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| Value-added service export helps growth: Report Fri, 22 Apr 2011 15:16:05 GMT |
| The latest figures reveal a huge surge in exports from India , of the merchandise variety read goods. As for export of services, a recent policy research working paper finds that increasing sophistication of output under the head is positively related to economic growth. The paper uses international panel data to show a positive link between growth in per capita income and higher sophistication of service exports. More importantly, the research suggests that the phenomenon is growing in importance over time. The idea that higher productivity in the export of modern services would rev up the growth momentum has extensive policy implications. The authors of the study hasten to add that proactively including services in growth considerations does not imply neglecting manufacturing exports and its attendant benefits. What is reiterated though is that sophisticated, tradable services can be a significant additional channel for boosting high growth. Now, the mavens have traditionally focused on growth as transition from agricultural to industrial production, with manufacturing envisioned as being the prime engine of growth. However, the pathbreaking 1990s heralded the digital age with two related developments. The first was the revolution in information and communication technology (ICT) and, second, rapid change and diffusion of world-wide trends often referred to as the 3Ts: technology, transportability, and tradability, thanks to the Internet. Both the game changers have hugely improved on the nature, productivity, and tradability of services, it's averred. The paper notes that the global value of cross-border services exports in 2007 added up to $3.3 trillion, which amounted to 20% of total world trade. But what is of import is that the share of services actually rises to almost 50% if transactions are measured in terms of direct and indirect value added content-measured in terms of processing of imported components into final products for export. Add the sales of services by foreign affiliates of multinational companies, and the value of trade in services rises further, the paper mentions. The study elaborates on the rapid growth of what can be termed modern impersonal services, such as communication, banking, insurance, business-related services, remote access services, transcribing medical records, call centres, education, et al. These services differ comprehensively from the traditional personal services, which demand face-to-face interaction of the pre-digital age. A rising number of services can now be stored and traded digitally, sans the constrains of trade barriers or logistical bottlenecks faced by physical exports. The services exports have also become similar to manufactures in that they benef it from technological change, innovation and their costs depend on scale economies, networks, and specialisation. More importantly, these sophisticated services mostly require digital labour mobility that provides an opportunity for relatively innovative, high-tech job creation in low- and middle-income economies, adds the paper. Service activities have not only become tradable, but also unbundled thanks to digitisation. A single service task or an activity in the global supply chain can well be fragmented and done separately at different geographical locations. The part-parcelling in service exports has also provided prospects for specialisation, which did not exist until recently. In the paper, a dynamic service export sophistication index is constructed, and econometric analyses done across time and economies to show how increasing value-addition in services exports does shore up growth. The index draws on the prior work of researchers Hausmann, Hwang and Rodrik (referred in the paper as the HHR model), who have shown that it is not the specialisation alone, but the sophistication of goods export that really matter for growth. In order to examine the phenomenon for service exports, the study creates an service exports sophistication index, based on the HHR model. In the HHR framework, a goods export sophistication measure or Goods EXPY is built as a proxy for the most productive set of goods a country can produce at a given time. The paper goes on to construct a Service EXPY to reflect the service production frontier of a country, by and large following the methodology developed by HHR. The paper starts by constructing so-called PRODYs for each category of goods exports, reflecting the income/productivity level associated with each good, and the same is done for each category of services. So PRODYj is the income value associated with the service j, and is constructed by using the service export (x) share of a country i in world's export of service j, divided by the sum of shares of j in world exports of j across all countries exporting that service, it is explained in the paper. The ratios are multiplied by the exporting countries' respective per capita income level (Y) and the result is summed up across all countries. Thus the PRODY becomes the weighted average of per capita GDPs, where the weights represent the revealed comparative advantage in service j for each country. The PRODYs are constructed for each service category, for each year of available data, and are by construction the same for all countries. The figures in the study show that the contribution of the services sector to growth in 2000-07 vis-a-vis 1990-99 rose by as much as two percentage points for developing countries, never mind that the IT sector employs a tiny fraction of the labour force. In India, the IT sector accounts for no more than 1% of the labour market and yet services exports have grown massively in the last decade here. The data cited in the paper confirm that measurable modern services are growing faster than traditional service exports-like tourism-since 2000. Following regression analyses, the study finds that higher dynamic export sophistication is associated with higher growth in GDP per capita. Further, it is noted is that countries are getting more and more engaged in higher value export of services, but also that the service exports themselves are increasing in sophistication due to improvements in ICT and 3Ts. The finding is that after controlling for initial income per capita, skills, financial development and other country specific characteristics etc, export sophistication in services is a good indicator of growth performance globally. The regression analyses provide statistical indication of the positive relation between service quality of exports and growth, concludes the paper. (Service Export Sophistication and Economic Growth , by Saurabh Mishra et al, World Bank policy research working paper, March 2011). |
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