Booming service industries can be a powerful engine for economic growth and job creation in Asia, but the sector’s true potential remains blocked by restrictions and red tape, a new ADB report claims.

“A slew of regulations restrict competition and hamper the development of the services sector, affecting everything from the corner shops to mobile telephones,” said Changyong Rhee, ADB’s Chief Economist. “These barriers need to be dismantled so that everyone, particularly the region’s poor, can seize the opportunities of growth.”

Services now account for almost half of developing Asia’s output, according to the ADB. The sector contributed about two-thirds of the growth recorded in India between 2000 and 2010, and more than 40% in China. Services have also been a massive source of jobs, employing 34% of the region’s workers, and thus furthering inclusive growth.

Notwithstanding their large and growing quantitative significance, labour productivity levels among Asia’s service industries still lag well behind those of advanced economies, standing at less than 20% of OECD levels in most countries. The relatively low share of modern services such as information and communications technology (ICT) weighs down on the sector’s productivity performance.

According to the report, creating a dynamic, high-productivity services sector with a larger role for modern services will require tackling a wide range of bottlenecks which stifle competition and innovation. These include a lack of highly skilled workers, which hampers the development of high-end services, and services-relevant infrastructure such as ICT and broadband, which still lag behind advanced economies, and above all, burdensome regulations which protect incumbent firms from domestic and foreign competitors.

Easing domestic regulations and trade barriers is critical to fostering more competitive services markets and higher productivity in the region. However, doing so requires a great deal of political will and commitment, given the formidable array of well-entrenched vested interests that benefit from regulatory barriers. These include state-owned enterprises as well as private monopolies.

Nevertheless, the report stressed that mustering the political courage to reform Asia’s services is an urgent priority for sustaining growth. A vibrant service sector will have large spin-offs for the rest of the economy, enable the region to take advantage of the growing tradability of services, and promote inclusive growth by generating high-quality, high-wage jobs for Asian workers.