The rise of services prompts developing countries to look beyond manufacturing-led exports and enable productivity growth across the economic system.
© Shutterstock/Alessandro Biascioli | Creative services exports, already surpassing the trillion-dollar mark in 2022, are a crucial driver of global trade.
Service exports, now representing 25% of world trade, offer a bright spot amid a subdued global economic outlook.
In 2023, trade in services expanded by 5% in real terms, contrasting a 1.2% contraction in merchandise trade, according to the Trade and Development Report 2024.
As a development strategy, services are gaining more traction than manufacturing, a longstanding growth engine for middle-income countries.
“This is largely because the comparative advantage of cheaper, less-skilled labour no longer aligns with the reliance of modern manufacturing on skill- and capital-intensive production,” the report notes.
“Additionally, industrialization is increasingly scrutinized for its large ecological footprint and contributions to climate change.”
North-South gap risks widening
The dawn of a service economy could be a game changer for developing countries, but not without challenges.
Currently, developing economies account for under 30% of global services export revenues and 44% of merchandise trade.
With services and intangible assets – such as brands, designs and patented technologies – getting prominence in global value chains, asymmetries between developed and developing regions could worsen.
Market concentration in the creative services trade is a case in point. In 2022, creative services were valued at $1.4 trillion, four fifths of which came from developed countries.
The predominance also manifests in the geography of multinational firms providing international services.
In 2022, 70% of these companies were headquartered in developed regions, compared to just 10% in developing ones excluding China.
Recalibrating development strategies
Current trade in services cannot generate enough quality jobs in developing countries, urging a policy shift towards green transition and promoting labour-absorbing activities in the service sector.
To this end, the UN Trade and Development (UNCTAD) report recommends a three-pronged strategy to expand productive employment in services, focusing on:
- Encouraging lower-skill job creation by larger firms in non-tradable services
- Providing public inputs and access to productivity-enhancing investments for small businesses
- Investing in technologies that complement, rather than replace, low-skilled workers in the service sector