Services have been an increasingly important sector, which currently dominates many economies. Changes in demand, structural transformation, development of technologies, and changing patterns of trade can explain the rise of services. According to the World Bank (2023) data, global value-added services increased from $20 trillion in 1995 to almost $62 trillion in 2021 showing more than 3 times growth. In the same period, employment in services (as % of total employment) increased from 38% to 50%. Differences between countries in terms of service employment are substantial. For instance, in the United States and Germany, shares of services employment in 2021 amounted to 79% and 71% respectively, while in India and Pakistan, it correspondingly equaled 31% and 37%. Trade in services also shows substantial growth. For instance, during the reported period services exports surged from $1.28 trillion to $6.2 trillion, increasing by more than 4.8 times. The World Bank (2021) shows that the services sector is increasingly driving economic transformation, which is possible because of new opportunities for scale, innovation and spillover effects that made manufacturing more productive in the past. The possibilities for remote delivery, branching and franchising, rise of digital technologies increase opportunities for service providers to access larger markets. Thus, the service sector accounts for a large share of output (almost 64% of GDP at the global level) and employment and provides significant trade opportunities.
The services sector in countries of Central Asia follows global trends. Shares of services in Kazakhstan’s and Kyrgyzstan’s GDPs increased substantially and in 2022 were approximately equal to 53% (Figure 1). Kazakhstan’s value-added services increased from almost $6 billion in 1992 to more than $116 billion in 2022, showing more than 19 times growth. In the same period, the indicator of Kyrgyzstan changed from $0.5 billion to almost $5.7 billion (11.4 times growth). In 2021, employment in services in Kazakhstan and Kyrgyzstan amounted to 64% and 57%, respectively (Figure 2). Trade in services in these countries grew significantly compared to the 1990s (Figures 3-4). Services exports from Kazakhstan changed from $0.5 billion in 1995 to $7.9 billion in 2022, while imports increased from $0.8 billion to $9.4 billion. Kyrgyzstan’s services exports increased from $39 million in 1995 to $522 million in 2021, while its imports grew from $195 million to $740 million. Thus, both countries’ services trade balances are negative.
Figure 1. Services value added, % of GDP
Source: The author’s compilation based on the World Bank (2023) data.
Figure 2. Employment in services, % of total employment
Source: The author’s compilation based on the World Bank (2023) data.
Figure 3. Kazakhstan’s trade in services, million USD
Source: The author’s compilation based on the World Bank (2023) data.
Figure 4. Kyrgyzstan’s trade in services, million USD
Source: The author’s compilation based on the World Bank (2023) data.
World Trade Organization (WTO, 2023) distinguishes four modes of services trade, including cross-border trade (Mode 1), consumption abroad (Mode 2), commercial presence (Mode 3), and presence of natural persons (Mode 4). Under Mode 1, services go from the territory of one member into the territory of any other member. For example, a user in one country receives services from abroad through its telecommunications or postal infrastructure. These services may include consultancy or market research reports, tele-medical advice, distance training, or architectural drawings. Mode 2 includes services consumed by individuals abroad. For instance, tourists visit different countries or students choose foreign universities to study. Commercial presence under Mode 3 means that services are provided within a country by a locally established affiliate, subsidiary, or representative office of a foreign-owned and – controlled company such as banks and hotels. Movement or presence of natural persons under Mode 4 means that foreign companies or specialists provide services in a country as independent suppliers. The activity of consultancy firms serves as a good example. According to Shingal (2020), Mode 1, or “cross-border services trade” includes the entire range of services transacted via the Internet, some of which at least continue to be delivered even in work-from-home scenarios. For instance, 43% of the Swiss labor force can work from home due to high levels of development of business services such as insurance and financial services. Similarly, more than three-fourths of India’s (and global) IT services exports are now delivered online. It is worth mentioning that IT services account for close to 40% of India’s total services exports.
Hence, it is important to identify factors that determine trade in services. Firms play a key role in the development of services trade. Service trading companies, in particular those that export their services, are different from goods-exporting businesses. Morikawa (2015), based on data from Japan, shows that service-exporting firms are more productive than non-exporting firms and goods-exporting firms. Millet and Crozet (2015) argue that manufacturing firms are no longer sole goods producers but also supply services. Data from French manufacturing firms show that a vast majority of them produce and sell services to third parties and this trend is steadily growing over time and reflects a deep transformation of the manufacturing sector, which affects firms’ performance and ultimately their competitiveness. According to Mayneris, et al. (2020), many large and successful firms sell both goods and services and are known as bi-exporters. These firms are larger in terms of sales, employees, and product and destination portfolios. Productivity of bi-exporters is higher. Generally, bi-exporters are multinationals. It is worth mentioning that bi-exporters rarely export services in destinations in which they do not provide goods, but the reverse does not hold. Therefore, services act as a demand shifter for the goods by making the product more appealing to consumers. Criscuolo and Breinlich (2010) mention that a natural explanation for the fact that many manufacturing firms export both goods and services is that the two are complements (e.g. a machine is hard to sell without the corresponding maintenance contract). If this is indeed the case, slow progress in liberalizing trade in services will also influence the growth of manufactured goods exports. Mattoo et al. (2013) provide an example of Chilean services companies developing innovations in the sector. For instance, Enaex, a firm that provides rock blasting services to mining companies, has become a global pioneer in optimizing choices of location, explosive mixing and dosage. It created Milodon, the world’s largest truck for mixing and loading explosives, and developed Inteliblast software that processes input data, such as compression and fracture frequency, and determines the type of rock fragmentation strategy. These products allow the Chilean economy to export both manufacturing and services products, diversifying exports and reducing risks. It is important to note that exporters in both manufacturing and services tend to invest more in innovation than non-exporters and be significantly more innovative than non-exporters. The quality of institutions also influences service-exporting firms’ decisions on relocation of their businesses. Fiorini (2015) notes that the institutional quality of destination countries influences service-exporting firms’ decisions. For example, a global provider of telecommunication services, Vodafone, has a direct presence in 21 markets and an indirect presence in 55 markets through partnerships with local firms. Of these 76 markets, 19 (25%) are countries with relatively low institutional quality, while the remaining are countries with relatively high institutional quality. Hence, institutional quality has a positive effect on Vodafone’s decisions. Marcolin et al. (2021) show that when firms export goods, they also incur costs related to service activities such as contacting retailers or distributing their products. These costs combined with firms’ higher export experience increase their propensity to source these inputs from the export destination market, rather than domestically. Market size, better regulations and the rule of law, as well as membership in regional trade agreements also influence firms’ decisions on shifting their business in destination markets. Moreover, firms, offshoring service inputs display higher and less volatile future export volumes and are less likely to exit the export market.
Baldwin (2022) argues that the future of globalization is intermediate services as trade in services continues to boom and shows no tendency to slowdown. China, Ireland, and India experienced miraculous growth rates from 1990 to 2008 – all over 1000%, and China’s growth rate was the highest at 3070%. In the 12 years from 2008 to 2020, several of the big traders enjoyed service-export growth of over 100%. India’s trade in services rose 1740% from 1990 to 2008, and 102% after 2018. Many of today’s service barriers are technological rather than fiscal or regulatory, and digital technologies are rapidly lowering them. Therefore, liberalization of services sector trade remains an important factor for further growth. Togan (2011) mentions that restrictions for services trade are mainly regulatory in nature and individual governments can change this unilaterally. At the same time, many regional trade agreements include measures for services trade liberalization. Multilateral negotiations on services began during the Uruguay Round. The General Agreement on Trade in Services (GATS) was signed in 1995. Currently, Doha offers improved GATS commitments, but at this stage, the gap between offers and actual policy is still large. However, as Monga (2020) argues that despite trade in services has increased faster than trade in manufactured goods since 2011, the current value of global trade in services is only one-third that of manufactured goods, even though services account for 75% of GDP and 80% of employment in OECD countries. He explains the rise of services by the failures of industrialization strategies that were not aligned with these economies’ comparative advantages. Low-skilled services may help many people escape extreme poverty, but they are not reliable engines of growth and sustainable economic development. At the same time, the development of high-skilled business services such as ICT services, financial intermediation, and scientific and technical services will require substantial investments in countries’ human capital. According to Rodrik (2022), the bulk of future jobs will come from services. Hence, governments must focus their efforts on creating productive jobs for less advantaged workers. Moreover, licensing, safety, and other regulations impede enhancing productivity in the service sector. Hence, improving the performance of services needs a reconsideration of service development policy.
Thus, based on the above-mentioned, the following conclusions can be made. Firstly, trade in services is booming and increases faster than trade in goods. Secondly, firms play a key role in global services trade. Service-exporting companies show better results than non-exporting or goods-exporting firms. Currently, the number of bi-exporting firms is increasing. Finally, there is a close link between manufacturing and services development and trade. The development of export-oriented service-based economies will require a strong manufacturing base.
References:
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Criscuolo, Chiara and Holger, Breinlich (2010). International trade in services: A portrait of importers and exporters. Retrieved from https://cepr.org/voxeu/columns/international-trade-services-portrait-importers-and-exporters. Accessed on 10.09.2023.
Fiorini, Matteo, Hoekman, Bernard and Cosimo, Beverelli (2015). Services trade restrictiveness, economic governance, and manufacturing productivity. Retrieved from https://cepr.org/voxeu/columns/services-trade-restrictiveness-economic-governance-and-manufacturing-productivity. Accessed on 10.09.2023.
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World Bank (2021). At Your Service? The Promise of Services-Led Development. Retrieved from https://www.worldbank.org/en/topic/competitiveness/publication/promise-of-services-led-development. Accessed on 16.09.2023.
World Bank (2023). Services. Retrieved from https://data.worldbank.org/indicator/NV.SRV.TOTL.CD?end=2021&start=1995. Accessed on 15.09.2023.
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Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy.