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Are Services the Trade of the Future?

Sebastián Sáez's picture

You see trade in services happening all around us. Medical tourism is an increasingly popular option, as patients seek affordable medical treatment in countries such as Costa Rica and Thailand. American students are choosing to earn their undergraduate degrees in Europe and Asia rather than staying close to home. More companies are finding their survival depends on business process outsourcing in developing countries. This growing phenomenon of trade in services has become the most salient characteristic of globalization.

Just a few decades ago, services such as tourism, distribution and communication were considered in the economic literature to be stagnant sectors or of little economic relevance. But now, they are a key determinant of overall countries competitiveness. Many of the costs that determine the competitiveness of domestic industries are associated with the availability and reliability of services. Moreover, trade in services is growing faster than trade in goods. The share of developing countries in exports of world services increased from 11 percent in 1990 to 21 percent in 2008.

In fact, the topic of trade in services has become a subject of recent debate among economists – between those who believe manufacturing will continue to prevail and those who side with services as the future of trade.

With the buzz around trade in services, this led us to ask the question: Is trade in services a developed country phenomenon?

In the World Bank’s recent book Exporting Services: A Developing Country Perspective by Arti Grover Goswami, Aaditya Mattoo, and Sebastián Sáez, the authors attempt to disentangle the determinants of trade in services from developing countries. The authors review the experience and performance of several developing countries, including Brazil, Chile, the Arab Republic of Egypt and the Philippines. Combining econometric analysis and case studies, the book tries to answer how these developing countries succeed in exporting services.

While developed countries maintain the lion share of trade, developing countries, despite the difficulties and barriers to trade they face, are increasingly exporting services. India is a well-known success story but the country is not alone. The Philippines is now the third largest player in the global business process outsourcing market, accounting for 15 percent of the market output. India holds 37 percent of the market and Canada maintains 27 percent.

Meanwhile, Morocco, Tunisia, Kenya, and South Africa provide a range of professional services to Europe. Brazil, Costa Rica, and Uruguay export professional and information technology related services, and Chile distribution and transportation services.

A country’s export of services depends on its infrastructure, factors of production, and institutions relevant to services. In countries where the infrastructure for service delivery and the institutions governing services have improved, they were able to become successful service exporters. Human capital and information technologies are also crucial to explain export success in modern services such as business and professional services. Generally, inadequate skills are seen as the reason that commercial service exports have failed to develop or are found to be an impediment to exporting these services or for their long-term growth. Openness to foreign investment, migration, and streamline business environment are also part of the story. 

Services also matter for development and social equity. Education, health, safe, reliable water and wastewater management services are relevant for quality of life, social progress, and on the extent to which different groups in society can benefit from economic growth. 

We hope this book will further understanding of the fundamentals as well as specific factors that influenced services exports performance and be a useful tool for governments to design successful trade and promotion strategies, as well as sound domestic policy reforms in the service sector.

We’re curious about what you think, so please share your thoughts with us: What do you think about these new developments in services trade? And how have these services affected your life or workplace? Do you think manufacturing or trade in services is here to stay? Is this dynamism sustainable and replicable in a wide number of countries?

Comments

Services are certainly a valid trading sector, and one that has done better the last few decades than probably anyone thought they would 30 years ago. For equivalent investments, services might produce more jobs or have further reach, market share, etc. than a manufacturing one. That being said, services might be a little less likely to produce a sustainable competitive advantage. Tourism might be attractive to bring in some quick cash, but most destinations outside of the actual tourism location don't look like they benefit much.

Submitted by Anonymous on
I am profoundly surprised that among the economies of Latin America they mentioned Uruguay and Costa Rica and not Panama which has been, since the 80's the Captain of the Central America, Caribean and even South America (excluding maybe Chile and Brasil). It is no secret that Panama's based service economy is one of the most succesful in the Americas (80% of its thriving economy is based on international services), and further from getting behind countries like Costa Rica and Uruguay these last 10 years has only increased productivity and growth by adding new services they were not great at, like tourism for example. Panama's economy is the trend setter of the region, not Costa Rica whose export of services, in numbers, do not come close to that of the former. The growth of certain areas are only surpassed by Chile and Brasil in the whole Latam Area. All these areas in the services industry, i.e. Transport,Legal Services, Call Centers, Back Offices, Constitution of Corporations, Special Economic Zones and the number one Free Zone of the Western Hemisphere surpassed only by Hong Kong, shipping services and the list goes on. So not mentioning Panama at all makes me question how the author did not even see these numbers but saw CR and Uruguay. Panama has a new Headquarters Law which had been the culprit for more than 115 multinational companies headquarter to be located in Panama, instead of any other country of Latam, from there services and distribution chanels are directed for ALL the Region. So I suggest getting serious with numbers here and investigate a BIT more further!

Submitted by Rachel Kasumba on
This growth in service trade is fueled mainly by the bottom-line and often-times at the expense of quality service. However, as consumer expectations continue to rise and people get to interact with others from different backgrounds and regions, both the quality and level of service will also improve. In addition, services seem to be on the increase as a result of the need for their delivery to be formalized – traditionally, services were ignored due to their intangible nature – whereas manufacturing of products and goods that could be touched and felt, received all the attention. Increasingly, services are no longer seen as a by-product of manufacturing but indeed as an integral part of the production and sale’s process that could determine the success or failure of the business.

Submitted by Andrew Jensen on
The point on tourism as made by DAVID K WALTZ is well taken, but is short-sighted. Services trade flows (as opposed to goods manufacturing) shows immense potential for growth in the next century. Globalization is the driving force behind this growth, primarily internet and cloud-computing technologies. There is even the emergence of new markets, like that of city-planning and development for example. South Korea is building such a city called Songdo. China has a multi-billion dollar one in the works too. Their providers? International services firms. IBM has made huge headway too in their new complex consulting services known loosely as business analytics--another huge industry. Services are the future, the recent surge in services mentioned in the blog post above is only the beginning.

Submitted by Bagumhe on
During the Uruguay round negotiation, service trade were first included as one of the component for negotiation. developing countries reacted that the industry is not in their favor since developed country passes more comparative advantage in this industry than developing countries. This was the story two decade ago. my argument will be based on East African Community the area which i work and come from. my discussion on this issue will be based on my paper titled Domestic preparedness for service trade liberalization to be presented at Sydney University next month. when you consider currently the five countries of East African Community, Services is now contributing more that 45 percent of their GDP. basically it is the dominant sector in whole economy. when is now happening in the services industry of these countries is a barometer of the whole economy. according to the calculation that i have made basing of the 160 services sub sectors as per the GATS language. Tanzania have liberalized by 37%, Kenya by 39%, Uganda by 61%, Rwanda by 63% and Burundi by 46%. the liberalization i am describing here is based on the commitment made in the East African Common Market protocol. it terms of services growth rate , In Tanzania the growth rate is 6.2%, Kanya is 4.4%, Uganda is 10%, Rwanda is 8.9% and Burundi is 10.4%. when you compare the growth rate as well as the share of the sector to GDP of these countries it is apparent that services now is no longer a phenomenal of developed country alone but a developing country as well.

Submitted by Muema Thomas on
Hi I have really liked you line on EAC. Am greatly interested in the integration of professional services in EAC. Currently am doing some study for APSEA on this area and would very much like you to share with me your paper. The speed at which the EAC professionals are moving in integrating trade in services is much slower. Tanzania though maintaining some good level of liberalization of trade in services is a bit slower when it comes to opening up to professionals from other member countries. I do however agree that trade in services is the in thing and likely to increase the competitiveness of the region

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