Demystifying the value of the services sector across South Asia

As development economists, we are taught to measure a phenomenon by using various techniques to look at cause and effect to subsequently make policy recommendations. But the first step is to know what we are measuring even if we can’t see it. Services—its measurement and contribution to growth across South Asia—has somehow defied convention and has had us economists in a fix for a while now. It’s kind of like being in a jetlagged stupor and looking for lost house keys under the streetlamp, because that is the only place anything is visible at all. We have applied the same sets of tools to measure the productivity of services as we use to measure the productivity of manufactured goods, just because they are there at our disposal, under the streetlamp, and it’s easier to do so.

However, our latest South Asia Economic Focus takes the services bull by the horn—measurement challenges et al—to paint a detailed picture of its role in the region’s economic growth.

Services: Omnipresent, yet ignored

Even though services contribute immensely to other sectors all over the world, including manufacturing, they are continually underappreciated when calculating growth and productivity. Take the example of automobiles. The Sanand plant owned by Tata Motors in Gujarat, India can churn out between 250,000-300,000 cars a year with about 4,500 workers—about 60 cars per worker per year. This compares to the now-defunct General Motors Lordstown, Ohio plant, which in its heyday in 1990 could produce about 341,000 cars with 10,600 workers—about 32 cars per worker per year. The first conclusion may be that labor productivity in automobile manufacturing has almost doubled in 30 years globally, and therefore is an engine of growth for South Asian governments to consider. Of course, this is due in part to Tata’s investments in robotics and high-tech machines.

What this inference leaves out however, is that this increase in productivity—attributed solely to the automobile sector just because we see the car roll out of the factory—was the result of services such as:

• Research and design by a firm of engineers
• Programming of robots in university labs
• Transacting new shipping routes for rubber and steel supply chains
• Design of sophisticated electronics and apps for the console
• Better quality control and safety tests
• More efficient back-office work
• Leasing, repair, and maintenance providers that help make driving affordable

Interestingly, Tata Motors promotes itself as an engineering, R&D, and manufacturing business. In fact, for every $1 increase in the final demand for automobiles globally in 2019, the transportation industry required almost 50 cents of inputs from the service activities spread out across the world and across time.  And those services in turn created huge demand spillovers into other sectors, spurring growth.

Then consider the acceleration of digital technologies and remote work during the pandemic, which further enabled opportunities in new services across South Asia—and with it, new measurement challenges . Software and business process outsourcing services exports in India had already been growing by an annual average rate of 10.8 percent since 2000, and free apps like WhatsApp were becoming indispensable to so many small businesses even before the pandemic. But what do these advances mean for the contribution of services going forward?

Cutting the Gordian knot

Taking these challenges of tracking and measuring services head on, in the recent South Asia Economic Focus we looked at myriad factors to demystify the value of services and its contribution to region’s economy:

• Matched words based on the descriptions of what services firms do, who owns them, and where they are located to understand their relationship and contribution to other sectors
• Identified outsourcing of business services and their spillover effect through inter-sectorial linkages
• Analyzed surveys of digital technology adopters in India and Bangladesh (specifically, e-commerce users)
• Derived changes in occupations of South Asians to understand what jobs they perform, how those jobs changed in the last 10 years, and whether—in the process—average skills improved.

The proof is in the (services) pudding

Through these analyses, the trend that emerged is that South Asia is steeped in services activities and very much embarked on a path of services-led development . In addition:

• India and the four countries that are major tourism exporters- Bhutan, Maldives, Nepal, and Sri Lanka- have an important comparative advantage globally.
• The South Asia region is embracing digital platforms including home-grown ones. Firms and individuals adopting e-commerce saw a significant improvement in their business income, tending to innovate and improve their business practices as a result.
• South Asian workers are increasingly moving into service occupations, even those that are mapped to the manufacturing sector  as the bar chart below shows, particularly high-skilled service occupations. In the process, the labor force as a whole has seen an upgrading of skills from on-the-job learning.

So, what do we make of these findings?

The message overall for policy makers in South Asia is to turn their attention to the new realities in the services sectors , as services-led growth through exports has been comparatively successful (See Figure 3.4 in the latest South Asia Economic Focus)—much more so than export-oriented manufacturing-led growth in India. There is also still an implicit preference to “promote labor-intensive, export-oriented manufacturing-led growth”, a key strategy in Bangladesh’s Five-Year Plan 2020-2025. That makes it more difficult to switch gears and find the political capital to embark on major reforms in the services sector.

Nonetheless, through our effort in demystifying measurement of services, we hope to have provided some arsenal for policy makers looking to promote the new services economy in South Asia.  Using the earlier analogy, we have guided our friend out of the daze of jetlag to the place they likely lost their keys. And the proverbial streetlamp encounter points to the services sector as South Asia’s key to unlocking economic growth across the region.

This blog is part of a series centered around the latest edition of our South Asia Economic Focus (SAEF)- Shifting Gears: Digitization and Services-Led Development. 

• New GRID on the block for South Asia
• The road toward economic recovery in South Asia 
• Addressing climate change in South Asia through carbon taxing