Monday, June 22, 2009

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.

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.


hishamh said...

A comprehensive and well-thought out post, thank you!

I am reminded of what happened to agriculture in the wake of our "Look East" policy and industrialisation.

In retrospect, food security was left by the wayside not just from a lack of investment but also a lack of imagination in implementing policies.

There was never a holistic strategy towards food-based agriculture apart from saving votes in the hinterland. As a result, policies and subsidies always targeted individual producers, rather than promoting development of food industries.

So we now have the situation where we get most of our deep-sea fish and rice from Thailand, while our own production capacity is either non-existant or stagnant.

Let's hope manufacturing and plantations don't go the same way.

de minimis said...

Bro hishamh

I'm glad you share my sentiments. I do believe very strongly in our agricultural sector. But we lag behind Thailand in innovation. We've got some catching up there.

walla said...

More seamless transition from hardware (manufacturing) to software (services) will require a parallel ladder-climbing of the value-adding process.

This means more content which means more intellectual input which means more relevant and cutting-edge education which also means more R&D which thus ends in a more information-affined society and that can only emanate from a more educated and better informed population working in tandem with a more transparent government and a more knowledge-intensive industry.

The foundation of a good services sector is thus a world-class, relevant and accessible education system. How else, for instance, can people who are to deliver services differentiate the quality of their services in order to lure and excite more customers which translates to higher bottom-line revenues?

One suspects the economic issues in catalyzing a services-based economy are more challenging than those in building a manufacturing-based economy.

It's like the durian. Just changing the fertilizer to organic will change its taste. The inputs for the manufacturing-to-services migration are more complex because the outputs are needed to appeal to the human spirit.

It appears from records that the bigger slices of contribution so far by our services sector to the GDP pertain to the wholesale, retail and hotel segments. That means local retail trade and inbound tourism. There are other segments. Education and healthcare, for instance, might have grown due to pent-up but primarily local demands for alternative offerings which then led to the growth of private education and healthcare privatization. Likewise the growth of the financial services segment out of the ongoing currency policy which fuels credit-taking for the construction and automotive industries. So too the export of infrastructure and oil installations services to mostly muslim-based markets.

The situation thus could be this:

the services sector to-date is mainly focused on the domestic market with minor exports to freshly emerging economies.

In the former case, that primarily means money transferring from right hand to left hand with the funds bounced around in an economy that's mostly run on commodity-earnings now that manufacturing revenues are sliding.

In the latter case, that could mean long gestation periods before one gets paid for the construction services which again will mostly be in the lower-end side of the value-added scale which means they attract less than premium earnings which may thus not be able to fill the income-level gaps for the economy on the whole during the period of increasing the focus on services to make for the shortfall in manufacturing revenues.

There is therefore an aggregate revenue gap which may grow which presents some risk which has apparently not been measured, including the risk of depending on basically one type of services export market.

Furthermore, a growing services sector will not grow jobs faster than that of a growing manufacturing sector. Ten bank clerks cannot equal one hundred production workers for the very fact that the former cannot impact as much as the latter in the demand side of the basal economy which means the retail trade segment may see a downward spiral. The gini coefficient may also increase.

A pertinent question which thus awaits asking is what to do with the production workers who cannot move into services. Do they move back into agriculture, for instance, and how does one do that? Maybe more ideas are needed on what to do with land.

walla said...

It remains to make a few other suggestions. One, there doesn't seem to be a paypal-like system for locals to withdraw money earned through online services which can be an export growth item. This should be studied. Two, the private sector should be encouraged to innovate. Even a simple thing like a cup of tea mixed with coffee can be turned into a tourist item in HongKong provided the brew is done exceptionally fine; the local brews are getting from bad to worse. Three, the government should not just liberalize the nominated services sector but also waive all taxes on the segments for the next two years to coincide with the rise of the fuel bill when we become net oil importer by then. As it stands, it is hard to be sanguine that the drive towards increasing the portion of services to the GDP will bear immediate fruit because of the global economic condition as well as the present weaknesses of both service deliverers and service delivery systems. The tax waival should draw global attention and if twinned with a specific program to attract specialist expats hit worldwide by their respective economic downturns, it may just tip the scale before we get caught in the jaws of economic limbo.

What we direly need are an abundance of agile brains who can innovate and genuflex new businesses in the services sector. If they come from the advanced economies, they will also bring that cosmopolitan standard we have been hankering for when we think about becoming a more cosmopolitan Malaysia.

The local flavour and fares can then intermingle more creatively into the new wave which may yet make this country a greater tourist if not livable attraction.

The question remains whether any new programs should be contained within specific zones to create clustering, or open up. One problem remains unresolved. That is the complaint made by many parties that different government agencies and departments practise different interpretations to the same policies. There is no reason federal cannot solve this before the next tea break. But then again, that may be expecting too much, considering you can't even find online last year's annual report of the tourism promotion board (

Meanwhile the durian season has arrived but the pricings have gone south. The glut of this king of fruits is painful, especially when it can command premium demand, especially in places like China whose citizens continue to wallop the thai durian which is nothing compared to ours. The agriculture authorities should waste no more time to find how to make ours hardier for the long distance. That's income for poor farmers, forgone.


"memo to: oaktree clients"
also, of course, Taleb's Black Swan