countries (Sri Lanka being an exception). On infrastructure comparisons (for example, in electric power consumption per capita and container traffic), another driver of international competitiveness also, South Asia faired a lot poorer than East Asia. These, in part, not only explain the much lower share of trade to GDP ratio in South Asia compared to East Asia, but also highlight the much smaller proportion of hi-tech products in South Asia's merchandise exports compared to East Asia's.

REMITTANCES AND STRUCTURAL CHANGE: Clearly, South Asia's growth trajectory has been different from East Asia's manufacturing and export-led growth. One important difference is that growth was foreign investment-driven in East Asia while in South Asia, worker remittances have been the significant source of external flows into the region (15 per cent of GDP in Nepal, 10 per cent in Bangladesh and Sri Lanka and 4.0 per cent and 3.0 per cent respectively in India and Pakistan). Remittances in all South Asian economies are considerably larger than the combined financial inflows associated with foreign investment and concessionary official development assistance (ODA).

Remittances have been a mixed blessing for South Asian economies. On the positive side, remittances have flown into depressed regions of South Asia and to the poorer households (for that is where migrants originate as they seek to improve living standards in employment overseas). This is mainly why poverty has fallen sharply throughout South Asia - even in Nepal, which experienced low GDP growth rates due to political turmoil. On the other hand, remittances have fuelled a massive consumption boom in South Asia.

Associated with remittances, the bonanza in imported consumer goods has been the reason for rapid growth of domestic retail, financial services, telecommunications and construction activities. Put differently, the accumulation of reserves has prevented currency adjustments to wipe out the trade deficit. Instead, the adjustment has happened in terms of the evolving structure of the economy whereby services have become the dominant economic activity in South Asia.

In East Asia, foreign investment-driven and merchandise export-led growth resulted in a large number of workers moving from low productivity, low wage agricultural jobs to higher productivity, higher wage manufacturing jobs. The share of agriculture in national GDP and employment fell while that of manufacturing increased.

On the other hand, rapid growth up to 2008 in South Asia resulted in decline of agriculture in the economy, but an increase in the share of services in GDP. Manufacturing has shown little dynamism in terms of capturing international markets and creating employment opportunities. However, South Asia's services-led growth has established a new growth paradigm. India's modern services sector is often cited as the harbinger of a new South Asian services-led growth paradigm.

Generation of enough employment opportunities in the service sector to absorb most of the working poor in South Asia over the next three to four decades remains the implication. The burden thus is on continued high demand for modern services by households receiving remittances from members working overseas. This derived demand for services is subject to considerable uncertainty. Alternatively, South Asia can export modern services in which case the South Asian growth paradigm is not all that different from East Asia's.

The growth stimulus still comes from international trade, but the trade would centre around modern services rather than manufactured goods. India's recent phenomenal success in the export of information technology (IT) services is cited as an example of how IT-enabled splintering of services has created a dynamic, internationally-competitive growth node for the economy. India's IT achievements, in fact, are undoubtedly remarkable.

Software development in India for international market increased from US$ 1.1 billion in 1996-97 to US$ 23 billion in 2006. India now accounts for 60 per cent of global outsourcing.

Rapid technological change in telecommunications has allowed the validation of predictions of new economic growth models centring around economic geography. None of the other South Asian economies, however, has achieved India's success with regard to export of IT and enabled services despite being well-endowed in terms of enabling environment i.e. power rate, percentage of English speakers, internet subscription etc. Furthermore, no other South Asian economy has matched India's success in export of computer and business services. Services-led sustained high growth, thus, may enable the region to eventually join the rank of middle-income countries and reduce poverty to single digit.

The composition of services in all South Asian economies has indeed improved with an increasing share of services now accounted for by "modern" services such as financial intermediation, communications and transport. This "splintering" of services made possible by IT has created employment opportunities that are more productive and command higher wages than employment in agriculture. This employment transition from agriculture to relatively modern services largely explains the recent high growth spurts in South Asian economies.

Jahangir Bin Alam is Secretary and CEO of India-Bangladesh Chamber of Commerce and Industry.

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