Service sector in Asia rises with middle class

Mr Đinh Tú quit being a monk three years ago and worked in a yoga studio in Hồ Chí Minh City to cater to a growing Vietnamese middle class, which is finding new outlets for its money.

These days, he is selling insurance as well.

“People in Việt Nam have more to spend now,” said the 40-year-old agent for Dai-ichi Life Insurance.

“I can see that insurance is a good business.”

As Mr Tú and millions of other Asians switch from traditional occupations, farms and factories, the contribution of service industries to the region’s emerging economies is poised to exceed 50 per cent for the first time, according to data compiled by Bloomberg from government statistics.

vuitonA report by HSBC predicts that almost 3 billion people – more than 40% of today’s population – will join the middle classes by 2050

The watershed marks Asia’s shift from its role as the world’s workshop, with countries led by China now concentrating on building domestic economies.

From Japan’s expansion in the 1960s to the Asian tigers of the 1970s and China’s economic liberalisation in the 1980s, Asia’s post-war growth has been driven by government strategies that poured investment into producing engineers and factories that made most of the world’s clothes, toys and electronics.

With Asian wages and currencies rising, the investment-export model is becoming less attractive, and funds are switching to domestic consumer markets, increasing the need for banking, health-care and retail workers.

“This is a natural consequence of Asia becoming wealthier.”

Said Mr Donghyun Park, principal economist at the Asian Development Bank (ADB), who has researched the region’s shift from manufacturing.

“Millions are joining the middle class every year and demanding more services.”

Rising demand in a region with almost two-thirds of the world’s people is rebalancing the global economic map.

As export-dependent economies led by China shift their focus to Asia’s 525 million middle-income consumers, manufacturers such as General Electric are choosing to locate factories in Europe and North America, while service providers including international law firm Linklaters are sending staff to Asia.

By 2030, two-thirds of the world’s middle class will live in the Asia-Pacific, Ernst & Young estimates.

Services will account for more than half of developing Asia’s gross domestic product (GDP) for the first time either this year or next, from 48.5 per cent of regional output in 2010, Mr Park said.

That ratio is 75 per cent for members of the Organisation for Economic Cooperation and Development.

One effect will be less emphasis among Asian governments on currency levels, which are key to export-based economies.

“Interest rates will become more important than exchange rates.”

Said Mr Chua Hak Bin, an economist at Bank of America in Singapore.

“When an economy gets richer and the trade component becomes smaller – the likes of the US, Japan and even Australia – they don’t have a problem letting the currency slide and yet there is hardly an impact on inflation.”

Said Mr Changyong Rhee, the ADB’s chief economist:

“If you have a bigger manufacturing sector, that does not necessarily create as many jobs as in the past because of a greater use of automation.

But as an economy develops, the manufacturing sector can create service-sector jobs.”

The growing wage disparity between the new, more-skilled employees and lower-paid workers will help spur demand for services, said economics professor Joseph Kaboski from the University of Notre Dame in Indiana, who has researched the effect of high-skilled labour in service industries.

“When the cost of your time is high, you buy these things on the market – day care, landscaping, eating at restaurants rather than cooking.”

He said.

Source: Bloomberg

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