MARKETS Source: CTBUH / RoMF

Service with a SmileLearning Event on “Trade and Regulation in Services in Africa” Ethiopia,

June 5, 2013

Ejaz Ghani & Arti Grover

An outline

• Can services contribute to growth, jobs and poverty reduction in low income countries?

• Is tradability of service increasing?• How important is service sector for Africa’s

development? Can Africa take advantage of the globalization of service?

• Policy toolkit: Institutions/regulation; Infrastructure; International business engagement (trade and investment); Innovation and education.

Can service be a driver of growth in low income developing countries?

Can service create jobs?

Can labor productivity grow in services sector?

Industry, Developed

Industry, Low Developing

Services, Low Developing

Services, Developed

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51

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Pro

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ctivity G

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1990 1995 2000 2005 2010Year

Comparing Labor Productivity Growth across sectors

Is service productivity contingent on the stage of development? Ethiopia, and Lesotho are just as likely to excel in services,

compared to industry, as rich countries like Hong Kong and Bulgaria.

ALB

ARG

ARM

AUS

AUT

AZE

BEL

BGR

BLZ

BOL

BRA

BWA

CANCHE

CHL

CHN

COL

CRI

CYP

CZE

DEU

DNKDOM

DZA

EAP

ECA

ECU

EGYEMUESP

EST

ETH

FIN

FRA

GBR

GEO

GRC

HIC

HKG

HND

HRV

HUN

IBDIDN IRL

ISLITA

JAM

JOR

JPN

KAZ

KGZ

KOR

LAC

LKA

LSO

LTU

LUX

LVA

MAR

MDA

MEXMKD

MNG MUSMYS

NIC

NLDNORNZL OEC

PAK

PAN

PER

PHL

POL

PRTPRY ROM

RUS

SAU

SGP

SLV

SUR

SVK

SVN

SWE

SYR

THA

TJK

TTO

TUR

UKR

UMC

URY

USA

UZB

VEN

VNM

YEM

ZAF

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19

91

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6 7 8 9 10 11Log of real per capita income, 1990

Development Level and Productivity Difference Across Sectors

Is tradability of services increasing in low income countries?

Low Developing

Developed

68

10

12

Se

rvic

es E

xpo

rts to V

A, in

perc

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1990 1995 2000 2005 2010Year

Services Tradability

Can low income countries trade Modern ICT intensive Services?

Developed

Low Developing

30

35

40

45

50

55

Mo

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er.

Exp

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Ag

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Se

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xport

s, in

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1990 1995 2000 2005 2010Year

Modern Services Tradability

Can services be as sophisticated as goods?

Modern Services

Goods

Traditional Services

50

00

10

00

01

500

02

000

0P

RO

DY

1990 1995 2000 2005 2010Year

Trend in PRODY

PRODY Decomposition

So where is Africa in the Service Revolution?

How large is service sector in Africa?

Is Africa’s Service sector expanding?

Is Africa’s service export growing?

How tradable is Africa’s service sector?

Is Africa doing well in modern and traditional services export?

There is a new boat in town.

• The marginalization of Africa during a period when China, India, and other East Asian countries grew rapidly has led some to wonder if late-comers to development like Africa are doomed to failure. Many considered the “bottom billion” to be trapped in poverty (Collier 2007). The process of globalization in the late 20th century led to a strong divergence of incomes between those who industrialized and broke into global markets and a bottom billion” of people in some 60 countries where incomes stagnated for twenty years.

• In both developed and developing countries the services sector is now the dominant source of economic growth and job creation.

• Service offers several advantages over manufacturing. They can more readily employ women and are less likely to despoil the environment. Located in big cities, they accelerate urbanization.

• Modern services are less vulnerable to protectionism than either traditional services, such as lawyers, or goods, both of which require physical entry to the foreign market.

• A toolkit of policies to rapidly improve developing countries’ services productivity exists.

Service-led growth can be sustained

• Service-led growth is sustainable because the globalization of services is just the tip of the iceberg (Blinder 2006). Services are the largest sector in the world, accounting for more than 70% of global output. Developing countries can sustain service-led growth as there is a huge room for catch up and convergence.

• The Services Revolution could upset three long-held tenets of economic development. First, services have long been thought to be driven by domestic demand. They could not by themselves drive growth, but instead followed growth. Second, services in developing countries were considered to have lower productivity and lower productivity growth than industry. Third, services jobs in developing countries were thought of as menial, and for the most part poorly paid, especially for low skilled workers. As such, service jobs could not be an effective pathway out of poverty.

• The promise of the service revolution is that countries do not need to wait to get started with rapid development. The globalization of service provides alternative opportunities for developing countries to find niches, beyond manufacturing, where they can specialize, scale up and achieve explosive growth, just like the industrialisers.

But don't skip on jobs

• Modern services require skilled workers, not the unskilled type that poor countries have in abundance. In South Asia, service workers typically have one to three more years of education than industry workers. In modern services, school grades or a university degree are often necessary. The flip side of their high productivity is that modern services employ relatively few people. Just 2m of India's population of 1.2 billion work in information technology; in the rest of South Asia, only 100,000 do. That is one reason why India is still keen to promote manufacturing, which is also booming.

• For many countries, the success of services can be an indictment of their failure in manufacturing. In India and Sri Lanka, restrictive labor laws have hamstrung the emergence of a more competitive manufacturing base. In contrast India helped its information-technology sector by declaring it an essential industry and lifting the prohibition on operating around the clock in some states. In South Asia services have benefited from investment in telecoms infrastructure, as measured by the number of phone lines and personal computers per 100 people, whereas manufacturing is held back by a shortage of paved roads.

• Manufacturing still holds the most promise for millions of reasonably well-paying jobs. For those not so lucky, at least there's an alternative.

So what should Africa do? Is there a Toolkit?

• Develop Service Export Strategy • Develop the infrastructure needed to promote service export. Although the same

set of general non-distortionary policies is as important for modern services as for goods, specific strategies for services matter. Modern services need a strong telecommunications backbone and more advanced education (secondary and higher).

• Specialization, outsourcing, privatization, disintermediation, supply chain, interoperability, performance based standards, deregulation

• Reduce the barriers that African service firms face in regional service trade. • Increase engagement by business in the delivery of services, including ‘essential

services’ formerly delivered by government • Competition policy and interoperability • Globalization of services provides many opportunities for late-developing

countries to find niches where they can be successful. Taking advantage of these opportunities requires a government that energetically takes steps to accelerate services growth, through a variety of active policies. Services may provide the easiest and fastest route out of poverty for many poor countries.

Reference

• Economics focus: The service elevator | The Economist• http://siteresources.worldbank.org/INTAFRREGTOPTRADE/Resources/Can

_Kenya_become_global_exporter_business_services_31May.pdf• Oxford University Press: The Service Revolution in South Asia: Ejaz ...• Determinants of Competitiveness and Factors affecting Productivity • Services-led growth in India: A new hope for development late ... – Vox• Economic Premise – Promoting Shared Prosperity in South Asia.• The Service Revolution - World Bank Internet Error Page AutoRedirect• Developing the Services Sector as Engine of Growth for Asia• Are China and India Converging? « The Global Dispatches• The Service Sector in Lower-Income Asian Economies• The Spatial Development of India - Princeton University• Export Promotion Council (EPC) & World Bank (2009). Services Exports Study: Assessment of Kenya‘s

Export Potential and Supply Capacities in Selected Professional Service Sectors. • Government of Kenya (GOK) & Export Promotion Council (EPC) (2008). Strategy for Export Promotion of

Professional Services in Kenya.• World Bank (2010a). Reform and Regional Integration of Professional Services in East Africa: Time for

Action. • World Bank (2010b). Towards a Regional Integration of Professional Services in Southern Africa.