Using a newly constructed dataset on trade in services for 192 countries from 1970 to 2014, this IMF Working Paper shows that services currently constitute one-fourth of world trade and an increasingly important component of global production.

A detailed analysis of patterns and stylized facts reveals that exports of services are not only gaining strong momentum and catching up with exports of goods in many countries, but they could also trigger a new wave of trade globalization. Research applications of the trade in service dataset on structural transformation, resilience, labor reallocation, and income distribution are outlined.

Introduction

The structure of economic production is continuously evolving, with trade in services playing an ever greater role. Services export is an increasingly important component of a nation’s export basket. Services exports are also growing as a share of the world economy. The share of services export in total goods and services export has doubled from around 9 percent in 1970 to over 20 percent by 2014.

Although there are several likely channels that are responsible for driving up demand for world trade in services, none is as instrumental as advances in technological change. Technological innovations provide a wide array of services to be carried out in one location and consumed in many other places. Historically, buyers and sellers needed to be face to face. However, increasingly many services between buyers and sellers can be traded globally across and within borders almost instantly through satellite networks. The internet and other systems of network technologies like mobile phones, big data, and artificial intelligence are providing technical changes to production techniques and business processes. Software has become the main component of all hardware systems. This has given services a physical presence like goods; they can be produced, and stored. But perhaps it is the virtual capabilities of services, such as being transported cheaply and swiftly in binary bits, that make it even more desirable than exported goods. These structural changes are putting services at the center of world commerce, perhaps heralding a new wave of globalization.

Are the drivers of growth and development shifting away from manufacturing into services? It may be too early to tell, but rapid inter-and intra-sectoral resource reallocations are offering new investments opportunities in a variety of tradable service activities. More recently, there is also a growing sentiment in policy and media that the pace of globalization driven primarily by exports in goods, may have started to decelerate after two decades of uninterrupted progress. Could trade in services support a future wave of globalization, trade and growth? These questions have sparked an interest in understanding the implications for trade in services on productivity, jobs and growth, but very little is known about global services trade.

A nascent yet growing body of evidence has begun to challenge the long held tenets of economic development that industrialization is the prime engine of growth. However, due to deeply rooted prejudice against service sector, this classical view still remains prevalent. In The Wealth of Nations, Adam Smith questioned the social value provided by “churchmen, lawyers, physicians, men of letters of all kinds, players, buffoons, musicians, opera-singers, opera-dancers, etc.” Similarly, William Baumol (1967) fostered the view that services are a sector resistant to improvements in productivity. Provision of services – such as restaurant meals, haircuts, and medical checkups – required face-to-face transactions. These did not lend themselves easily to standardization and trade, the source of growth in productivity and hence income. Furthermore, Kaldor (1967) put forth an argument for the supremacy of the industrial sector for the promotion of broad economic growth. Recent evidence highlights that business services seem to allow productivity growth by the same Kaldorian mechanisms that have traditionally made manufacturing the key driver of growth. It is well accepted that the stages of diversification follow a non-monotonic path through the development pathway. India’s idiosyncratic pattern of development has been driven by service-led growth, China’s growth as a manufacturing powerhouse quickly propelled its economy to a middle-income level. However, at this juncture many middle-income countries including China are seeking new sources of growth to be service-led. Further, as many resource-rich and low-income countries face the Dutch-disease symptoms, service-led growth may propel the manufacturing base and offers opportunities for future growth strategies in these countries. The growing tradability of services will remain an imperative for diversification and competitiveness of nations across the development spectrum.

In this paper, the authors introduce a new disaggregated annual panel data set on global trade in services for 192 countries, more detailed than any earlier efforts. The data is broken down into one and two-digit disaggregation, providing as many as 27 services export sectors.

Using this rich dataset, it is shown that trading services are gaining momentum in world trade and are becoming an increasingly important component of global production. Our analysis documents global trends in trading services and provides stylized facts documenting how countries differ on various dimensions of exporting services. The paper makes the case that trading services are not only catching up with exports of goods in many countries, but they could help continue the strong globalization process started by exported goods. The authors argue that this development would have serious implications to shifts in structural transformation, labor allocation, and income distribution – issues that they start to consider later on in the paper.

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This paper was prepared by Prakash Loungani (IMF), Saurabh Mishra (University of Maryland), Chris Papageorgiou (IMF), and Ke Wang (IMF). IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed here are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.