Services sector: An alternative route to high growth?

Winarno Zain, Jakarta | Mon, 04/12/2010 9:09 AM | Opinion

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Indonesian economic growth has been marked by the rapid

growth of its services sector, as indicated in the growth of its
non-tradable sectors.
This sector, including trade, services, finance, transport,
communication and construction, has been growing at 8
percent each year for several years, which is higher than the
overall GDP growth.
Even after the impact of global economic crisis in 2009,
services sector still grew at 5.9 percent, almost doubled the
rate of growth of tradable sectors that consist of agriculture,
mining and manufacturing.
Because of its rapid growth, Indonesian services sector has
accounted for 51.9 percent of its GDP in 2009, compared with
48.9 percent in 2006.
This means that now, more than half of Indonesian GDP
comes from its services sector. This trend would continue in
the coming years, and as Indonesian industrial growth
continue to lag behind the growth of its services sector, the
Indonesian economy will be dominated more and more by its
services sector.
Some have argued that an economy with a high growth in its
services sector would tend to have high GDP growth, or to
put it the other way, a country that has a high economic
growth tends to show high growth in its services sector.
This argument was put forward recently by Ejaz Ghani (The
Jakarta Post, March 31, 2010) an adviser to the World Bank.
He made the argument after studying economic growth of
China and India.
China and India have achieved a remarkable economic
growth in recent years, but according to Ghani, the paths and
patterns of their growth have been strikingly different.
While the Chinese pattern followed conventional stages,
where manufacturing took over the roles of agriculture,
India’s economy has leapfrogged from an agriculture-based
economy into a service-sector-dominated economy. Ghani
thinks India’s pattern of growth could be an alternative for
underdeveloped economies still struggling to achieve high
economic growth by developing their manufacturing sector.
Ghani’s arguments have provided some intriguing questions
regarding the Indonesian economy: Has the Indonesian
economy entered the threshold of an advanced economy,
whose primary characteristic is the dominance of service
industries?
If so, would its pattern of growth divert from conventional
stages — from agriculture to industry and then to services —
as prescribed in textbooks on economic development?
Before contemplating these questions it is worthwhile first to
know why the services sector has seen higher growth than
other sectors? There are several reasons that could explain
this.
The services sector is a sector that could readily benefit from
information technology and globalization. The process of
adapting technology in services is more automatic and less
complicated than in other sectors.
The market for services is already more global. Once a
business entity enters service business, it is immediately
plugged into a global IT network. This is clearly the case in
the finance and telecommunications industries.
Globalization and the inherent competition it brings with it,
and the widespread use of IT has brought down costs, which
has benefited customers worldwide and generated
opportunities for higher profit and growth.
In the case of Indonesia, high growth in services sector is
also the result of its far reaching liberalization that has been
accorded by successive Indonesian governments in the past.
While deregulation has been resented and criticized, and has
aggravated an economic crisis in the past, the fact remains
that the liberalization of its service industries has served as
impetus for its high growth by enabling the sector to provide
cheaper and better services to customers.
The other reason is that the service industries are less prone
to backlogs in physical infrastructure than other industries
such as manufacturing, whose growth is highly dependent
on the availability of adequate physical infrastructure.
The increasing role of the services sector in the Indonesian
economy is not a result of its ingenuities, nor does it mean
the Indonesian economy is entering an advanced-economy
stage. The services sector’s apparent growing importance in
the overall economy is because the growth of the
manufacturing sector is still depressed.
The manufacturing sector in Indonesia is still facing all
myriad problems ranging from uncertain regulatory
frameworks to a lack of infrastructure. Even though the
government is working hard to overcome these problems,
given its limited competence it will take several years to its
structural reforms.
So Indonesia’s economic growth would still depend on the
growth of its services sector. To make growth in the services
sector more sustainable would require certain conditions,
the most important of which is education.
India may be a poor country but it has an excellent education
system. Its technical colleges have produced thousands of
highly qualified engineers. Thousands of Indian engineering
graduates have returned from American universities and
Silicon Valley, California, the center of US computer
industries.
These are people who have pushed Indian IT services to
become a global power. They have made Bangalore, a dusty
town in Southern India, become a Mecca for IT services for
many large international corporations.
English language, which is the second language in India, has
helped its services sector expand enormously.
Indonesia does not have these kinds of advantages, yet its
services sector has managed to grow rapidly. But to rely too
much on the services sector growth raises questions as to
the quality of growth. Service industries require a highly
skilled and educated workforce, so they tend to be less labor
intensive than manufacturing industries.
While the growth of the services sector could be left to the
dynamics of globalization and technology, Indonesia with its
huge population and workforce needs to pursue high growth
policies in its manufacturing industries especially those with
high labor absorption capacities.
So, even though the growth of the services sector can pull
up the overall GDP growth, it should not, and could not be an
alternative to growth in the manufacturing industries. 

The writer is an economist.