Revive economy by strengthening services sector

 

From Moaz Nair

Malaysia’s services sector employed over 63% of the total workforce in 2019 and accounted for over half of the GDP, making it a major contributor to the country’s economic growth, productivity and earnings.

It generated more employment than any other sector for the past 10 years before the economic slowdown. This has now been thwarted due to the Covid-19 pandemic, political instability and lack of foreign investors.

In some developing countries, the primary sector continues to be the largest employer as opposed to the services sector. More than half of their workers work in the primary sector, mainly in agriculture, producing only a quarter of the GDP.

However, the services sector, if enhanced, could make an important contribution to the GDP, providing jobs, inputs and public services for the economy. By honing its human capital, trade in services can improve economic performance and provide a range of traditional and new export opportunities.

Activities in the services sector include retail, banks, hotels, real estate, education, healthcare, social work, computer services, recreation, media and basic utilities like energy and water supply.

Areas that have the potential to grow are IT, healthcare, telecommunication and infrastructure, fast-moving consumer goods, housing, finance companies and machinery accessories.

The tertiary sector predominantly comprises Islamic banking, finance, telecommunications and tourism. It also comprises various service industries including warehousing and transportation services, information services, securities as well as other investment and professional services.

The healthcare sector is going to be a major sector that will stimulate economic growth and contribute to employment.

Some of these sectors have been crippled by the pandemic and it has led to poor economic returns with many employees losing their jobs.

The three main economic sectors of the economy – primary, secondary and service industries – have all been affected. Nevertheless, with the right government policies, political stability and human capital development strategies, these sectors can be revived to meet the crisis.

Stable political environment

During this time when investors are hard to come by, steps have to be taken to understand, research and implement the key initiatives in the services sector that could help make the service culture an integral domain of Malaysia’s economy to enhance productivity.

Government services play a critical role in providing a conducive and stable political environment for investment and economic growth.

Services such as public education, health care, well-maintained roads, communication facilities, clean and conducive environment and public safety are necessary for the economy to thrive and the people to prosper.

The effort to attract foreign direct investment (FDI) and growth in the services sector also depends on government policies that promote the service industries, including tax benefits and investment as well as specialisation in niche service industries.

Better technology and improved labour productivity will enable a higher output of manufactured goods and agriculture with less labour.

Major factors responsible for the rapid development of the services sector will occur when there is increased volume of trade, low tariff and non-tariff barriers on imports. The foreign trade reforms will enable domestic products to interact and compete in international markets.

The services sector provides finance, marketing, transport, insurance for the development of the agriculture sector. The expansion of services sector activities will boost the secondary sector activities as well. It can play a major role in reducing inequalities in the distribution of income in the economy.

The services sector plays a vital role in the development of a modern economy. This sector is so vital that the total performance of an economy depends on the performance of the tertiary sector.

The focus, therefore, has to be on service orientation and service excellence that can contribute to the growth of the economy.

To boost the services sector economy, there has to be proper organisational culture, consultations, research and training. The country does not lack the manpower to achieve these goals.

The management of service culture has to depend on leadership qualities, values adhered to, theories put to practice, and compliance to standard criteria of measurement in the service industries.

The process and development of the service culture need to be fully in tandem and relevant to the services sector demand for its effectual formation. The consolidation process to service culture will gain momentum only when tangible results are achieved in the organisation and the economic sector.

To make this paradigm a reality, appropriate consultation, research and training (CRT) services need to be offered in the various sub-disciplines within the service culture component of university curricula to further enhance academia, graduate employability as well as the economic sector of the nation. These are necessary for the human capital transformation in the services sector.

Domestic-oriented

The country could do more to consolidate the services sector, particularly in helping the export industry. Promoting the services sector locally and abroad can also help generate productivity, especially in times when there is a slowdown in foreign investment.

The services sector has a lot to offer in terms of employment as the other industries are almost saturated market-wise or not developing as much as they ought to. It plays a vital role in its linkage with other sectors.

At present, about 50% of the total services produced in the country is consumed as final demand, while about 30% is channelled into other sectors as intermediates. Only 10% is exported.

Unlike agriculture and manufacturing, the services industry is a more domestic-oriented industry and the bulk of its services are consumed as final demand.

The consumption pattern of the services industry has diversified slightly in the past 10 years, with a slight increase in intermediate demand. However, the export of services has not shown much improvement but has declined from 12% in 2000 to 8% in 2020.

Export-oriented

The Malaysian economy is basically export-oriented, focusing on manufactured goods, raw commodities and agricultural products and it has been traditionally a net importer of services.

Its role in services trade has been rather weak, leaving a perennial deficit in the services account of the balance of payments. The size of the deficit has also been on the rise but the introduction of several proactive measures by the government in the last decade has helped reduce the services deficit a little.

The deficit in the services account of the balance of payments has been largely due to heavy import of shipping, freight and insurance services, the huge outflow of investment income from foreign direct investment, and debt servicing, royalties and consultancy fees paid abroad.

However, until very recently, efforts to reduce our reliance on the import of services and to export Malaysian services have not been thriving. There are a few large service firms in the country that could offer sophisticated services and compete internationally, but they are normally linked with foreign firms. Many of such firms provide accounting, legal and other business services to the local market.

Overall, employment in the services sector in the country has not increased to the same extent as production. The government, with the help of educational and training institutions, professionals and industrial players, should come up with a realistic roadmap to create resourceful human capital that could help the services sector in the domestic and export industries to boost employment and economic returns. - FMT

Moaz Nair is an FMT reader.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.