Servicing the world is the new focus

He agrees that a vibrant service sector can have broad economic benefits.

"Synergies between services and industry could improve overall productivity," he says. "For example, industrial design, marketing and legal services could facilitate investment and development of new manufactured products.

"The service sector also tends to be more effective in job creation, particularly for women, thus supporting inclusive growth."

Developing the service sector could also diversify the production base, he argues, enhancing economic resilience and boosting growth.

"Modern services are becoming increasingly tradable, providing new export opportunities," he says, citing India and the Philippines which have become world leaders in the export of outsourced business processes.

Rhee says that skill gaps and a lack of infrastructure are frequently cited as factors that hinder service-sector dynamism in Asia. Although he argues that "burdensome regulations" are the biggest barrier.

"Excessive regulation that protects incumbent firms and other vested interests undermines market competitiveness and limits prospects for improved productivity and efficiency," he says.

He gives examples of legal markets that are dominated by rich lawyers, schools controlled by teachers' unions and a medical sector that is influenced by powerful doctors. This leads to higher business costs that also hamper industrial development. "Many service firms in Asia are owned by the public sector, so governments have less incentive to deregulate services. But the same authorities have already opened their economies' manufacturing and agriculture sectors for the common good, even at the expense of minority groups like farmers and factory workers.

"Why, then, are they maintaining policies that protect the special-interest groups that dominate the service sector?" Rhee asks.

The East-West Center, a Honolulu-based institute, published a paper earlier this year calling for more support for modern services in Asia.

"Asian economies must support their service sectors to improve employment opportunities and both internal stability and international relations," it said.

The report said that while traditional services still dominate the lower income Asian economies, modern services such as business process outsourcing and IT are becoming increasingly significant in the higher income economies.

"The intangible nature of many services takes nothing away from the very real economic effects in employment and broader economic dynamism," the paper said. "Efficient energy, distribution and transportation networks boost productivity in manufacturing.

"Strong modern services — especially business services such as design, marketing and prototyping — can stop Asian economies from becoming trapped at the middle-income level and lead them into higher value-added activities generating higher incomes."

Economists say the development of services further helps in the reduction of poverty in a region which, despite great progress, still remains home to almost two-thirds of the world's poorest people.

Like ADB's Rhee, the paper points to the fact that for modern services to take off in the region, governments will need to remove "policy and structural constraints" to allow the sector to better serve as an engine to employment and growth.

Specific changes have to be tailored to fit local circumstances, however, because of the region's vast diversity. One answer will not fit all in identifying what reforms need to be made.

According to the East-West Center paper, some themes, however, appear common to all countries, such as removing restrictions protecting local interests. Allowing greater competition brings variety, lower prices and increased employment.

"Overall the guiding principle for Asian policymakers must be to create a more competitive environment for their service industries," the paper said.