Serving Up Growth

• Author: Olaf Unteroberdoerster
• Position: a Senior Economist in the IMF's Asia and Pacific Department.

ARCHANA NANANCHERLA attributes India’s economic success to her compatriots’ appetite for hard work. “We work harder than others . . . it is a trait of Indians,” she declares. But perhaps it is Nanancherla herself and people like her—educated, working in the service sector, with growing disposable income—who are the real secret behind India’s domestic-led growth.

Nanancherla was recruited straight out of college by Tata Consultancy Services, the largest information technology and business process outsourcing services firm in India. She is now a project manager with responsibility for up to 120 people and a salary of about $5,000 a month. Nanancherla’s way of life offers valuable lessons for other Asian economies seeking to maintain their growth momentum.

Maintaining Asia’s growth

India differs from the many Asian economies that have relied on manufactured exports to power growth. This was evident during the 2008–09 global recession, when the slump in demand from the United States and Europe hit the region disproportionately hard (see “Asia Leading the Way,” in this issue of F&D). A key medium-term challenge for Asia will be to reduce that dependency on exports and strengthen domestic sources of growth—a pattern already set by India.

Many observers blame weak private consumption—often referred to as the Asian “savings glut”—or investment for Asia’s unbalanced growth. But, on the supply side, increasing production by developing Asia’s service sector would restore that balance and boost growth.

Some Asian economies’ consumption or investment may be too low, but they cannot all be characterized as weak. Ratios of consumption and investment to gross domestic product (GDP) vary widely across the region. Factoring in country-specific differences and long-term historical norms adds another level of nuance. The empirical evidence on domestic demand-side imbalances is mixed.

However, it’s easy to overlook the supply-side counterpart of high dependence on exports. Asia’s external dependence has led to an unbalanced production structure, with overreliance on tradable, or manufactured, goods, which broadly corresponds to the industrial sector (IMF, 2010). For example, at about 50 percent, industry’s contribution to GDP in China is nearly twice the Organization for Economic Cooperation and Development average and more than 10 percentage points of GDP above the world average for low- and middle-income countries. This overreliance on industry also...