The promise of modern services in traditional economies

The process of structural transformation in the now industrialized economies was generally linear, moving first from agriculture to manufacturing and then from manufacturing to modern knowledge-intensive professional services. But growth in less industrialized countries over the past three decades has not followed this pattern. “Modern” services have provided opportunities for productive growth in “traditional” economies, i.e. those that do not have a large manufacturing baseeither by meeting final demand abroad or by taking advantage of domestic demand from sectors other than manufacturing. These opportunities, in turn, have contributed to job creation.

Meet demand in foreign markets

Much like manufactured goods, the production of modern services – computer programming, business process outsourcing (BPO) and knowledge process outsourcing (KPO) of accounting, architectural and engineering services – is fragmented across countries. This can occur when development, maintenance and training for software-related code is performed in one country and digitally delivered to customers in another. This labor cost trade-off is reflected in the inverse relationship between the share of cross-border delivery (i.e. “mode 1” trade under the General Agreement on Trade in Services Trade Organization) in total exports of information and communications technology (ICT) and professional services and per capita income levels (Figure 1). Service providers in some developing economies, such as India, the Philippines, Ghana, Costa Rica and Lebanon, have particularly benefited from the export of offshore services.

Figure 1. Developing economies have benefited from offshore business services exports

Share of cross-border delivery in total exports of ICT and professional services relative to per capita income levels, 2017

Source: Author’s calculations based on WTO’s TiSMoS database and World Development Indicators.

BPO services have played a pivotal role in the evolution of the Philippines from an agriculture-based economy where manufacturing has played only a limited role. Costa Rica has been a pioneer in attracting offshore BPO services to Latin America, and Ghana has become the first BPO hub in sub-Saharan Africa. Similarly, Lebanon has become a regional hub for exporting financial services to the Arab world. India has long been the benchmark for exporting software and other KPO services. And it is now home to a quarter of the world’s online freelancers on English-language workforce outsourcing platforms, such as Upwork and Freelancer.

Leverage links with sectors other than manufacturing

Modern professional services, either upstream (R&D and product design) or downstream (branding and advertising), increasingly represent a large part of the added value in the supply chain of manufactured goods. And firms in industrialized countries have used their established manufacturing core to diversify into related but higher value-added services. For example, traditional manufacturing companies such as Apple, Dyson or H&M locate R&D, design and branding departments at their headquarters in the United States or Europe, while largely offshoring production jobs to sites in lower cost.

In less industrialized countries, links with sectors other than manufacturing industry have largely contributed to the growth of these modern services. For example, Chile has used its mineral resources to diversify into providing sophisticated engineering services. And Uruguay now exports advanced information technology (IT) services for the livestock industry. There is also a range of information and IT services embedded in mobile phone applications that are often linked to other services, such as retail, hospitality and entertainment. This app development market, supported by local linguistic and cultural considerations, is booming everywhere, including in sub-Saharan Africa and South Asia.

The jobs dividend

Opportunities for productive growth among modern professional services are associated with job creation. For example, the wage share of business services exports from the Philippines exceeds that of ready-made garments exports from Bangladesh. The share of wages going to unskilled workers is, however, lower in the former than in the latter. For every $1,000 of ready-made clothing exports from Bangladesh, about $160 can be attributed to the added value of unskilled labour. For the same value of Philippine business services exports, less than $90 can be attributed to the value added of unskilled labour. This skills bias narrows with indirect job creation from linkages with other sectors. When a sector’s inputs into economy-wide production are included, the contribution of value added generated by unskilled labor for every $1,000 of exports is $130 USD for business services in the Philippines, compared to USD 160 for clothing in Bangladesh (Chart 2).

Figure 2. Labor value added content in exports: Bangladesh garment industry versus Philippines business services sector, 2015

Figure 2. Bar chart of labor value added content in exports: Bangladesh garment industry versus Philippines business services industry, 2015

Source: Authors’ calculations based on World Bank Labor Content of Exports database.

In conclusion, the growing promise of ICT and other professional services should not be forgotten in economies without a large manufacturing base. On the contrary, the advent of digitalization during the pandemic has given new impetus to those sectors where remote delivery is possible, opening up new opportunities for service-led growth. Even traditional economies need to capitalize on this boost provided by modern services.

Previous Complex negotiations to get grain out of Ukraine
Next A Sydney team's ambitious plan to use a submarine to rescue a wreck of refugees