Unlike Western economies, most of the Asian economies are overly dependent on manufacturing for growth. As the demand for cheap products declines in the West,  Asian countries can reduce their dependency on exports and instead grow their service sectors to boost growth according to an article by Olaf Unteroberdoerster in the latest edition of IMF’s Finance and Development(F&D) magazine.

Chart:

Industry’s contribution to China’s GDP is about 50%. This is much higher than the average for OECD countries and about 10% higher than the figure for low and middle-income countries. As the chart above shows, other countries such as Malaysia, Indonesia, Japan, Korea, etc. are also heavily reliant on industry. Similar to China, the industrial  sector contribution to the GDP of these economies are also high by 5 to 10 percentage points of peer countries.

From the article:

“Given Asia’s dependence on exports, it is no surprise that services’ share in GDP is generally low by international standards. For example, in 2008 China’s service sector GDP share was nearly 13 percentage points below the low- and middle-income
country average. The same holds true even for Singapore, which as a financial center is a service-based economy. Employment patterns—the distribution of the labor force across agriculture, industry, and the service sector—confirm Asian economies’ overexposure to industry and underexposure to services.

The dominance of industry has been an important factor in Asian economies’ strong growth performance and rapid rise in living standards. Rapid industrialization allowed hundreds of millions of workers to move out of low-paying jobs, particularly in agriculture, where Asian productivity levels have remained very low (see Chart 2). But future growth will depend on the service sector. As Asian economies, starting with Japan and Korea, move into a postindustrial world, the service sector must create jobs and catch up with productivity levels in advanced economies. Until now, productivity growth in Asia’s service sector has stagnated compared with that of the United States in recent years.”

The author notes that the service sector is a major component of India’s economy and has been leading India’s GDP growth for the past two decades. India’s service sector productivity is much higher than other countries due to the following reasons:

• Advances in communications technology, which gave India’s ample supply of trained, English-speaking workers access to growing domestic and global markets
• Successful deregulation of services
• Privatization
• Foreign direct investment
• Financial sector reforms

Converting an economy from manufacturing-based to service sector-led will be a tough challenge to Asian countries. Malaysia tried to grow its service sector especially in the IT field but was unsuccessful. Malaysia then focused on manufacturing on the mass production electronic goods and components, the traditional industries of palm oil and rubber plantations. However it was an easy process to accomplish in the West especially in the U.S. when factories were moved overseas to low-cost locations and American workers ended up taking employment in the service sector.