The promise of development through services

Manufacturing-driven growth has been the central development paradigm for centuries, but it’s time to shift the focus. The share of industry in total employment in low- and middle-income countries (LMICs) has strikingly remained virtually unchanged over the past decades (Figure 1). On the contrary, the share of the service sector increased from 40 percent to 50 percent between 1991 and 2018, offsetting almost all of the decline in agriculture. The most common response to this structural transformation is concerns about “premature deindustrialization” and renewed calls for low-income countries to develop the manufacturing sector. The promise of service-oriented development is rather overlooked, but this shouldn’t be our new book “At your service? The promise of service-oriented development” shows.

Figure 1. Services, not industry, drive structural transformation in LMICs

Source: “At your service? The Promise of Service-Oriented Development ”, World Bank.

The services growth dividend

Service jobs too often conjure up images of someone selling merchandise on the side of the road or in a small retail store. But this misses the diversity of opportunities with services and the extent to which they contribute to income gains. Like the manufacturing sector, ICT (information and communications technologies), finance and professional services are subject to significant international trade, relocatable and linked to other sectors. Freight transportation and wholesale services are traded internationally as they are linked to the export and import of goods. Accommodation, food, passenger transportation and health care are also exported as international travelers purchase these services.

Several developing economies have taken advantage of these export opportunities regardless of their level of industrialization. Computer and professional services account for more than half of all service exports to Costa Rica, Ghana, India, Pakistan and the Philippines. And about 50% of all online freelancers who provide remote services are based in India, Pakistan, and Bangladesh alone. China, Costa Rica, Jordan, Turkey and Thailand are among the top 10 health tourism destinations in the world. Although currently affected by the COVID-19 pandemic, tourism-related transport and accommodation services accounted for two-thirds of service exports, even to less traditional destinations, such as Rwanda, Tanzania and the United States. ‘Uganda.

It should come as no surprise, then, that labor productivity growth in services has matched that of manufacturing in LMICs in many regions since the 1990s, and that it has performed particularly well in South Asia. and in sub-Saharan Africa. Service productivity growth over the past three decades in LMICs has also exceeded that of high-income countries, helping 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 Service-Oriented Development ”, World Bank.

The power of digital technologies, intangible capital and links

The challenge for LMICs is that jobs tend to be concentrated in less productive services. Highly skilled and productive services, such as IT and professional services, employ only 5-10% of service workers in low-income countries, compared to 15-20% in high-income countries. In contrast, low-skilled subsectors such as retail trade and personal services that have provided little productivity gains employ two-thirds of service workers compared to 30 percent in high-income countries. If LMICs could increase their share of employment in more productive services to reflect that in high-income countries, productivity could increase by a third.

But new opportunities for scale and innovation make low-skilled services more productive. For example, restaurants and hairdressers can grow by investing in intangible capital such as marketing and software that enables branching and franchising. There are similar possibilities for achieving scale in arts and entertainment services where streaming platforms such as Netflix and YouTube quickly allow artists to remotely distribute their creative content to international markets. Small retailers can innovate with digital applications that automate skill-intensive tasks like inventory management and accounting. Likewise, for carpool drivers, the platform replaces both map reading and numeracy skills.

At the same time, highly skilled productive services, such as ICT and professional services, expand opportunities for low skilled workers through their linkages with other sectors. For example, when including indirect export (i.e. sale to other sectors that export, such as agriculture and manufacturing), the unskilled labor content for every thousand dollars of business services exports to the Philippines, at around $ 150, comes close to that for out-of-the-box businesses. – made clothes in Bangladesh.

The importance of services for industrialization

While services offer growth opportunities in the absence of industrialization, they are also increasingly important for improving the competitiveness of the manufacturing sector. Services are incorporated into manufactured goods as inputs, such as design, marketing, logistics, or e-commerce platforms, and account for one-third of the value of gross exports of manufactured goods to countries. With the advent of “smart” production processes, ICT services, as the main producers and users of data, will play a particularly crucial role in increasing manufacturing productivity.

Services also complement industrialization by bundling them with manufactured goods, which adds value to post-production. Smartphones are increasingly associated with applications that broadcast music and films where the latter constitute audiovisual services. Automakers offer financial services through monthly installment payment plans. For producers of durable consumer goods, 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 focus on expanding services Trade, favoring Technology adoption, coaching workers and businesses to upgrade their skills, and targeting services that offer broader benefits to help ensure that service-oriented development serves development.