Strengthen service sector to greater height

强打服务业创高薪

Is it an ultimate dream? Yes. Is it an economic pride? Yes. Is it a source of prosperity? Yes. Then, it must be the “service sector”, right?

Less developed nations has been associated with backward agriculture economy while developing nations aggressively push their manufacture sector. Service sector has been seen an important engine of growth to developed nations. Therefore, service sector is regarded as a dream for every nation, a pride for every economy and a sector that can generate lots of income.

One of the benchmark targets in Malaysia’s Economic Transformation Program (ETP) is increasing the contribution of service sector to 65% of GDP by 2020. The journey towards service sector has started – but are we ready? In answering this question, let analyze the trend and the gap.

The Trend: Service versus Others

Best possible data available through Malaysia Statistical Department are ranged from 1987 to 2013. Taking first and last three year averages, percentage of output contribution to Gross Domestic Products (GDP) is shown in Figure 1. There are some classification changes between these two periods of time. Hence, minor adjustment is made to match the earlier years (1987 to 1989; will be referred as “Period 1”) to the latest years (2011 to 2013; will be referred as “Period 2”) classification for better comparison.

Figure 1: Output Contribution to GDP (%)

(Data source: Statistical Department of Malaysia)

Service sector has already the biggest contributor to GDP since Period 1. Its contribution has increase 10.26 percentage points to 55.37% over the two periods of study. At the same time, manufacturing sector’s contribution also increases to 3.82 percentage points to 25.13%. Primary sector of “agriculture, livestock, forestry and fishing” and “mining and quarrying” collectively suffered decline of 14.34 percentage points to 15.97%. Construction sector has minor increase of 0.26 percentage points in its contribution to GDP.

Figure 2 shows share of labor employed as percentage of total employment. Similar trend to output contribution, service sector has largest share followed by manufacturing sector. Over the two period of study, labor share of service sector increase significantly from 47.18% to 60.38% or 13.2 percentage points. Indeed, all sectors labor share increase except “agriculture, livestock, forestry and fishing” sector which suffer a drop of 17.77 percentage points.

Figure 2: Share of Labour Force(%)

(Data source: Statistical Department of Malaysia)

Based on the trend analysis of output contribution and labor share, it seems that Malaysia is ready to go from manufacturing to service sector. Indeed, Malaysia has already completed transforming from agriculture-based economy to manufacturing-cum-service sector. From the comparison between two periods of study, Malaysia also has started its transformation from manufacturing to service sector.

Therefore, the question should now be extended: Are we ready to transform from manufacturing to service sector “in the best possible ways” to “achieve ETP target”? In addition, policy makers should also ask what benefit of developing service sectors to various citizen groups, especially the youth, golden generation, women and business group, which ranged from small and medium (SME) entrepreneurs to big conglomerate.

In the Best Possible Ways

To get the best possible ways, productivity should be increased, not just increasing the percentage share of output or percentage share of labor. Productivity can be measured in term of GDP per labor employed – amount of output each labor produced – as calculated and shown in Table 1.

Based on Table 1, mining and quarrying sector shows extraordinary high level of GDP per labor employed despite having lowest output contribution per GDP and percentage of labor share per total labor employed (see Figure 1 & 2). This could be due to activities in this sector (include oil exploration) is both highly capital intensive and very high selling price, thus did not really reflect labor work productivity. Ignoring mining and quarrying sector, manufacturing sector turns out to be the most productive followed by service sector. Over these two periods of study, manufacturing sector achieved highest productivity improvement. Perhaps thanks to modernization of agriculture sector in Malaysia, its GDP per labor also increase a lot. Yet, each sector productivity increase about two to three times over a period of about 24 years, which is small.

Table 1: GDP per labor employed

	Agriculture, Forestry, Livestock and Fishing	Mining and Quarrying	Manufacturing	Construction	Service sector
Avg 87 - 89	9.03	325.40	18.66	8.39	13.91
Avg 11 - 13	35.18	778.32	83.75	22.18	53.31
Productivity changes	+ 26.15 (2.9  times)	+ 452.92 (1.4 times)	+ 65.09 (3.5 times)	+ 13.79 (1.6 times)	+ 39.39 (2.8 times)

(Calculated from data obtained from Statistical Department of Malaysia)

World Bank data (in our previous article in this column but not stated here) reveals Malaysia’s overall GDP per labor employed for 2012 is about 18 years, 25 years and 32 years behind South Korea, Singapore and Japan respectively. Malaysia’s GDP per labor employed is also ways behind developed countries like Germany, France, Australia, United Kingdom, United States, Spain and Netherlands. These countries GDP per labor employed is 1.7 times to 2.7 times higher than Malaysia. Current growth in productivities for service sector (2.8 times over 24 years) may only see Malaysia reaching developed nations’ current level only in more than 15 years time.

ETP Target vs. Gap

ETP targeted service sector to contribute at least 65% of GDP. Based on data from Malaysia statistical department, service sector contribution to GDP fluctuated between 44.64% (lowest, recorded in 1988) and 55.91% (highest, 2013). Mathematically, service sector’s contribution need to increase 9.09 percentage points from 2014 to reach target in 2020. This is translated into an average 1.30 percentage point per year over seven years. Based on historical trend from 1988 to 2010 - see Figure 3, service sector recorded only an average yearly changes rate of 0.41 percentages point per year. For the past 26 years (1988 to 2013), service sector only twice recorded consecutives three years of incensement in share of GDP, which is from 1991 to 1993 and 2011 to 2013. Therefore, despite Malaysia’s service sector is the biggest economic sector in term of output and labor usage, it remain a doubt whether this sector can achieve its 65% contribution to GDP target by year 2020.

Figure 3: Service Sector Share to GDP (%) and Yearly Changes (percentage point)

(Data source: Statistical Department of Malaysia)

Benefits to Citizen Groups

National effort to develop a particular sector (in this case, service sector) can only be justified if it can bring significant benefits to various citizen groups. Therefore, what can the service sector bring to four important groups, namely (i) youth, (ii) senior citizen, (iii) women and (iv) entrepreneurs?

Youth – Job creation matching population growth

On aggregate, Malaysia did not have and most likely may not going to have unemployment problem in near future. Based on Table 2, service sector alone has created enough job opportunities to match population growth rate.

Table 2: Service Sector Job Creation

Description	2011	2012	2013	Average
Population growth (annual, %)	1.69	1.66	1.62	1.66
Service sector: Labor changes (% of total employed)	3.31	1.62	2.52	2.48

(Data source: World Bank and Statistical Department of Malaysia)

However, two qualitative matters cannot be revealed with available statistics. Firstly, the wages and other employment benefits to youth labor enough to match current and expected inflation? Manufacturing sector, especially those in export-oriented industries may suppress wages to maximize competitiveness in cost. In wake of China “super cheap” products, the only way of survival for non-branded Malaysian exports is selling at even lower price. Furthermore, higher emphasis on mechanization (or automation) may lead to jobless growth – have growth but reduce new job opportunity as labor is to be replaced by machine.

In service sector, the focus is mainly local market where global price competition more easily avoided. Hence, there is less pressure to minimize wage and higher emphasis to improve service quality through human capital development. As service is localized business, more local youth are needed as compare to hiring cheap unskilled foreign labors to operate machine through simple and standardized procedures.

Senior citizen – To work is win-win situation

Imagine a country having aging problem, especially significant numbers of old age citizens (called “senior citizen” or “golden generation”) who did not have tertiary education level for formal employment beyond retirement age. Instead of giving social benefits or shedding pity tears, why not offer them paid-job that suit their ability? This policy enable senior citizen to proudly earn their living. There are scientific findings claimed senior citizens who actively in work may improve health (like reduce risk of dementia).

This policy of employing golden generation has been practiced very successfully in China and Singapore. At Singapore, one will notice senior citizen working at various job level (pushing pedestrian traffic light, waiter, security guard, shop manager, chef to name a few) in various service industry. Those with higher education may have opted to extend their retirement as consultant, free-lance and various other jobs.

Women – Flexi working make big different

On average from 1990 to 2011 (World Bank statistics), female labor participation rate in Malaysia is 43.5%, lower than neighboring countries like Thailand (66.2%), Singapore (52.8%), Indonesia (50.2%) and Philippines (49.4%). Iceland female labor participation reached 70.2% while United States is 58%, Australia (55.1%) and United Kingdom (53.9%). One of the main reasons for low female labor participation is inflexible working hours that causes women (especially those married with children) to stop working. Service sector may be the best opportunity to offer flexible working hour and part-time that suit female group.

Entrepreneurs – New opportunities

According to the SME census 2011, SMEs have 98.2% of total establishments, 32.5% share of GDP and 71.1% share of total employment. More than 87.6% of the SMEs are come from services sector. Therefore SMEs is an important lifeline of our economy. Developing services sector may give new business opportunity to current and potential entrepreneurs especially priority services sectors encourage by ETP.  Example are wholesale and retail trade, finance and insurance, transport and storage.

Conclusion

Services sector has higher potential than other sector and provides benefit to various groups. So Malaysia moving towards services sector is correct direction but within services sector must choose a suitable sub-sector to focus.

[Chinese version published at Nanyang Press, 12th January 2015. Available online at http://www.nanyang.com/node/674801. This English version may be slightly different from the Chinese online/printed newspaper version]