The promise of services-led development
Manufacturing-led growth has been the central development paradigm for centuries, but it is time to shift the spotlight. The share of industry in total employment across low- and middle-income countries (LMICs) has, strikingly, remained almost unchanged in recent decades (Figure 1). Rather, the share of the services sector increased from 40 percent to 50 percent between 1991 and 2018, offsetting almost the entire decline of agriculture. The most common response to this structural transformation is worries about “premature de-industrialization” and renewed calls for lower-income countries to expand manufacturing. The promise of services-led development is instead overlooked but it should not be as our new book “At Your Service? The Promise of Services-Led Development” shows.
Figure 1. Services, not industry, are driving structural transformation in LMICs
Source: “At Your Service? The Promise of Services-Led Development,” World Bank.
The growth dividend of services
Services jobs all too often conjure up images of someone selling goods on the side of the road or in a small retail shop. But this misses the diversity of opportunities with services—and the extent to which they are contributing to income gains. Much like manufacturing, ICT (information and communications technology), finance, and professional services are highly traded internationally, offshorable, and linked to other sectors. Cargo transportation and wholesale services are internationally traded because they are linked to the export and import of goods. Accommodation, food, passenger transportation, and health care are also exported as international travelers buy these services.
Gaurav Nayyar
Senior Economist, Finance, Competitiveness and Innovation – World Bank
Twitter
Gaurav__Nayyar
Mary Hallward-Driemeier
Senior Economic Adviser, Finance, Competitiveness and Innovation – World Bank
Twitter
MHallwardDrieme
Elwyn Davies
Economist – Firms, Entrepreneurship and Innovation Unit, World Bank
Several developing economies have leveraged these export opportunities regardless of their level of industrialization. IT and professional services account for more than half of all services exports in Costa Rica, Ghana, India, Pakistan, and the Philippines. And around 50 percent of all online freelancers that deliver services remotely are based in India, Pakistan, and Bangladesh alone. China, Costa Rica, Jordan, Turkey, and Thailand are in the top 10 health tourism destinations worldwide. Even though currently hit by the COVID-19 pandemic, tourism-related transportation and accommodation services accounted for two-thirds of services exports even in less traditional destinations, such as Rwanda, Tanzania, and Uganda.
It should not, therefore, be surprising that labor productivity growth in services has matched that of manufacturing across LMICs in many regions since the 1990s and performed particularly well in South Asia and sub-Saharan Africa. Productivity growth in services during the past three decades in LMICs has also exceeded that in high income countries, contributing to catch-up (Figure 2).
Figure 2. Labor productivity growth in services has been strong in LMICs since the 1990s
Source: “At Your Service? The Promise of Services-Led Development,” World Bank.
The power of digital technologies, intangible capital, and linkages
The challenge for LMICs is that jobs tend to be concentrated in less productive services. High-skill and productive services, such as IT and professional services employ only 5-10 percent of services workers in lower income countries, compared with 15–20 percent in high-income countries. In contrast, low-skill subsectors such as retail and personal services that have provided little by way of productivity gains employ two-thirds of services workers compared with 30 percent in high-income countries. If LMICs could increase their share of employment in more productive services to mirror that of high-income countries, productivity could increase by one-third.
Related Content
Future Development
Could services drive globalization in the post-COVID-19 world?
Addisu Lashitew and Abdul Erumban
Wednesday, June 17, 2020
But new opportunities for scale and innovation make low-skill services more productive. For example, restaurants and hairdressers can scale up through investments in intangible capital such as marketing and software that enable branching and franchising. There are similar possibilities to achieve scale in arts and entertainment services where streaming platforms such as Netflix and YouTube are fast enabling artists to deliver their creative content to international markets remotely. Small retailers can innovate through digital apps that automate skill-intensive tasks such as inventory management and accounting. Similarly, for ridesharing drivers, the platform substitutes both map-reading skills and numeracy skills.
At the same time, high-skill, productive services such as ICT and professional services, are expanding opportunities for low-skilled workers through their linkages with other sectors. For example, when indirect exporting is included (i.e., selling to other sectors that export, such as agriculture and manufacturing), the unskilled labor content in every thousand dollars of exports of business services in the Philippines, at around $150, approximates that for ready-made garments in Bangladesh.
The importance of services for industrialization
Even though services provide growth opportunities in the absence of industrialization, they are also increasingly important in improving the competitiveness of the manufacturing sector. Services are embodied in manufactured goods as inputs, such as design, marketing, logistics, or e-commerce platforms and account for one-third of the value of gross manufactures’ exports across countries. With the advent of “smart” production processes, ICT services—as the predominant producers and users of data—will play an especially crucial role in boosting manufacturing productivity.
Services also complement industrialization through their bundling with manufactured goods, which adds value postproduction. Smartphones are increasingly combined with apps that stream music and movies where the latter constitute audiovisual services. Car manufacturers offer financial services through monthly installment payment plans. For producers of consumer durables, after-sales services, such as advertising, warranties, and equipment maintenance account for the lion’s share of total revenues.
Given the growing contribution of services to development, ignoring this agenda is no longer an option. There is a need to emphasize expanding services trade, fostering technology adoption, training workers and firms to upgrade skills, and targeting services that provide wider benefits to help ensure that services-led development is indeed in the service of development.
ARGENTINA: Gridlock likely and governability crisis possible after mid-terms
The governing Front for All (FdT) coalition will struggle to avoid a damaging defeat in November’s partial mid-term elections. The government is hoping to limit its losses with unabashed clientelism, but FdT power struggles and highly problematic economic conditions milita… Become a member to read the rest of this article Username or E-mail Password […]
Global GHG reduction – an uncoordinated muddle and mess
Global Letter Dear Colleague, COP26 in November faces an impossibly wide spread of national interests to corral into a unified global programme. It has been set up for failure by the clash between ambi… Become a member to read the rest of this article
EMERGING MARKETS: Covid-19 Vaccinations and Challenges
Our Covid-19 vaccination table includes updated information on the immunization strategies selected EMs are pursuing and the challenges they face. Below are some of the latest developments. Please do not hesitate to contact us if you want to discuss any of the countries mentio… Become a member to read the rest of this article
CHINA: “Negative list” may force private capital to divest from news media
China’s state planning agency updated its Market Entry Negative List with what appear to be tighter restrictions on private investment in news media and internet livestreaming. The Negative List is not new policy, but annual changes to the list can signal shifts to Beijing… Become a member to read the rest of this article
Argentina: New “Cepo”, Old Problems, No Solutions
Last week the Central Bank again intensified the “cepo”, cutting import payments and making the operation of alternative dollars even more restrictive. You could see it coming. The sale of reserves was unsustainable, and it did not seem very likely that the government would bless… Become a member to read the rest of this […]
Cross-border crisis simulation exercise in South America
This report sets out general findings and recommendations on a range of topics, including crisis management tools; recovery and resolution planning; liquidity and resolution funding; domestic decision-making procedures; and cross-border cooperation and information-sharing.