A vibrant service sector could have broad economic benefits. Synergies between services and industry could improve overall productivity. For example, industrial design, marketing and legal services could facilitate investment and development of new manufactured products. The service sector also tends to be more effective in job creation, particularly for women, thus supporting inclusive growth.
Developing the service sector could also diversify the production base, thereby enhancing economic resilience and boosting growth momentum. Modern services are becoming increasingly tradable, providing new export opportunities. India and the Philippines, for example, have established themselves as world leaders in the export of outsourced business processes.
Skills gaps and a lack of infrastructure are frequently cited as factors that hinder service-sector dynamism in Asia, but burdensome regulations are the biggest barrier. Excessive regulation that protects incumbent firms and other vested interests undermines market competitiveness and limits prospects for improved productivity and efficiency.
For example, legal markets are dominated by rich lawyers, schools are controlled by teachers’ unions and the medical sector is influenced by powerful doctors, resulting in high business costs that also hamper industrial development.
Many service firms in Asia are owned by the public sector, so governments have less incentive to deregulate services, but the same authorities have already opened their economies’ manufacturing and agriculture sectors for the common good, even at the expense of minority groups like farmers and factory workers. Why, then, are they maintaining policies that protect the special-interest groups that dominate the service sector?
Many argue that regulations protect small domestic firms against undue competition from large foreign firms, but the truth is that regulations are stifling even for domestic competition.
In India, for example, there is fear that small mom-and-pop retailers will be crushed when Wal-Mart enters the market in the next few months, but policymakers must recognize that there are ways to protect small retailers without stifling competition. The government can, say, impose zoning regulations, help small retailers find specialized niches in the market, or provide skills training to displaced workers. The survival of artisanal retailers should not be used as an excuse to introduce or uphold business regulations that ultimately protect the incumbent rich.
Asian policymakers must remember how they successfully developed their manufacturing sector — through competition. The same logic should be applied to services.
Upgrading the service sector is low-hanging fruit for Asia, because tremendous investments are not required and, yet, service-sector reform remains just out of reach for the region, owing to the absence of the political will needed to dismantle the vested interests that keep it there.
Changyong Rhee is chief economist at the Asian Development Bank.
Copyright: Project Syndicate