Asia asked to cut red tape to boost potentials of service sector

Booming service industries can be a powerful engine of economic growth and job creation for developing Asia, but the sector’s true potential remains blocked by restrictions and red tape, a new ADB report shows.

“A slew of regulations restrict competition and hamper development of the services sector, affecting everything from the corner shop to mobile telephones,” said Changyong Rhee, ADB’s Chief Economist. “These barriers need to be dismantled so that everyone, particularly the region’s poor, can seize the opportunities of growth.”

Services now account for almost half of developing Asia’s output, ADB says in the theme chapter of Asian Development Outlook 2012 Update. The sector contributed about two-thirds of the growth recorded in India between 2000 and 2010, and more than 40% in the People’s Republic of China. Services have also been a massive source of jobs, employing 34% of the region’s workers, and thus furthering inclusive growth.
 
Notwithstanding their large and growing quantitative significance, labor productivity levels of developing Asia’s services industries still lag well behind those of advanced economies, less than 20% of OECD levels in most countries. The relatively low share of modern services such as information and communications technology (ICT) weighs down on the sector’s productivity performance.

Creating a dynamic, high-productivity services sector with a larger role for modern services will require tackling a wide range of bottlenecks which stifle competition and innovation. These include a lack of highly skilled workers, which hampers the development of high-end services, and services-relevant infrastructure such as ICT and broadband, which still lag advanced economies, and above all, burdensome regulations which protect incumbent firms from domestic and foreign competitors.

Easing domestic regulations and trade barriers is critical to fostering more competitive services markets and higher productivity in the region. However, doing so requires a great deal of political will and commitment, given the formidable array of well-entrenched vested interests that benefit from regulatory barriers. These include state-owned enterprises as well as private monopolies.

Nevertheless, the time to act is now. Mustering the political courage to reform Asia’s services is an urgent priority for sustaining growth in the face of the uncertain global outlook. A vibrant services sector will have large spin-offs for the rest of the economy, enable the region to take advantage of the growing tradability of services, and promote inclusive growth by generating high-quality, high-wage jobs for Asian workers.

Asian Development Outlook and Asian Development Outlook Update are ADB’s flagship economic reports analyzing economic conditions and prospects in Asia and the Pacific, and are issued in April and October, respectively. (ADB)