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The Great Recession and Developing Countries
consumption levels engendered by remittances later call for continued remittances, which strengthens the structural relationship of remittances and consumption. Notwithstanding the overall low level of foreign investment, in some sectors it has contributed to higher potential growth. Most notably, investment in manufacturing—about 30 percent of which is in information and communications technology—has boosted the potential growth of that sector. Much of the rise in FDI was in unclassified sectors but is likely to go to outsourced business services that have been strong since 2000. Nonfactor services have improved because of the contribution of the business process outsourcing (BPO) sector. The rapid expansion of the BPO industry spurred growth in the real estate, construction, and communications sectors. Call centers have experienced especially high demand in telecommunications equipment and real estate. Partly as a result, durable investment in the telecom sector has been robust, and FDI increased substantially in the real estate sector while the BPO sector was expanding rapidly. This has spurred private construction and expanded the capacity of the services sector. Based on growth decomposition analysis, physical and (especially) human capital contribution to GDP growth fell in 2003–07 as a result of the weak capital formation and labor market in the aftermath of the Asian crisis (figure 9.10). Total factor productivity (TFP) was noticeably stronger during 2003–07, averaging 3.5 percent against 0.3 percent during 1994–2002. This surge in TFP likely stemmed from the 1990s reforms and the technological shifts they brought. With the deregulation of the telecommunications industry and the growth of the financial sector, the services sector expanded rapidly. The initial boom in the communications industry improved overall productivity, enabling the rise of the BPO sector. External finance increased during the boom period, but it was not used to address binding constraints in infrastructure. Net external financing of the national government was higher in the boom period, especially in the pre–fiscal consolidation period (pre-2004). Public investment as a percentage of GDP, however, had been on a declining trend up to 2006 and has failed to address pressing infrastructure needs.