Services play a vital role in economic transformation and job creation in poor countries, but the effects are different from those in agriculture or manufacturing. While much of the discussion on economic transformation centres on transforming agriculture and moving into manufacturing, services are an under-explored component of economic transformation strategies.

This set of essays analyses the role of services, and especially trade in services, in economic transformation. The essays are divided into three parts. The first set of contributions is about understanding the role of services in economic transformation and what the donor community could do over the next few years to support increases in economy-wide productivity and employment by focusing more on services policies and the performance of services sectors. The second part discusses the need to improve data on trade in services and where the focus should be. The third and final part examines ways to support developing countries through trade agreements and preferential access to markets, and help poorer countries benefit from greater trade opportunities. What should be the priorities for promoting services trade and providing services preferences for developing countries?

Key findings and policy suggestions

• While much of the discussion on economic transformation centres on transforming agriculture and moving into manufacturing, services are an underexplored component of economic transformation strategies.

• Services play a vital role in economic transformation and job creation in poor countries, but the effects are different from those in agriculture or manufacturing. Services affect developing countries, directly in the form of significant shares in gross domestic product, trade and foreign exchange, but also indirectly through productivity growth and enabling linkages with other sectors.

• Trade in services can support economic transformation. Notable examples of successful expansion of trade in services include the development of diversified financial services hubs in Kenya, health and business tourism in Mauritius, information and communication technology services in India, air transport in Ethiopia, and hydropower transmission services in Lesotho.

• Donors should focus more on enhancing their knowledge and understanding the relevance of a competitive services sector for the achievement of development goals, specifically through economic transformation and job creation. They can do this by supporting improvements in market intelligence, trade and regulatory data related to services; developing national export strategies in services; building a conducive policy environment in developing countries, including by setting up public-private dialogue and coalitions supporting services reform; and strengthening country capacity to collect data on services.

• The lack of quality data is a particular hindrance to policy-making in the area of services. Some data have begun to be available, including through recent support by donors, but further improvements on trade in services should focus on:

  • capturing all the modes of trade in services;

  • tracking south-south trade in services;

  • reconciling firm-level and national-level data; and

  • improving information on applied services policies.

• Trade policy is important. Openness leads to higher productivity in services firms, especially in least developed countries (LDCs), especially with appropriate domestic regulation. International negotiations in services can also support services trade in the poorest countries, including by giving preferential access to LDC exports (for example, facilitating market access by reducing the cost of visas and putting in place domestic support mechanisms to assist LDC providers to deal with administrative requirements). However, very few meaningful preferential trade measures have so far been offered in areas of comparative advantage of LDCs such as tourism, travel, construction and Mode 4.

• Aid for Trade for services is generally limited as a share of total aid. Targeting more aid to facilitate trade in services has great potential to be effective.

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Background

This essay collection follows a working paper on services trade and economic transformation and a roundtable event held at the London office of the Department for International Development in November 2016.

The aim of the roundtable, organised in collaboration with the Department for International Development (DFID), the Supporting Economic Transformation (SET) team at the Overseas Development Institute (ODI), was to unpack key challenges and opportunities for trade in services in developing countries and identify what DFID could do to support services.

This collection has been edited by Professor Bernard Hoekman (European University Institute) and Dr Dirk Willem te Velde (ODI; Director of the SET programme). All views expressed are those of the authors alone and do not reflect the views of DFID, ODI or indeed all the organisations represented.

Download the SET Essay Series here: Trade in services and economic transformation: A new development policy priority (PDF)