Overall Structure and Performance of the Services Sector

The services sector as defined here covers a wide range of activities that can be broken down into the following subsectors:

• Electricity, gas, and water supply
• Wholesale and retail trade
• Hotels and restaurants
• Transport, storage, and communication
• Financial intermediation
• Real estate, renting, and business activities
• Public administration, defense, and compulsory social security
• Education
• Health and social work
• Other community, social, and personal service activities

Appendix 1 [ PDF 33.6KB | 2 pages ] provides a listing of the detailed components of each subsector based on the International Standard Industrial Classification (ISIC) Code Revisions 2 and 3. Services are differentiated products characterized by limited tradability, multiple modes of supply, asymmetric information, network externality, fixed costs, and regulation (Hoekman 2006). When network externality is present, the value of a product or service increases when more people use it. For instance, as a cellular network subscriber base increases, it becomes profitable to offer a wider range of services. Subsectors such as electricity, transportation, and telecommunications, which are crucial for competitiveness, have important network externalities. These services subsectors require regulatory policies that ensure markets remain contestable. Given technological developments, many countries have opened up their electricity and telecommunications sectors to private ownership and investment.

In general, traditional services subsectors such as wholesale and retail trade, public administration, education, and health have benefitted less from technological change, although there is still scope to improve their productivity through the use of technology. Modern services subsectors such as banking, insurance, and other business activities and communications—all highly globalized service industries—have experienced rapid growth and higher productivity due to their intensive use of ICT.

The services data used in this paper is drawn from the Key Indicators of the Asian Development Bank, the World Development Indicators of the World Bank, and the International Financial Statistics of the International Monetary Fund. This is combined with services information from national statistics sources and the central banks of the ASEAN member countries. The employment data is from the International Labor Organization Labor Statistics Database.

2.1 Services Value Added and Employment Structure

ASEAN consists of a heterogeneous group of countries with varying levels of development. Singapore is a member of the newly industrialized economies while the ASEAN 4, consisting of Indonesia, Malaysia, the Philippines, and Thailand, are middle-income countries. Brunei Darussalam is an oil-rich country while Cambodia, the Lao People's Democratic Republic (Lao PDR), Myanmar, and Viet Nam are the least developed member countries of ASEAN.

The services sector represents an important source of output and employment among the ASEAN member countries. While the sector comprises a major portion of the ASEAN economies, there are notable differences in the structure of services in each country, given the differences in the countries' levels of economic development, resource endowments, and trade intensities. Table 1 [ PDF 69.6KB | 1 page ] shows the economic structure in terms of the distribution of total value added for each ASEAN member country, averaged over the 1990s (1990–1999) and the 2000s (2000–2007). Table 2 [ PDF 75.7KB | 2 pages ] presents the structure of services value added in each country. Table 3 [ PDF 67.2KB | 1 page ] shows the employment contributions of the major economic sectors, while Table 4 [ PDF 71.7KB | 1 page ] presents the structure of services employment.

2.1.1 Singapore

Singapore's economy is service-oriented with the share of the services sector constituting, on average, 70.1% of total value added for the period 2000–2007 (see Table 1). Industry accounted for a further 29.8%, as Singapore moved towards higher value-added manufacturing activities. On average, services grew by 7.6% per annum throughout the 1990s, but this rate has slowed to 6.0% in recent years. Table 2 shows that Singapore's services sector is dominated by finance, insurance, and business, with an average share of 33.8% in the 2000s. This is followed by wholesale and retail trade with an average share of 21.3%. Next is the transport, storage, and communications subsector with an average share of 18.9%.

In terms of employment contribution, services accounted for an average share of 75% of total employment in the 2000s (Table 3). The largest source of employment was the finance subsector with an average contribution of 18%, followed by wholesale and retail trade with an average share of 16% (Table 4).

2.1.2 Indonesia

As seen in Table 1, Indonesia's economy is led by industry with an average share in value added of 44.0% over the period 2000–2007. Services followed closely with a share of 41.1%, while agriculture accounted for the remaining 14.9%. Services grew by an average of 6.8% per year in the more recent period. Within services, on average, the wholesale and retail trade subsector accounted for the largest share of value added at 40.2%, followed by finance with an average share of 21.7%, and transport, storage, and communications with an average of 14.0% (see Table 2).

In terms of employment contribution, services represented an average share of 38.0% in the 2000s, an increase from 35.7% in the 1990s (Table 3). Wholesale and retail trade has been the largest source of employment with its average share rising from 17% to 20% across the two periods (Table 4).

2.1.3 Malaysia

Malaysia's economy is largely concentrated in services, indeed this sector posted an average share in value added of 50.0% during the 2000s (Table 1). Industry was second with a 42.1% share while agriculture's share was, on average, 7.9%. On average, services grew by 6.4% per annum in the 2000s. The services sector was led by finance, insurance, and business with an average share of 28.6%, followed by wholesale and retail trade with a share of 26.5% (Table 2). The third largest subsector was transport, storage, and communications with an average share of 14.3%.

In terms of employment contribution, services accounted for an average of 54.4% of total employment in the 2000s (Table 3). Within the services sector, wholesale and retail trade accounted for the largest source of employment with its average share rising to 22% in the 2000s from 18% in the 1990s (Table 4).

2.1.4 The Philippines

Among the ASEAN 4 countries, the Philippines has the smallest industry sector and its average share in value added even dropped from 32.0% percent in the 1990s to 30.2% in the 2000s (Table 1). In contrast, Thailand's industry share in value added went up from 39.0% to 42.6% during the two periods under study. In the 2000s in Indonesia and Malaysia, industry posted average shares of 44.0% and 42.1% respectively. While the share of agriculture in value added is already less than 10% in Malaysia and Thailand, in the Philippines it is still around 20%, while in Indonesia it is around 15%.

With this structure, the Philippine economy has largely depended on the services sector, with its average share in value added rising to 50.3% in the 2000s from 46.4% in the 1990s. On average, the growth rate of this sector increased from 2.3% in the 1990s to 4.4% in the 2000s. Wholesale and retail trade dominated the services sector in both the 1990s and 2000s with an average share of 33.0%, followed by transport, storage, and communications with a share of 16.1%, and finance, insurance, and business with a share of 10.2% (Table 2).

Services' contribution to total employment increased substantially during the two periods, from an average of 41.6% in the 1990s to an average of 48.0% in the 2000s (Table 3). On average, wholesale and retail trade was the largest source of employment within the sector, accounting for a share of 20% in the 2000s, a substantial increase from its share of 15% in the 1990s (Table 4).

2.1.5 Thailand

In Thailand, the services sector continues to dominate the economy, although its average share in value added fell from 50.2% in the 1990s to 47.7% in the more recent period (Table 1). The share of industry increased from 39.0% to 42.6%, while agriculture dropped from 10.8% to 9.7%. The services growth rate increased from an annual average of 4.1% in the 1990s to 4.5% in the 2000s. Services are largely concentrated in wholesale and retail trade, which accounted for an average share of 30.3%, followed by transport, storage, and communications with a share of 21.0%, and finance with a share of 15.0% (Table 2).

In terms of employment contribution, services accounted for the largest average share which rose from 28.4% to 36.1% across the two periods under study (Table 3). Finance was the leading subsector within services with an average contribution of 18% in the 2000s, followed by wholesale and retail trade with an average share of 15% (Table 4).

2.1.6 Brunei Darussalam²

Brunei Darussalam's economy is dominated by industry, which had an average share in value added in the 2000s of 60.9%, followed by services with a share of 38.0%. The average annual growth rate of the services sector posted an increase from 2.1% in the 1990s to 4.6% in the 2000s (Table 1). Public administration is the largest subsector within services, with an average share of 42.3% in the 2000s. In the same period, wholesale and retail trade comprised on average 10.7% of the total value added derived from services, while transport, storage, and communications accounted for an average share of 10.1%. Finance, insurance, and business followed closely with a share of 9% (Table 2).

2.1.7 Cambodia

Cambodia's economy has been largely dependent on services, with the share of services in value added rising from an average 38.6% in the 1990s to an average 40.7% in the more recent period. Agriculture follows with an average share of 32.7%, a substantial fall from its 45.2% average share in the 1990s. Industry rose from an average share of 16.2% to 26.6% across the two periods. The average services growth rate per annum increased from 6.8% in the 1990s to 10.1% in the 2000s. Within the services sector, wholesale and retail trade was the largest subsector although its average share dropped to 35.1% in the 2000s from the 41.7% registered in the 1990s (Table 2). Finance, insurance, and business is the second most important services subsector with an average share of 21.4% in the 2000s, followed by transport, storage, and communications with an average share of 17.1%.

Although services made the largest contribution in terms of value added, in terms of total employment it contributed only 22.9% on average in the 2000s, with the wholesale and retail trade subsector contributing the largest share within services (Tables 3 and 4). Agriculture has remained the largest source of employment in Cambodia, accounting for an average of 65.7% of total employment in the more recent period.

2.1.8 Lao PDR³

The Lao PDR depends on its agriculture sector, which accounted for an average of 48.1% of total value added for the period 2000–2007 (Table 1). Services constituted an average of 28.1% of value added in the same period, while industry's share posted an average of 23.7%. The services growth rate registered a slowdown from 7.3% per annum in the 1990s to 6.6% in the 2000s. Within the services sector, wholesale and retail trade is the largest subsector, accounting for an average share of 35.9% in the latter period, followed by transport, storage, and communications with an average share of 22.0% (Table 2). These are followed by public administration and electricity, gas, and water, each with an average share of around 10.0%.

2.1.9 Myanmar⁴

Like the Lao PDR, Myanmar also depends largely on its agriculture sector, which contributed an average of 52.8% of total value added in the 2000s. Services accounted for an average share of 34.4% of total value added, concentrated mainly in wholesale and retail trade with a share of 68.4% of the services total (Tables 1 and 2). The transport, storage, and communications subsector followed with an average share of 22% in the same period. On average, the services sector grew by 14.6% per annum during the 2000s.

2.1.10 Viet Nam

Viet Nam has relied mainly on its services sector, although this sector's share in value added declined to an average of 43.3% in the more recent period from 45.0% in the 1990s (Table 1). Agriculture dropped to an average 20.6% share in value added in the 2000s, from 27.2% during the 1990s. Industry witnessed a substantial increase in its share, from an average 27.8% to an average 36.1% across the two periods under review. The average services growth rate remained almost the same throughout the two periods at approximately 7.5% per annum. The services sector is largely concentrated in wholesale and retail trade, which had an average share of 37.7% in services value added in the 2000s (Table 2). Public administration is the second most important service subsector with an average share of 20.0% in the 2000s, followed by transport, storage, and communications with an average share of 9.0% in the same period.

Like Cambodia, Viet Nam's service sector's contribution to total employment was only around 24% on average in the 2000s, with agriculture remaining the largest source of employment (Table 3). Nevertheless, the average share of agriculture in total employment dropped from an average of 66.2% to an average 59.4% from the 1990s to the 2000s. Within the services sector, wholesale and retail trade constituted the largest share in terms of employment contribution (Table 4).

2.2 Labor Productivity

While it is more useful to calculate both labor and total factor productivity (TFP), data availability limits our analysis to the former. Labor productivity is relatively easy to calculate and makes comparisons among industries very straight forward. However, in the presence of other inputs, focusing on labor productivity alone can be misleading. Faster productivity growth can be due to heavy capital spending without an overall improvement in economic efficiency. More machines and equipment will automatically boost output per worker. One therefore needs to measure TFP to take into account other inputs in the production process.

Labor productivity is defined as the ratio of output to labor input. However, due to the difficulty of defining real output in the services sector, labor productivity is measured as the ratio of real value added to total employment in each subsector. Given the output heterogeneity in the services sector, in practice value measures of output are often applied. Though the use of real value added as a measure of output may be appropriate in sectors such as retail trade, there are weaknesses when using this measure in other subsectors, such as legal, technical, and advertising services, where output may not be fully captured by real value added (Fernandes 2007).

With the above caveats, labor productivity is applied as a productivity measure in this paper. Real value added is used since it is the only measure with complete country scope and time coverage for the ASEAN member countries. To allow cross-country comparisons of labor productivity in the region, a subsector's nominal value added expressed in local currency units is converted into real value added at common prices in a common currency using purchasing power parity (PPP) conversion rates (Fernandes 2007).⁵ Appendix 2 [ PDF 18.3KB | 1 page ] outlines the methodology applied.

2.2.1 Singapore

Within the region, Singapore exhibited the highest average labor productivity in both industry and services throughout the two periods under review (see Figure 1A [ PDF 84.5KB | 1 page ]). Within Singapore's services sector, the electricity, gas, and water subsector registered the highest average labor productivity, followed by finance (Figure 3A [ PDF 150.6KB | 1 pages ]). The transportation and communications subsector was next, followed closely by the wholesale and retail trade subsector. In terms of average growth, Table 5 [ PDF 61.7KB | 1 page ] shows that the services sector slowed down from around 11% growth per annum to around 6% across the two periods. Among the subsectors, the wholesale and retail trade subsector posted the highest average growth rate at 9.1% in the period 2000–2007.

Figure 2 [ PDF 38.1KB | 1 page ] demonstrates that there is a large and rising productivity gap that separates Singapore from the rest of the ASEAN countries. In 2000–2007 Malaysia's average labor productivity was only 27% of Singapore's level while Thailand's was about 17%. In the 1990s, however, Malaysia's level was 34% that of Singapore's, while Thailand's was 25%. The average labor productivity of Indonesia and the Philippines stood at around 9% and 8% respectively in the 2000s. In the 1990s, these figures were about 11% and 10% respectively. The most recent figure for labor productivity in Viet Nam is 7% (from 9% in the 1990s), while Cambodia's is 4% (from 6% during the 1990s).

2.2.2 ASEAN 4: Indonesia, Malaysia, the Philippines, and Thailand

Figures 1B–1E [ PDF 84.5KB | 1 page ] show that, within each country, labor productivity gaps exist in that industry is more efficient than services while both are more efficient than agriculture. Figure 2, which focuses on average labor productivity in the service sectors, indicates that average labor productivity levels for all ASEAN 4 countries increased from the 1990s to the 2000s. Among these four countries, Malaysia has the highest average labor productivity, followed by Thailand. Behind are the Philippines and Indonesia, which share very similar productivity levels. In the more recent period, Thailand's average labor productivity was about 64% of Malaysia's, for the Philippines the same ratio was about 35%, and around 30% for Indonesia.

Figures 3B–3E [ PDF 150.6KB | 1 pages ] show that, within the countries' services sectors, the electricity, gas, and water subsector is the most efficient subsector in Malaysia, Thailand, and the Philippines. In Indonesia, finance is the most productive subsector. The wholesale and retail trade subsector displays, on average, the lowest labor productivity across ASEAN 4. It should be noted that disparities in the average labor productivity of the services subsectors may be attributable to differences in technological characteristics across subsectors, such as the level of capital intensity, as earlier discussed.

Table 5 and Figures 4A–4D [ PDF 99.3KB | 1 pages ] show the average annual growth rates in labor productivity for each services subsector and the services sector as a whole. Average annual growth rates between the 1990s and 2000s slowed down from 8.4% to 3.1% in Malaysia and from 3.6% to 3.0% in Thailand. Across the two periods, increases in average annual labor productivity growth rates in services were posted in Indonesia and the Philippines. In Indonesia, the average annual growth rate of labor productivity increased from 3% to 7% across the two periods under study. In the Philippines, it increased to 5%, from 3% in the 1990s.

Within Malaysia's services sector, the transport, storage, and communications subsector shows the highest average labor productivity annual growth rate (4.9%) in the latter period. In Thailand, the Philippines, and Indonesia, electricity, gas, and water has been the fastest growing subsector having registered average annual growth rates of 16.7%, 11.4%, and 8.9% respectively in the period 2000–2007 (Figure 4B). Indonesia (4.9%) and Thailand (4.3%) posted the highest average annual growth rates in wholesale and retail trade including hotels and restaurants. In transport, storage, and communications, the Philippines registered the highest average annual growth rate at 8.1%, followed by Indonesia at 7.2% (Figure 4E). In finance, insurance, real estate, and business, the Philippines also posted the highest growth rate at 6.8%, followed by Thailand at 2.6% (Figure 4D). Note that in the Philippines, average labor productivity growth increased in all the major services subsectors throughout the two periods.

2.2.3 Cambodia and Viet Nam

Within Cambodia and Viet Nam, industry has the highest labor productivity, followed by services, with agriculture having the lowest productivity (Figures 1F and 1G). Viet Nam is ahead of Cambodia in terms of the services sector's average level of labor productivity (Figure 2). In the more recent period, Cambodia's average labor productivity was about 60% that of Viet Nam's. For both countries, average labor productivity levels increased across the two periods. Figures 3F and 3G indicate that, within services, Viet Nam's electricity, gas, and water subsector is the most efficient, while in Cambodia finance is the most productive subsector.

Table 5 and Figure 4 show that Viet Nam also registered a relatively high average labor productivity growth rate of 6.2% in the 2000s. Average annual growth rates between the 1990s and 2000s slowed down from 1.9% to 1.0% in Cambodia. In terms of growth, in the 2000s the transportation and communications subsector had the highest average annual growth rate in Viet Nam (11.5%) followed by public administration (10.0%) and wholesale and retail trade (6.4%). In Cambodia, the fastest growing subsector was transport and communications (5.6% average annual growth) followed by public administration (4.1%).

To summarize, the key messages emerging from the preceding analysis are: (i) there is an apparent labor productivity gap between Singapore and the rest of the ASEAN countries and disparities in labor productivity also separate the ASEAN 4 countries from Viet Nam and Cambodia; (ii) Indonesia and the Philippines were characterized by strong labor productivity growth from the 1990s to the 2000s, with Viet Nam catching up as it showed signs of improved growth; and (iii) highly skill-intensive and ICT user and producer subsectors, such as electricity, gas, and water; finance, insurance, and business; and transport, storage, and communications, exhibited on average the highest labor productivity levels and growth rates during the two periods. All of these suggest the strong potential for services to become one of the major drivers of growth in the ASEAN region.

2.3 Trade in Services

Table 6 [ PDF 63.8KB | 1 page ] presents trade in services⁶ along with trade in goods covering the two periods 1990–1999 and 2000–2007. Singapore and Malaysia, the two countries with the highest trade in goods ratios, also had the highest trade in services ratios. Singapore's trade in services ratio increased substantially from 53.79% to 80.46% of gross domestic product (GDP) in the two periods under review, while in the case of Malaysia this ratio rose from 28.10% to 30.51% of GDP. Thailand's ratio increased from 19.34% to 25.73%, while Cambodia's ratio registered a dramatic increase from 11.45% to 24.42% of GDP. Indonesia's ratio saw a slight increase from 10.03% to 11.29%.

The remaining countries witnessed declines in their ratios of trade in services. Viet Nam's share fell from 20.02% to 18.39% of GDP. The Lao PDR's ratio also dropped slightly from 12.18% to 9.68%. The Philippines experienced the largest decline as its ratio tumbled from 19.14% to 11.17% of GDP. In terms of workers' remittances, as a percentage of GDP, the Philippines topped the list with its ratio almost doubling from 6.06% to 11.70% across the two periods. Viet Nam followed with a ratio of 7.35%, followed by Cambodia with 3.43%.

Download this Paper [ PDF 602.2KB| 46 pages ].

Comment(s)

There are [0] comment(s) for this entry. Post a comment.