Go straight to services?

It is easy to envision a future where manufacturing industry hops from one country to the next in a search of lowest cost of production. However, in a recent article* three respected individuals** have suggested that this cycle may not hold true for the future, saying that it may be that countries can miss out the manufacturing stage and go straight to the services level. Is the attack of the low-cost producers on the wane? Services were considered menial, low-skilled and low-innovation, but, today, can be among the most dynamic sectors in an economy, they say, concluding that this is even true for poor countries. In fact, services are now the fastest growing part of global trade, with the share of developing countries in world service exports having increased from 14% in 1990 to 21% in 2008, it is highlighted. The average growth of service exports from poor countries has exceeded that of rich countries during the last two decades and, critically, their service exports are growing faster than goods exports. Services are divided into two broad categories – modern services and traditional services. Modern services, which are information communication technology (ICT) intensive, can be unbundled, disembodied and splintered in a value chain, just like goods. They can be electronically transported internationally through satellite and telecom networks. The other category is traditional services, which are not ICT-intensive. It is modern services that are developing rapidly, thanks to growing tradability, more sophisticated technology and reduced transport costs. Of total services exports of $3.5 trillion in 2007, modern commercial services accounted for $1.73 trillion. ICT has made modern services more tradable for all countries, but particularly for poor countries. India is the main example cited, but, during the last decade, Rwanda, Swaziland and Burundi, for example, have experienced growth rates in aggregate service exports that are even higher than India's. Of course, the success of service industry in these countries could be the flip side to a failure in manufacturing, which is what The Economist has suggested, citing India as just such a country where policies have helped services, but hindered manufacturing. And India has, as it happens, just recently announced a manufacturing strategy, saying that it wants manufacturing to be 25% of GDP by 2025, as against the current 15-16% – about a 1% increase per year, then. What is probably true is that obtaining growth through ICT-based services has been a faster, easier route to success for some, but that manufacturing is still part of a rounded economy's mix, viz India's thinking (see also, Last Word, August, 20011, page 42). So, not all one thing or the other: it's a matter of a balanced economy, you might say. An increasingly common phrase, I believe. * Service with a smile: A new growth engine for poor countries http://www.voxeu.org/index.php?q=node/6459 **Ejaz Ghani, economic advisor at the World Bank; Arti Grover, consultant, International Trade Department, World Bank; and Homi Kharas, senior fellow in global economy and development, Brookings Institution First published in Machinery, September 2011