South has not benefited from services exports, says new study

A recent study has found no empirical evidence to suggest that the services sector is a dynamic engine for export growth in developing countries.

by Chakravarthi Raghavan

GENEVA: Seven years after the entry into force of the WTO’s General Agreement on Trade in Services (GATS) and the liberalization of trade in services, exports of services by developing countries have not proved dynamic and episodes such as increases in Indian exports of computer and data processing services are only “outliers,” according to a new study.

The study by Rolf J Langhammer, of the Kiel Institute of World Economics, “Developing Countries as Exporters of Services,” in the June issue of the Journal of Economic Integration, suggests that developing countries have not yet benefited from innovations in the information technology (IT) sector and its promise of providing a growth momentum for producer services like financial and software services.

The study cites world trade data, as well as US import trade figures, to argue that neither of these support the perception (or the hype used by the WTO to push the further liberalization of services in developing countries) that the services trade, and developing-country exports in particular, are dynamic segments, and that the developing countries could export more, both directly and through the contribution of IT sectors via the growth momentum of producer services.

Developing countries, the study finds, continue to rely on relatively slow-growing exports of the labour-abundant consumer services for movements of goods and persons.

There is a link between production of goods and their distribution, and thus those successfully exporting manufactures overlap with those exporting services.

For the present, any growth in services exports of developing countries in larger proportion to their goods trade would remain limited to country episodes, and will not have the wider country coverage or growth of manufactured exports, the study concludes.

Based on calculations of data published by the WTO, the study calculates that the merchandise trade exports of the industrialized countries (including those of the transition economies) grew by an annual 6.4% between 1989 and 1998, while their commercial services exports grew faster by an annual 7.6% over the same period.

In contrast, the merchandise trade exports of the developing countries registered an annual 8.9% growth rate, while their services grew only by 8.3 percent.

There has thus been no spectacular increase of the world trade in services: the world merchandise exports grew over that period by an annual 6.4% and that of services by 8.3 percent.

For developing countries, in 1989 the commercial services exports originating in these countries had accounted for 17% of their total exports, but in 1998, the share had declined to 16.3 percent.

Generally, the leading exporters of manufactures among developing countries were also leading exporters of services - though Egypt and Turkey have proved exceptions (with more exports of commercial services), while Mexico, a leading goods exporter, fared worse in services.

The import data from the United States too appear to bear this out.

During the1990s, the US imports of services rose as fast as in manufactured goods, with services imports stagnating at15%, though US imports of services from developing countries declined by two percentage points to 13 percent.

Thus, developing countries had flourishing merchandise trade exports to the US, but not services.

The developing countries concentrated on and maintained their positions in US imports in regard to travel and transport services (where they have competitive skills based on unskilled labour), but gave ground on royalty and user fees and other such knowledge-based services.

The US trade data allow for distinctions to be made between purchases by US companies from their affiliates abroad (intra-firm trade), and purchases from non-affiliates.

In 1989, about 60% of US total imports were not party-related, only 40% were intra-firm. This proportion remained fairly stable over the nineties. But in terms of services imports, the proportion of intra-firm trade in US imports was 20% - reflecting the pattern of US investments abroad, which are more concentrated on the OECD countries than developing countries, the study says.

The US data on sales of services of US majority-owned foreign affiliates (MOFAs) do not distinguish between local and foreign sales of affiliates by host countries. However, the worldwide sales of all services by US affiliates were predominantly (about 82% in 1997) transactions with customers residing in the same country.

If the same proportion holds good also for affiliates of US-MOFAs operating in developing countries, the foreign affiliate export sales of US corporations from host developing countries are roughly about 15 percent.

There is little or no empirical evidence that services are a stronger engine for export growth in developing countries. Their services exports benefit from their unskilled labour and abundance of natural resources (important for tourist industry).

And labour-intensive services (like the distribution sector) are joint products of labour-intensive manufacturing, and thus countries that are successful suppliers as exporters of manufactures also are successful as exporters of services - in transportation, cargo handling, a share that can increase if bilateral cargo sharing and bilateral aviation agreements prevent other suppliers than the origin and destination countries from breaking into the market.

Conversely, it is clear that arguments and pressures against such bilateral agreements will result in further losses to the developing country concerned.

Very few developing countries have been able to host production factors such as IT-software specialists that can compete internationally. The Indian computer software industry and the Mexican telecommunications services are found to be exceptions. These services need a knowledge pool in the host country and when it is there the FDI has been able to deepen the link between the local knowledge pool and international clients.

The study finds that, contrary to expectations, financial services originating from the banking centres such as Hong Kong China or Singapore play a minor role, though the offshore banking services not being included in the statistics may be responsible.

The study says that the “inadequate reporting system” for trade in services also impedes more in-depth empirical research. (SUNS5141)                           

From Third World Economics No. 282 (1-15 June 2002)