Description:
<jats:sec><jats:title content-type="abstract-heading">Purpose</jats:title><jats:p>The purpose of this paper is to extend the theory of services‐led industrial policy in services dominated but industrially lagging developing Asian economies and discuss its implications for employment, competitiveness, and diversification.</jats:p></jats:sec><jats:sec><jats:title content-type="abstract-heading">Design/methodology/approach</jats:title><jats:p>An inductive approach using qualitative methodology is adopted reviewing the available literature and evidence from Pakistan. The critical synthesis of the history of economic growth and industrial policy has followed Kuhn's paradigm approach.</jats:p></jats:sec><jats:sec><jats:title content-type="abstract-heading">Findings</jats:title><jats:p>Focusing on Pakistan, the paper synthesizes the history of industrial policy to identify the major paradigm shifts, especially the structural reforms era of the 1990s. The evidence suggests that the reforms under the structural adjustment program (SAP) have proved to be the necessary but not sufficient conditions for inclusive growth and industrial competitiveness in services dominated economies. Services‐led growth without an integrated and competitive industrial sector can lead to severe external accounts deficits and unemployment. The traditional role of services as “driver of demand/growth” is extended as “driver of productivity/competitiveness” through forward linkages with other sectors of the economy. The services sector's enabling role as the “software” of the economy and its impact on total factor productivity growth, diversification, and inclusive growth is postulated.</jats:p></jats:sec><jats:sec><jats:title content-type="abstract-heading">Research limitations/implications</jats:title><jats:p>A quantification of forward and backward linkages is needed to identify the potential of services sub‐sectors in driving growth and productivity, respectively.</jats:p></jats:sec><jats:sec><jats:title content-type="abstract-heading">Originality/value</jats:title><jats:p>The paper identifies the need to match the existing industrial policy regimes with the economic structures in services‐dominated developing economies. The role of forward linkages in the productivity growth has implications for measurement of services output in national accounts in order to fully capture the contribution of this sector.</jats:p></jats:sec>