World Trade in Services
Evidence from A New Dataset*

Using a newly constructed dataset on trade in services for 192 countries from 1970 to 2014, this paper shows that services currently constitute one-fourth of world trade and an increasingly important component of global production. A detailed analysis of patterns and stylized facts reveals that exports of services are not only gaining strong momentum and catching up with exports of goods in many countries, but they could also trigger a new wave of trade globalization. Research applications of the trade in service dataset on structural transformation, resilience, labor reallocation, and income distribution are outlined.

Abstract

Using a newly constructed dataset on trade in services for 192 countries from 1970 to 2014, this paper shows that services currently constitute one-fourth of world trade and an increasingly important component of global production. A detailed analysis of patterns and stylized facts reveals that exports of services are not only gaining strong momentum and catching up with exports of goods in many countries, but they could also trigger a new wave of trade globalization. Research applications of the trade in service dataset on structural transformation, resilience, labor reallocation, and income distribution are outlined.

1 Introduction

The structure of economic production is continuously evolving, with trade in services playing an ever greater role. Services export is an increasingly important component of a nation’s export basket. Services exports are also growing as a share of the world economy. The share of services export in total goods and services export has doubled from around 9 percent in 1970 to over 20 percent by 2014.

Although there are several likely channels that are responsible for driving up demand for world trade in services, none is as instrumental as advances in technological change. Technological innovations provide a wide array of services to be carried out in one location and consumed in many other places. Historically, buyers and sellers needed to be face to face. However, increasingly many services between buyers and sellers can be traded globally across and within borders almost instantly through satellite networks. The internet and other systems of network technologies like mobile phones, big data, and artificial intelligence are providing technical changes to production techniques and business processes. Software has become the main component of all hardware systems. This has given services a physical presence like goods; they can be produced, and stored. But perhaps it is the virtual capabilities of services, such as being transported cheaply and swiftly in binary bits, that make it even more desirable than exported goods. These structural changes are putting services at the center of world commerce, perhaps heralding a new wave of globalization.

Are the drivers of growth and development shifting away from manufacturing into services? It may be too early to tell, but rapid inter-and-intra sectoral resource reallocations are offering new investments opportunities in a variety of tradable service activities. More recently, there is also a growing sentiment in policy and media that the pace of globalization driven primarily by exports in goods, may have started to decelerate after two decades of uninterrupted progress. Could trade in services support a future wave of globalization, trade and growth? These questions have sparked an interest in understanding the implications for trade in services on productivity, jobs and growth, but very little is known about global services trade.

A nascent yet growing body of evidence has begun to challenge the long held tenets of economic development that industrialization is the prime engine of growth. However, due to deeply rooted prejudice against service sector, this classical view still remains prevalent. In The Wealth of Nations, Adam Smith questioned the social value provided by “churchmen, lawyers, physicians, men of letters of all kinds, players, buffoons, musicians, opera-singers, opera-dancers, etc.” Similarly, William Baumol (1967) fostered the view that services are a sector resistant to improvements in productivity. Provision of services—such as restaurant meals, haircuts, and medical checkups—required face-to-face transactions. These did not lend themselves easily to standardization and trade, the source of growth in productivity and hence income. Furthermore, Kaldor (1967) put forth an argument for the supremacy of the industrial sector for the promotion of broad economic growth1. Recent evidence highlights that business services seem to allow productivity growth by the same Kaldorian mechanisms that have traditionally made manufacturing the key driver of growth (see, e.g., Meglio, Gallego, Maroto, and Savona, 2015; Flaaen, Ghani and Mishra, 2013). It is well accepted that the stages of diversification follow a non-monotonic path through the development pathway (see Imbs and Wacziarg, 2003). India’s idiosyncratic pattern of development has been driven by service-led growth, China’s growth as a manufacturing powerhouse quickly propelled its economy to a middle-income level (Kochhar, Kumar, Rajan, Subramanian, and Tokatlidis, 2006). However, at this juncture many middle-income countries including China are seeking new sources of growth to be service-led (McKinsey, 2013). Further, as many resource-rich and low-income countries face the Dutch-disease symptoms, service-led growth may propel the manufacturing base and offers opportunities for future growth strategies in these countries. The growing tradability of services will remain an imperative for diversification and competitiveness of nations across the development spectrum (Copeland and Mattoo, 2007; Reinsdorf and Slaughter, 2009; Gervais and Jensen, 2014; Leo and Philippe, 2014).

In this paper, we introduce a new disaggregated annual panel data set on global trade in services for 192 countries, more detailed than any earlier efforts. The data is broken down into one and two-digit disaggregation, providing as many as 27 services export sectors.

Using this rich dataset, it is shown that trading services are gaining momentum in world trade and are becoming an increasingly important component of global production. Our analysis documents global trends in trading services and provides stylized facts documenting how countries differ on various dimensions of exporting services. The paper makes the case that trading services are not only catching up with exports of goods in many countries, but they could help continue the strong globalization process started by exported goods. We argue that this development would have

The rest of the paper is organized as follows. The next section describes in simple language the construction of the dataset, leaving details for the Technical Appendix. Section 3 provides a rich set of stylized facts for the world, country-income groups, and a few selected country cases. Potential research applications of the dataset in the areas of structural transformation, macroeconomic volatility, labor reallocation and income inequality, are discussed in Section 4. Section 5 concludes.

2 Constructing a New Dataset

We construct new estimates by using information from the International Monetary Fund’s Balance of Payments Statistics (BOPS). More specifically, we merge one, two, and three-digit classification to obtain 66 categories of services exports for 192 countries based on the Balance of Payments Manual 6 (BPM6).

The IMF Statistics Department (STA) started publishing balance of payments (BOP) and International Investment Position (IIP) data on a BPM6 presentational basis with the August 2012 editions of the IMF’s International Financial Statistics (IFS) and the online Balance of Payments Statistics (BOPS) database. The data series began with 2005 data in electronic media and with 2008 data in the hard copy of IFS. To present data on a consistent BPM6 presentational basis, IMF Statistics Department (STA) had worked closely with IMF member countries. For each country, one of three approaches was followed:

  • (i) economies implemented BPM6 and provided their own BPM6 estimates;

  • (ii) economies reported BPM5 data to STA and opted for a “generic conversion” of their data to a BPM6 basis using standard rules that are broadly applicable to a large number of economies and over time; or

  • (iii) economies opted for a “customized” conversion of their BPM5 basis data, by adjusting the results from the “generic conversion” in consultation with the IMF.

With the September 2015 edition of the IFS, STA started re-disseminating an economy’s own official BPM6-basis estimates for all years for which the economy developed such estimates, and converted BPM5-basis estimates for years where there are no official BPM6-basis estimates. Major changes on BOP services classification from BPM5 to BPM6 include:

  • (i) BPM6 introduces financial intermediation services indirectly measured (FISIM);

  • (ii) methodological changes in insurance transactions;

  • (iii) treatment of Intellectual Property; and

  • (iv) addition of manufacturing services and maintenance services.

Countries report services data to STA as part of the balance of payments data collection for re-dissemination in publications (IFS/BOP database). These data are only available at world-partner level only, which means that information is only available for countries’ export services to the rest of the world following the BOP standard classification, which can be found in the BPM6 Manual. Bilateral level data for services are published by WTO and the World Bank with much smaller coverage than the dataset we have constructed using BPM6. For convenience, users can refer to the classification of services as in BPM6/B0P and the MSITS 2010. The process of compilation and validation of services data, is done individually by the responsible agencies in each country and may differ according to the available source data by category of service2.

The BOPS is the only source of harmonized world data on services trade that includes developing countries. The final dataset that we use is in an annual panel form for the time period 1948 - 2014. Given data quality concerns in earlier years, we focus on the available data from 1970 - 20143. Appendix Table 1 shows the BPM6 classification metrics. The details highlight the degree of disaggregation used for an integrated dataset for meaningful analysis4.

To improve the data quality and maximize available information, we have made the following modifications to the raw data. For one-digit level services data, the main modifications include:

  • (i) Dropping any negative values of the export data because negative export values imply those observations are actually imports. We dropped 178 observations at one-digit level out of 50,582 of total one digit observations. Note that in sum, we dropped 315 observations out of total observations 158,602 at all digit levels.

  • (ii) Dropping 7,457 observations at the one-digit level with values equal to 0 which imply the export sectors do not exist. In sum we dropped 22,773 observations at all digit levels.

  • (iii) Generating the total sum of exports by summing up the export values at one-digit level and compare the sum with the reported total exports value.

  • (iv) Calculating total count of sectors at the one-digit level to provide information for data availability.

We processed two-digit level data with the following procedures:

  • (i) For three sectors “1.A.b.2 Maintenance and repair services n.i.e.”, “1.A.b.8 Charges for the use of intellectual property n.i.e.”, “1.A.b.12 Government goods and services n.i.e.”, we naturally used the one-digit data because by classification those sectors are reported at one-digit level.

  • (ii) For some sectors, if no two-digit level observations are available, we kept the one-digit level to represent the sector.

  • (iii) If a sector had partial information of the two-digit level observations, we compensated the data by generating “Other” categories at the two-digit level by subtracting one-digit level sector value with available two-digit level subsectors. For example, if a country only had data for one-digit “1.A.b.6 Insurance and pension services” and subsector “1.A.b.6.1 Direct insurance”, we kept the subsector “Direct Insurance” and compensated the other subsectors of insurance with “other” which is equal to the difference of the insurance sector and direct insurance.

  • (iv) If a sector had all categories of two-digit level sectors reported but the sum of the two-digit sectors does not equal to the one-digit level value, we recalculated the two-digit level values using the same ratio and one-digit level value to adjust for the differences.

  • (v) If a sector had all categories of two-digit level sectors reported but all the two-digit observations equal to 0, we contract the sector because no real data exist.

A data portal that includes the newly constructed dataset in its entirety along with tools to produce charts and stylized facts is made publicly available5. Figure 1 summarizes the number of countries by income groups reported in our dataset. In 2014, there is reliable aggregate data on services export reported for 56 advanced economies and 111 developing countries.

Figure 1.
Figure 1.

Countries reporting service exports data in BPM6, by income groups

Citation: IMF Working Papers 2017, 077; 10.5089/9781475589887.001.A001

Sources: BPM6, and authors’ calculations.

3 Patterns and Stylized Facts

This section uses the newly developed dataset discussed in the previous section to identify stylized facts on trading services for the world as a whole, different country-income groups, and selected country cases, highlighting the increasingly important role of services export in the global economy.

3.1 World

Services export has become more important in trade. As Figure 2 shows, the share of services export has increased from around 9 percent in 1970 to around 20 percent in 2014. Similarly, the share of services export in world GDP has also increased from 1 percent in 1970 to over 6 percent in 2014.

Figure 2.
Figure 2.

Share of services exports in total world exports and world GDP

Citation: IMF Working Papers 2017, 077; 10.5089/9781475589887.001.A001

Sources: BPM6, World Economic Outlook, and authors’ calculations.

The rise in services trade has brought about a shift in gains from trading services across variety of new activities. Many services sectors are gaining from reduced transportation costs thanks to technological changes and growing tradability. In addition, services export plays a central role in globally interconnected production networks and value chains. For instance, while Transport and Travel have declined in relative importance of national export bundle, they are increasingly a vital backbone for the rest of the economy. From the early 2000s, expanding merchandise trade and international air passenger traffic are responsible for significant growth in the transport sector. In 2008, world transport exports reached US$ 891 billion (WTO, 2016).6

At the same time, services such as Telecommunication, Computer and Information services have emerged as one of the most dynamic sectors. Between 1995 to 2014, world exports of computer and information services expanded much more rapidly than any other services sector, recording as much as 18 per cent growth on average annually. In 2014, world exports of computer and information services reached an estimated US$ 302 billion. Similarly, financial services are increasingly internationalized and growth of financial technologies (fin-tech) will likely continue to witness their exports in low income and developing countries. At the global level, financial services have grown rapidly in world exports and have bounced back since the financial crisis to US$ 349 billion in 2014. Figure 3 illustrates the evolution of global services export basket between 1990 and 2014. We clearly notice the increasing importance of computer and financial sectors from the density shift.

Figure 3.
Figure 3.

Service exports of the world by sector

Citation: IMF Working Papers 2017, 077; 10.5089/9781475589887.001.A001

Sources: BPM6, and authors’ calculations.

3.2 Country-income groups

The rise in services trade is not just an advanced economy story. Our stylized facts show that globalization of services has been more significant for developing countries, where services export is growing much faster. Services export from developing countries have grown twice as fast compared to advanced economies, growing tenfold since 1990. Developing countries share in world services export market has increased from 3 percent in 1970 to over 20 percent in 2014. Figure 4 plots the share of world exports, with advanced economies on the left axis and developing countries on the right axis.

Figure 4.
Figure 4.

Share of world service exports in Advanced vs. Developing countries

Citation: IMF Working Papers 2017, 077; 10.5089/9781475589887.001.A001

Notes: Developing countries include low-income, and lower- and upper-middle income countries following the World Bank’s country income classification. Sources: BPM6, and authors’ calculations.

Figure 5 shows evolution of various services export sectors by income groups - High-income countries (HIC’s), Middle-Income Countries (MIC’s), and Low-Income Countries (LIC’s). We note that developing countries are fast taking over market share across various service exporting sectors, not just in traditional but modern services as well. Travel and Transport service exports occupy a major share of exports from developing countries, occupying about 20 percent of global market share of transport services and around 30 percent of travel services. The growth of modern services such as Business, Computer and Information, Finance and Intellectual Property services from developing countries is also remarkable. Developing countries have been steadily increasing their global market share in modern services reaching almost 30 percent of global exports. In particular, developing countries have been consistently taking over the world market in Business services (including R&D, professional, and management consulting), as well as in Intellectual Property and Computer and Information service exports. Impressive also is the growing share of developing countries in Financial services (occupying over half of world financial services export) as well as Construction services. The range of modern services that can be digitized and traded globally is constantly expanding. India has been a pioneer (Dehejia and Panagariya, 2010), but many other emerging markets are also finding it easier to generate productivity growth in services than in industry.

Figure 5.
Figure 5.

Services exports by sector and income group

Citation: IMF Working Papers 2017, 077; 10.5089/9781475589887.001.A001

Notes: High-, Middle-, Low-Income country groups follow the World Bank’s country income classification. Sources: BPM6, and authors’ calculations.

Indeed, recent evidence suggests that expanding modern services may be a remedy for countries facing the “middle-income trap”. This would work in practice, when traditional sectors with low productivity shed labor, and high productivity modern sectors (be they in goods or services) grow and hire more labor. Both processes are needed if a country is to climb out of the middle-income trap (see Flaaen, Ghani and Mishra, 2013).

3.3 Geographical regions

This section examines the evolution of trading services from a regional perspective. The intention here is to recognize that a country’s experience with exporting services depends not only on its stage of development and income level, but also the geographical region it belongs to. As we will see below, the experience of Asia over the last two decades is a very good point in case.

Europe is still the leader in services export. East Asia and Pacific region has been catching up and has recently become more significant than North America, a phenomenon primarily driven by Japan and China (Figure 6, Panel A). There is rapid inter and intra-sectoral reallocation taking place into services within South Asia (SAR), Latin American countries (LAC) and Middle East and North Africa (MENA) too. Figure 6 Panel B, illustrates the evolution of services export by individual sectors across geographical regions of the world. The charts show that East Asia & Pacific are catching up in sectors such as Travel and Intellectual Property. South Asia is catching up faster in Computer and Information services. MENA countries are impressively also catching up fast in export of Business and Computer and Information services. While North America and Europe dominate across a variety of service exports, Asian countries are fast catching up.

Figure 6.
Figure 6.

Export Services by Geographical Region

Citation: IMF Working Papers 2017, 077; 10.5089/9781475589887.001.A001

Notes: Geographical regions are classified using the IMF’s World Economic Outlook classification system.Sources: BPM6, and authors’ calculations.

In reality, services account for a greater proportion of global trade and the export of services are a crucial component of productivity growth. Europe (which is the largest commercial service exporter) has two-thirds of its total GDP in the services sector, and for four-fifths of growth in recent years is due to the services sector (see e.g., Uppenberg and Strauss, 2010). Similarly, over 70 percent of the surge in labor productivity in the US economy post 2000 is attributed to productivity gains in services (see e.g., Bosworth and Triplett, 2008). Productivity growth driven by services requires both fixed investment in building and ICT technologies, but also requires intangible capital in terms of new computer software and skills in other disciplines so as to create new organizational structures and business models, sometimes based entirely on services7.

3.4 Country trends

The growth in services export for some countries has been astonishing with almost 100-fold increase in the last 30-40 years. Table 2 lists the top service exporters in the world reporting the export value (in billions of current US$) and world rank based on export value for respective years. The United States has remained the top services exporter while Europe as a region is the largest service exporter. Several European nations are near the top of the list, but many developing countries are catching up fast. China, India, are in the top 10, whereas Thailand, Brazil, Indonesia, Egypt are in the top 30 and moving up rapidly.

Table 1.

BPM6 Service Credit Account Categories

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Sources: BPM6, IMF.
Table 2.

Largest service exporters in the world (in billions of current US$)

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Sources: BPM6, World Economic Outlook, and authors’ calculations.

At the sectoral level, the dynamics of the largest exporters is also rapidly evolving. Figure 7 illustrates patterns for the top exporters across various exporting sectors. The United States is still one of the top exporters in many sectors, while the UK, France, Germany and some other European countries are key players too. Emerging countries like India and China show larger role in service exports in Transport, Travel and IT. In addition, Hong Kong has emerged as a prime Financial services export hub, similarly, Israel a Computer services export hub and Thailand in Travel services. These are only a few examples to demonstrate our new dataset’s usefulness in exploring in more detail and depth the country-specific experiences with trade in services.

Figure 7.
Figure 7.

Top service exporters of selected sectors

Citation: IMF Working Papers 2017, 077; 10.5089/9781475589887.001.A001

Sources: BPM6, and authors’ calculations.

Figure 8 presents the share of country services export in world services export market in 1990 and 2014. It is clear that the importance of advanced economies like United States, France or Germany has declined significantly in world service export market (from 20 tol4, 10 to 5, and 7 to 5 percent, respectively). Other emerging markets like China, India, Singapore, Korea, and Hong-Kong have increased from almost negligible in 1990 to significant positions in 2014 (4.8, 3.2, 2.9, 2.3, and 2.2, respectively).

Figure 8.
Figure 8.

Share of service exports in world service exports

Citation: IMF Working Papers 2017, 077; 10.5089/9781475589887.001.A001

Notes: The Euro Area as a whole occupied the biggest world market share of almost 16% in 2014 (not shown in chart). Sources: BPM6, and authors’ calculations.

The United States has been the world leader in services export. Traditional large sectors such as Travel and Transport continue to contribute heavily to US services export, even as other modern services have grown quickly such as Business services, Financial services, and the use of Intellectual Property. From the 2-digit level data, the main growing subsectors under Other Business Services are, R&D and Consulting services (Figure 9).

Figure 9.
Figure 9.

United States service exports: 1 and 2 digit levels

Citation: IMF Working Papers 2017, 077; 10.5089/9781475589887.001.A001

Sources: BPM6, and authors’ calculations.

There has been much attention regarding India’s services export miracle defying the conventional laws of structural transformation and economic development (Dehejia and Panagariya, 2014).

Indeed, the share of services export in India has tripled to over 3 percent of world services export during the period 2000-2013. This stands in contrast to China, where export growth was driven by exported goods (Figure 10).

Figure 10.
Figure 10.

Export growth, comparing China and India (2000 is indexed to 100)

Citation: IMF Working Papers 2017, 077; 10.5089/9781475589887.001.A001

Sources: BPM6, and authors’ calculations.

Less known beyond the common impression of being a prime manufacturing exporter is the fact that China has become one of the most important services exporter (rank 5th in the world in 2014), as well as one of the largest services importer. Travel, Transport, and Other Business Services have become the largest exporting sectors for China in the last few years. China has also made progress in exports in Computer and Information and Construction and building significant momentum in other service sectors as well (Figure 11).

Figure 11.
Figure 11.

China service exports: 1 and 2 digit levels

Citation: IMF Working Papers 2017, 077; 10.5089/9781475589887.001.A001

Sources: BPM6, and authors’ calculations.

Turning to India, the largest sectors that dominated exports in this dynamic economy were Computer and Information and other Business services (Figure 12). Indeed, India is the largest Computer and Information service exporter in the world at around US$74 billion in 2014. This is quite impressive and highly unique for an emerging market. However, it is interesting to point out that India is behind China in more traditional export services, such as, Transport, Travel, and Manufacturing services with a gap of over US$60 billion.

Figure 12.
Figure 12.

India Service Exports: 1 digit and 2 digit

Citation: IMF Working Papers 2017, 077; 10.5089/9781475589887.001.A001

Sources: BPM6, and authors’ calculations.

4 Research Applications

This section provides potential research applications using the newly developed dataset. Specifically, we report preliminary evidence of the emerging importance of modern services in the global economy, the role of exporting services in the process of structural transformation, and also consider implications of the upward trend in trading services for macroeconomic volatility, labor reallocation and inequality.

4.1 Modern services

A growing share of world trade takes place without proximity of buyer and supplier. These ICT enabled services are typically called modern services. Many other services, called traditional services, still require proximity of buyer and seller. Services such as Transport, Travel or Retailers still require physical presence, however, they too are gaining from network effects and technology enabled tradability (Loungani and Mishra, 2014). The line between the traditional-and-modern service activities will only become more blurred, with many traditional services becoming modern.

For simplicity, let us classify Computer, Information, Business, Intellectual property and Financial services as modern services. The results are presented in Figure 13. This shift to modern services export has spread across countries at different income levels leading hi-technology services export becoming one of the fastest growing sectors of the world economy. The gains from technological advancement and trade provide lower entry barriers for such modern services to be tradable, and also enable reduced transport costs. The rise of modern services is an important trend concerning global export reallocation, particularly related to growth strategies for developing countries.

Figure 13.
Figure 13.

Modern service exports are one of the fastest growing sectors of the global economy

Citation: IMF Working Papers 2017, 077; 10.5089/9781475589887.001.A001

Sources: BPM6, 2016 UN COMTRADE, and authors’ calculations.

Similarly, Figure 14 Panel A plots the world map where the color denotes the export value in billions of dollars for a country in 2014. The color spectrum of darker blue indicates services export value exceeds US$200 billion, a dark red indicated export values below US$10 billion. It is easy to identify countries like China, Russia, and Australia that have exported US$230, US$66, and US$54, billion respectively. In similar light, comparing the level of services export and relative growth in services export can be viewed in Panel B. The color scheme is the same as above, however, the bubble size represents the compounded annual growth rate of services export between 2000 and 2014. It is interesting to note that many Middle East, African and Latin American countries have witnessed services export growth over 30 percent during this period.

Figure 14.
Figure 14.

World map of service exports

Citation: IMF Working Papers 2017, 077; 10.5089/9781475589887.001.A001

Notes: Panel A shows the service export value in billions of dollars. Panel B represents the bubble size as the compounded annual growth rate of service exports between 2000 and 2014. The color represents US$ amounts. Sources: BPM6, World Economic Outlook, and authors’ calculations.

4.2 Structural transformation

There is also some suggestive evidence that movements in service value added are more correlated to country level GDP growth outcomes. The relation of service growth with overall economic growth has become stronger overtime, hence we highlight results only for latest time period concerning 2010-14. Figure 15 Panel A below plots the average annual growth in services, manufacturing, and agriculture value added against per capita GDP growth for almost all countries in the world between 2010-2014. It is shown that the slope between services and GDP growth is steeper than the relevant slope for manufacturing and agriculture. Specifically, the magnitude of the correlation coefficient is 0.60 between services growth and per capita GDP growth, compared to 0.24 for manufacturing growth versus per capita GDP growth. In addition, the R-square for service value added plot is 0.51 and the R-square for manufacturing value added is 0.19.

Figure 15.
Figure 15.

The contribution of services in economic growth

Citation: IMF Working Papers 2017, 077; 10.5089/9781475589887.001.A001

Sources: BPM6, World Economic Outlook, World Development Indicators, and authors’ calculations.

Our evidence illustrates that exports of services is also associated with higher per capita GDP growth. Figure 15 Panel B plots the average per capita GDP growth between 2010-14 and sectoral export growth. The magnitude of the coefficient on services export growth is substantially higher than other sectors. The coefficient estimates are 0.07 for Agriculture, 0.04 for Mining, 0.08 for Manufacturing, and 0.14 for Services.

4.3 Resilience

Services trade has been more resilient than trade in goods to shocks and financial crisis. Recent evidence from the United States shows that services trade has weathered the financial crisis much better than goods trade. For example, as of February 2009, the value of US goods imports had declined year-on-year by 33 percent and the value of goods exports by 21 percent; services imports and exports each had declined by less than 7 percent. Particularly important to note is that the range of modern services has continued to grow since the crisis. Perhaps more important is the fact that services export from developing countries has been more resilient than from advanced economies.

There are two potential reasons for the resilience of services trade: First, demand for a range of traded services is less cyclical, and second, services trade and production are less dependent on external finance (Borchert and Mattoo, 2009). Similarly, recent research using firm-product destination exports for Belgium has shown that the particular resilience of services is explained by a significantly lower elasticity to demand in export markets. Services exports declined on average 5 percent less than exports of goods following a 1 percent decrease in GDP growth in destination countries for Belgium. Again, modern business services have been substantially more resilient than traditional services (Ariu, 2014).

In this vein, Figure 16 plots the average annual growth in goods and services export for the world, highlighting the crisis years. We note that services export has been more resilient than goods exports globally.

Figure 16.
Figure 16.

Resilience of service exports

Citation: IMF Working Papers 2017, 077; 10.5089/9781475589887.001.A001

Sources: BPM6, NBER, and authors’ calculations.

4.4 Labor reallocation

Trade in services also offers opportunities for labor reallocation and job creation for the decades ahead to address the growing polarization of labor markets. The demand for jobs for the future global workforce would be led by the technology infrastructure that powers the internet and system of network technologies. As automation of routine tasks and codification of job tasks becomes more prevalent and macro-critical, national economies are already starting to reallocate labor based on such consumer preferences and forces of global demand. Evidence from United States and European economies has shown that specialized local labor markets in routine tasks have differentially adopted information technology.

These technical forces have placed low-skill labor into service occupations (employment polarization) and evidence across various recent studies has reaffirmed that earnings growth are at the tails of the distribution (wage polarization), especially at low end of service occupations and at the very high end, with a hollowing out at the middle (Autor, 2010; Autor and Dorn, 2013). Jobs in manufacturing have witnessed a secular decline, not just in advanced economies but across developing economies as well.

For illustration purposes, Figure 17 plots the average annual growth in total employment of countries (for period 2010-2014) against the average annual growth in services export for the same time period. The upward sloping curve has many uncertainties, but provides some support to the hypothesis that on average, countries that experience higher growth in exporting services also experience fast job growth.

Figure 17.
Figure 17.

Labor allocation and service export growth

Citation: IMF Working Papers 2017, 077; 10.5089/9781475589887.001.A001

Sources: BPM6, ILO, and authors’ calculations

4.5 Income inequality

Finally, export of services may be more inclusive than the traditional goods based model of the world economy that is well accepted. Figure 18 plots the level of Gini coefficient (Solt, 2014) as an average for 1980-2014 against the average natural log of services export, across a large number of developing and advanced countries. The second chart shows the relationship between inequality and services exports in percent of GDP. Interestingly, it is shown that there is a negative correlation between the change in export services and income inequality. An explanation could be related to the previous discussion on labor reallocation which may trigger an upward labor mobility benefiting primarily low- and middle-income workers. Another plausible explanation is that female labor employment increases in countries with a sizable export service sector, thereby providing a downward pressure in gender inequality which in turn translates to lower income inequality. Examining these and other potential mechanisms by which export services could play a catalytic role in reducing inequality is a promising area of future research.

Figure 18.
Figure 18.

Inequality and service exports

Citation: IMF Working Papers 2017, 077; 10.5089/9781475589887.001.A001

Sources: BPM6, UNU-WIDER, and authors’ calculations

5 Conclusion

This paper constructs a novel dataset on trade in services covering 192 countries from 1970 to 2014 drawing on information from the IMF’s Balance of Payments Statistics (BOPS). Using this new dataset, the paper then proceeds by assembling a rich set of stylized facts and emerging patterns on export services for the world as a whole, different country-income groups, geographical regions, and several selected country cases. Finally, research applications are outlined, including those on structural transformation, macroeconomic volatility, labor reallocation, and inequality.

The evidence from the analysis in this paper makes the case that trade is rapidly shifting away from manufacturing and into services. Could this be a good thing for the global economy which for so long depended on the stable engines of manufacturing production and exports? Could the future wealth of nations be written on the technological foundation and dynamism of exporting services? The industrial revolution built the manufacturing process with the steam engine, division of labor, electricity and mass manufactured production. The post WWII era provided the foundations of modern day computing and electronics. Today, structural changes are putting services at the center of world commerce, heralding a service revolution. Evidence from this paper suggests that export of services may indeed be a game-changer, offering an opportunity to revive and sustain globalization. Thanks to the growing tradability of services, service led growth could be the new norm for countries seeking an alternative growth strategy where manufacturing resources are exhausted. And in that case the economics literature on international trade agreements based on tariff agreements covering trade in goods should be revisited to seriously consider trade-in-services agreemets (Staiger and Sykes, 2016).

Technological innovation is increasingly making services exportable at low prices, and thus causing a shift in a 60-year-old economic paradigm about tradable versus nontradable sectors (Meade, 1956; Swan, 1960; Corden, 1960), in that countries do not need to build a domestic market or invest first in a manufacturing sector, but rather “leapfrog” directly to exporting services. In such a case, service globalization offers new hope for countries at various stages of economic development. Growing tradability of services may help with the diversification strategies for resource-rich countries and low-income countries that are highly concentrated exporters. For advanced economies, harnessing the benefits of trade in services will likely remain a key factor to retaining their global competitive edge that powers the internet, and high value components in global value chains.

World Trade in Services: Evidence from A New Dataset
Author: Mr. Prakash Loungani, Mr. Saurabh Mishra, Mr. Chris Papageorgiou, and Ke Wang