SINGAPORE'S economic planners are busy revving up the services engine to crank out more jobs and growth in the economy. They may want to take a look at a World Bank study which underscores the importance of services trade in economic growth.
The findings in Services Trade and Growth by World Bank economists Bernard Hoekman and Aaditya Mattoo - published in January and a follow-up to a similar World Bank study in 2006 - could offer Singapore some useful insight, as well as a clearer picture of the road ahead.
The study is also timely for Singapore, which recently released figures showing that trade in services is growing more important for its economy. Such trade in services, which accounted for under two-thirds of Singapore's gross domestic product (GDP) in 2000, expanded to 91.3 per cent in 2006, according to the Singapore Department of Statistics.
But the bad news is that while the deficit in Singapore's services trade balance has narrowed, Singapore's economic planners do not see the gap disappearing anytime soon. Despite the government's push for exports of services - in infrastructure, logistics management, education and health care - there is still more that Singapore can do for its service export. The same goes for domestic services, where productivity is still low.
Going by the World Bank study, much of Singapore's economic future will ride on how well it does on the services front. Typically, as a country climbs the economic ladder, the share of services in its GDP also rises. Services make up just over a third of GDP among the poorest countries, and over 70 per cent in the richest.
Traditionally, economists have attached greater weight to increases in the supply and productivity of capital and labour for growth. However, according to the World Bank, services are playing an increasing role in fostering growth.
For instance, financial services reduce transaction costs and improve the allocation of real resources, it points out. Low-cost and high-quality telecommunications 'will generate economy-wide benefits, as the communications network is a transport mechanism for information services and other products that can be digitised'.
The benefits of transport, business and distribution services are also felt economy-wide. So are those arising from health and education services, which 'are key inputs into - and determinants of - the stock of growth of human capital', the study notes.
Indeed, when seen as inputs, services are indispensable in the modern economy. No company can go without a telephone, grow without finance or get its goods to markets without transportation.
Services today underpin all economic activity needed in the production and distribution of goods and services. In manufacturing, the services content in a product expand as it grows more sophisticated.
This means that for Singapore, which still depends much on the export of goods even as it moves up the value chain of production, a strong services sector is key to its performance.
'The importance of services for export performance rises with per capita incomes - business, distribution and communications services become the most important sectoral elements of overall exports in terms of inter-industry linkages,' the World Bank study points out.
But Singapore is hampered by a small home market - even for services. It has to reach out to global markets. Thus, service exports deserve at least as much attention as goods exports.
Unlike in the manufacturing sector, there is still room for liberalisation in Singapore's services sector. According to the World Bank, freeing up the services sector can bring even more gains for an economy than liberalisation in the goods sector.
This article was first published in The Business Times on May 12, 2008
