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Services sector deserves more attention

Kazi Iqbal
***Wholesale and retail business, and transportation and communications constitute about half of the total services sector output and onefourth of the total national income***
SOME economic issues always receive less attention from policymakers and researchers than they duly deserve. The services sector is one of them.
An article published on The Daily Star on September 18, written by my colleague Dr Abul Basher, rightly pointed out the role of the services sector in economic growth and advocated considering the role adequately in the upcoming Seventh Five-Year Plan. The objective of my piece is to complement Basher's article and also put the issue on a broader canvas.
While the discussions and debates on the services sector centre around only the ICT and IT-enabled services, this article argues that the focus should be on the overall services sector which generates half of total national income and employs more than one third of the total labour force.
Once dubbed as "unproductive of any value' by Adam Smith, the services sector has now become a fertile ground for technological innovations and a major source of growth in developing countries.
Currently, the services sector produces about 70 percent of the world output, and about a half of output of the developing countries.
The stage theory of growth suggests that an economy moves through several stages of development from pre-industrial phase (predominately agriculture) to industrial phase (predominantly manufacturing) to post-industrial phase (predominantly services).
However, current experiences in some developing and emerging economies suggest that an economy can bypass the pure manufacturing dominant phase with a hybrid phase where both manufacturing and services sectors can grow simultaneously to complement each other. India is a classic example of such hybrid growth unlike China, which saw purely manu-facturing-led growth.
From the planning's point of view, there lies an equity-efficiency trade-off in choosing the optimal relative size of manufacturing and services sector for a developing country. The services sector is more labour intensive than the manufacturing sector because of the nature of technology it uses.
Therefore, growth of services implies creation of greater employment opportunities. On the other hand, it is also argued that total factor productivity or labour productivity is lower for services than manufacturing.
Therefore, transfer of labour from rural to low productive services sector more than the manufacturing sector will lower the growth of the economy.
Therefore, policymakers should ask if shifting labour directly from agriculture to services confers the same benefits in terms of productivity growth and living standards as the more conventional path of shifting labour from agriculture to manufacturing in a labour surplus country like Bangladesh.
The services sector is no longer a residual' sector; this sector has been growing at around 6.5 percent for the last one and a half decades. This growth rate is higher than the overall growth rate of the economy and is twice as large as the agriculture sector.
The contribution of the services sector is much higher than the industry sector in generating income and employment. It is important to note again that the services sector produces half of national income and employs about 35 percent of the total labour force as opposed to one-third of income and about one-fifth of labour force by the industry sector.
The services sector in Bangladesh is highly heterogeneous in terms of output, inputs, technology (such as capital and skill intensity), formality, tradability, scope for productivity improvement and potential for growth.
Wholesale and retail business, and transportation and communications constitute about half of the total services sector output and onefourth of the total national income. The growth of the services sector and the economy critically hinges on the productivity growth of these two subsectors.
However, one can hardly come across any discussion on how to enhance the productivity of these sectors.
Growth rates of hotel and restaurants, financial institutions, education and health are also noteworthy, registering more than 7.5 percent growth. But contribution of these subsectors to the national income is hardly recognised.
The key policy documents such as Sixth Five-Year Plan, Perspective Plan (2010-2021) or older Poverty Reduction Strategy Paper 2005 hardly recognised the services sector as an important engine for growth and an effective tool for poverty reduction despite its huge potential.
Lack of recognition in the important policy documents partly explains why this sector has been paid little attention over the years.
Therefore, the first step is to recognise the significance of the services sector in promoting growth, generating employment and reducing poverty.
Second, better understanding of different subsectors of service and their potential for growth and employment generation is required. The need for a comprehensive study on the services sector is felt more now than ever before because of greater globalisation of the market of service.
A large number of services markets in the advanced economies have been opened up for competition and Bangladesh has to be prepared to claim its share.
Third, insights from the rigorous studies on the services sector should be translated into both subsector-wise policies and an overall sectoral policy.
While subsector-wise policy is important for promoting growth of a specific subsector, an overarching policy is required for the development of the whole services sector.
The writer is the research fellow of Bangladesh Institute of Development Studies.