At Whose Service? Jobs and Services Trade in Developing Countries

Services-led Employment Growth?

Creating jobs to match their ever increasing, relatively young labor forces is probably the biggest challenge that developing countries are facing in the medium term. Reducing unemployment is perhaps the most effective tool to achieve a wide range of development goals, such as poverty reduction, improving health, and fostering gender equality. While rapid industrialization has been the way Asian Tiger States and most of the Western world have opted for in the last decades, the structure of the global economy has undergone significant changes since then, potentially offering alternative paths to  job creation. The services sector in particular is noteworthy, as it has seen the greatest relative expansion across both developed and developing countries over recent years. In fact, it now employs roughly 46% of the labor force worldwide, while contributing 66% to global GDP. In terms of employment, services has been the fastest growing sector across all geographical regions of the world.

Figure 1: Employment changes 2000-2013

Source: ILO Global Employment Trends 2013

Trade policy has always been an instrument of industrial policy, aiming at creating or maintaining vibrant industries that offer employment opportunities to the domestic workforce, and continues to be so today (Schwarzer, 2013). However, services trade policy has only recently entered public policy debates, owing in part to a serious underestimation of the actual magnitude of services trade flows. While trade in services, as conventionally measured, makes up roughly 20% of global trade flows, this number more than doubles when measuring flows in terms of trade in value added, a line of work that has started only recently (see e.g. the OECD’s work). As such, services trade policy is poised to become another addition to policymakers’ toolboxes, and might indeed be of particular interest to developing countries.

In this context, a CEP workshop at the WTO Public Forum 2014 has taken up the issue, in order to improve our understanding of related challenges and opportunities for creating jobs through services trade in developing countries.

Structural Transformation and Services Trade

Presenting a recent paper, Ejaz Ghani from the World Bank looked at sectoral labor productivity developments in a sample of some 100 countries, to explain why developing countries are growing much faster than developed economies (see also Ghani’s article on the CEP blog). Other authors have stressed the importance of the manufacturing sector in driving this growth and warning of a “premature de-industrialization” that produces structural change where labor moves from high productivity (manufacturing) to low productivity sectors such as agriculture and some services sectors (Rodrik & McMillan, 2011). Looking at sectoral productivity growth, Ghani finds that global productivity convergence is actually driven by developments in the services sector, as productivity growth has been largest in countries with low initial productivity levels. Accordingly, the strength in global productivity convergence in services is stronger than in manufacturing, suggesting that the services sector provides latecomers to development with more room to catch up with developed economies.

Figure 2: Global Productivity Convergence in Services

Source: Ghani and O’Connell, 2014

Increased services trade flows may well drive sectoral development just as export-led manufacturing growth has helped Asian Tiger States seize the opportunities of tapping global markets to develop domestic industries. Growing offshoring and tradability of services tasks are key driving forces in this context and imply a greater relevance of services trade policy for employment outcomes. Nevertheless, it appears that the link between services trade and employment is not as obvious as one would think. Taking the example of India and China, Marion Jansen of the International Trade Centre (ITC) pointed out that the services sector in China employs roughly 33% of total employment, whereas the number for India is only 26%. Given that China is known as the global supplier of manufactured goods and India the global services provider, this suggest that structural transformation seems not to have depended – so far at least – on what countries export. Similarly, Taisuke Ito from the United Nations Conference on Trade and Development (UNCTAD), drawing on lessons learned from the UNCTAD Services Policy Reviews, argued that the share of services trade notably in Sub-Saharan African trade (roughly 11%) appears to be too small to seriously affect overall employment levels, which are more sensitive to domestic demand changes.

At the same time, looking at gross services trade flows may be misleading, as services trade becomes much more important when looking at it in value added terms. In fact, Jansen emphasized that services trade can have substantial indirect employment effects, due to linkages that exist with other parts of the economy. While these relationships are yet to be fully understood, it is estimated that on average a new job in services leads to the creation of another two jobs elsewhere. Such linkages with other industries are perhaps highest in the tourism industry, where the ratio increases to up to almost three jobs for any one job created in the tourism sector. Interestingly, the effect becomes stronger the richer a country gets and has also become stronger over time across countries.

Quality of Jobs

The services sector is large and heterogeneous, offering a wide array of employment opportunities. While many jobs in e.g. banking, IT, and telecommunications are widely regarded as “good” jobs, bad working conditions are usually associated with sectors like hotels, restaurants, retail, and health. Jobs in the latter category are often gender biased towards women, and often less tradable. Moreover, service sector jobs are often found in the informal economy. Informality comes with a lot of drawbacks for workers, like lack of social security, insurance, etc. While the percentage of informal jobs is estimated to be largest in agriculture, services jobs display a higher degree of informality than jobs in manufacturing. Nevertheless, a few indications exist that services trade can help create higher quality jobs. Ito pointed out that export-oriented services enjoy considerable productivity gains, which implies that output growth exceeds employment growth. While this is a drawback in terms of absolute job creation numbers, jobs in these sectors are usually higher paid and offer better working conditions. Drawing on a study undertaken by the ITC, Jansen explained that small and medium enterprises in the services sector find it easier to internationalize than their manufacturing counterparts, because size is less of an impediment to exporting. As internationally operating firms are found to offer substantially better working conditions than domestic firms in developing countries, one may deduct that jobs created in such firms are beneficial in terms of job quality.

In conclusion, at first glance, direct employment effects of services trade appear to be small, but are larger for the economy as a whole. Research on this issue, however, remains inconclusive. Similarly, while there are indications for improved working conditions in internationally operating sectors, the evidence so far is only indicative. As disciplines on services trade policy increasingly become part of trade agreements, more careful analysis of the employment effects of various liberalization schemes need to be done.