Introduction

Initially, many economists expected that Asia would be spared the ill effects of the global financial crisis due to its limited exposure to the subprime market. However, as the crisis began to affect global demand, growth in the East Asian region fell dramatically to 6.3% in 2008 from an impressive 9.6% in 2007 (Asian Development Bank [ADB] 2009a). With regard to the Association of Southeast Asian Nations 5 (ASEAN 5) economies of Indonesia, Malaysia, the Philippines, Thailand, and Viet Nam, their combined average growth rate fell to 4.8% in 2008 from 6.3% in 2007, while the newly industrialized economies (NIEs) of Hong Kong, China; the Republic of Korea (hereafter Korea); Singapore; and Taipei,China saw combined average growth rates drop sharply to 1.8% in 2008 from 5.6% in 2007. In the People's Republic of China (PRC), the gross domestic product (GDP) growth rate was 9% in 2008, the lowest rate registered since mid-2003.

Due to the region's high degree of openness, the recessions in the US, Europe, and Japan brought a precipitous drop in exports. This hit at the heart of Asia's economies, thereby seriously affecting the region's growth prospects. Emerging Asia's¹ exports fell by almost 23% while industrial production plunged by 17%. In 2009, growth rates dropped further to 1.7% for the ASEAN 5, 8.7% in the PRC, and –0.8% in the NIEs (ADB 2010).

Clearly, the present crisis is broader, deeper, and far more complex than the Asian financial crisis of 1997–1998. As such, calls for rebalancing Asia's economies have intensified. Rebalancing growth requires the adoption of policies to build strong domestic demand and reallocate resources more efficiently (ADB 2009b). These would include measures to strengthen domestic consumption, improve the investment climate and social infrastructure, develop the financial system, and deepen regional integration and cooperation.

To boost domestic demand, the growth rebalancing model emphasizes the development of the services sector by removing policy distortions that favor manufacturing over services or the production of tradables over nontradables. Growth rebalancing also highlights the importance of government investment in physical and social infrastructure such as roads, ports, health, and education for creating a climate conducive to investment (Park 2009).

Developing a more efficient services sector would have both direct and indirect effects on economic growth and, as such, a shift towards services could lead to an increase in aggregate productivity. An efficient services sector has indirect consequences for economic growth through its effects on efficiency in other sectors in the economy. For instance, high quality services in sectors like transport or telecommunications can positively affect the production costs and competitiveness of firms in all sectors of the economy.

The services sector consists of a wide variety of industries ranging from traditional personal services like wholesale and retail trade, hotels and restaurants, education and health, transport, and government and public administration services, to modern impersonal services that make extensive use of information and communications technology (ICT) like banking, insurance, communications, and business-related services.

In light of its focus on the growth rebalancing model, this paper will focus primarily on the nontradables sector and particularly on the provision of infrastructure and social services in the region. With the exception of Singapore, ASEAN countries have in general remained protective of their services sectors and maintained discriminatory and market access barriers. Restrictions include foreign equity limitations along with domestic regulations affecting business operations which often favor state-owned companies.

Within ASEAN, the services sector has become an important provider of both output and employment. At present, services contribute more than 40% of total value added in Singapore, Malaysia, the Philippines, Thailand, Indonesia, Viet Nam, and Cambodia. In terms of employment, services represent more than 40% of total employment in Singapore, Indonesia, Malaysia, and the Philippines.

The objectives of this paper are twofold: (i) to examine the implications of the growth rebalancing model on the structure and performance of the services sector and (ii) to identify priority areas of action that ASEAN governments may pursue to improve the sector's productivity growth. This paper is divided into five parts. Following this introduction, section two will examine the structure and performance of the services sector from the beginning of the 1990s. Section three will assess the impact of the current global financial crisis on the services sector, along with the potential implications of the growth rebalancing model on the sector. Section four will identify existing institutional rigidities or barriers that impede the growth of the sector, particularly government regulations that affect market access and national treatment. Section five will recommend policy reforms, measures, and priority areas of action that governments may pursue to redirect the services sector's productivity growth toward a more balanced path.

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