The dramatic diffusion of digital technologies and partial policy reforms in services is transforming East Asian economies. This column describes how the result is higher productivity and changing jobs in the services sector, as well as in the manufacturing sectors that use these services. However, a region that has thrived through openness to trade and investment in manufacturing still maintains innovation-inhibiting barriers to entry and competition in key services sectors. Deeper domestic reforms and greater international cooperation could unleash a virtuous cycle of increased economic opportunity and enhanced human capacity that would power development in the region.
Services are often seen as slow to innovate, tough to trade, and hard to liberate from regulatory restrictions. A combination of technological change and policy reform, however, is transforming services into the most dynamic part of many economies, as highlighted by recent contributions (Baldwin 2019, Nayyar et al. 2021, World Bank and WTO 2023, Baldwin and Forslid 2023).
A new book (World Bank 2024a) shows how services are already driving development in East Asia, a region associated with manufacturing-led growth. First, over the last decade, the services sector contributed more to aggregate labour productivity growth than manufacturing in all major economies in the region. Second, in all countries except Viet Nam, service exports – especially of digitally delivered services – grew faster than manufacturing exports; and foreign direct investment (FDI) in services grew five times faster than FDI in manufacturing in China, Indonesia, Malaysia, the Philippines, and Thailand. Third, because services tend to employ more skilled workers than manufacturing or agriculture, the growing share of services sectors is increasing the relative demand for skilled workers. Fourth, services tend to have higher female-to-male employment ratios, and those ratios are growing faster in services than in manufacturing as the level of development increases. Fifth, services, except for transportation, have significantly lower greenhouse gas emissions than industry and agriculture for each unit of output generated.
The book proposes a simple framework for thinking about services-led development (Figure 1). Changes in technology and policy reforms within services are leading to structural change across and within sectors. The result is higher productivity in services sectors and in the other sectors that use those services, as well as increased demand for the sophisticated skills that complement the new technologies. The same combination of services policy reform and technological diffusion is also improving education, health, and finance to equip people to take advantage of these new opportunities. Fully unleashing the virtuous cycle between opportunity and capacity that constitutes development will, however, require deeper reform.
Figure 1 The virtuous cycle of opportunity and capacity: A framework
Source: World bank (2024a), Figure O.4
The book presents evidence on the importance of each of these channels. First, new firm-level analysis reveals that in the Philippines, the average services firm has about a third more data and software assets per worker than its manufacturing counterpart. Firms with access to broadband and foreign-owned firms have stronger digital technology adoption, and the adoption of digital technologies is associated with higher productivity and value added within firms.
Second, new firm-level evidence for Viet Nam reveals that the reduction in restrictions on transportation, finance, and business sectors over the period 2008–16 was associated with a 2.9% annualised increase in value added per worker in these sectors. Furthermore, the liberalisation in services was associated with a 3.1% annualised increase in labour productivity of the manufacturing enterprises that use services inputs, benefiting small and medium private enterprises most significantly (Figure 2).
Figure 2 In Viet Nam, services liberalisations between 2008 and 2016 increased firms’ labour productivity in both services and downstream manufacturing firms
Source: World Bank (2024a), Figure O.6
Third, new jobs created in digital services require greater skills than those in traditional services, as indicated by new micro-level evidence from Indonesia. Digital employment represents a larger share in services than in agriculture and manufacturing, and an even higher share in more technical services, such as information and communication technology and financial services, than in less technical sectors like distribution and transportation services. Furthermore, close to 40% of formal digital workers have a university degree or above whereas less than 20% of nondigital workers do so. These findings imply a likely increase in the demand for skilled workers in the coming years.
What skills are needed will, of course, be affected by the growing use of artificial intelligence (AI). At this stage, adoption of AI in most East Asian and Pacific countries, except in the Republic of Korea and in Singapore, remains lower than in advanced economies. Moreover, a high share of the East Asian workforce is employed in sectors with low generative AI exposure and a low proportion in occupations likely to be complemented by AI (World Bank 2024b). Nevertheless, AI could augment less-skilled workers in East Asian countries by automating skills they don’t possess and allowing them to do new types of work (for example, people without coding expertise can code with AI-assisted copilots). In any case, many East Asian and Pacific countries are ageing fast and could run out of workers before they run out of jobs. With the right policy choices, AI has the potential to offer solutions to some of these challenges.
Finally, the use of new digital technologies, including AI, and reforms in education and health services could help address the skills deficit as well as the inequality of access and quality in these services across the region, and it could equip more East Asian and Pacific citizens to engage productively in the new digital economy (as illustrated on the right branch of Figure 1). Digital distance education and telemedicine supported by well-selected, trained, and motivated local staff are producing better learning and health outcomes, for instance in China.
To unleash the virtuous cycle between opportunity and capacity, and to ensure inclusive and sustainable services development, three pairs of policy actions are needed.
First, countries must pursue both liberalisation and regulation. Services trade liberalisation is still unfinished business in East Asia. Despite past reforms, many countries still have relatively restrictive regimes for services. For example, Malaysia, Thailand, and Viet Nam restrict foreign ownership in telecommunications and maritime transportation, and Malaysia and Thailand in commercial banking and insurance. Second, governments need to work with the private sector to build the infrastructure and skills needed to take advantage of emerging opportunities. China, Malaysia, Thailand and Viet Nam have significantly improved their digital infrastructure while other countries are lagging; and most countries in the region need to strengthen basic education and foundational skills. Third, unilateral domestic reforms must be complemented with cooperative international action to address services market failures that have a transborder dimension. For example, countries need to work together to protect privacy and cybersecurity but also to ensure that heterogeneity in national regulatory approaches do not impede the data flows central to the global services economy.
Looking ahead, pursuing policy strategies that are attuned to the interplay between opportunity and capacity will be critical for development. Considering specific measures of capacities and opportunities lends some empirical content to the conceptual framework in Figure 1. Tertiary enrollment rates can be considered a measure of capacity, and the skilled labour content of export (which has the virtue of being driven in part by external demand) as a measure of opportunities. Figure 3 presents a scatter plot along these two dimensions for all countries with available data on these measures. The horizontal axis reports the skilled labour content of exports in 2014 and the vertical axis the average tertiary enrollment rate in 2012–16 (to maximise country coverage). The global sample medians of these measures are also plotted as black dashed lines.
Figure 3 An illustration of opportunities and capacities in selected countries
Source: World Bank (2024a), Figure 5.2
As Figure 3 highlights, in 2014, countries such as Australia, Japan, and Singapore had both opportunities and capacities above the global median. Countries such as China and Thailand exhibited tertiary enrollment rates above the sample median but demand for skilled labour below the sample median. By contrast, countries such as Ghana or India displayed demand for skills above the sample median but enrollment rates below the median. Finally, countries such as Cambodia and Lao PDR displayed both capacities and opportunities below the median.
While Figure 3 presents a static picture, the main message for policymakers is that only pursuing balanced policies in which the enhancement of endowments shapes comparative advantage, and the evolution of comparative advantage incentivises the enhancement of endowments, could generate a virtuous cycle that powers development.
Source : VOXeu
