Growth in services vital for rapid economic development
A much-misunderstood issue is the significance of services in economic growth. Many cling on to the view that increases in services is not a real contribution to growth. In fact some have gone to the extent of saying that the services contribution to growth should be curtailed and that the diminishing share of agriculture in the overall contribution to GDP should be arrested.

Such persons, including some Sri Lankan economists, have failed to understand either the role of agriculture or of services in economic development. In this context of misconceptions on economic growth, the recent K. Sivagananathan Memorial Oration by Dr. Satish Shinde was most opportune. In this lecture Dr. Shinde said in no uncertain terms that the growth potential of South Asian countries lay in the development of services to serve their own economies and the international demand for services.

He pointed out that the major challenge of absorbing those entering the labour force facing SAARC countries could only be met by growth in services. He pointed out that agriculture's labour absorptive capacity was very limited and even manufacturing faced problems that imply lower growth in this sector.

He illustrated his argument pointing out that even in India that is currently growing fast, employment in manufacturing had declined. Automation in order to reduce costs and improve efficiency to cope with increasing international competition was the reason for this. What he said of India is especially relevant to Sri Lanka that lacks adequate resources for agricultural development and where labour costs are much higher than in India. Unlike India, Sri Lanka also lacks a large domestic market and hardly any raw materials for industry.

These in fact are the reasons for export-oriented industries. Dr. Shinde pointed out that services were less capital intensive and more labour absorptive, could be developed on a small scale and provided opportunities for the educated youth to be profitably employed. He referred to the information technology boom in India that serves the international market and is very competitive globally.

Dr. Shinde's arguments may not be convincing to many who remain embedded in past notions of economic development, are unable to face the realities of international development and have fanciful ideas about the Sri Lankan economy. Unfortunately these deficiencies in thinking appear to be gaining in popularity rather than waning.

They are also espoused by vociferous political parties and are popular views in the country. The realities of the Sri Lankan economy are that with a population density of 315 persons per square kilometre and a severe shortage of land for cultivation, the scope for additional labour absorption is indeed very limited. In addition and paradoxically nearly all agricultural crop sectors face a shortage of labour and high wages that result in high costs of production of most crops. Even more pertinent is the fact that educated and even not so educated youth are uninterested in agricultural employment.

The rationale for the growing importance of services both globally and in the Sri Lankan economy is based on the fundamental law of diminishing share of food in consumption. As a consequence the increasing demand is for other services such as communications, entertainment, transport and travel, among others. That is the reason why there are massive increases in demand for such services from the developed world. Even in Sri Lanka the expenditure on non-food items is increasing. As incomes rise demand shifts to services. It is this increase in demand that we must position ourselves to serve as they are also the more value added and remunerative economic services to provide.

It must be admitted that there are sub-sectors of the Sri Lankan services sector that are not real contributions to economic growth and development. These include the large deployment in the armed forces and the huge numbers in the public services. Some years ago the World Bank provided the statistics that indicated that Sri Lanka had the largest public service per capita. About one third of the government budget is currently spent on wages. Despite these facts last year the government recruited a further 42,000 graduates and others for public service employment. It is hardly likely that these youth would be productive to offset the costs of their wages.

These are illustrations of some areas in the services sector that are unproductive and even drag economic growth through the costs that are incurred in them. On the other hand, growth in tourism, energy, transport, and such services are important contributions to the economy. They serve to keep the wheels of agriculture and industry moving, satisfy demands of the population or earn foreign exchange. The need for financial services to gear themselves to serve this sector was the bottom line of Dr. Shinde's oration. And that is a valuable aspect that requires to be followed if substantial development is to be achieved by services.

These reflections should not be interpreted to mean that agricultural growth is unimportant. In fact agriculture has a vital role to play in the country's development. These have been discussed in this column previously. Agricultural growth has a significant role in increasing food production, increasing agricultural exports and saving foreign exchange.

It is through agricultural development that much of the country's poverty could be alleviated and household food security could be improved. However that role should not blind us to the view that rapid economic growth lies in developing our services to cater to an expanding international market. It is an indisputable fact of economic history that with development agriculture's share in GDP declines while the share of services increase and the nature and character of services too change.

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