Bolstering the services industry

Cho Yoon-jae

Advances in the services sector have become essential to generate traction in the slow-moving South Korean economy and ensure stable activity at a time when the export-led growth engine has increasingly turned rusty and unreliable. Deregulation to perk up the services industry is one of the keystones of the three-year government outline to reinvent the economy. Despite all the talk about the necessity, progress has been slow. The services sector share of overall output has decreased in recent years. The government is out to address the services sector because its share against the gross domestic product is low compared not only with high-income countries, but also countries with similar income levels.

Productivity in our services industry is substantially below manufacturing and the foreign competition. According to 2012 data, the services industry was 58.2 percent of the country’s output, compared to 70 percent to 80 percent in the United States, Japan and Europe. The productivity of labor in our services sector reached just 30 percent of U.S. levels and about 60 percent that of domestic manufacturers.

Before expecting a quantum leap in competiveness in the services industry, we must first assess the exact state of the market and what course of direction and actions are needed to benefit the economy.

First of all, we need to reexamine whether the data the government provides is an accurate reflection of the services sector. Self-employed businesses take up a greater share in the market compared with other countries. They are mostly engaged in wholesale and retail, restaurant and food, and lodging businesses. But in 2012 data, the wholesale, retail, restaurant and lodging industry was just 11 percent of GDP, sharply lower than countries with similar incomes. The employment share of the services industry, however, was relatively high at 23 percent. Domestic manufacturers contribute 31 percent to output and 18 percent of employment.

Productivity in the services industry is cited as low because of poor output figures against the number of employees. This is because revenue from wholesale/retail and restaurant/lodging businesses has not been accurately surveyed. The share of the services sector in the economy and productivity data naturally has been underestimated. It is true that the industry uses a large number of part-time employees and pays less than manufacturers. But it is overblown to claim that a worker in the services industry generates output less than one fourth of those in the manufacturing sector.

The competitiveness and productivity of the services industry also should be separately measured. Retail and dining businesses are redundant and heavily competitive, but nevertheless few countries can match our excellent and efficient service. Koreans can slip out late in the night on foot to buy beer and get something to eat. Anything from a full meal set to a bowl of noodles arrives at our door within a few minutes from one phone call. How much better can services be?

To raise productivity, the industry must generate more value from employees. But this requires an increase in cost. The cost of goods and food at mom-and-pop stores as well as delivery and lodging charges must go up. This can lead to overall inflationary pressure and an increase in industrial costs that could translate into appreciation in the real exchange rate, hurting the country’s competitiveness on the export front. Consumer spending also would be dampened. South Korea’s income level in terms of purchasing power is higher than real income levels because services and consumer prices are relatively cheap compared to most advanced societies.

To advance the services industry, the focus should be more on developing specific financial, insurance, medical and tourism fields and intelligence-based areas instead of citing overall services data. These areas are interrelated and heavily deficit-ridden because they rely on external trade. The finance and insurance sector has a large share of the market and requires tougher supervision rather than deregulation. To bolster the intelligence-based services sector, liberalization and deregulation won’t do. The country must invest more in upgrading overall intelligence and knowledge levels. We must reorient society to better respect competence and intelligence, breed and spur creativity through open debates, encourage rationalization in every field, ensure protection in intellectual rights and innovate the education.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, March 22, Page 31

*The author is an economics professor at Sogang University.

BY Cho Yoon-jae