Services have an important role to play for inclusive growth and productivity in Asean, but service sectors in many member states are lagging behind those in peers elsewhere, argues the OECD in 'Developing and liberalising services to boost productivity in Southeast Asia', published in the 2018 edition of the OECD Investment Policy Reviews: Southeast Asia.
ASEAN BUSINESS summarises the key points of the report, and the OECD's recommendations for the region.
The importance of services
Services have great potential to drive inclusive growth and productivity:
- The role of services in the global economy is rising. Digital advances have made services tradable, transportable and storable, enabling productivity gains. With the rise of middle-class consumers, demand for services is also growing.
- Service sector development brings opportunities for job creation.
- Services are increasingly used in manufacturing and form part of global value chains.
Lagging services in Asean
Asean member states have not yet reaped the full potential of services, with many remaining "trapped in traditional and low-productivity services".
- The average contribution of services to GDP in low-income countries is 50 per cent, yet most Asean members have services shares below that. Thailand and Malaysia have shares at 55 per cent and 53 per cent, below those of average-middle income countries; the Philippines has reached the middle-income potential with a services share of about 60 per cent, while Singapore's services share of 74 per cent is equivalent to the high-income average.
- Asean also underperforms in exports of services, with lower services exports as a share of GDP than other developing regions.
- Although growing, labour productivity in services remains low. This is especially the case in backbone services such as transport and telecommunications.
- The use of services in manufacturing and exports is relatively low. According to 2014 figures, only Singapore is above the OECD average of almost 40 per cent for services value-added as a share of gross manufacturing exports.
The importance of liberalising services
Reforming the service sectors in Asean member states to eliminate barriers to entry could stimulate innovation and promote development.
- Foreign direct investment (FDI) is an important means of involving foreign services providers and fostering a modern services sector, giving an opportunity for local firms and people to tap their expertise.
- Barriers to FDI have been found to depress investment and labour productivity in service sectors.
- Liberalising services would also boost Asean productivity in manufacturing, and increase the use of high quality services in production.
- Liberalising services in countries with relatively high restrictions – the case in most middle-income Asean member states – is particularly favourable for productivity.
- Restrictions in upstream services have a relatively stronger negative effect on SME manufacturers. Furthermore, foreign-owned manufacturers may be less adversely affected by services restrictions than domestic firms.