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Competitiveness of Korea's Service Industry

Competitiveness of Korea's Service Industry

SHIN Changmock

July 11, 2011

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Originally released on May 24, 2011

As an economy grows, leveraging intangible capital matters more than achieving growth by simply adding more labor or capital. Thus, economic servitization where the share of services in an economy increases ensues. This is true of OECD member nations where there is a linear relationship between nominal GDP and the share of the service sector in the economy. Korea also has seen its service sector account for an expanding portion of the economy from 51.2% in 2000 to 52.4% in 2010.

Although the share of the service industry in the Korean economy and the volume of service trade have continued to rise, the chronic service account deficit has led to a decrease in the current account surplus and a drag on economic growth. Therefore, to maintain a decent level of current account surpluses and growth momentum, Korea needs to launch systemic efforts to address service trade-related problems and reinforce the competitiveness of the service industry. This paper sheds light on the current situation of the service industry's competitiveness and causes of chronic service trade deficits and ponders ways to improve the service trade account.

The share of Korea's service exports in the OECD service export market nudged slightly up to 2.70% in 2008 from 2.56% in 2000 while that of Korea's service imports in the OECD import market increased at a relatively faster clip during the same period- from 2.94% to 3.80%. This means the competitiveness of Korea's service trade has been lackluster from the perspective of market share. The Revealed Comparative Advantage (RCA) index showed a similar result. Unfortunately, the RCA index for Korea's service industry has remained below zero since 2000, indicating that the industry has continuously exhibited a comparative disadvantage since 2000.

Our sector-specific observations revealed that industries with more services deficits tend to be less competitive and their competitiveness seems on track to deteriorate. Specifically speaking, business services and travel are the most vulnerable sectors: they suffer from large deficits with their competitiveness withering. Patents and royalties are also in the vulnerable group: their deficits are big in relation to their small share in Korea's service trade. However, patents and royalties have seen gradually improving competitiveness despite large deficits - though they are still at a competitive disadvantage.

To scale up the competitiveness of Korea's service industry and reduce services trade deficits, sector-specific efforts should be made to first buttress the competiveness of vulnerable industries. In particular, business services, patents and royalties are crucial industries that are related to knowledge and core technologies and function as intermediate goods in business activities, so if these sectors continue to stay uncompetitive, Korea would spiral into the vicious cycle where more production and exports leads to mounting services account deficits. Thus, urgent endeavors should be made in this regard. Furthermore, the government has to mount multi-dimensional efforts such as easing regulations and encouraging investments in the service industry to enhance the overall competitiveness of the service industry.

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