Services sector as growth driver?

The Prime Minister/First Minister of Finance says that the target is to have the services sector grow to 70% of Malaysia's annual GDP from 54% currently: Govt to emphasise on services sector. Let's take a closer look, shall we?

Services sub-sectors

The major services sub-sectors are in banking and finance, tourism and transportation.

Malaysia's also has superlative strengths or efficiencies or capacity linked to traditional activities such as plantation management services, professional scientific services for rubber production and for downstream rubber goods production, engineering services for modern oil palm and rubber estates, support services for selected manufacturing such as engineering services for electronics industries, infrastructure and property planning and development services, and construction related services.

With respect to tourism, there are opportunities for further development of resort services.

A need to identify market niches

The niche markets will depend on the following factors:

First, the service products need to be identified. This includes higher education conducted in English for domestic and export markets (currently Malaysia has more than 20,000 foreign students drawn from about 100 countries enrolled in private colleges and universities), Islamic banking services, trading agencies for Malaysia's rubber, palm oil and oil and gas-related products.

Second, the services need to match demand. Using tertiary education services as an example, this is a matter of pricing of fees and quality of higher education. Another example is specialist medical and health services targeted at new segments, such as patients from neighbouring countries with less advanced services, who are motivated by Malaysia's relatively low price for similar services offered.

Third, the identification of where the demand can be tapped. For example there are tourists from the Asia Pacific and Middle East who prefer Malaysia's geographic location for any number of reasons such as language or cultural familiarity between buyers and providers of the services. There are specific demands for eco-tourism for rain forest tours or deep sea scuba diving packages or golfing trips. Such niches are sustainable only if service providers continuously maintain and improve their facilities to ensure safety, hygiene and quality standards that meet expectations of the niche markets.

Fourth, there is a perception of value - how much bang for the buck, so to speak. For example, highlighting that tertiary education and training in the English language at a competitive level of quality and cost. The centrality of Malaysia as a launching board for visiting other Southeast Asian countries is another example.

The imperatives in developing services

Within Malaysia's domestic economy, the development of the services could be ordered along the following lines:

• Accelerate import substitution in areas such as education and training services and, freight and transport services.

• Enhancing and deepening the consumption of existing services such as telecommunication, multimedia and information service products. This is where content is important.
• Developing new consumers through new business strategies, new ways of promotion and new approaches towards the delivery of services.

• Developing new service products or new modes of delivery for existing market niches. For example, in domestic tourism, the creation of strategic alliances between the core service provider with the providers of other products or services especially for foreign in-bound tourist.

The many steps required

Many believe that despite the overwhelming economic dominance of China and India, Malaysia still has a role to play and, remain relevant. That is true, of course.

The path towards services contributing 70% of Malaysia's annual GDP will be a tricky one. Economists may become exasperated with the manner in which the value of services are collated, computed or imputed.

Players may not have the skill sets in spite of the sincerest efforts of the government of the day. This may be due to declining standards of education and a decline in English proficiency.

The aspirational focus on services over other traditional sectors such as primary industries and manufacturing is obviously due to the clear realisation that Malaysia cannot compete strongly in these sectors.

It is believed that economic growth must come from the development of services. Greater value-added can be achieved. It is believed that these are the ingredients for shifting Malaysia's workforce from the low-cost, low-pay regime today to the high-cost, high-pay regime of tomorrow.

Musings

I want to jot some thoughts that I have explored in previous posts:

Is the economic growth paradigm the only model that Malaysia can subscribe to?

Will the declining education standards and level of English proficiency in Malaysia affect our competitive ability to shift from the low-cost, low-pay regime to the high-cost, high-pay regime?

If so much of Malaysia's scarce financial resources are to be allocated in favour of the services sector, what becomes of the brick-and-mortar primary resources and manufacturing sectors?

I am a big fan of the brick-and-mortar economic sectors. Although I am personally involved in the services sector, I am more comfortable with the thought that Malaysia has strengths in the primary industries and manufacturing because I have always felt that no matter what Malaysia does, these are the two sectors that will keep Malaysia close to some form of self-sufficiency.

This may not seem important in a globalised world. But we should give pause to consider the security aspects. Just remember how vulnerable the feeling was just less than 10 months ago when crude oil prices were at stratospheric heights and food prices were skyrocketing. We even feared where our rice supplies were going to come from. What happened to all that?

So, I hope that in allocating Malaysia's scarce economic resources, the economic planners maintain a balance. 70% of Malaysia's annual GDP coming from services is a good aspiration. But let us remain focused on things like food security which is derived from agricultural productivity.