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Rethinking Asia's pivot to the service sector

It's cold at Universal Studios Japan, in Osaka, but crowded with foreign tourists.

BANGKOK -- Around the time of the 2008 financial crisis, it seemed that the survival of Asia hinged on a shift from manufacturing-driven economies to service sector-led ones. Asian exports to the West, after all, were tumbling.

      Many were quick in drawing this conclusion; they should not have been.

      In China, the Economist magazine recently argued, there is overcapacity in the manufacturing sector and a deep labor pool that refuses to flow toward the service sector. In theory, it is right to posit that Asian countries should remake themselves into service economies once they move to a middle-income neighborhood.

     The problem is that reliable service sectors do not emerge overnight.

Deserted theme parks

Under the banner of promoting the service industry, shopping malls and theme parks have mushroomed across Asia. But many -- like the mock European cities in Shanghai known as Holland Town and Thames Town -- offer no interesting attractions and have been abandoned by tourists.

     For theme parks to be successful, entertainment is essential. To organize good, crowd-pleasing events, creative talent is needed. Management has to be skilled enough to efficiently use thousands of employees and to divide them into hundreds of teams. Using a theme park as a stage also requires an advanced communications network and employees with specialized skills.

     Putting on a show turns out to be more complicated than running an automated factory.

     Shopping malls face similar challenges. Putting up buildings and waiting for tenants to fill them can be a fool's errand. Bangkok has numerous malls lined with global luxury boutiques, but they are mostly quiet these days. Perhaps this is to be expected; the items in these tony emporiums can be had for less at airport duty-free shops.

     Shopping malls, like theme parks, need to be creative.

     Companies in many emerging countries rushed to develop low-value-added services that now incongruously occupy empty real estate.

     Easy-to-mimic services attract copycats, and saturation results. Survival often depends on touting low prices to foreign tourists, just like makers of low-value-added goods often dump their products to stay afloat.

     Going up the value chain is difficult because rich countries are already there. Global competition in finance, software development, drug development, consulting, fashion, cultural content and medical services is even fiercer than it is in the manufacturing sector.

     Without solid foundations, talent or rigorous preparation, it will be hard for late-comers to thrive in these sectors.

Where manufacturers flourished

In Asia, South Korea and Taiwan succeeded in joining the club of rich economies by staying true to their roots as producers of goods, rather than shifting to services. Data gathered by the Japan External Trade Organization confirms this, albeit roughly because of differences in how each economy keeps statistics and defines terms.

     Manufacturers accounted for 24% of South Korea's gross domestic product in 2004 and for 25% of Taiwan's. The figures increased to 29% and 31% in 2013, thanks to the rise of sophisticated electronic parts such as semiconductors and liquid crystal displays. Both started mainly as assemblers of low-value-added electronic parts and eventually began producing more high-tech stuff.

     Both had solid, basic electronics industries. They also had the kind of talent and financing that allowed them to become sophisticated manufacturing hubs. The core semiconductor-making industry created peripheral service industries, such as chip design and software development. Chipmaking ended up leaning heavily on the service sector. Now it is difficult to discern which industry leans more on the other, or where the line between the two is.

     Of course, as many experts suggest, a shift toward the service sector is necessary to achieve the kind of economic growth seen in advanced countries. However, hastily changing course and doing so without experience will not result in got-to-have services. A raft of noncompetitive service companies only hobbles an economy, partly by hollowing out the manufacturing sector.

     Malaysia and Thailand, where growth has slowed, tell this story. In both countries, manufacturers' share of GDP has fallen as the service sector has struggled to grow.

     The quiet shopping malls across Asia should remind us that a too-quick pivot to the service sector can lead to further economic deterioration.

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