Overblown expectations

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Overblown expectations

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Chang Ha-joon

The current South Korean government is committed to developing and expanding the services sector. A few months ago, Hyun Oh-seok, the deputy prime minister in charge of the economy, declared that the future of the Korean economy depends on advances in the services sector. Liberalization and deregulation in the services sector took up a large part of the economic stimulus measures the government trotted out over the last year. They have been mostly targeted to lift barriers in the high value-added fields like medical services, education, tourism, finance and software.

They are necessary. These productive areas demand competition to meet global standards, and with many talents in the medical and software industry, these areas could help exports and the overall economy.

But just because the non-manufacturing sector needs to be developed and its evolution could aid the economy, the government shouldn’t make services its only economic goal.

Tertiarization in economic jargon is a shift from the primary economic realm, agriculture, and the secondary realm, industry. When consumers reach a certain income level in society, they have more interest in services than manufactured goods. The economy is increasingly driven by the services sector. For the last several decades, the share of the manufacturing sector in advanced countries of gross domestic output and employment has sharply decreased.

But that does not mean the role of the manufacturing sector has ended. The share of manufacturing of GDPs of advanced economies fell not because of reduced output, but due to lower product prices. Relative prices of manufactured goods dropped because productivity of the manufacturing sector improved faster than that of the services industry. When compensating for the decreases in relative product prices, manufacturing’s share in the economies of the United States, Switzerland, Sweden and many other industrialized countries actually increased over the last two to three decades.

It is wrong to claim Korea’s services sector lags in productivity. Based on revenue per employee in the United States and the United Kingdom, their retail industries are highly productive. But the data is unrelated to customer satisfaction and quality in services. Because of the small numbers of staff members, customers are made to wait nearly half an hour for service in retail shops. Those countries have big-box retail stores outside cities that offer cheaper prices, but consumers have to put up with a long drive to get to them as well as long walks within the huge stores. In terms of customer services, they are basically terrible. We do not necessarily have to imitate their retail marketing and management styles in order to raise our productivity.

International trade in the services sector is difficult because the producer of services must be in the same space with the consumer. If shares of the services sector rise sharply, many complications may appear in the international account. Even the United States - the world’s largest services exporter - rakes in a trade surplus from services equivalent to just 1 percent of GDP. The sum hardly can make up for the deficit - equivalent to 4 percent of the GDP - from trade in commodities. India, whose services area is the most advanced among the developing nations, reports a trade surplus tantamount to 1 percent of GDP and incurs a deficit of 5 percent of GDP in its goods trade.

Scale also poses a problem. Let’s take the medical sector as an example. Korea is eager to export the country’s medical services. But whether that is a good idea is questionable given the country’s rank - third from the bottom among members of the Organization for Economic Cooperation and Development - in the number of doctors, with two doctors for every 1,000 people, below the 3.2 OECD average. Moreover, few countries earn money from medical exports.

America’s surplus from medical services exports quadruples the size of Korea’s, but the amount was a paltry 0.012 percent of GDP in 2011. Korea’s international surplus from medical services averaged 0.003 percent of GDP in 2011-2012.

The Czech Republic is the world’s largest exporter of medical services, and its surplus beat Korea’s by 45 times. But the scale amounts to no more than 0.136 percent of its 2011 GDP. Korea posted average surpluses tantamount to 1.1 percent against the GDP in international trade of semiconductors and 4.1 percent from automobiles in 2011-12. Even as Korea bolsters exports in the medical field up to the level of the Czech Republic, its contribution to the overall economy will remain insignificant compared to the performance by semiconductor and automobile manufacturers.

The services sector requires improvement and development. What can be exported should be. But we should not hype it as if it is the Promised Land for our economy. In fact, if resources are overly spent on the services sector, they may be wasted and steer the economy into harm’s way.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, April 10, Page 31

*The author is a professor of economics at the University of Cambridge.

By Chang Ha-joon



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