The ability to trade services has increased significantly thanks to technology: service exports now account for almost a quarter of total exports. Service exports have also come to play a central role in global production networks and value chains. A new dataset and toolkit document these important trends in the future wealth of nations. The rise in services exports is not confined to advanced economies; services exports have grown ten-fold since 1990. Services may thus be a game-changer, offering an opportunity to sustain globalization.
In “The Wealth of Nations,” Adam Smith questioned the social value provided by “lawyers, men of letters of all kinds, … musicians, opera-singers, etc.” He was expressing a prejudice against the service sector that holds to this day. Christina Romer lamented in an op-ed that there is a “feeling that is it better to produce ‘real things’ than services” (New York Times, Feb. 4, 2012). Meanwhile, services— which already account for 70 percent of world GDP and 50 percent of employment—are also becoming an important part of trade. In 2014, service exports accounted for nearly 25 percent of total exports (Figure 1). Services exports have also come to play a central role in global production networks and value chains.
While a haircut still requires a trip to the local barbershop, many other services no longer require the provider to be close to the customer. Financial services are global and many consulting services, such as architectural designs, can be delivered from anywhere. The main reason for the increased tradability of services is the revolution in information and communication technologies. Rapidly declining telecommunication costs, increasing internet adoption around the world, and rapid proliferation of broadband internet services have made arm’s length delivery of services possible within and across borders.
Since many countries can take advantage of these technological advances, the rise in services exports is not confined to advanced economies. Services exports from developing countries have grown tenfold since 1990 and at twice the rate of services exports from advanced economies; hence, developing countries’ share has increased from 3 percent in 1970 to over 20 percent in 2014 (Figure 2). This increase is not just due to higher exports of traditional services, but is also due to modern technology-enabled services as well, e.g., business services (including R&D and consultancy), computer and information services, financial services, and intellectual property.
As a result of these developments, a nascent literature has begun to challenge the long-held tenet that industrialization has to be the prime engine of growth for emerging markets and low-income countries. This classical view holds that the manufacturing sector promotes broad economic growth (Kaldor, 1967) while the services sector is resistant to improvements in productivity (Baumol, 1967). This argument was based on the assumption that the provision of services—such as restaurant meals, haircuts or medical checkups—required face-to-face transactions. These services did not lend themselves easily to standardization and trade—the source of growth in productivity and hence incomes.
Technology allows for services to be increasingly unbundled; a single service activity can now be fragmented into tasks that are done at different geographic locations. Adam Smith described how the productivity of a pin factory was boosted if, instead of one worker doing all the tasks involved in making a pin, several workers each specialized in a particular task, and then combined the fruits of their labor. A similar process of specialization and exchange is underway in many service industries. As with goods, services productivity can rise because of specialization (a finer division of labor) and scale (falling unit costs of production). Indeed, recent evidence highlights that services seem to experience productivity growth through the same 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).
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