The eurozone crisis has dominated discussion among policymakers in recent 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 percent this year, from 9.3 percent last year. 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 percent this year, from 6.5 percent 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 it requires rethinking the future of “factory Asia.”
Asia’s boom was driven largely by intra-regional 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 percent 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 Organisation for Economic Co-operation and Development (OECD) average in 2010 (41 percent versus 24 percent), but the share of services still lags by a wide margin (48 percent versus 75 percent).
Making Asia’s service sector more dynamic is essential to future growth, but the sector is still dominated by traditional services, such as restaurants, taxis and barbers. Modern services — such as Internet connectivity technology, or financial, legal and other professional business services — account for less than 10 percent of Asia’s service economy, well below the 20 to 25 percent in advanced economies.
While traditional service industries are able to provide jobs, they do not generate much income. Labor productivity is also quite low: For most economies in the region, service-sector productivity is less than 20 percent of the OECD average. Even in South Korea, labor productivity in industry is 118 percent of the OECD figure, but only 43 percent of the average for services.