Joint Seminar With the World Bank: Can the Service Sector Lead Development in Developing Countries?

The webinar started with presentations from Gaurav Nayyar and Mary Hallward-Driemeier, senior economist and senior economic advisor, respectively, of the Finance, Competitiveness & Innovation Global Practice, World Bank, who authored the report.

Nayyar pointed out that over the past two decades or so, the share of the manufacturing sector in GDP has declined in 75% of the world’s countries, including lower middle-income countries (LMICs). Generally speaking, industrial structure shifts from agriculture, manufacturing and then to services. However, LMICs are going through a phenomenon in which the proportion of the service sector to the overall economy increases before sufficient industrialization takes place. Nayyar said that while some argue for stronger promotion of manufacturing upon recognizing this phenomenon, whether and how the service sector can increase productivity and create jobs in place of manufacturing is overlooked. He then explained that depending on whether they can be engaged in international trade, their labor intensity, required skill levels and relevance with other sectors, the service sector can be grouped into four categories which show differences in productivity and job-creating capacities. The four categories are as follows: (i) global innovator services like ICT and finance which have high productivity and require high-level skills; (ii) low-skill but internationally tradable services like transportation and wholesale; (iii) skill-intensive social services like healthcare and education; and (iv) low-skill domestic services like retail and personal care. Nayyar then stated that the challenges for developing countries from here are to create even more jobs in global innovator services and at the same time enhance productivity among workers delivering low-skill services. He emphasized that the service sector has the potential to be the driving force to scale up the economy, just like the manufacturing sector in the past.

In response to this presentation, Harada Tetsuya, executive senior research fellow at JICA Ogata Research Institute, commented that discussion based on the categorization of the diverse service sector into four by the characteristics of its constituents is appropriate and he hopes this becomes the standard when analyzing the service sector in the future. Based on a comparison of productivity and distribution of workforce among different industries in non-agricultural sub-sectors of Asia and Sub-Saharan Africa over the past two decades, Harada pointed out that in Asia, it seems like the development of both manufacturing and service sectors influenced each other, allowing for improved productivity in both sectors. Meanwhile, in Africa, there are bottleneck issues common to both sectors, such as the outlook of regulations and the restrictions around infrastructure like electricity. He noted the need to pay attention to differences in regional preconditions among LMICs.

Next, Kimura Fukunari, professor, Keio University, commented that although economic development models focusing on manufacturing are important, we are starting to understand that not all LMICs can necessarily show economic development by following them. Furthermore, he raised three questions: 1) how concerns on productivity and jobs, capacity to earn foreign currencies through export sales, pace of intangible capital accumulation and politically sustainable inclusiveness, can be alleviated upon proceeding with development without manufacturing; 2) how East Asia’s advantage—the availability of manufacturing sectors—should be utilized; and 3) how we should shift from existing technological innovation centered around manufacturing to digital technological innovation, which happens with more speed but also imposes greater risks.