Service sector at crossroad

华商与经济转型系列69：服务业临分岔路口

夏伟文 & 陈薛卉

Economic growth is usually the main focus for developing countries including Malaysia. Currently, manufacturing and service sectors are our main engine of growth. Despite huge potential and many efforts to develop it, service sector is at a crossroad. Thus, it needs a clear vision on which path of further development it should take. Two questions to ponder. Firstly, which sub-sectors of service to concentrate? During our heavy industrialization, few big sub-sectors failed miserably. This can be avoided if we choose and put in more effort only to the most potential service sub-sector. Second, what are the challenges?

Trend Analysis

Many may thought service sector is just recently developed. Indeed, statistics from World Bank show that this sector has achieved over 10% annual growth rate in some years in 1970s and continuously from 1988 to 1994. Average annual growth rate from 1971 to 2011 is 7.4%. Service sector also contributed more than 35% of Gross Domestic Product (GDP) every year since 1970s. On average, this sector contributed 42.7% of GDP.

However, the years where service sector was having relative high annual growth rate (above 7.4%) and high contribution to GDP (above 42.7%) are the 1990s. After that, the growth rate slowed down while maintaining its high contribution to GDP. Therefore, it is a challenge for current economic policies to re-energize the growth of service sector.

Malaysia’s Statistical Department has categorized service sector into five main groups. They are “utilities, transport, storage & communication”, “wholesale & retail trade, accommodation and restaurants”, “finance, insurance, real estate and business services”, “government services” and “other services”. These sub-sectors are mainly dominated by Kuala Lumpur, Selangor and Johor states with a combined of more than half of total value added. Perak ranked third highest contributor in “utilities, transport, storage & communication” sub-sector, which is also the biggest sector in Perak economy. “Finance, insurance, real estate and business services” sub-sector is the main source of growth for Kuala Lumpur and Labuan.

Which sub-sectors to focus?

Sun Tzu’s Art of War advised to pull out from losing battle but reinforce the winning ones. Despite overall great potential for service sector, there are losers and winners sub-sectors. Therefore, it is important to clearly identify them, pull out from the declining sub-sectors and reinforce the growing ones. Unfortunately, publicly available data is so limited to make any precise analysis. Yet, based on four quadrants analysis of some data from Bank Negara Annual Report 2011, some deduction can be made.

Figure 1: Service Sub-sector Annual Growth vs. Share to GDP for Year 2010

Source: Bank Negara Annual Report 2011 (Table 1.3, page 26)

Figure 1 shows that “wholesale and retail trade” has relative high growth and high share to GDP, thus is a “superstar” in service sector. Continue robust consumer spending and recovery of motor vehicle supply distribution that was disrupted due to Fukushima disaster will be helpful to maintain such high growth in the future. Malaysia should put more resources into this sub-sector.

Putting extra effort to develop “finance and insurance” sub-sector may push it into superstar category. Liberalization of finance sector and expansionary monetary policy to counter global economy recession will encourage low interest rate that will boost growth in bank lending. Malaysia is third largest domestic currency bond market in Asia excluding Japan. Malaysia also has a dominant 47% share in global sukuk market. These indicate potential of this sub-sector.

“Rising stars” which has high growth but not yet contribute highly to GDP are located in the top left quadrant. They are “communication”, “utilities” and “transport and storage”. Rapid growth of broadband penetration is booster for communication sub-sector. However, potential slowdown trade and manufacturing may negatively affect demand for transport and storage as well as real estate and business service. There is limited growth potential for utilities service. Despite much hype on tourism industry, its related sub-sector, namely “accommodation and restaurant” still stuck with relatively low growth and low share to GDP.

Despite only taking only one year of statistic to make inference, the three best sub-sectors that Malaysia should focus on are “wholesale and retail trade”, “finance and insurance” and “communication”.

Opportunities and Challenges

Wholesale and retail trade

According to the Economic Transformation Programme (ETP) Roadmap book, there are 124 shopping malls in Klang Valley (Kuala Lumpur and Selangor) covering an estimated 3.37 million square meters. The ETP has identified 13 Entry Point Projects (EPP) planned for this sub-sectors. These EPPs coverage are diverse from domestic hypermarket, superstores, Pasar Komuniti, Makan Bazaars, wellness resorts, retail hub in Kuala Lumpur International Airport (KLIA) and big box boulevards to virtual malls and expansion to foreign countries.

Observation will tell that some of these EPPs is conflicting each other. For example, small retailer transformation program (Program TUKAR) is in conflict with large megamalls growth. Indeed, Program TUKAR is to help small retailers to combat the big mall players. Furthermore, the success of wholesale and retail businesses are very much depending on demand side, not the supply of stores. Thus, ETP should incorporate plan to increase domestic purchasing power and foreign (tourist) customers.

Finance and insurance

There are 10 EPP for this sub-sector aiming on regional excellence for banking and global dominance for Islamic finance. EPP 7 and EPP 8 are on financial management while one each for capital market (EPP 1), bond market (EPP 2), insurance (EPP 5), banking (EPP 9) and Islamic finance (EPP 10).

Perhaps, the biggest challenge to this sub-sector is financial liberalization, especially the ASEAN Framework Agreement on Services (AFAS). If fully implemented, Malaysia’s financial services may not be able to match foreign institutions’ competitiveness, particularly those from Singapore. Incongruence between AFAS commitments and goals by several countries including Malaysia is a sign of reluctant to open up this sub-sector, perhaps due to unable to meet the challenges.

Communication

Transition to a knowledge-based society is the objective of communication sub-sector. Ten EPP has been identified to serve that objective. Those EPPs focuses on the development of creative content, E-application in learning, healthcare and government service as well as extends connectivity particularly in rural area.

However, one can easily observe that competition among few network operators failed to match our efficiency and quality to foreign countries like Singapore, Taiwan, South Korea and others. Worst, prices for broadband service, multimedia and creative contents are high, hence making the poor cannot afford to buy the services. Excessive control on creative media could also peg back its development. Those are big challenges for the government and industry players to overcome.

Conclusion

There is no doubt that service sector can be very important source of growth to Malaysia. In order to maximize its potential, we need to identify the most potential sub-sectors to concentrate on so that we can have better chance to overcome any possible challenges to success.

Appendix

Table 1: Service Sub-sector Annual Growth vs. Share to GDP for Year 2010

Sub-sector 子行业	Share to GDP (%) 国内生产总值率	Annual growth (%) 年度增长
Utilities 水电煤	3.0	8.2
Wholesale and Retail Trade 批发和零售贸易	13.6	8.0
Accommodation and Restaurant住宿和餐饮	2.4	5.0
Transport and Storage运输及仓储业	3.8	6.9
Communication通讯	4.2	8.5
Finance and Insurance金融及保险业	11.7	6.4
Real Estates and Business service房地产和商业服务	7.8	5.5
Government Services政府服务	7.5	5.8
Other services其他服务	5.9	4.0
Average平均	6.7	6.5

[Source: Bank Negara Annual Report 2011]

[Chinese version published at Nanyang Press, 28th January 2013. Available online at http://www.nanyang.com/node/525277. This English version may be slightly different from the Chinese/ newspaper version]