Will services make the world rich?

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Will services make the world rich?

The Economist | June 24, 2024

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Exports of goods are familiar. Factories churn out widgets, which are shipped to customers around the world. Yet, improved international connectivity has made various kinds of outsourcing and digital commerce much easier. As a result, service exports have jumped by 60% over the past decade, reaching $7.9trn (7.5% of global GDP) in 2023. The market for physical merchandise is even bigger, at $24trn, but has grown far more slowly, staying flat as a share of GDP.

What does this mean for countries hoping to get rich? Speaking in 2005 Lee Kuan Yew, Singapore’s first prime minister, observed that, “since the industrial revolution, no country has become a major economy without becoming an industrial power.” But since 2005, the world has changed. Manufacturing is now more capital-intensive, making it easier for China to retain its role as the world’s factory. In the past few years, Western countries have embraced industrial policy and protectionism in an attempt to boost domestic manufacturing. Policymakers in emerging markets are arguing about how best to respond.

At present, services are mostly exported by rich countries, where white-collar professionals often work across borders.  But developing economies are starting to make a mark in the more advanced types of services that can be sold overseas. Many countries export audiovisual, computer and telecommunication services.  India is the best-performing Asian country in this category.  The less tech category of “business and trade-related services”, which covers things such as accounting and human resources, is another area of growth. Then there is tourism. Not every country can replicate Japan’s temples or Mexico’s beaches, but many are finding ways to entice visitors, such as with medical services. Dentistry, hip replacements and hair transplants are among the treatments on offer. 

In the short term, it seems likely that service exports will keep growing.  But will service exports raise living standards in the manner of manufacturing?  

In the longer run, AI might cause problems. Models are best at well-defined tasks that do not need in-person context. That makes business services vulnerable. A report by Capital Economics, a consultancy, argues that ai could lead to the “slow demise” of India’s service exports, cutting growth by 0.3-0.4 percentage points a year over the next decade. The spread of communication tech has facilitated services outsourcing. Fresh technological change could, in time, be its undoing.

Governments that want to boost growth will have to focus on different things. Whereas they once had reason to ensure that workers could easily move from farms to factories, today they would be better off paying attention to human capital among future white-collar workers. Getting services right, especially those which can be sold overseas, is now a crucial condition for growth. 

3 key takeaways from the article

1. Improved international connectivity has made various kinds of outsourcing and digital commerce much easier. As a result, service exports have jumped by 60% over the past decade, reaching $7.9trn (7.5% of global GDP) in 2023. The market for physical merchandise is even bigger, at $24trn, but has grown far more slowly, staying flat as a share of GDP.  At present, services are mostly exported by rich countries, where white-collar professionals often work across borders.  But developing economies are starting to make a mark in the more advanced types of services that can be sold overseas.  
2. In the short term, it seems likely that service exports will keep growing.  In the longer run, AI might cause problems. Models are best at well-defined tasks that do not need in-person context. That makes business services vulnerable.
3. Governments that want to boost growth will have to focus on different things. Whereas they once had reason to ensure that workers could easily move from farms to factories, today they would be better off paying attention to human capital among future white-collar workers.

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Topics:  Services, Economic Development, Global Economy, Manufacturing, Employment, Technology, Exports, Automation, AI, Outsourcing, Freelancing, Jobs