As they explore an empty office looking for evidence in the movie State of Play, Russell Crowe and Rachel McAdams quip: “Did they outsource to Mumbai or something?” India has become synonymous with outsourcing of services. How did this come to be?
The explosion of service-led growth in our part of the world is the subject of the book The Service Revolution in South Asia, edited by Ejaz Ghani. The book looks to debunk the theory that industrialisation is the sole path to rapid economic development.
According to the text, India exported $ 29 billion worth of software for the fiscal year 2008. This accounted for 60 per cent of both all global software outsourcing and all non-US software exports. The rest of the South Asia accounted for an additional 2.5 per cent of global software exports.
Using the experiences of these South Asian countries, the book tries to provide a road map for other developing countries on how to sidestep manufacturing and move directly from agriculture to services.
Given the fact that services is the largest sector in the world, contributing 70 per cent of the global output, twice the contribution of the manufacturing sector, the book contends that there are huge opportunities for developing countries to gain comparative advantages in their services sectors.
The book looks at how this revolution could overturn the commonly accepted canons of development. These are that services are driven by domestic demand and cannot independently drive growth. That services in developing countries have lower productivity and lower productivity growth than industry. And finally, that services jobs are low-skilled, and as such, they cannot be an effective solution to poverty. The book proves all these contentions wrong.
While the East Asian growth model is manufacturing-led, the South Asian one is services-led.
Services have led to growth comparable to East Asia, at nearly 7 per cent annually between 2000 and 2007. The book points to the fact that the services sector has become increasingly crucial to South Asia, growing from 40 per cent of GDP in 1980 to more than 50 per cent in 2005 in India, Bangladesh and Sri Lanka. The services sector is the largest contributor to the growth of these economies.
The dynamism of this growth is expressed by looking at absolute labour productivity in South Asian countries. Both labour productivity and labour productivity growth are higher than manufacturing in India, Pakistan and Sri Lanka.
This makes services-led growth a “transformational engine for growth”.
The book attributes the explosion in services-led growth in South Asia to three main factors — increases in technology, transportability and tradability.
Advances in technology have increased the ability to trade services in the global marketplace. Service exports have a close relationship with the growth of the services sector. For South Asia, the two most important kinds of service exports are IT and ITeS, and migration and the resultant inflow of remittances.
In South Asia, service exports have increased faster than East Asian manufactured exports. The importance of service exports is that the demand for them demonstrates that the services sector should not be treated as a “domestic demand-driven, non-tradable sector”.
Traditional service exports have grown dramatically as over 1.5 per cent of the South Asian population lived outside their countries in 2005. In 2007, the remittance inflows were $43.8 billion.
Services-led growth can reduce poverty directly by increasing the number of jobs available. Indirectly, the expenditure of the income derived from these jobs fuels a further demand for goods and services and thus, more jobs are created.
The book points to the fact that services-led growth can only work if an adequate infrastructure is in place. Unlike manufacturing, services do not need roads and ports as much as they need strapping telecommunications networks, broadband connectivity and a proficient, English-speaking workforce.
Education is key to the success of South Asian countries embracing the services sector in a bigger way. As the services sector requires more skills than manufacture or agriculture sectors, it is crucial to develop a workforce consisting of highly skilled graduates.
In India, for example, the globalisation of services has been possible because of the presence of high-quality tertiary education in the form of the IITs and the IIMs. Owing to the failure of the public sector to fill the demand for high-quality tertiary education, the private sector has stepped in to form partnerships with the government to increase the number and quality of these institutions.
The book recommends that other South Asian countries should follow suit and increase investments at all levels of education to cultivate an educated workforce that can cater to the needs of the services sector.
Five main challenges to a strong higher education system are identified for Bangladesh, Sri Lanka, India, Pakistan and Nepal. These are access, quality, relevance, finance and governance. One of the solutions suggested is a regional collaboration in higher education. Since the issues South Asian countries face are analogous and there is a shared culture, there are potential economies of scale in working together. The book suggests looking at a similar framework as the European Community has established to integrate tertiary education.
Rapid growth and development of the telecommunications sector is also at the heart of services-led growth. While South Asia invested more in services-related infrastructure, the issue of universal access still remains unsolved.
The authors make a good case against the closely held notion that industrialisation is the only path to economic development.
THE SERVICE REVOLUTION IN SOUTH ASIA
Edited by Ejaz Ghani
Oxford University Press
382 pages; Rs 795
