The Strategist

Study: Services exports may become new growth source for developing countries

02/14/2020 - 07:13

Development of new technologies leads to automation and localization of production, while competition in services markets, on the contrary, becomes more global. This trend will change economic growth strategies for developing countries, the authors of a study published by the National Bureau of Economic Analysis (NBER) believe. The advantage will be given to countries with cheap labor since this will allow them to increase the export of services.

Jamie Tubers via flickr
Jamie Tubers via flickr
Globalization and development of robotics will have a significant impact on how economies develop: vigorous industrialization and export-oriented products will lose their relevance, while an alternative scenario based on the export of services will become more popular, according to a preprint study by Richard Baldwin from the University of Stockholm and Rikard Forslid of the Geneva Graduate Institute, published by the National Bureau of Economic Research (NBER). Researchers cite China and India as examples of two scenarios. In the first one, from 1990 to 2012, the contribution of production to GDP growth was 5.2%, services - 4.3%, the agricultural sector - 0.8%, and in India, the average contribution of production was 1.2%, while 4.7% accounted for services.

The main changes will be related to the fact that services are increasingly being traded (traditionally, this definition applies only to goods in which international trade is conducted).

“This will allow developing countries to compete directly through the cheapness of their labor resources, without first converting it into goods,” the authors note. Production will gradually turn into the same area as oil production - goods produced using robots will create value and exported, but the number of people employed in this area will be insignificant. In addition, digitalization makes it easier to localize the processing process.

In most developed countries, the peak of employment in the industrial sector was passed back in the 1970s.

At the same time, it was the removal of industries abroad to developing countries that significantly reduced the gap in income and level of development. The rapid growth of the latter, in turn, has supported exporters of energy resources. Now, according to the authors' forecast, employment in developed countries will shift to sectors where personal contact is required (“protected” segments of the service market), while developing countries will see an outflow from production and the agricultural sector to export-oriented segments of the service sector.

Besides, the researchers expect no increase in the gap between developed (more technologically advanced) and developing countries, on the contrary, noting that exporting services will strengthen income equalization, and all added value to a greater extent will be created through knowledge (human capital and intellectual property rights) rather than capital in the form of fixed assets. However, unlike the introduction of new production technology, the formation of competencies is a longer process, the economists warn.