Modern services such as internet connectivity technology, or financial, legal & other professional business services account for less than 10% of Asia’s service economy, well below the 20-25% in advanced economies
The eurozone crisis has dominated discussion among policymakers over the last few years, but the economic slowdown in Asia’s two giants—the People’s Republic of China (PRC) and India—has become a source of growing public concern as well. How worried should we be about an additional drag on the global economy?
After years of double-digit GDP growth, the PRC’s economy is decelerating. At the Asian Development Bank, we predict that its growth will slow to 7.7% this year, from 9.3% in 2011. The PRC’s population is aging, real wages are rising, and growth is moderating toward more sustainable rates.
India, too, has massive potential to grow fast and reap a demographic dividend, but it has been struggling with structural reform. We expect that India’s expansion will slow to 5.6% in 2012, from 6.5% last year.
Weak external demand is partly responsible for the falloff in growth, but internal factors—namely, slowing investment and stagnating consumption—are also holding back economic expansion. Maintaining growth in the face of a global slowdown is a daunting task, and requires rethinking the future of “factory Asia”.
Asia’s boom was driven largely by intraregional manufacturing linkages: intermediate goods and parts were sourced from within Asia for assembly into final goods exported to advanced economies. But, with budget-tightening around the world, demand for Asia’s exports is expected to continue to falter. Where, then, should Asia look for another source of growth?
Upgrading the service sector—for example, business processing, tourism, and health care—could play a critical role in the region’s future growth. Asia’s service sector is already large, contributing significantly to growth and employment. Services accounted for nearly half of developing Asia’s GDP in 2010, two-thirds of India’s growth from 2000 to 2010, and 43% of growth in the manufacturing-oriented PRC in the same period. In addition, service workers comprise more than one-third of total employment in developing Asia.
If these countries follow the same path traveled by the advanced economies, agriculture’s dominance will give way to industry, which in turn will be supplanted by services, further broadening their role. There is certainly room to grow: the share of industry in developing Asia’s output surpassed the OECD average in 2010 (41% vs. 24%), but the share of services still lags by a wide margin (48%