Revolutionary Services

Includes: PEK
by: Otaviano Canuto

Last year, in China, WTO Director-General Pascal Lamy remarked:

"The global economy is being transformed at an unprecedented speed and at the heart of that transformation is the services economy. (…) Services underpin every part of the production process, from research and development to design, engineering, financing, transportation, distribution and marketing. In short, without services, there would be little value-added and innovation."

A snapshot of that revolution in its course can be seen in a short piece - "Service with a Smile" - by Ejaz Ghani, Arti Grover Goswami, and Homi Kharas. The authors reckon that in the last 30 years the contribution of services to GDP growth has been higher than industry's in both developed and developing countries. On the jobs front, the net creation in services has compensated the destruction in both industry and agriculture (see chart).

Chart - Sources of Job Creation in Developed and Developing countries

(Click to enlarge)

Source: Ghani et al

It is known that, after some income levels, services (tourism, health, education, and leisure-related activities) tend to rise as a proportion of households' consumption baskets. Furthermore, on the production side, in the wake of the wave of restructuring, downsizing and all that corporate jazz of the eighties, sources of enhancing competitiveness have been found in divesting and contracting-out the provision of business, logistic and professional services once internalized by industrial firms. However, the deep transformation that new technologies of information and telecommunications have been bringing to a substantial range of services is yet to be widely realized.

As Ghani et al. note, until recently "services were considered as menial, low-skilled, and low-innovation", whereas now "the number of services that can be transported digitally is constantly expanding." Modern services constitute sophisticated key components of value chains in agriculture and industry. They can also themselves be unbundled and broken down into value chains just like physical goods. In this context, the authors show that productivity - value-added per employee - growth in services has substantially outpaced that in industry, again in both developed and developing countries. From call centers to medical records transcription to IT support, trade in services is becoming more sophisticated -- that is, exported services are increasingly moving up the value chain.

Trade in services has accompanied the rising tide of global trade, going beyond commercial presence and the cross-border movement of service providers and consumers. In the past, services such as customer service, IT, and accounting were viewed merely as inputs into the production of goods; today, these and other services have become exports for direct consumption, accounting for approximately 70 percent of global GDP. Remarkable has been the growing cross-border trade, with the delivery of some services from the territory of one country into the territory of other country, something increasingly made possible by rapid global developments in information and communication technology, paired with rapid global developments in the three Ts -- technology, transportability, and tradability.

Like Goswami et al., Ghani et al. make the case about services as a possible new channel for export-led growth by developing countries. Let me here stress the relevance of services modernization even for developing countries that may not envisage becoming services-export platforms. If services are getting bigger as a share of GDPs and jobs, productivity increases in the former are fundamental for income growth and development. Furthermore, without those increases, the competitiveness of non-service activities in agriculture and industry in a country will suffer from rising wage costs and lower-quality inputs. It's therefore paradoxical that some countries have resorted to protection or incentives in favor of manufacturing, while not realizing that such efforts tend to be self-defeating if the domestic supply of services remains closed to provision from abroad or, in the case of non-tradable ones, non-competitive in its local production.

Next time you troubleshoot your computer with an IT representative in Chennai, or make an inquiry with your Bank's customer service department in Manila, remember that these services are helping to underpin economic growth in countries around the world. "Globalization of services is still in its infancy", say Ghani et al. If trade in services benefit from future negotiations, then infant, modern, and revolutionary services alike will spill forth their economic rejuvenating potential.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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