:: Jayati Ghosh

Services exports need new markets

Jayati Ghosh

Sept.08 : Services exports have emerged as an important source of foreign exchange and even employment generation for many countries in developing Asia. This is part of the global explosion in services trade, which really occurred after 2003; before that, world services trade was growing at around the same rate as merchandise exports. Some developing and newly industrialised countries of Asia benefited disproportionately from this trend of increasing services trade, particularly from the export of commercial services other than transportation and travel.

Contrary to the general perception of India as the most important service exporter from developing Asia, it turns out that China is the largest exporter of commercial services, and also has shown the fastest rate of growth, especially in transport services. To some extent that is explicable by the rapid growth of foreign trade, which would naturally have required more transport services. But even "other commercial services" exports, which are supposed to be India's great success, have grown by 22 per cent per annum for China in the period 2000-2007, slightly faster than India. However, unlike China, which has a net deficit in commercial services, India has a surplus in this category.

Service exports from developing Asia are vulnerable to the current global crisis because of the significant reliance on the Northern markets. Where data are available (such as for Hong Kong China and South Korea) they suggest that the United States and the European Union accounted for around 40 per cent of total services exports in 2007. In India, it is known that at least 60 per cent of software exports (the fastest growing category of services exports in India) are destined for the US market alone. A significant proportion of that has been to the banking and financial services industry. The impact of the crisis on this sector, and the subsequent (and related) protectionist attempts to limit offshoring of services by Northern companies, are therefore likely to have a clear negative impact on such exports.

One specific element of travel services that has direct employment effects is the tourism industry. The recent decade witnessed a substantial increase in international tourism in developing Asia. One notable feature is the increase of intra-Asian tourism that has been noted within the trade, and reflects the growing prosperity of Asian middle classes as well as some easing of restraints on cross-border travel within the region. However, the crisis acted swiftly and sharply to affect tourism in many countries of the region. Both tourist arrivals and tourism receipts (in US dollar terms) decelerated sharply in 2008 compared to 2007 for most countries, and even turned negative from very sharp earlier growth in the case of China.

However, the monthly pattern of tourism receipts does not show such a sharp decline for China. Rather, the impression is of volatility around a relatively stagnant trend. In the case of India, the effect of the global recession is clear in that the usual seasonal increase in the winter months of 2008 and early 2009 simply did not occur, and the peak level of January 2009 was only around the same as that achieved two years earlier in January 2007. However, initial evidence from the case studies suggests that the downward trend is likely to be prolonged into late 2009. In addition to the economic effects of the crisis, concerns about the spread of the AH1N1 virus and security concerns in some countries in the region are also likely to affect tourist arrivals.

The crisis may also have changed the geographical pattern of tourist arrivals. For example, since the onset of the global financial crisis, Cambodia has received less tourists from South Korea and Japan as well as other high income countries, but more from Vietnam and China, which are relatively lower income countries. This has implications for tourism revenues, since per capita spending of tourists from these regions may be lower. It has been found that luxury hotels have been facing lower occupancy rates than three star and budget hotels.

Some countries with a higher proportion of tourists from Asia-Pacific countries (such as Indonesia, where more than half came from the Asia Pacific region, with Japan, Australia, China, Malaysia and South Korea among the top five markets) have been relatively less adversely affected by the downturn. However, in Vietnam the opposite tendency was evident: while all tourist arrivals reduced by 22 per cent in the first five months of 2009, tourists from China and South Korea decreased by 38 per cent and 22 per cent respectively, while the number from US fell by only 1.2 per cent and those from Canada actually increased by 4.2 per cent.

Just as for merchandise exports, therefore, it appears that diversification of markets is the key to continued expansion of service exports as well.