Developing the Service Sector as Engine of Growth for Asia: An Overview

Noland, Marcus; Park, Donghyun; Estrada, Gemma B. Working Paper Developing the Service Sector as Engine of Growth for Asia: An Overview ADB Economics Working Paper Series, No. 320 Provided in Cooperation with: Asian Development Bank (ADB), Manila Suggested Citation: Noland, Marcus; Park, Donghyun; Estrada, Gemma B. (2012) : Developing the Service Sector as Engine of Growth for Asia: An Overview, ADB Economics Working Paper Series, No. 320, Asian Development Bank (ADB), Manila, https://hdl.handle.net/11540/1270 This Version is available at: https://hdl.handle.net/10419/109458 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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Estrada No. 320 | November 2012 ADB Economics Working Paper Series ADB Economics Working Paper Series Developing the Service Sector as Engine of Growth for Asia: An Overview Marcus Noland, Donghyun Park, and Gemma B. Estrada No. 320 November 2012 Marcus Noland is the deputy director of the Peterson Institute for International Economics, where he is also a senior fellow, and a senior fellow at the East–West Center. Donghyun Park is Principal Economist at the Economics and Research Department of the Asian Development Bank. Gemma B. Estrada is economics officer at the Economics and Research Department. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org © 2012 by Asian Development Bank November 2012 ISSN 1655-5252 Publication Stock No. WPS125112 The views expressed in this paper are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. By making any designation of or reference to a particular territory or geographic area, or by using the term “country” in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area. Note: In this publication, “$” refers to US dollars. The ADB Economics Working Paper Series is a forum for stimulating discussion and eliciting feedback on ongoing and recently completed research and policy studies undertaken by the Asian Development Bank (ADB) staff, consultants, or resource persons. The series deals with key economic and development problems, particularly those facing the Asia and Pacific region; as well as conceptual, analytical, or methodological issues relating to project/program economic analysis, and statistical data and measurement. The series aims to enhance the knowledge on Asia’s development and policy challenges; strengthen analytical rigor and quality of ADB’s country partnership strategies, and its subregional and country operations; and improve the quality and availability of statistical data and development indicators for monitoring development effectiveness. The ADB Economics Working Paper Series is a quick-disseminating, informal publication whose titles could subsequently be revised for publication as articles in professional journals or chapters in books. The series is maintained by the Economics and Research Department. Printed on recycled paper CONTENTS ABSTRACT v I. INTRODUCTION: WHY DOES DEVELOPING ASIA NEED TO STRENGTHEN ITS SERVICE SECTOR? 1 II. HETEROGENEITY OF SERVICE SECTOR AND MEASUREMENT PROBLEMS 2 III. SERVICE SECTOR DEVELOPMENT AND PER CAPITA INCOME: SOME KEY STYLIZED FACTS 4 IV. SERVICE SECTOR IN ASIA: THE BASIC FACTS 10 V. LOW PRODUCTIVITY OF ASIA’S SERVICE SECTOR 17 VI. ASIA’S SERVICE SECTOR HAS SOME EFFECT ON POVERTY REDUCTION AND THUS INCLUSIVE GROWTH 22 VII. SERVICES, GENDER EQUALITY, AND ENVIRONMENTALLY SUSTAINABLE GROWTH 27 A Services and Gender Equality 27 B. Services and Environmentally Sustainable Growth 28 VIII. SERVICES, URBANIZATION, AND INFORMALITY 28 A. Urbanization and Service Sector 29 IX. URBANIZATION AND INFORMAL SECTOR EMPLOYMENT 30 X. QUALITY OF DATA: A MAJOR PROBLEM IN THE ANALYSIS OF ASIAN SERVICES 31 XI. SOME CONCEPTUAL ISSUES 34 A. The Either-Manufacturing-or-Services Fallacy 34 B. Synergies Between Services and Industrial Productivity 35 C. Service Sector Development, Inclusive Growth, and the Role of Government 36 XII. CONCLUDING OBSERVATIONS 37 REFERENCES 39 ABSTRACT     The maturing of the manufacturing sector in many Asian countries, combined with the relative backwardness of its service sector, has made service sector development a top priority for developing Asia. Our central objective is to broadly survey and analyze the current landscape of the region’s service sector so as to assess its potential to serve as an engine for inclusive economic growth. Our analysis indicates that services are already an important source of output, growth, and jobs in the region. However, its productivity greatly lags that of the advanced economies, which implies ample room for further growth. The impact of service sector on poverty reduction is less clear but we do find some limited evidence of a poverty reduction effect. One key challenge for all Asian countries is to improve the quality of service sector data. Overall, while service sector development is a long and challenging process, creating more competitive services markets by removing a wide range of internal and external policy distortions is vital for improving service sector productivity. As important as such policy reforms are, complementary investments in physical infrastructure and human capital will also be necessary to achieve a strong service sector. Keywords: Services, structural change, growth, productivity, Asia JEL Classification: L8, O14, O40, O47 I. INTRODUCTION: WHY DOES DEVELOPING ASIA NEED TO STRENGTHEN ITS SERVICE SECTOR? An integral part of the economic growth and development process is structural transformation. The structure of output and employment changes as a country grows and develops. A wellknown stylized fact is that the share of agriculture in output and employment falls and the share of manufacturing and services correspondingly rises during the industrialization process. Beyond a certain point, as the manufacturing sector matures, productivity growth in manufacturing offsets employment growth and the employment share of services continues to increase while the employment share of manufacturing begins to decline. In some highly open countries in East and Southeast Asia, comparative advantage is strongly concentrated in manufacturing, and the manufacturing share of output itself may peak and decline as the economy eventually rebalances in response to rising income and domestic demand, which has a larger services component, increases in importance. In many Asian countries, especially in East and Southeast Asia, the industrialization process has gone on for quite some time. In those countries, the scope for further growth of the manufacturing sector is increasingly limited. While export-oriented industrialization has transformed East and Southeast Asia into the factory of the world, the region’s record in the service sector has been much less impressive. Asia does have some well-known success stories, such as India’s emergence as the world’s leading information and communications technology-business process outsourcing (ICT-BPO) exporter (see, for example, Dossani 2010). The Philippines is also emerging as a major ICTBPO hub. However, even in those countries, some tradable service industries rather than the entire service sector are performing well. Overall, there is a general perception that in Asia the productivity of a weak service sector lags a strong, internationally competitive manufacturing sector. And in some cases, where there are strong service sectors, there are concerns that they are effectively enclaves with weak backward and forward linkages to the rest of the economy. This matters considerably for economic growth since low productivity growth in the service sector can retard economy-wide productivity growth. The growing tradability of services and consequent emergence of global supply chains in services, for example in health care, presents new growth opportunities for a region which is heavily involved in the global supply chain in manufacturing. There are a number of inter-related factors which further strengthen the case for a more vibrant Asian service sector at this point in time. For one, while Asia has grown faster than the rest of the world for decades, the global financial and economic crisis of 2008–2009 has cast a dark cloud over its future growth prospects. The crisis originated in the advanced economies and hit those economies harder than the developing countries. As a result, the post-crisis recovery has been noticeably weaker in the advanced economies. Furthermore, in the euro area, recovery has been dealt another big blow by the ongoing sovereign debt crisis. The bottom line is that advanced economies are likely to experience a slowdown relative to the preglobal crisis period. This has significant adverse ramifications for Asia’s export and growth prospects since advanced economies still take in a large share of Asia’s manufactured exports even though their share has been declining. At a time when the manufactured exports engine is stalling, igniting the services engine can help offset the loss of growth momentum. Therefore, the global financial crisis has increased the urgency of the rebalancing effort (see, for example, ADB 2009).The global crisis and its pronounced effect on Asia’s exports and growth shattered any notion that Asia had decoupled from the business cycle of the advanced economies. More fundamentally, it highlighted the risks of disproportionate dependence on exports and a corresponding need to strengthen domestic demand. As a result of strong 8  ADB Economics Working Paper Series No. 320 Trade in services has been dealt with unevenly at the multilateral, regional, and bilateral levels. The General Agreement on Trade in Services (GATS) identifies four modalities: trade in services where physical interaction between the buyer and seller is unnecessary, analogous to trade in goods; consumption abroad where the consumer travels to the provider (i.e., tourism); commercial presence where the provider establishes a facility in the client’s country (i.e., investment); and temporary movement of service providers to the client (i.e., migration). These different modalities involve differing issues and complicate negotiations; the process is further complicated by the fact that countries have differing comparative advantages and interests in liberalization across the range of service activities associated with differing modes of delivery. Services trade policy restrictiveness tends to decline with per capita income (Figure 8). Presumably, causality runs in both directions: More open economies tend to grow faster and get rich, while for political economy reasons, rich economies with large service sectors tend not to impose restrictions on these important and politically influential industries. However, differential performance with respect to services imports and exports (Figures 9 and 10, respectively) suggests that the competitiveness of Asian service providers may also be an issue. Figure 8: Trade Restrictiveness and per Capita Income ARM = Armenia; BAN = Bangladesh; CAM = Cambodia; GEO = Georgia; IND = India; INO = Indonesia; KAZ = Kazakhstan; KOR = Republic of Korea; KGZ = Kyrgyz Republic; MAL = Malaysia; MON = Mongolia; NEP = Nepal; PAK = Pakistan; PHI = Philippines; PRC = People’s Republic of China; SRI = Sri Lanka; THA = Thailand=; UZB = Uzbekistan. Note: Data on restrictiveness of policy on services trade are from 2008 to 2011, and on gross domestic product in 2010. Sources: Borchert, Gootiz, and Mattoo (2012); World Bank. World Development Indicators online database (accessed 16 April 2012). ARM BAN PRC GEO INO IND KAZ KGZ CAM KOR SRI MON MAL NEP PAK PHI THA UZB VIE 0 20 40 60 80 Index of restrictive policy on services trade 010 20 30 40 50 Gross domestic product per capita (2005 constant purchasing power parity $’000) Developing Asia Developing Europe Latin America and Caribbean Middle East and North Africa Sub-Saharan Africa High-income economies Developing the Service Sector as Engine of Growth for Asia: An Overview  9 Figure 9: Ratio of Service Imports to Goods Imports Sources: World Bank, World Development Indicators online database (accessed 24 February 2012); Authors' estimates. Figure 10: Ratio of Service Exports to Goods Exports Sources: World Bank, World Development Indicators online database (accessed 24 February 2012); Authors' estimates. 0.00 0.10 0.20 0.30 0.40 0.50 1980 1984 1988 1992 1996 2000 2004 2008 Ratio India Singapore Thailand Korea,Rep.of Pakistan China,People'sRep.of 0 0.1 0.2 0.3 0.4 0.5 0.6 1980 1984 1988 1992 1996 2000 2004 2008 Ratio India Singapore Pakistan Korea,Rep.of Thailand China,People'sRep.of 10  ADB Economics Working Paper Series No. 320 IV. SERVICE SECTOR IN ASIA: THE BASIC FACTS Across the region, the service sector has clearly been on the rise, whether viewed in terms of output or employment. From about 44% average share in 1980, the service sector now accounts for slightly over one-half of GDP in developing Asia, but there is some variation across the subregions (Figure 11).3 In East Asia, the service sector comprises about 60% of GDP, and the current high share is mainly due to the newly industrializing economies (NIEs)— Hong Kong, China; the Republic of Korea; and Taipei,China—with services shares of about 60%–90% (Figure 12). But the PRC has also witnessed a significant rise in services, by roughly 20 percentage points over the past 3 decades. Compared to other subregions, the service sector has been less dynamic in Southeast Asia; only Philippines and Singapore have services shares, rising to over one-half of GDP. A uniform pattern of rapidly growing service sector can be seen across South Asia, most notably in India, Nepal, and Sri Lanka, where services shares have risen by about 15–20 percentage points. In Central Asia, the surge of the service sector has been quite dramatic, as economies’ newly gained independence in the 1990s resulted in the rise of new service activities. Owing to their geographic conditions and significant tourism sector, most Pacific countries have maintained large service sectors. Figure 11: Sector Shares of GDP by Subregion Note: Countries covered are those with data around 1990, 2000, and 2010. Central Asia includes Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. East Asia covers the People's Republic of China; Hong Kong, China; the Republic of Korea; Mongolia; and Taipei,China. South Asia covers Bangladesh, Bhutan, India, Nepal, Pakistan, and Sri Lanka. Southeast Asia comprises Brunei Darussalam, Indonesia, the Lao PDR, Malaysia, the Philippines, Singapore, Thailand, and Viet Nam. Pacific includes Fiji, Kiribati, Papua New Guinea, Solomon Islands, and Tonga. Source: Authors’ estimates based on data from ADB 2007; Asian Development Bank Outlook database; CEIC Data Company; World Bank, World Development Indicators online database (databases accessed 16 April 2012). 3 Developing Asia is defined as Afghanistan, Armenia; Azerbaijan; Bangladesh; Bhutan; Brunei Darussalam; Cambodia; the PRC; Fiji; Georgia; Hong Kong, China; India; Indonesia; Kazakhstan; Kiribati; the Republic of Korea; the Kyrgyz Republic; the Lao PDR; Malaysia; the Maldives; the Marshall Islands; the Federated States Micronesia; Myanmar; Nepal; Pakistan; Palau; Papua New Guinea; the Philippines; Samoa; Singapore; Solomon Islands; Sri Lanka; Tajikistan; Thailand; Timor-Leste; Turkmenistan; Tuvalu; Uzbekistan; Vanuatu; and Viet Nam. 0 20406080100 1990 2000 2010 1990 2000 2010 1990 2000 2010 1990 2000 2010 1990 2000 2010 1990 2000 2010 Developing Asia CentralAsiaEastAsiaSouthAsiaSoutheastAsiaThePacific % Agriculture Industry Services Developing the Service Sector as Engine of Growth for Asia: An Overview  11 Figure 12: Service Sector Share of GDP by Economy Lao PDR = Lao People’s Democratic Republic, PRC = People’s Republic of China. Sources: ADB 2007; Asian Development Outlook database; CEIC Data Company; World Bank. World Development Indicators online database (databases accessed 16 April 2012); Authors' estimates. The service sector is a key provider of jobs in the region. Majority of the employed are now in services in several economies, including Kazakhstan, Malaysia, the Maldives, the Philippines, and the NIEs (Figure 13). In 1990, only Singapore and Hong Kong, China had service employment shares of over one-half, while in the PRC, Cambodia, and Viet Nam, less than 20% were employed in services. Since then, employment shares of the service sector have risen by 10–20 percentage points in the latter set of economies. However, despite the rapid rise in India’s services output share, the employment share of its services remains low at 27%. A similar concern holds true for other South Asian economies, particularly Bangladesh, Pakistan, and Sri Lanka, where services employment shares are quite low relative to their output shares. 050100 Armenia Azerbaijan Georgia Kazakhstan KyrgyzRepublic Tajikistan Turkmenistan Uzbekistan PRC HongKong,China RepublicofKorea Mongolia Taipei,China Bangladesh Bhutan India Maldives Nepal Pakistan SriLanka BruneiDarussalam Cambodia Indonesia LaoPDR Malaysia Myanmar Philippines Singapore Thailand VietNam Fiji Kiribati PapuaNewGuinea Samoa SolomonIslands Tonga CentralAsiaEastAsiaSouthAsiaSoutheastAsiaThePacific % 1980 1990 2010 12  ADB Economics Working Paper Series No. 320 Figure 13: Share of Services in Employment PRC = People’s Republic of China. Note: Latest data refer to 2006 for Cambodia and the Maldives; 2007 for Georgia; 2008 for Armenia, the Kyrgyz Republic, and Pakistan; and 2010 for Bangladesh and India. Initial data refer to 1991 for Bangladesh, Germany, and Singapore; 1993 for Cambodia and Mongolia; and 1994 for India. Source: CEIC Data Company; International Labour Organization. Key Indicators of the Labor Market online database (both accessed 16 April 2012); ADB estimates. Not only is the service sector now a large part of the economy, but it has also been a huge contributor to overall growth. In the past 10 years, the service sector accounted for more than one-half of GDP growth in most economies in the region (Figure 14). Even during the 1990s, a period of more subdued growth for the region, the service sector contributed to most of the growth. Services’ contribution to growth has been higher in South Asia than in other regions. In India, the Maldives, and Sri Lanka, roughly over 60% of the growth in 2000–2010 was due to services. In Southeast Asia, the service sector contributed to over one-half of the growth in Indonesia, Malaysia, the Philippines, and Singapore. But in East Asia, particularly the PRC; the Republic of Korea; and Taipei,China, the story is still industry rather than services, driving overall growth. As noted in ADB (2007), the service sector has played an important role in countries where the pace of industrialization has been slow such as in the case of South Asian countries and the Philippines. Furthermore, for South Asia, the modern service sector drove overall growth (see Bosworth and Maertens 2010 and Ghani 2010). 0 306090 VietNam India Cambodia Bhutan PRC Bangladesh Pakistan Georgia Thailand Armenia SriLanka Indonesia Mongolia KyrgyzRepublic Azerbaijan Philippines Kazakhstan Taipei,China Malaysia Maldives RepublicofKorea Singapore HongKong,China DevelopingAsia % 1990 Around2009 Developing the Service Sector as Engine of Growth for Asia: An Overview  13 Figure 14: Sector Contributions to Annual GDP Growth Lao PDR = Lao People’s Democratic Republic; PRC = People’s Republic of China. Note: The contribution of each sector in GDP growth is equal to the real growth of this sector during the period weighted by its share in GDP in the initial year. Source: Authors’ estimates using data from CEIC Data Company; World Bank. World Development Indicators online database (both accessed 16 April 2012). The trends identified at the global and regional levels in the previous section appear to apply broadly to developing Asia, though missing, fragmentary, and insufficiently disaggregated data impede complete documentation for all countries in developing Asia. Panel data for developing Asia clearly demonstrate that the growth of services is correlated with the rise in income (Figure 15) and educational attainment (Figure 16) over time. 9 6 3 0 3 6 9 12 Georgia Tajikistan KyrgyzRepublic Kazakhstan Armenia Mongolia Uzbekistan Kiribati BruneiDarussalam Fiji Tonga SolomonIslands Philippines PapuaNewGuinea Indonesia Pakistan Thailand Taipei,China Bangladesh Nepal Bhutan SriLanka India RepublicofKorea LaoPDR Malaysia Singapore Maldives VietNam PRC Percentagepoints 1990–2000 Agriculture Industry Services 303691215 Tonga Fiji Samoa PapuaNewGuinea Nepal HongKong,China Taipei,China KyrgyzRepublic RepublicofKorea Thailand Malaysia Philippines Pakistan SriLanka Indonesia Singapore Bangladesh Mongolia Georgia Uzbekistan LaoPDR VietNam Armenia India Cambodia Tajikistan Kazakhstan PRC Maldives Azerbaijan Percentagepoints 2000–2010 Agriculture Industry Services 14  ADB Economics Working Paper Series No. 320 Figure 15: Log Services to Log GDP/Capita Relationship across Time, Developing Asia (1960–Present) Note: Observations include all available observations between 1960-present for developing Asian economies. Sources: World Bank, World Development Indicators online database (accessed 24 February 2012); Authors' estimates. 14 16 18 20 22 24 26 28 30 4567891011 LogServicesCalueAdded (constant2000$) LogGDPperCapita(constant2000$) Armenia19902010 Azerbaijan19922010 Bangladesh19602010 Bhutan19812009 BruneiDarussalam19892007 Cambodia19932009 China,People'sRep.of19602010 Fiji19662009 Georgia19902010 HongKong,China20002010 India19602010 Kazakhstan19902010 Kiribati19822009 Korea,Rep.of19702009 KyrgyzRepublic19872008 Indonesia19602010 LaoPDR19842010 Malaysia19702009 Maldives19952010 Mongolia19812010 Nepal19732009 Pakistan19602010 PapuaNewGuinea19802010 Philippines19602010 Samoa19932009 Singapore19752010 SolomonIslands19902009 SriLanka19602010 Tajikistan19852010 Thailand19602010 Tonga19812009 Turkmenistan19912009 Tuvalu19902008 Uzbekistan19872010 Vanuatu19792008 VietNam19852010 Log Services Value Added (constant 2000 $) Developing the Service Sector as Engine of Growth for Asia: An Overview  15 Figure 16: Log Services to School Life Expectancy Relationship across Time, Developing Asia (1998–Present) Sources: World Bank, World Development Indicators online database; UNESCO Statistical Database (both databases accessed 24 February 2012); Authors' estimates. But the countries in developing Asia are not consistently above or below an international norm established by regressing the logs of services value added against per capita GDP (Figure 17). While most of the developing Asian countries lie above the regression line, i.e., have larger than expected service sectors (e.g., Bangladesh; Cambodia; the PRC; Hong Kong, China; India; Indonesia; Kazakhstan; the Republic of Korea; Malaysia; Nepal; Pakistan; the Philippines; Singapore; Sri Lanka; Thailand; Uzbekistan; and Viet Nam ), a significant number are below the line (e.g., Armenia, Azerbaijan, Bhutan, Fiji, Kiribati, the Kyrgyz Republic, Lao PDR, the Maldives, Mongolia, Papua New Guinea, Samoa, Solomon Islands, Tajikistan, and Tonga).4 4 This listing (and the one for employment that follows) could well change if one adopted a nonlinear norm à la Eichengreen and Gupta (2009). Please refer to Park and Shin (2012) for empirical analysis based on the nonlinear models of Eichengreen and Gupta (2009). 14 16 18 20 22 24 26 28 30 4567891011 LogServicesCalueAdded (constant2000$) LogGDPperCapita(constant2000$) Armenia19902010 Azerbaijan19922010 Bangladesh19602010 Bhutan19812009 BruneiDarussalam 19892007 Cambodia19932009 China,People'sRep.of19602010 Fiji19662009 Georgia19902010 HongKong,China20002010 India19602010 Kazakhstan19902010 Kiribati19822009 Korea,Rep.of19702009 KyrgyzRepublic19872008 Indonesia19602010 LaoPDR19842010 Malaysia19702009 Maldives19952010 Mongolia19812010 Nepal19732009 Pakistan19602010 PapuaNewGuinea19802010 Philippines19602010 Samoa19932009 Singapore19752010 SolomonIslands19902009 SriLanka19602010 Tajikistan19852010 Thailand19602010 Tonga19812009 Turkmenistan19912009 Tuvalu19902008 Uzbekistan19872010 Vanuatu19792008 VietNam19852010 Log Services Value Added (constant 2000 $) 16  ADB Economics Working Paper Series No. 320 Figure 17: Snapshot 2009: Log Services Value Added against Log GDP/Capita ARM = Armenia; AZE = Azerbaijan; BAN = Bangladesh; BHU = Bhutan; CAM = Cambodia; FIJ = Fiji; HKG = Hong Kong, China; IND = India; INO = Indonesia; KAZ = Kazakhstan; KIR = Kiribati; KOR = Korea, Rep. of; KYR = Kyrgyz Republic; LAO = Lao PDR; MAL = Malaysia; MLD = Maldives; MON = Mongolia; NEP = Nepal; PAK = Pakistan; PHI = Philippines; PNG = Papua New Guinea; PRC = China, People’s Rep. of; SAM = Samoa; SIN = Singapore; SOL = Solomon Islands; SRI = Sri Lanka; TAJ = Tajikistan; THA = Thailand; TON = Tonga; UZB = Uzbekistan; VAN = Vanuatu. A similar analysis can be performed on employment data, albeit with a smaller sample of countries and once again developing Asian countries reveal a mixed pattern of performance (Figure 18). Countries in developing Asia exhibiting greater than expected employment in services include Hong Kong, China; Malaysia; the Philippines and Singapore, while developing Asian countries falling below the regression line include Indonesia, Kazakhstan, Sri Lanka, and Thailand. In short, those countries below the international norm in both the income and employment applications tend to be poorer, suggesting that developing Asia’s challenges are concentrated among a group of countries where underperformance implies the greatest social cost. ARM AZE BAN BHU CAM PRC FIJ HKG IND INO KAZ KIR KOR KYR LAO MAL MLD MON NEP PAK PNG PHI SAM SIN SOL SRI TAJ THA TON UZB VAN VIE 15 20 25 30 Log services value-added (2000 $) 4 6 8 10 12 Log GDP per capita (2000 $) Developing Asia Rest of the world Developing the Service Sector as Engine of Growth for Asia: An Overview  17 Figure 18: Snapshot 2009: Share of Labor in Services against Log GDP per Capita Source: World Bank, World Development Indicators online database (accessed 24 February 2012). Moreover, these aggregate figures do not illuminate some critical issues such as the degree of backward and forward linkages from the service sector to the rest of the economy or the extent of diffusion of service sector productivity advances to the rest of the economy that may have a significant impact on development outcomes. To cite an illustrative example, it may be the case that a country has, a large information technology sector, but that sector is essentially an enclave, oriented largely toward the global market, and does not generate much productivity enhancement for the rest of the local economy. Another example would be a tourist sector based on natural, cultural, or historical endowments that functions as an enclave with little spillover to the rest of the local economy. V. LOW PRODUCTIVITY OF ASIA’S SERVICE SECTOR Although the service sector has been rapidly rising across economies in the region, the sector continues to be dominated by traditional activities. As in the past, traditional services comprising wholesale and retail trade, hotels and restaurants, real estate, transport, personal services, and public administration, continue to predominate (Table 2). At the other end are modern services which include information and communication, finance, and professional business services; they comprise only about 8%–12% of the economy in the PRC, India, Indonesia, Thailand, and Taipei,China, but in advanced Organisation for Economic Co-operation and Development (OECD) economies such as France, Japan, and the US, they account for about 17%–25%. Only Hong Kong, China; the Republic of Korea; and Singapore have sizes of modern services that are comparable with the OECD. Modern service activities are considered tradable internationally and thus offer opportunity for countries to widen as well as to diversify their foreign trade. Advanced economies have shifted toward a larger modern service sector, which tends to have higher productivity and better wages compared to traditional services. Hong Kong, China Indonesia Kazakhstan Malaysia Philippines Singapore Sri Lanka Thailand 40 50 60 70 80 90 Share of services in employment (%) 7 8 9 10 11 12 Log GDP per capita ($) Developing Asia Rest of the world s Working Paper Series No. 320 Table 3: Correlations with Poverty Reduction Variables r ty g e Initial Poverty Level Services Growth Agricultural Growth Manufacturing Growth Female Education Polity IV Former CPE DMC - Developing Asia Government Consumption Investment Arable Land Urban Population * ** 1.000 * ** 0.1264*** 1.000 * ** 0.3987*** 0.1704*** 1.000 * ** 0.2236*** 0.5745*** 0.2729*** 1.000 * ** –0.4907*** 0.0428* –0.0687*** –0.1599*** 1.000 * ** –0.4992*** –0.0521** –0.1459*** –0.1535*** 0.4954*** 1.000 * ** 0.0122 0.3815*** 0.2196*** 0.2019*** 0.3209*** –0.1503*** 1.000 * ** 0.2490*** 0.5202*** 0.2122*** 0.3465*** –0.0089 –0.0135 0.3049*** 1.000 * ** 0.1251*** 0.2958*** 0.0554** 0.0434* 0.0492*** –0.0510*** 0.3152*** 0.0428** 1.000 * ** –0.0694*** 0.1817*** –0.1905*** 0.3107*** 0.1954*** 0.0129 –0.0376 0.1578*** 0.0102 1.000 * ** –0.1516*** –0.2273*** 0.0399* –0.0246 0.2739*** 0.0655*** –0.0976*** –0.2047*** –0.0321* –0.1258*** 1.000 * ** –0.7051*** –0.3148*** –0.2088*** –0.4383*** 0.4809*** 0.4802*** –0.0356 –0.3452*** –0.1766*** 0.0181 0.2197*** 1.000 o my. p <0.1. D evelopment Indicators; Barro-Lee Dataset; Polity IV Project; Penn World Tables (all data accessed 24 February 2012); Authors' estimates. Developing the Service Sector as Engine of Growth for Asia: An Overview  25 To examine this possibility more definitively, some multivariate regressions were estimated on data for 56 countries, of which 17 are developing Asian economies, covering the period 1990–2010. The form of the model follows the commonly used convergence growth model in which, conditional on the starting level value of the dependent variable, the determinants of the rapidity of its change are estimated. This approach to the analysis of poverty reduction has been previously explored for a shorter period, 1990–2005, by Ghani and Kharas (2010). This is but one indicator of inclusive growth; one can think of others, such as the level of employment, or employment by particular, traditionally disadvantaged groups, such as women. These regressions are reported in Table 4. Controlling for initial poverty, poverty change is regressed against growth in services, agricultural, and manufacturing outputs. We also explored a number of other potential drivers of poverty reduction: educational attainment, particularly female educational attainment; Polity IV democracy scores (per Kuznets a reduction in inequality with rising per capita income may reflect a greater weight put on poverty reduction due to democratization), physical investment; government consumption; urbanization; and the abundance of arable land (there is evidence that land-scarce countries may have unique development paths distinctively amenable to inclusive growth); due to their distinct institutional organization, status as former CPEs; status as a developing Asia country, as well as sample period. In this multivariate framework, most of the potential regressors were found not to be robustly correlated with poverty reduction. As expected, initial poverty is consistently correlated with poverty reduction, indicating that countries with higher poverty rates tend to have faster rates of poverty reduction. Results of the basic model (specification 1 in Table 4) indicate that change in poverty is negatively related to growth in services output, i.e., growth in services output growth is significantly associated with poverty reduction. Neither agricultural nor manufacturing output growth is significant in the model. Additionally, former CPEs exhibit more rapid rates of poverty reduction. The results are broadly in line with the results of Ghani and Kharas. In specification 2, the share of females attending secondary school or higher at the beginning of the sample period is included. Female education is significantly associated with poverty reduction. Service output growth, initial poverty, and status as a former CPE remain significant. In specification 3, we remove the former CPE variable as well as the insignificant manufacturing and agricultural growth variables. In their place, we introduce a developing Asia binary variable. To be clear, it is not theoretically obvious why specific regions of the world should exhibit distinctive results. That said, status as a developing Asian country appears to be significantly correlated with poverty reduction. Specification 4 reincorporates former CPE into the model while retaining developing Asia. The developing Asia dummy absorbs so much sample variation that the coefficients on several apparently robust regressors, including the services variable, become statistically insignificant. s Working Paper Series No. 320 4 : Cross-country Regressions on Change in Poverty Headcount (at $1.25 a day), 1990-2010 (4.1) (4.2) (4.3) (4.4) (4.5) (4.6) (4.7) (4.8) (4.9) –0.421*** –0.465*** –0.437*** –0.428*** –0.501*** –0.450*** –0.485*** –0.405*** –0.447*** (0.072) (0.072) (0.068) (0.071) (0.067) (0.069) (0.062) (0.059) (0.062) –7.681*** –6.007* –3.781 –8.136** –8.682*** –6.169** (2.465) (3.231) (3.536) (3.780) (2.611) (2.632) –6.816** –6.819* –7.651** –8.791*** –6.560** (3.088) (3.533) (3.251) (2.942) (2.963) –1.179*** –1.138** –0.908* –0.711 –1.076** –0.846 –1.171** –0.913 –0.673 (0.438) (0.480) (0.515) (0.509) (0.498) (0.550) (0.456) (0.553) (0.483) –0.358 0.105 (0.819) (0.778) 0.051 –0.104 (0.326) (0.425) e condary school or -0.123* –0.129** –0.097 –0.071 –0.108 (0.070) (0.056) (0.071) (0.085) (0.070) 0 to 10) –0.387 –0.217 –0.427* –0.292 –0.363* (0.267) (0.233) (0.220) (0.205) (0.204) 21.706*** 24.941*** 18.572*** 18.917*** 24.111*** 16.898** 22.193*** 10.667* 16.463*** (5.905) (7.251) (6.078) (6.554) (6.173) (6.289) (5.714) (6.008) (5.991) 56 52 54 52 52 52 56 56 56 0.685 0.692 0.706 0.716 0.708 0.716 0.707 0.711 0.730 o my. are reported in parentheses. “***” means significant at 1%, “**” at 5%, and “*” at 10%. All regressions control for time period. D evelopment Indicators; Barro-Lee Dataset; Polity IV Project (all data accessed 24 February 2012); Authors’ estimates. Developing the Service Sector as Engine of Growth for Asia: An Overview  27 In specification 5, the Polity IV score is substituted for the developing Asia dummy variable along with the remaining regressors from specification 2. As a consequence of collinearity between female education and the polity score, the estimated coefficients on these variables are not statistically significant, though they are jointly significant at the 90% confidence level. In specification 6, the former CPE dummy is replaced with the developing Asia dummy. As with specification 4, developing Asia absorbs sufficient sample variation to render the service output, female education, and polity score coefficients insignificant. Jointly, the three variables are significant at the 95% confidence level. Similarly, female education and service production are jointly significant at the 90% confidence level. In short, it appears that female educational attainment, services output, and the democracy indicator are all correlated with poverty reduction, but teasing out the precise relationship is hampered by multicollinearity. In specifications 7 through 9, the female education variable is dropped while the democracy variable is retained. Specification 7 uses the former CPE control and produces significant results for all included variables with polity score indicating a significant correlation with poverty reduction. Specification 8 includes the developing Asia dummy without the former CPE variable. The results from equations 4 and 6 are repeated as the inclusion of the developing Asia dummy renders the coefficients on the services and polity score variables insignificant. Finally, specification 9 includes the former CPE and developing Asia controls jointly along with the polity score variable. Unlike specification 4 in which the coefficient on status as a former CPE was insignificant, in specification 9, the estimated coefficients on both the former CPE and developing Asia dummies are significant. A country’s polity score is also significantly correlated with poverty reduction in this specification. Services output growth, however, is not significant in this case. In sum, visual inspection of the data along the lines of Figure 22 confirm that services output is associated with inclusive growth. The simple correlations reported in Table 3 show that the growth of services output is the structural characteristic more highly correlated with the reduction of poverty. The high degree of multicollinearity among the variables of interest frustrate identifying the precise causal channels, but the multivariate regressions reported in Table 4 establish that while there is evidence that services growth is associated with poverty reduction, the relationship does not appear to be robust. What can be said definitively is that there is no evidence that growth of services output is associated with worsening poverty.  VII. SERVICES, GENDER EQUALITY, AND ENVIRONMENTALLY SUSTAINABLE GROWTH In addition to poverty reduction, greater gender equality is another key dimension of more inclusive growth. In particular, expanding access to education and employment opportunities holds the key to including women in the growth process and spreading the fruits of growth to women. Asian countries are recently paying more attention to the environmental costs of rapid growth and developing the service sector can contribute to more environmentally sustainable growth. A. Services and Gender Equality Intuitively, as an economy evolves from agriculture to manufacturing and services, service sector growth should be more conducive for female employment since services jobs tend to be less physically demanding than manufacturing jobs. Development of the service sector can widen employment opportunities for both men and women, but especially so for women. Indeed 28  ADB Economics Working Paper Series No. 320 the World Development Report (World Bank 2012) shows that across 77 countries, services accounts for a higher proportion of female employment than male employment, and the reverse is true for manufacturing. Ghani (2010) supports the view that the growth of services is key to female employment. He finds that countries where services account for a higher share of employment have higher female labor force participation rates. In India and Pakistan, the service sector experienced the largest growth in female labor force participation over the past three decades. Furthermore, a thriving modern service sector in India opened up huge employment opportunities for women. Women account for 30% of the information technology (IT) services and information technology enabled services (ITES) workforce in India, which is higher than female share of services employment. But while advances in information and communication technologies can open up new job possibilities for women, they can also entail female job insecurity and gender wage disparities rooted in gender gaps in access to education and acquisition of skills. Addressing such gaps will be crucial in enhancing the potential of the service sector in reducing gender disparities in the labor market. B. Services and Environmentally Sustainable Growth As noted earlier, as countries grow richer, the relative importance of services in the economy tends to rise. In addition, the general public tends to demand a cleaner environment in richer countries, which consequently invest more in protecting the environment. The two stylized facts—cleaner environment and services-oriented economy—may not be independent of each other. Relative to agriculture and manufacturing, the service sector tends to be less resourceintensive and thus places less strain on the environment. For example, food and beverage manufacturing uses resource inputs such as agricultural products, land, water, fuel, and electricity, in addition to labor input. In contrast, an IT firm is highly dependent only on labor and electricity. Furthermore, IT exports can be sent through the internet and so will require less transport and energy costs than manufacturing exports. The relationship between services and environment can also be analyzed in terms of the potential impact of certain environmental risks on services. For example, climate change will affect the availability of resources, but its impact will be less serious for the service sector compared to its impact on the agricultural and industrial sectors. Still, there are service sector activities such as tourism, transport, and telecommunications which can be adversely affected by severe changes in the environment (World Resources Institute and International Finance Corporation 2009). But overall, considering the relatively low resource-intensity of services, environmental changes are expected to have less direct impact on services compared to other sectors. This suggests that resource degradation and depletion will pose a bigger constraint to the expansion of output in agriculture and manufacturing sectors than in services. Going forward, it may be less environmentally costly to expand services than other sectors. VIII. SERVICES, URBANIZATION, AND INFORMALITY Asian economies are increasingly becoming more urbanized. Several cities in the region such as New Delhi, Seoul, and Shanghai are among the largest megacities in the world. Urbanization can be viewed as a natural consequence of economic growth. For the service sector, urbanization can be a major driver of the sector’s growth. At the same time, urbanization, especially at the early stages, tends to generate more informal sector activities which in turn are also associated with the service sector. Developing the Service Sector as Engine of Growth for Asia: An Overview  29 A. Urbanization and Service Sector Rising urbanization is associated with higher income which in turn raises the demand for a wide array of services. Thus, both traditional and modern services thrive in urban locations. There is a tendency for service sector industries to locate in urban areas to enable proximity to both clients and suppliers. Face-to-face interaction with clients is important for many service sector industries such as retailing, education, health, and other community and personal services, so the presence of a large concentration of people in urban locations is ideal for the service sector. Service sector industries also often cater to varying business activities, so they will locate in areas with dense and diverse business settings (Kolko 2010). The evidence for Asia indicates that more urbanized economies have larger services output and employment shares (Figures 23 and 24). The rapid urbanization of Asian economies is therefore another reason to expect that services will become more important as a source of growth and jobs. Figure 23: Urbanization Rate and Share of Services in GDP, Developing Asia, 2009 (%) AFG = Afghanistan; ARM = Armenia; AZE = Azerbaijan; BAN = Bangladesh; BHU = Bhutan; CAM = Cambodia; FIJ = Fiji; GEO = Georgia; HKG = Hong Kong, China; IND = India; INO = Indonesia; KAZ = Kazakhstan; KIR = Kiribati; KOR = Korea, Rep. of; KGZ = Kyrgyz Republic; LAO = Lao PDR; MAL = Malaysia; MLD = Maldives; MON = Mongolia; MYA = Myanmar; NEP = Nepal; PAK = Pakistan; PHI = Philippines; PNG = Papua New Guinea; PRC = China, People's Rep. of; SAM = Samoa; SIN = Singapore; SOL = Solomon Islands; SRI = Sri Lanka; TAP = Taipei,China; TAJ = Tajikistan; THA = Thailand; TON = Tonga; TKM = Turkmenistan; UZB = Uzbekistan; VIE = Viet Nam. TAP AFG ARM AZE BAN BHU CAM PRC FIJ GEO HKG IND INO KAZ KIR KOR KGZ LAO MAL MLD MON MYA NEP PAK PNG PHI SAM SIN SOL SRI TAJ THA TON TKM UZB VIE 20 40 60 80 100 Share of services in GDP 20 40 60 80 100 Urbanization rate 30  ADB Economics Working Paper Series No. 320 Figure 24: Urbanization Rate and Share of Services in Employment, Developing Asia, 2009 (%) ARM = Armenia; AZE = Azerbaijan; BAN = Bangladesh; BHU = Bhutan; CAM = Cambodia; GEO = Georgia; HKG = Hong Kong; China; IND = India; INO = Indonesia; KAZ = Kazakhstan; KOR = Republic of Korea; KGZ = Kyrgyz; Republic; MAL = Malaysia; MLD = Maldives; MON = Mongolia; PAK = Pakistan; PHI = Philippines; PRC = People’s Republic of China; SIN = Singapore; SRI = Sri Lanka; TAP = Taipei,China; THA = Thailand; VIE = Viet Nam. Note: Employment data refer to 2006 for Cambodia and the Maldives; 2007 for Georgia; 2008 for Armenia, the Kyrgyz Republic, and Pakistan; and 2010 for Bangladesh and India. Sources: CEIC Data Company; World Bank. World Development Indicators online database (both accessed 16 April 2012). IX. URBANIZATION AND INFORMAL SECTOR EMPLOYMENT The informal sector is a large part of the economy in many Asian countries. As share of nonagricultural employment, the informal sector accounts for over 60% in Cambodia, India, Indonesia, Pakistan, Sri Lanka, and Viet Nam (Figure 25). Since the informal sector is often dominated by the service sector, this provides another reason to suspect that services are a large part of output and employment. TAP ARM AZE BAN BHU CAM PRC GEO HKG IND INO KAZ KOR KGZ MAL MLD MON PAK PHI SIN SRI THA VIE 20 40 60 80 100 Share of services in employment 20 40 60 80 100 Urbanization rate Developing the Service Sector as Engine of Growth for Asia: An Overview  31 Figure 25: Share of Informal Sector in Non-agricultural Employment ARM = Armenia; AZE = Azerbaijan; CAM = Cambodia; IND = India; INO = Indonesia; KYR = Kyrgyz Republic; PAK = Pakistan; SRI = Sri Lanka; THA = Thailand; VIE = Viet Nam. Sources: International Labour Organization (2011), Key Indicators of the Labour Market, 7th edition; Asian Development Bank (2005), Key Indicators. One factor which may well drive the link between services and the informal sector is the importance of both in providing jobs in urban areas, especially in low-income economies or at the early stages of urbanization. Many urban migrants settle for informal sector work because their low skills and limited education constitute a major barrier in finding jobs in the formal sector. It is easier for poor urban migrants to find work in simple service sector jobs such as street vendor, peddler, and small shop assistant, unlike in manufacturing where a minimum level of skill is required to become a machine operator or a worker in the production line. At substantially high income levels though, the importance of informal sector diminishes (ADB 2005), while that of service sector in general rises even more. X. QUALITY OF DATA: A MAJOR PROBLEM IN THE ANALYSIS OF ASIAN SERVICES It would be desirable to focus the discussion on a more narrowly defined range of services relatively suitable to liberalization and clear economic linkage to the performance of the rest of the economy such as “business services.” What one immediately confronts, however, is the dearth of data. Indeed, one of the central messages of this study is the need to greatly expand efforts at basic data collection—one cannot manage what one cannot measure. This is an activity that the Asian Development Bank is ideally positioned to support. Table 5 summarizes data available for developing Asian economies, based on a survey of the countries’ bureaus of statistics and labor. It may well be incomplete and we would welcome identification of missing sources. Nevertheless, even interpreted as an incomplete first pass, it is cautioning. There is a tendency for occupational employment and wage data to be available at finer levels of disaggregation than sectoral output or value-added data which in turn is reported with greater granularity than the international transactions data. This unevenness appears to be at least in part a function of bureaucratic tasking, with labor ministries tending to 0 20 40 60 80 100 AZE THA ARM KYR INO SRI CAM VIE PAK IND % 32  ADB Economics Working Paper Series No. 320 take the lead on employment data, economics or industry ministries the output data, and the finance ministry or central bank the international transactions data. Greater coordination and consistency across reporting sources could improve the usefulness of this data. Table 5: Available Services Data in Selected Developing Asia Economies Selected Asian Economies Economic Data on Services Types of Data Level of Disaggregation in Services Years Available China, People's Rep. of Services Value Added 13 2005–present GDP by Sector 6 1978–present Hong Kong, China Exports & Imports of Services by Sector 7 2006–present GDP by Sector 8 2005–present India Net Domestic Product by Sector 10 2005–present Classification of Output/Value Added by Sector 10 2000–present Korea, Rep. of Service Industry Survey (Sales, # of establishments, Employment) 6 1996–2007 GDP by Sector 12 1985–present Malaysia Revenue/Expenses by Sector/Occupation 37 1971–2007 Value of Fixed Assets by Sector/Occupation 37 1971–2007 Philippines GDP by Sector 6 2009–present Singapore Value Added by Sector 7 2004–present Number of Establishments by Sector 7 2004–present Taipei,China GDP by Sector 5 1986–present Selected Asian Economies Employment Data on Services Types of Data Level of Disaggregation in Services Years Available China, People's Rep. of Average Wages by Sector 14 2003–present Employment by Sector 14 2003–present Hong Kong, China Average Wages by Sector 6 2005–present Employment by Sector 6 2005–present India Employment by Sector Full 4-digit Indian NIC Coding System 2010 Employee Compensation by Sector 10 2000–present Korea, Rep. of Average Wages by Sector 12 2011 Employment by Sector 17 2004–present Malaysia Employment by Sector/Occupation 37 1971–2007 Total Wages by Sector/Occupation 37 1971–2007 Philippines Employment by Occupation 17 1990–present Employment by Sector 11 2001–2009 Singapore Employment by Occupation 25 2010 Employment by Sector 12 2011 Taipei,China Employment by Sector 55 2011 Wages by Sector 55 2011 GDP = gross domestic product, NIC = National Industrial Classification. Sources: Included countries' bureaus of labor and statistics; Authors' compilation. As an illustrative example, Malaysian data are reported in table 6. Thirty-eight activities are covered. Ones that might be considered “business services” are in bold.5 For most sectors, data on revenue, expenditure, employment, wages, and the capital stock are reported. While Table 6 reports only the data for 2007, the data go back to 1971 (albeit not for all sectors) which would permit the calculation of sector-level changes over time in wage rates, apparent profitability, labor- and total-factor productivity, and other indicators of interest. This would allow us to begin to analyze how these sectors responded to major changes in regulation, opening to trade, and other policies. 5 A separate issue is which services are tradable (Jensen 2012). Developing the Service Sector as Engine of Growth for Asia: An Overview  33 Table 6: Service Employment Snapshot: Malaysia 2007 Industries/Occupations Revenue (million Malaysian Ringgit) Expenditure (milllion Malaysian Ringgit) Total Employment (1000 persons) Salaries and Wages Paid (million Malaysian Ringgit) Value of Fixed Assets (million Malaysian Ringgit) Lawyers 2,109 1,525 36 701 354 Accountants 1,464 1,089 23 604 183 Architects 1,146 953 12 310 243 Building draftsman 28 22 1 8 6 Engineers 4,956 4,427 27 1,179 492 Surveyors 1,079 912 12 313 202 Private schools 5,887 5,204 84 2,001 5,814 Driving schools 251 221 5 76 169 Medical services 2,991 2,329 31 631 857 Dental services 308 217 4 67 92 Veterinary services 71 60 1 12 18 Private Hospitals 4,372 4,020 31 864 3,050 Accommodation 8,461 7,157 103 1,683 19,328 Stock, share, commodity brokers and foreign exchange services 3,202 2,035 10 471 492 Real estate agents 344 306 4 89 87 Advertising agencies 2,078 1,949 6 290 154 Motion picture projection services 234 200 1 15 134 Bus transporta 1,168 1,267 16 294 836 Road haulagea 6,724 6,420 48 1,066 2,510 Shipping companies 13,041 9,634 21 872 15,445 Inland water transporta 199 182 2 34 106 Air transport 20,478 23,751 23 1,406 13,386 Train/light rail services 727 862 7 199 4,153 Other cargo servicesa 1,222 983 6 155 476 Stevedoring companiesa 200 187 3 52 44 Storage and warehousing servicesa 569 492 3 86 529 Parking lots servicesa 447 386 4 65 469 Highway operation services 4,256 2,664 6 162 14,010 Port operation servicesa 3,335 2,524 10 396 6,364 Travel agencies and tour operato r servicesa 5,443 5,256 15 346 572 Shipping agenciesa 946 813 4 146 241 Forwarding agenciesa 3,472 3,116 13 363 755 Post and courier servicesa 2,359 1,988 24 547 469 Telecommunication servicesa 40,118 31,977 44 2,261 24,384 Computer services 14,711 13,395 47 2,528 1,943 Wholesale trade b - - 108 4,206 - Retail trade - - 313 5,576 - Motor vehicle trade - - 56 1,725 - Total 158,398 138,521 1,167 31,797 118,366 a data for 2006. b data for 2008. “ - “ means data not available. Note: In the first column, business services are highlighted in bold. Source: Malaysia Department of Statistics. Unfortunately, the Malaysian data does not contain information on international transactions nor does it break down the figures by local and foreign producers. These lacunae simply underscore that while the available data does allow one to do analysis of issues of interest, there are significant limitations. And the data for Malaysia is among the best in the 40  ADB Economics Working Paper Series No. 320 Kolko, Jed. 2010. Urbanization, Agglomeration, and Coagglomeration of Service Industries. In E. Glaeser, ed. Agglomeration Economics. Chicago: National Bureau of Economic Research and The Chicago University Press. Leamer, Edward E. 1987. Paths of Development in the Three-Factor, n-Good General Equilibrium Model. Journal of Political Economy 95, no. 5: 961–99. Noland, Marcus, and Howard Pack. 2003. Industrial Policy in an Era of Globalization. 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Product Market Regulation: Extending the Analysis Beyond OECD Countries. OECD Economics Department Working Paper No.799. Paris: Organisation for Economic Co-operation and Development. World Bank. 2012. World Development Report: Gender Equality and Development. Washington, DC. World Resources Institute and International Finance Corporation. 2009. Emerging Risk: Impacts of Key Environmental Trends in Developing Asia. Washington, DC. Yuskavage, Robert E., Erich H. Strassner, and Gabriel W. Medeiros. 2008. Outsourcing and Imported Services in BEA’s Industry Accounts. In M. Reinsdorf and M. Slaughter, eds. International Flows of Invisibles: Trade in Services and Intangibles in an Era of Globalization. Chicago: University of Chicago Press. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org/economics Printed on recycled paper Printed in the Philippines Developing the Service Sector as Engine of Growth for Asia: An Overview The study finds that the service sector is already an important source of output, growth, and jobs in developing Asia. However, the sector’s productivity greatly lags that of the advanced economies, which implies ample room for further growth. The impact of the service sector on poverty reduction is less clear, but the paper finds some limited evidence of a poverty reduction effect. About the Asian Development Bank ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to two-thirds of the world’s poor: 1.7 billion people who live on less than $2 a day, with 828 million struggling on less than $1.25 a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration. Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance.