Services sector is largest and fastest growing sector in the world economy. The share of services sector in total GDP is 47 percent in low income countries, 53 percent in middle income countries and 73 percent in high income countries. It is expected that rising trend of services sector would continue, to gain more and more importance through advancement in the area of knowledge based and skill oriented activities. For Pakistan, share of services are increasing in all sectors of economy from time to time.
In fact, the growth rate of services sector is higher than agriculture and manufacturing sector. 1/3rd of total employment and 54% of GDP is affiliated with services sector. Services sector provides essential inputs to agriculture and manufacturing sector.
Classification of Services Sector:
Services sector is highly diversified; it consists of 4 major sectors in Pakistan: distributive, producer, personal and social services. Distributive services is further distributed into subsectors i.e., transport, communications and trade sector. It provides convenience to consumer, household and profits for traders.
Producer services consist of financial sector which provides the capital for industrialist and business community. Personal services provide public goods and shelter to citizens. The social services sector is also divided into further two subsectors (1) public administration and defense, (2) health and education facility.
Global Perspective of Services Sector
Services is the fastest growing sector that account 69 % of global output, 35% of global employment and about 20 % of global trade. A service value has increased by 41.7% value of good has increased by 35.5% during 1975-2005. The role of industry and agriculture sector in advance countries has been avoided, as economies increase their productivity and education they shift to advanced services. With increasing complexity of modern industrial organisation, manufacturing activities have become more and more service intensive, both upstream (e.g. design, research and development) and downstream (e.g. Marketing and advertising). Competitive advantages depend upon the specialized services like financing and after-sales facilities. In cross border trade and foreign direct investment contribution of service has increased that provides exports opportunities and lower-cost imports. Trade in services has been defined in term of the following four modes covered in General Agreement on Trade in Services (GATS).
* Cross-border Supply
This is the possibility for non-resident services suppliers to supply services cross border into member territory
* Consumption Abroad
This is the freedom for the resident of one country to enjoy and consume from territory of another country
* Commercial Presence
This is the opportunities for one country to establish joint venture, foreign based corporation or expand a commercial presence to supply services for the people of their own country.
* Presence of Professional Persons
These are the opportunities for the entry and temporary stay in the member territory of foreign individuals in order to supply services.
Contribution of Services Sector in Economic Growth
Pakistan’s major share is contributed by services sector. Significant changes have been observed in last few decades. Pakistan’s share of agriculture has been declining gradually over time from 43.6 percent in 1960-61 to 21.5 percent of GDP in 2009-10, and share of industry has increased from 15.6 percent in 1960-61 to 25.2 percent of GDP in 2009-10. Whereas the share of services sector has increased from 39% of GDP in 1960-61 to 53.3% of GDP in 2009-10, so it’s the largest contributor in GDP of Pakistan. Services sector grew very rapidly, from 1975-76 to 2009-10, growth rate of services sector is 5.46%. Growth rate of goods sector is just 4.96% but growth rate of industrial sector is 5.7 %. Increasing growth rate of services sector is due to increasing growth in finance and insurance sector. Growth rate of finance and insurance sector is 6.8% during 1975-2010. The growth rate of social and community sector has also been increasing which is recorded 6.5 percent during 1975-2010. A group that has experienced modest growth rate, in transport, storage and communication, wholesale and retail trade, ownership of dwelling, public administration and defense.
Consumer Demand for Goods and Services:
Demand for goods and services are mostly related with income. With rise in income, demand of services is higher than demand of goods: this is a common expectation for demand of goods and services. Relationship of demand for goods and services with income are measured by income elasticity. Income elasticity of demand measures the responsiveness of demand of goods and services due to change in income. Demography and lifestyle changes have the major contribution to increase in the growth of consumer demand of services. But in 2007 -08 the demand of food, textile and footwear decreased by 6.4 percent; whereas demand of services increased by 4.9 percent. Consumption demand of transport and communication are increased by 1.73 percent. The people have been spending more on the rent and housing, the spending on housing is increased from 18.9 percent in 1985-86 to 22.7 percent in 2007-08. Likewise, household spend more of their income on recreation, entertainment and education.
Pakistan Service Trade:
State bank of Pakistan has been compiling Balance of Payments (BOP) accounts November 2003 on the basis of fifth IMF BOP manual. International service transactions have been disaggregated in many sub-categories.
Foreign Direct Investment:
Inflow of FDI both in goods and services declined in 2009-10 as compared to 2008-09; due to global and financial crisis. FDI services turned down from $1951.1 million in 2008-09 to $767 million in 2009-10, this was due t energy crisis land law and order situation along with external factors of global economic crisis. It shrinked the profitability of firms and increased the uncertainty and risk aversion and reduced the availability of finance to firms for further investment. Share of services sector in net inflow of FDI decreased from 53.8 percent to 37 percent in 2009-10. Inflow of FDI in transport and social services increased over previous year. There has been zero net inflow of FDI in tourism sector for last two years due to worse law and order situation in Pakistan for tourist.
They are insecure and Pakistan is also facing political instability. Growth rate of net inflow of FDI is 18.3% between FY02 to FY10. Services sector has grown fast making 28 % whereas growth rate of good sector is 14.3% between the same time periods. The share of transport, storage and communication in FDI has been increasing over time. Financial sector is playing major role to increase the FDI of Pakistan. Pakistan’s FDI in services is concentrated with few major markets. Netherlands is the major Player to contribute FDI and its share is 29.5 percent in FDI of Pakistan. Switzerland, Singapore and UK K are also dominating countries and their FDI was $120.3 million, $112 million and $107.9 million in 2009-10 respectively in 2009-10. The other main contributor was USA and its share was 12.5 percent in FDI.