The promise of modern services in a traditional economy

The process of structural transformation in now industrialized economies has generally been 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, that is, in countries without a large manufacturing base.either by serving final demand abroad or by leveraging domestic demand in sectors other than manufacturing. These opportunities, in turn, contributed to job creation.

Servicing demand in foreign markets

Like manufactured goods, the production of modern services—computer programming, business process outsourcing (BPO), and knowledge process outsourcing (KPO) of accounting, architecture, and engineering services—is fragmented by country. This can happen when the development, maintenance, and training of the code associated with the software is done in one country and delivered digitally to customers in another. This labor cost arbitrage is reflected in the inverse relationship between the share of cross-border supply (i.e. “mode 1” trade under the World Trade Organization General Agreement on Trade in Services) in total information and communication technology (ICT) exports and professional services and per capita income level (Fig. 1). Service providers in some developing countries, such as India, the Philippines, Ghana, Costa Rica and Lebanon, have particularly benefited from the export of offshore services.

Figure 1. Developing countries increased exports of offshore business services

Share of cross-border shipments in total ICT and professional services exports compared to per capita income, 2017 Figure 1. Bitmap: Developing countries use the export of offshore business services

Source: Author’s calculations based on the WTO TiSMoS database and world development indicators.

BPO services have played a key role in the evolution Philippines from an economy based on agriculture, where production played only a limited role. Costa Rica was a pioneer in attracting offshore BPO services in Latin America, and Ghana has become the leading BPO center in sub-Saharan Africa. Similarly, Lebanon has emerged as a regional hub for financial services exports in the Arab world. India has long been a model for exporting KPO software and other services. And it now employs a quarter of the world’s online freelancers on English-language workforce outsourcing platforms like Upwork and Freelancer.

Leveraging links with sectors other than manufacturing

Modern professional services—either upstream (R&D and product design) or downstream (brand and advertising)—increasingly account for the majority of value added in the industrial supply chain. And firms in industrialized countries have used their established manufacturing core to diversify into related services, but with higher value added. For example, traditional manufacturing firms such as Apple, Dyson, or H&M locate R&D, design, and branding services at their US or European headquarters, while generally shifting manufacturing jobs to cheaper locations.

In less industrialized countries, links with sectors other than manufacturing have made an important contribution to the growth of these modern services. For example, Chile used its mineral resources to diversify into the provision of sophisticated engineering services. As well as Uruguay currently exports advanced information technology (IT) services for animal husbandry. There are also a number of information and computing services embedded in mobile phone applications that are often linked to other services such as retail, hospitality and entertainment. This application development market, supported by local language and cultural considerations, is flourishing everywhere, including in Sub-Saharan Africa and South Asia.

Jobs dividend

Opportunities for productive growth among modern professional services are related to job creation. For example, the wage share of business services exports from the Philippines exceeds the wage share of Bangladesh’s garment exports. However, the wage share of unskilled workers is lower in the former than in the latter. For every $1,000 of Bangladeshi ready-made clothing exports, about $160 is value-added unskilled labor. For the same value of business services exports from the Philippines, less than $90 can be attributed to the value added of unskilled labor. This skills bias is narrowed by indirect job creation through linkages with other sectors. When the economy-wide production costs of the sector are taken into account, the value-added contribution of unskilled labor for every $1,000 of exports is $130 for business services in the Philippines compared to $160 for clothing in Bangladesh (Figure 2) .

Figure 2. Value added of labor in exports: Bangladesh ready-to-wear production versus Bangladesh ready-made clothing production. Philippine Business Services Sector 2015

Figure 2. Histogram of labor value-added content in exports: Bangladesh ready-made clothing production and Bangladesh ready-made clothing production.  Philippine Business Services Sector 2015

Source: Authors’ calculations based on World Bank export labor intensity database.

In conclusion, in countries that do not have a large industrial base, one should not forget the growing prospects for ICT and other professional services. If anything, the emergence of digital technologies during the pandemic has given new impetus to sectors where remote delivery is possible, opening up new opportunities for growth through services. Even traditional economies should benefit from this momentum provided by modern services.