Service Export Sophistication and Economic Growth: By Saurabh Mishra, Susanna Lundstrom and Rahul Anand World Bank Policy Research Working Paper 5606
The fact that India’s rapid growth has been driven by the services sector has challenged the conventional wisdom that industrialization is the only route to development. Late developing countries, especially the “tigers” of East Asia, have all developed by exporting industrial goods. In sharp contrast, the services sector has traditionally been associated with the domestic economy and with low productivity. Can this change and can services exports also lift a country out of poverty?
This paper considers whether the growth and sophistication of services exports can become a means of rapid economic growth in developing countries.
The nature of services has been transformed by the revolution in communications technology and by the globalization of financial services. This has resulted in modern services that can be traded, unlike the earlier services that required face-to-face interaction.
In fact, modern services like information and financial products can be traded even more easily than manufactured goods, because they are not subject to many of the physical barriers faced by manufactured goods. What’s more, transportation costs in these services are negligible.
The rapid growth of computer and communications technologies has also led to increasing productivity. In India, the average annual percentage change in output per worker in services has been 4.9% between 1990 and 2000, and 4.6% between 2000 and 2006. That’s much higher than output per worker in Indian industry, which was 3.3% between 1990 and 2000, and 2.7% between 2000 and 2006. The authors point out that no more than 10% of services is currently tradable, and prospects for productivity gains from trade and fragmentation are potentially large. Also, services exports as a share of services value-added are growing faster than goods exports as a share of industry value-added after 2000. That makes services-driven growth a viable prospect.
Modern services, such as financial services and information processing services, are growing faster than traditional services such as tourism, education, media, etc. This has led to higher productivity in the services sector as a whole. Perhaps more importantly, even traditional services have benefited from the revolution in computers and telecommunications, resulting in improved productivity for them as well. And finally, as an economy develops, the share of services goes up—this makes services-driven growth even more essential.
The authors say their analysis suggests that increasing sophistication of services is positively related to growth. Their paper specifically looks at what countries export rather than how much and the results show that services exports’ sophistication is positively related to growth, even when controlling for a number of variables across different samples. This does not mean, of course, that countries should neglect their manufactured exports, but only that high-end services are an additional source of growth, even though the size of this sector may be small.
The researchers point out that “the Indian experience has shown that even when approximately 1% of its population is engaged in high productivity service exports, it has contributed to overall high growth”.
The need to step up trade in high-end services is important not only for developing countries like India, but also for developed countries like the US, which will have to increasingly rely more on innovation and competitiveness in sophisticated services exporting firms.
Graphic by Jayachandran/Mint
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