Is services-driven economic development model flawed?

Many pundits in Sri Lanka have claimed that the services-driven economic development model is unsound and vigorously point out the island needs to pursue a strategy with a strong emphasis on the manufacturing sector to propel growth and prosperity. Such sentiment is conveyed through the term production economy – a political slogan, not a concept found in the principles of economics, which questions the validity of Sri Lanka’s reliance on trade and services for economic development. 

The proponents of this idea – mainly the propagandists of the NPP – are highly influenced by the views of the controversial economist Dr. Howard Nicholas, who advocates on following an industrialisation strategy dominated by high-tech manufacturing like Vietnam and South Korea. In fact, most of the economic policy ideas enunciated by the NPP, like establishing a development bank have been extracted from the presentations of Nicholas who is a vehement critic of the IMF-endorsed economic reforms implemented by the Government.

Those who clamour for a manufacturing-dominated economy view that growth through the services is unstable in addition to not being sustainable. According to their world views, services do not reflect real production. They derive pleasure by the production of tangible goods via agricultural and industrial activities. IT/computer services, logistics, tourism, banking fail to make them satisfied. On the other hand, night clubs, wellness spas, and casinos make them go mad.

However, such unbalanced opinions are not consistent with the realities of the modern world. Although traditional schools of thought on economic development asserted that industrialisation as the path towards growth and prosperity, the empirical evidence suggests that nations can become wealthier by focusing on the services sector. In the past three decades, the services sector has grown faster than manufacturing in many developing economies. According to Chief Economist of the World Bank Group and Senior Vice President for Development Economics Indermitt Gill, by 2019, services accounted for 55% of GDP and 45% of employment in developing economies. In developed economies, services account for an even larger share of economic growth – 75% on average. A few low and middle-income countries were among the top 10 global exporters of services between 2005 and 2017.

In the neighbouring India, It has been acknowledged that the resilience of its economy is due to the buoyancy of the services sector. The economists in India have also concluded that the services-led growth model is sustainable not only from the economic perspective but from social and environmental perspectives as well. The growth of the Indian economy is primarily driven by services and today the Asian giant has become the largest exporter of services in the world. 

Due to the advancement in technology and transportation, services are no longer non-tradable and they can be exported across the borders. Moreover, service sectors such as tourism and higher education (when countries attract foreign students) create a spillover effect, positively impacting the primary and secondary sectors of the economy.

Nations specialising in low-skill and light manufacturing such as garments (e.g. Cambodia, Sri Lanka) and food processing (e.g. Indonesia) have found it difficult to diversify into medium or high-tech manufacturing. The dream of those who espouse the production economy concept is for Sri Lanka to become a leading manufacturing hub which produces mobile phones, consumer electronics, cars, and semiconductors in the calibre of South Korea. Does Sri Lanka have the required infrastructure to attract investments into large-scale manufacturing? The State has not been able to provide energy/electricity at competitive rates apart from ensuring uninterrupted power supply. Attempts to generate low-cost power via coal and wind have been strenuously opposed by groups with vested interests.

It makes sense to allow the market forces to determine whether to invest in manufacturing or services instead of bureaucrats and politicians, who have never been involved in entrepreneurship, interfering with decisions that should be left for the private sector to make.