Asian manufacturing slows, but services have been slow to fill the gap
Changyong Rhee says upgrading sector could see broad economic benefits
The euro-zone crisis has dominated discussions among policymakers over the past few years, but the economic slowdown in Asia's two giants - China and India - has become a source of growing public concern as well. How worried should we be about an additional drag on the global economy?
After years of double-digit gross domestic product growth, China's economy is decelerating. We predict its growth will slow to 7.7 per cent this year, from 9.3 per cent in 2011. Its population is ageing, real wages are rising and growth is moderating towards more sustainable rates.
India, too, has massive potential to grow fast and reap a demographic dividend, but it has been struggling with structural reform. We expect that India's expansion will slow to 5.6 per cent in 2012, from 6.5 per cent last year.
Weak external demand is partly responsible for the slower growth, but internal factors - namely, slowing investment and stagnating consumption - are also holding back expansion. Maintaining growth in a global slowdown requires rethinking the future of "factory Asia".
Asia's boom was driven largely by intraregional manufacturing linkages. But, with budget-tightening around the world, demand for Asia's exports is expected to continue to falter. So where should Asia look for new sources of growth?
Upgrading the service sector - for example, business processing, tourism and health care - could play a critical role in future growth. Asia's service sector is already large; services accounted for nearly half of developing Asia's gross domestic product in 2010, while service workers comprise more than one-third of the total workforce.
If these countries follow the same path as the advanced economies, agriculture's dominance will give way to industry, which in turn will be supplanted by services, further broadening their role.