Staff Papers
Published Date: 01 May 1998

Singapore's Services Sector in Perspective: Trends and Outlook

MAS Occasional Paper No. 5 May 1998 - By Domestic Economy Division, Economics Department

1          The importance of the services sector in the Singapore economy has increased steadily over time, particularly over the last one-and-a-half decades. Its share of total output and employment in the economy has risen at the expense of the manufacturing sector, and today accounts for about two-thirds of value-added and seven-tenths of employment. The declining share of manufacturing output has been accompanied by slower growth rates in the manufacturing sector. Trend estimates show that since the late-70s, growth of the service sector has on average exceeded manufacturing growth by about half a percentage point.

2          Deindustrialisation has long been observed in the industrialised countries, and should not be viewed as a negative development but the natural consequence of economic progress. Deindustrialisation in Singapore may be attributed to sectoral differences in productivity growth rates. With higher productivity growth in the manufacturing sector, the services sector requires an ever greater proportion of total employment just to keep output rising in line with that of manufacturing. Between 1981-96, productivity growth in the manufacturing sector averaged 5.7% compared to 4.4% in the services sector. This finding is in line with an International Monetary Fund (IMF) study which found that about two-thirds of the actual decline in the industrial countries' share of manufacturing employment between 1970-94 was accounted for by relative productivity differentials.

3          The decline in manufacturing employment share has been accentuated by two trends: (a) the move offshore of more labour-intensive manufacturing activities to make way for high technology and high value-added activities, and (b) outsourcing of services such as design, logistics and accounting previously done in-house. The trend towards the outsourcing of services is reflected in the growth of the business services industries.

           Profile of the Services Sector

4          The nature of the services sector has undergone tremendous transformation over the years. The days of of small-scale, family-owned sundry services have given way to higher skilled and higher value-added activities like financial services and information technology. Financial and business (F&B) services experienced the largest gain in share of total services output since the 1960s to account for 40% of total services output in 1996, followed by commerce (26%), transport and communications (19%) and social, community and personal services (15%). The main impetus behind the strong growth of F&B services during this period came from exports (47%) and technological change (30%).

5          The financial and business services subsector has also experienced the highest employment growth rate within the services sector (averaging 8.9%) in the 1990s. More than 35% of the employment gain between 1991-96 was absorbed by F&B, a disproportionate amount given its employment share of 11% in 1991. Taken together, the services sector accounted for the bulk of net jobs created since 1991, while the manufacturing sector shed 10% of its workers. Most of the services jobs consisted of executive, administrative and managerial, and technical and professional jobs, requiring a high level of skills and competence. Indeed, average wage in the manufacturing sector in 1996 was lower than those in all the services subsectors with the exception of commerce. The services sector in Singapore also boasts a higher percentage of skilled workers - with at least post-secondary education - compared to manufacturing.

6          Productivity growth in services has also generally not lagged manufacturing until recently. Between 1980-90, productivity growth in services (averaging 5.2%) was marginally higher than in manufacturing (5.1%). This was reversed in the 1990s, with productivity growth in the manufacturing sector (6.6%) significantly higher than that in services (3.4%). Productivity figures for services, however, are likely to be underestimated due to such factors as the inherent difficulties of measuring services output and the relatively higher proportion of part-time workers in services.

           Impact of Growing Importance of the Services Sector

7          The services sector is relatively more stable than other sectors of the economy and acts as a buffer during periods of economic downturn. Between 1981-85, GDP growth was derived entirely from growth in services, while the rest of the economy reeled from the effects of world recessions in the early- and mid-1980s. While the services sector provides some underlying growth in the economy, the performance of the manufacturing sector provides that extra boost to GDP growth. The manufacturing sector has been the swing factor behind GDP growth from one year to the next.

8          The greater stability of services growth rates as a whole belies wide fluctuations in growth within certain subsectors, however. Based on standard measures of volatility, the commerce sector exhibited wider swings in growth rates than manufacturing, while the volatility of transport and communications was not much smaller.

           Interdependence Between Services and Manufacturing

9          The services sector has evolved over time to increase its interdependence with the manufacturing sector. Many of today's large corporations contract out activities such as marketing and computing to the services sector. Data from the input-output tables shows that the share of services output used by the manufacturing sector has been on a trend increase over the years. In 1978, 5.0% of total services output went to the manufacturing sector; by 1990, it had risen to 8.4%. The input-output coefficients also show that the amount of services output induced by every $100 of manufacturing output increased from $8.50 in 1973 to $12.30 in 1990.

10          While the manufacturing sector has increasingly drawn on output produced by the services sector, the converse does not appear to have taken place significantly. The share of manufacturing output going into the services sector declined from 3.7% in 1978 and 1983 to 2.8% in 1990. At the same time, although the amount of manufacturing output induced by every $100 of services output produced rose from $5.40 in 1973 to $6.40 in 1988, it moderated to $4.70 in 1990.

11          The above finding does not detract from the fact that over time, manufacturing and services activities will increasingly resemble each other, as advances in information and communication technology allow firms to cross the boundaries between manufacturing and services in their development of new knowledge-based products. The advancement of IT into services could make the sector more cyclical like manufacturing. The increasingly capital-intensive nature of services means that services firms could now slash investment plans in a downturn, leading to a drop in output and employment, as well as introducing stockpiling problems. The recessions in the US and the UK in the 1990s, for example, saw the services sector slow by much more than during previous dips. Conversely, manufacturers have increasingly emphasised service-like characteristics such as quality, tailoring products to the requirements of individual customers and 'just-in-time' delivery systems.

12          Hence, as economies become more complex and interconnected over time with advances in IT, the distinction between manufacturing and services will become less meaningful. Instead of emphasising one sector over another, the focus of economic development policy should be on facilitating system-wide gains that maximise the efficiency resulting from the integration of different industries. Government policy should be aimed at ensuring that its labour force receives the best education and training so that they are able to perform any kind of high value-added job.

           Outlook for the Services Sector

13          In line with global trends, the importance of the services sector can be expected to increase over time. Assuming services share continues to increase at the same rate as over the 1990s, its nominal share will rise by 6% points to 72% of GDP in 20 years. The manufacturing sector's share will decline by 9% points to 15% over the same period.

14          The expanding share of services in the economy implies that growth in overall productivity and living standards in the economy will likely be increasingly influenced by productivity developments in the services sector. As such, raising productivity in the services sector will be critical for economic growth.