Asias stifled services

Nov 08 2012, 03:49 IST
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SummaryThe eurozone crisis has dominated discussion among policymakers over the last few years, but the economic slowdown in Asias two giantsthe Peoples Republic of China and Indiahas become a source of growing public concern as well.

Modern services such as internet connectivity technology, or financial, legal & other professional business services account for less than 10% of Asias service economy, well below the 20-25% in advanced economies

Changyong Rhee

The eurozone crisis has dominated discussion among policymakers over the last few years, but the economic slowdown in Asias two giantsthe Peoples Republic of China (PRC) and Indiahas 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 PRCs 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 PRCs 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 Indias 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 factorsnamely, slowing investment and stagnating consumptionare 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.

Asias 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 Asias exports is expected to continue to falter. Where, then, should Asia look for another source of growth?

Upgrading the service sectorfor example, business processing, tourism, and health carecould play a critical role in the regions future growth. Asias service sector is already large, contributing significantly to growth and employment. Services accounted for nearly half of developing Asias GDP in 2010, two-thirds of Indias 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, agricultures 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 Asias output surpassed the OECD average in 2010 (41% vs. 24%), but the share of services still lags by a wide margin (48%

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