Chile has long been known as a superstar in liberalization reforms and innovative export-led growth strategies. The country successfully exports tourism and transportation services. But these successes are, in some ways, yesterday’s news. The country’s performance in more modern service exports – internet and communications technology, business process outsourcing and others – has been less remarkable. Chile is no India.
What does this mean for a country that has famously followed sound economic policies? Is the government doing something wrong? Is the country stuck? A look at the way services data is interpreted may provide a different answer. Perhaps Chile’s reputation is simply a victim of statistical inaccuracies.
A project underway in the International Trade Department, with the help of Professor Joseph Francois of Johannes Kepler University Linz, may shed light on this conundrum. The innovative approach takes a broader view of services than just those that are exported. It uses a new database to assess both the direct and indirect contribution of services to total exports. Typically a country requires a number of services to reach out to the world – to export either goods or services. This necessary, domestic foundation includes ICT-enabling services, banking and insurance services, distribution services and professional services. These indirect inputs are known as “sectoral forward linkages,” and they usually support other economic activities in addition to trade. A concrete example of the tremendous value-added of these services in trade can be found in a decades-old study of grape exports from Chile to New York. The 1989 research found that, even excluding transportation services, about 74 percent of the value of Chilean grapes in a New York store came from services contributions (ECLAC, 1989).
When we use this methodology to assess the general importance of Chile’s services (excluding transport services) to exports, we conclude that the services contribution to total trade is much more significant than expected. Under conventional measurement, services make up only 3 percent of total exports (see figure). This proportion is one of the lowest in the world. If we measure the total contribution of services (including sectoral forward linkages) to Chile’s exports, we find that services make up 19 percent of export value. In fact, this share is higher than that in other successful services exporters such as Brazil or the Philippines or among upper/middle income countries. And it is a stable percentage – it has remained near this level since 1994.
Thus, Chilean services are primarily inputs to other traded activities. This result has implications for the strength of the Chilean economy overall. One interpretation is that this distribution of services inputs, while not measurable in gross trade statistics, is healthy. The less visible “sectoral forward linkages” have multiple roles: Not only do they contribute to exports, but they support domestic economic activities, provide many specialized jobs, and help create substantial value-added by the time the product reaches the final consumer.
This can be contrasted with the example of the Philippines, which has seen a large growth of a single services export – business processing outsourcing. Indeed, the Philippines has become the third largest player in the global business processing outsourcing market, accounting for 15 percent of the market output, after India (37 percent) and Canada (27 percent). Measured by conventional methods, services contribute much more heavily to the exports of the Philippines than those of Chile. But this may be a shallow addition to the local economy. When the overall services contribution to exports is measured, the Philippines’ results are much lower than Chile’s, showing that the services in the Philippines may be too narrowly focused. Because Chilean services are heavily weighted toward those in a supporting role, it might be said that the country has developed more versatile services and made more efficient use of them.
Figure 1, Export of Services as Share of Total Trade, 2007
Source: PRMTR data.