East Asia’s Digital Leap: How Technology and Policy Shape a New Services Era

The World Bank's report highlights how digital technologies and policy reforms are transforming East Asia and Pacific’s services sector, driving productivity, trade, and inclusive growth. However, disparities in access and skills call for balanced reforms, investment in education, and regional cooperation.

Research by the World Bank explores how digitalization and policy reforms are reshaping the services sector in a region traditionally dominated by manufacturing. Conducted by the World Bank’s East Asia and Pacific Regional Office, the research highlights how services are becoming vital drivers of productivity, trade, and economic growth. Over the last decade, foreign direct investment (FDI) in services has grown five times faster than in manufacturing across several countries, including China, Indonesia, and the Philippines. In Vietnam, policy reforms in transport, finance, and business services have led to marked productivity gains, while the Philippines has seen significant benefits from adopting advanced digital tools. However, the growth has been uneven, with disparities in access and capability persisting across sectors and demographics.

Digital Technologies Driving Productivity

Digitalization has been a game-changer for the services sector, enabling firms to enhance efficiency, access new markets, and innovate at scale. The report reveals that digitally delivered services, such as telecommunications, financial solutions, and software, are expanding rapidly, often outpacing traditional trade sectors. In Vietnam, lifting restrictions on foreign ownership resulted in a 2.9 percent annualized productivity increase in several service sectors, which also boosted manufacturing firms reliant on these inputs. Similarly, in the Philippines, digital technologies like data analytics, cloud computing, and customer relationship management systems helped firms improve productivity by 1.5 percent annually from 2010 to 2019. Yet, these advancements are not equally distributed. Foreign-owned firms and those with access to high-speed broadband are far more likely to benefit, while domestic and smaller firms often struggle due to resource and infrastructure limitations.

Uneven Access and Persistent Inequalities

While digital transformation is reshaping businesses, its benefits remain unequally distributed across the region. Urban areas and wealthier households enjoy greater access to high-speed internet and digital tools compared to rural and low-income groups. This digital divide exacerbates existing inequalities, leaving significant segments of the population unable to participate fully in the digital economy. For instance, households in urban centers are twice as likely to have broadband access compared to their rural counterparts. Gender disparities also persist, even as the services sector employs more women than manufacturing or agriculture. High-tech digital jobs, such as those in IT and financial services, demand advanced skills, which many workers in the region lack. The report emphasizes the urgent need to address these gaps through targeted investments in digital literacy and education to prepare the workforce for emerging opportunities.

The Role of Policy in Unlocking Potential

Policy reforms have been a critical driver in the evolution of services, particularly in opening markets and fostering competition. From the 1980s to the early 2000s, many countries in the region implemented sweeping reforms in domestic finance, telecommunications, and other sectors. These reforms eliminated barriers to entry, privatized public monopolies, and attracted foreign investment. However, the pace of reform has slowed in recent years, leaving substantial gaps. For example, many EAP countries maintain restrictive policies on services trade, such as limits on foreign ownership and competition, which hinder further growth. According to the World Bank–World Trade Organization Services Trade Restrictiveness Index, several countries in the region have more restrictive regimes compared to peers at similar development levels. To fully unlock the sector’s potential, the report calls for balanced reforms that not only liberalize markets but also establish robust regulatory frameworks to address challenges like data privacy, cybersecurity, and monopolistic practices.

Building a Future of Inclusive Growth

The report highlights the importance of creating a virtuous cycle where enhanced opportunities and capacities reinforce each other. Investments in education, health, and finance are essential to equipping people to seize the opportunities created by digitalization and policy reforms. For example, Vietnam’s liberalization efforts and the Philippines’ adoption of advanced technologies have shown tangible economic benefits. However, achieving inclusive growth requires addressing last-mile challenges, such as extending broadband infrastructure to underserved areas and ensuring affordable digital tools for all. Public-private partnerships can play a crucial role in bridging these gaps. Governments must also foster skill development programs and enhance access to quality education to prepare workers for the demands of the digital economy.

The report emphasizes the role of international cooperation in addressing transboundary challenges. Harmonizing regulations on data flows and cybersecurity is essential to ensuring seamless cross-border services trade. Similarly, efforts to reduce carbon emissions from transportation and tourism require collaborative frameworks that align regional and global sustainability goals. By adopting a comprehensive approach that balances liberalization with regulation, EAP countries can ensure that digital advancements benefit all segments of society.

A Balanced Path Forward

East Asia and the Pacific are at a critical juncture in their development trajectory. The rapid growth of the services sector, driven by digitalization and policy reforms, presents unprecedented opportunities to drive inclusive and sustainable growth. However, realizing this potential requires a concerted effort to address disparities in access, skills, and regulatory environments. By fostering public-private partnerships, investing in education and infrastructure, and strengthening international cooperation, the region can harness the transformative power of services. A balanced approach that aligns capacity-building with opportunity creation will ensure resilience and enable the region to lead in the global digital economy. This vision not only promises economic prosperity but also a more equitable and sustainable future for all.