Hausmann, Ricardo, Rodrik, Dani, and Velasco, Andres (2005): “Growth Diagnostics”, John F. Kennedy School of Government, Harvard University, Cambridge, MA, Manuscript.
Malik, Rajeev (2006a): “The Indian Diaspora Catalyzes India’s Global Ambitions” – Special Economic Report (J.P. Morgan), March 24, 2006.
Malik, Rajeev (2006b): “India’s IT Sector is a Key Driver of the Booming Economy” – Economic Research note (J.P. Morgan), September 8, 2006.
Singh, Nirvikar (2006): “Services-Led Industrialization in India: Assessment and Lessons”, UNDESA Research Paper, November 2006.
Prepared by Ayako Fujita and Srikant Seshadri.
With the recent emergence of the Business Process Outsourcing (BPO) industry, this may have already changed. However, the growth in the exports of services is not, as yet, evident in the balance of payments data. The authorities are currently taking steps to strengthen data gathering in this area.
In Malaysia, 2006 data suggest that investment has recovered.
In the case of financial services, part of the rise is also due to services emanating from the disposal of NPLs in the banking system, so part of this rise may be temporary.
There is now greater regional diversification of worker placements, with increasing numbers of workers being placed in the Middle East, and Central and Eastern Europe, whereas in the past workers were mainly concentrated in the U.S., Western Europe, and closer to home, in Hong Kong SAR and Singapore.
A recent survey indicates that the annual number of graduates in engineering, science, and business has grown by 23.7 percent since 1994-95, while the total jobs in the economy across all sectors have grown by less than 20 percent.
According to industry consortium estimates, the service sector related to Information and Communications Technology (ICT) in India has grown rapidly, currently employing 1.3 million people (4.5 times the employment in 1990), while revenues have trebled to 4.5 percent of GDP in 2005-06 from 1.5 percent of GDP in 1997-98. By comparison, the Philippines industry consortium estimates that the BPO sector’s employment has grown nearly five-fold since 2000 to 112,000 employees in 2005, while revenues have grown from a negligible share to 1.5 percent of GDP over the same period.
There are many studies on the impact of service sector growth on the Indian economy, and potential development lessons it offers, from academic, multilateral, and private financial institutions. Among them: Singh (2006), Malik (2006a, and 2006b) and Gordon and Gupta (2004).
The inclusion of lagged-growth of GDP assumes adaptive expectations, where past growth is seen as a basis for current investment decisions. Other more sophisticated specifications are certainly possible, and a more robust econometric specification would be an interesting refinement for future research. The coefficient for lagged-growth is expected to be positive, and the interest rate coefficient is expected to be negative. For sectoral shares, a positive coefficient is expected for the industry sector and a negative for the service sector.
Since a simple adaptive expectations model is employed using lagged-growth as a proxy of expected growth, the high investment during the period is largely explained by the high growth expectations and associated expected return on investment prior to the crisis. A more sophisticated specification might reveal stronger statistical significance of the dummy variable.
Hausmann et al (2005) offers some possible explanations for this. Countries where economic returns to investment are low, or the private appropriability of those returns may be low (due to high taxes or corruption, for example) may tend to see a rise in remittances go towards increased consumption, housing, and/or capital flight. Whereas, countries where the primary problem is due to poor financial intermediation, causing access to capital to be limited (even though there may be plenty of productive uses for it), and the cost of finance to be prohibitive, are likely to see increased investment from a rise in external inflows.
See Chapter III of this Selected Issues Papers.
Remittances may be substituting for consumer lending which has not taken off as in other countries, yet consumption has maintained its steady growth.
Based on the Family Incomes and Expenditures Surveys conducted by the National Statistics Office. The bottom two brackets are defined as those having incomes under 50,000, and 100,000 pesos respectively. The third quartile has income between 100,000 and 250,000 pesos, and the top bracket has income over 250,000 pesos.
To the extent that the returns to human capital are higher where the stock of physical capital is higher, as elucidated, among others, by Lucas (1988), the Philippines may also be successfully leveraging off the world’s physical capital stock to sustain growth.
The BSP, together with the Overseas Workers Welfare Administration (OWWA), is conducting an education campaign to encourage OFWs to save and invest greater shares of their remittances domestically.