Achieving Balanced Growth Through Service Sector Expansion: Expected Benefits and Risks (in Korean)

Since the global financial crisis, the need for a stronger service sector is emerging to ensure a balanced growth between external and internal markets. If the economy becomes more service-oriented, however, a growing internal demand would eventually lead to a decrease in current account surplus. Also, rising prices of non-tradable goods could trigger a rise in real exchange rates, posing a risk of making tradable goods less attractive in international markets. This paper provides an empirical analysis of the expected effects of balanced growth strategies with a focus on the service sector expansion, as well as relevant risk factors. The analysis suggests that a highly productive service sector with stronger linkages to a manufacturing sector is associated with a higher productivity growth in the whole economy. Meanwhile, the service sector expansion could also lead to rising real exchange rates and deteriorating current account balance. Still, those risk factors would diminish if such expansion is accompanied by higher productivity in the service sector. Thus it will be desirable to achieve a balanced growth between external and internal markets by pursuing both quantitative and qualitative growth in the service sector, rather than merely by focusing on its expansion in size.