Services as a New Engine of Growth for ASEAN, the People’s Republic of China, and India

Ben Shepherd, Gloria Pasadilla
ADBI Working Paper Series

Development of a vibrant and competitive services sector is a key characteristic of modern economies. In the developed world, services frequently account for two-thirds or three-quarters of all economic activity. The transition from agriculture through manufacturing to a services economy has been the hallmark of economic development for many countries. In line with this trend, we see many emerging markets currently working hard to support and develop services industries, and to put in place the regulatory structures required for more integrated international services markets. Doing so is likely to form an important part of efforts to avoid the so-called “middle income trap”, as improving services sector productivity is key to invigorating the economy and supporting the sustained innovation needed to move to high income status.
The Association of Southeast Asian Nations (
Broadly speaking, measures aimed at reducing barriers to entry—which make markets less competitive—and lowering the costs of doing business for domestic and foreign service providers alike can have major impacts throughout the economy. A more productive services sector is not only good news for those directly connected with it through investment or employment, but also for other parts of the economy that use services inputs intensively. As just one example, growth in the services sector is one of the foundations on which international goods production networks are built, since it is impossible to move intermediate inputs across borders and undertake complex coordination of production processes without efficient markets for services such as transport, telecommunications, and business processes. ASEAN) countries, along with the People’s Republic of China (PRC), and India (“the ACI countries”), are no strangers to this underlying trend. Although experience differs greatly from one country to another, the data reviewed in this report strongly suggest that an increasing services orientation is likely to be a key feature of the ACI economies over the medium-term. Services trade among the ACI countries has been growing at a very rapid rate over recent years, despite starting from a relatively low baseline. Although data are scarce and must be interpreted with caution, an analysis of applied services sector policies in the region suggests that there is much policymakers can do to intensify this process, and increase the pace at which the transformation to a services economy is taking place. Indeed, services policies in the ACI countries are generally quite restrictive by world standards, even though experiences differ greatly across countries.
In addition to traditional services sectors such as finance and telecommunications—where the gains from reform remain potentially large—there are also a number of “sunrise” sectors of interest to the ACI countries. Healthcare is one example, with considerable potential for trade growth through outsourcing of allied health functions, as well as movement of patients, movement of medical personnel, and foreign investment in hospitals and other health care providers. Business process outsourcing has already become an important export earner in regional economies such as India and the Philippines. There is clear scope for policymakers to support expansion of this kind of trade in the future.
Regional integration can provide a useful impetus for continued reform of services sector policies, thereby promoting competitiveness more broadly. Priorities for the ASEAN countries include ensuring on the ground implementation of the ASEAN Economic Community Blueprint as it relates to services markets. The same is true of the ASEAN-PRC Trade in Services Agreement, even though only a few countries have made substantially stronger commitments than under the General Agreement on Trade in Services (GATS). Conclusion of a services agreement with India could provide an additional spur to the already rapidly growing services trade between ASEAN and India.