Trade in Services, Economic Development and the Role of Aid for Trade

Published in Hilal English

Written By: Dr. Zafar Mahmood

Old ideas of services being non-transportable and non-tradable no longer hold for a number of modern impersonal services that are traded over the internet, digitized and stored electronically, and have become part of growing international businesses. Trade in services over the last 2-3 decades has become a dynamic component of international trade but has been rather neglected in the Pakistani policy debate on trade and economic development.


Services have become a primary economic activity and play a key role in infrastructure building, enhancing competitiveness and trade facilitation. They have a crucial role for growth and efficiency across a wide range of industries, and overall performance of the economy. Services are essential inputs into the production of virtually all other goods and services, and producers depend on services to deliver their outputs to end-users. Because the price and quality of the available services have major impacts on all sectors, services sector related policies and efficiency enhancing reforms, including regulatory and institutional changes, thus have major implications for economic performance. Services sectors, such as transport, telecommunications, tourism and financial, are key determinants of the conditions in which peoples, goods and services move across borders. Infrastructure services, such as financial, transport, telecommunications, water and energy, are fundamental to develop essential services including water, energy, health and education, which are critical in meeting the sustainable development goals (SDGs).

 

tradeinservices.jpgCurrently, services account for approximately 70% of global gross domestic product (GDP). The share of services in GDP tends to rise significantly with income. Services account for 73% of GDP on average in high-income countries, against 54% and 47%, in middle and low-income countries, respectively.
In 2015, developing countries accounted for 32% of total world exports of commercial services, out of $4.68 trillion. Participation by developing countries in global trade in services varies considerably by type of service. Travel and transport account for bulk of developing countries’ exports of commercial services. Specifically, travel services account for 37% followed by transport services (20.2%), information-communication services (9.1%) and financial services (4.1%), and the rest consists (29.6%) of host of other business services.


In low-income countries, the production of services is also a fundamental economic activity, whose contribution to GDP is more than both industry and agriculture together. For instance, in Pakistan, the share of services in GDP is about 60%. The services sector provides jobs to 42.24% of employed workforce in Pakistan. On average, monthly wage provided by the services sector is 56% higher than the commodity producing sectors. Commercial services exports as a percentage of goods and services exports in FY 2015 was 19.6% out of $29.969 billion. Although, Pakistan imports ($8.843 billion) more than it exports ($5.5880 billion) of the commercial services yet it exports ($821 million) more of telecommunication services than it imports ($396 million), which is an encouraging sign. Whereas, export of goods fell by an annual growth rate of 2.91% between 2011-12 and 2015-16, the services exports went up by 2.2% during the same period. This speaks of the upcoming opportunities for Pakistan from trade in services.


Services matter a lot for economic development due to there being a source of export diversification, an input into the production of goods and services and because of their contribution to employment generation and poverty alleviation. Revolution in Information and Communications Technology (ICT) has transformed the tradability of services. The recent development experience of South Asia for increasing tradability of services supports this position. This experience shows that growth has been led by services exports and that labor productivity levels in services can be higher than those in manufacturing industries.


Professional services are vital for economic development. Accounting, legal and engineering services contribute directly and indirectly to economic growth. They also lower transaction costs and create spillovers of knowledge to other sectors. Greater usage of professional services is associated with higher labor productivity for industries in general and for small firms in particular. While professional services are among the fastest growing services, their weaknesses and underdevelopment adversely affect their contribution to economic growth.


Services help alleviation of poverty through direct and indirect channels. Directly, they provide the largest source of new job growth. Indirectly, they provide income that, when spent, raises further demand for goods and services and for the jobs to produce them. In addition to direct job creation, some studies suggest that the indirect effect of a growing services sector can be larger than its direct effect. According to certain estimates, for every job created in the ICT sector, four additional jobs are created in the rest of the economy. A World Bank study covering 50 developing countries over the period 1990-2005 found that ‘growth in the services sector was more closely correlated with poverty reduction than growth in agriculture’. Lack of access to different services has been shown to be a critical constraint on economic development.


Factors that adversely affect the participation of Pakistani firms in trade in services, include the following:


• Lack of access to export financing. Services exports often require relatively low capital. They benefit from the possibility of access to foreign capital via international partnerships. Firms in Pakistan often face difficulty in building foreign client base that can act as their platform for export financing.
• Lack of access to efficient and cost-effective infrastructure. Unreliable telecom services adversely impact outsourcing or direct export potential, while a lack of reliable energy and transport services raises costs for all the service sectors. Thus, weak infrastructures affect the ability of export firms to provide reliable services and therefore create credibility problem with foreign clients in particular.
• Non-availability of formal and informal networks and institutional facilities necessary for trade. These include a sound domestic legal environment for business and links with other exporters and business networks. For services, especially, for their close linkages between services sector, problems arise for services firms with lack of availability of supporting services.
• Limited availability of trained staff and vocational training facilities. One major constraint to setting up new service operations is finding either suitable and qualified or experienced staff. This can be further compounded by absence of the necessary vocational training.


China-Pakistan Economic Corridor (CPEC) is likely to generate massive and very specialized demand for services. Given the presence of the above mentioned factors that may adversely affect Pakistan’s ability to meet the demands of CPEC-related projects and the prospect for trade in services coming from the international market, the government needs to pay special attention to develop the services sector to gainfully exploit opportunities by transforming the services sector to produce cost-effective, time-efficient services that meet standard of international quality services.

 

Whereas Pakistan can develop an indigenous program to develop the services industries, it can also benefit from the Aid-for-Trade (AFT) offered by donor countries and agencies in addressing the above mentioned supply-side and trade-related infrastructure constraints. AFT can play a complementary role, notably by helping put in place the appropriate conditions for developing a modern services sector. Pakistan has successfully transformed some of its trade-related merchandise under the UNIDO’s trade-related technical-assistance (TRTA) over the past 6 years. Now it’s time that we seek such an assistance for the services sectors too.


All in all, trade in services is providing alternative opportunities to Pakistan to find niches beyond manufacturing. By specializing in services and scaling up their production, the country can achieve very high growth rate that the commodity producing sectors are not currently delivering. Furthermore, as the international experience suggests, the gains stemming from the liberalization of services could potentially be larger than in all other areas of international trade; therefore, there is a need to introduce efficiency enhancing reforms and requisite regulatory and institutional changes to fundamentally revitalize and transform the trade-related services sector in Pakistan.

 

The writer is a Professor of Economics at School of Social Sciences and Humanities at NUST, Islamabad.

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