APEC 2015: Tapping Into the Potential of High-Value Services

Students attend an IT class in Bandung, Indonesia
Students attend an IT class in Bandung, Indonesia

By Shanti Jagannathan

Analysts have long argued that the services will help take Asian emerging economies further up the value chain in global markets, but first we need an altogether different lens to look at the sector.

Analysts have long argued that the service sector will help take Asian emerging economies further up the value chain in global markets. The growing share of services as a percentage of GDP in these countries has been viewed as a predictable and essential path of structural post-industrial transformation followed by many economies. Mature economies have predominant services sectors.

We need an altogether different lens to look at the services sector. Recent trends suggest bundling goods and services to create more value in global markets. In rural economies, putting together agriculture and high-value services also has tremendous potential – and is particularly well suited for emerging economies which continue to have large employment in the primary sector.  

The recent APEC Senior Officials Meeting in Manila featured a public and private dialogue on services. I recommended unpacking the promise that lies within the overall services sector. In countries where agriculture and industry still dominate GDP and employment, developing high-value services can drive up the value of the primary and secondary sectors as a whole. It is value addition that matters, and increasingly the services sector could be viewed as a partner rather than a substitute. I proposed three types of services that hold considerable potential for the APEC region and Asia in general.

1. Manufacturing services. Higher-order manufacturing increasingly embodies a growing proportion of services. A report by the World Economic Forum shows that 30% of the value chain in a typical American car is from services – R&D, design, advertising and marketing, transportation and insurance. Emerging Asia economies are well placed to go beyond the ‘factory of the world’ advantage from low labor costs with manufacturing services.. According to a survey by the Economist Intelligence Unit, engineering companies in Asia are growing at breakneck speed with top-line revenues growing by an annual average of 20% between 2005 and 2011. Asia’s strength in R&D services is also rising beyond low-cost engineers, and the People’s Republic of China (PRC) and India are now net exporters of R&D services to the European Union.

2. Creative services.  The value of creative goods and services in world trade in 2011was $624 billion. UNCTAD, which has analyzed the huge trade potential of the creative economy, suggests that while creative goods—arts, crafts, books, graphic and interior design works, fashion, films, or music—account for the bulk of the creative economy, doubling in value between 2002 and 2011, it is creative services—architecture, cultural and recreational, audiovisual, advertising, and R&D services—that are showing higher dynamism, with global exports almost tripling from $62 billion to $172 billion during the same period. Lucrative digital enterprises, including entertainment and animation, are further accentuating this trend. However, developing economies only accounted for 11% of total exports of creative services in 2008 –- a considerable untapped potential for emerging economies.

3. Services for IT and mass market technologies. I believe it is this category of services that may have a more defining impact on the region’s development, as they provide exciting opportunities for emerging economies to not only strengthen service sector capabilities, but also reinforce inclusive growth. Mid-range and low-end technologies are setting markets on fire in emerging economies and contributing to “reverse innovation” – a low-cost product innovation in the developing world that eventually finds its way to advanced markets. The annual growth rate of entry-level product innovations is estimated to be 6%, with India and PRC expected to record 10% growth. A mass market for cloud-enabled services could generate up to 14 million jobs by 2015, most of them in developing economies. Deep inroads made by mobile technologies in even the most remote and poorest parts of developing Asia provide enormous opportunities for m-Education and m-Health services. ADB-supported projects in this realm include an electronic health center that delivers virtual primary health care services using television white spaces up in the Bhutan hills, or pay-as-you-go solar energy services to households that cannot afford to invest upfront in solar home systems. Such services at the bottom of the pyramid can further spur frugal innovation, leading to inclusive growth in the region.

The Philippines is the chair and host of the APEC Summit in 2015. Of the 21 APEC members, New Zealand, Canada, Australia, Taipei,China, the US, Hong Kong, China, Japan and Singapore are above APEC and OECD averages in the Knowledge Economy Index of the World Bank. Malaysia and Thailand are below the APEC average. Finally, the PRC, the Philippines and Indonesia are below the Asia and Pacific average, so will gain from advancing the services sector. In the case of the Philippines, the services sector roadmap being developed should go beyond the IT-BPO nexus to explore additional areas outlined above. For developing Asia in general, the journey of Singapore in building competitiveness in services, such as trading services and financial services, offers good lessons. The country’s competitiveness committee included services with manufacturing as twin engines of growth for the economy.