The Transformative Potential of Services in Low and Middle-Income Economies
In today’s global economy, the services sector plays a critical role—contributing a staggering 75% of real gross value-added activity in high-income countries and 63% in low- and middle-income countries (LMICs). As value-added trade in services surpasses that of goods, it becomes evident that expanding the services sector is vital for sustainable economic growth, particularly in LMICs.
Shifting Focus: The Importance of Services
Traditionally, economic development efforts in LMICs have emphasized manufacturing, following a historical pattern seen in many nations transitioning to higher income levels over the past century. However, the current landscape necessitates a shift in focus towards services, which offer substantial growth potential for various reasons:
- Global Trade Capability: The digitalization of services has increased their tradeability across borders.
- Growing Workforce Participation: Enhanced educational opportunities have led to greater involvement in high-skill service jobs.
- Job Diversity: The labor-intensive nature of many service sectors facilitates the inclusion of a diverse workforce.
- Lower Capital Requirements: Numerous services have minimal capital needs, lowering the barriers for entrepreneurs and businesses.
- Empowering Women: A larger percentage of the workforce in services is female compared to manufacturing, making this sector more attractive for gender-inclusive policies.
Identifying Growth Opportunities
Our recent report highlights specific areas poised for rapid growth within the services sector that could catalyze economic progress in LMICs. These can be delineated into four categories:
- Export Rockets: Services where countries can leverage existing assets, language, or cultural ties to achieve global competitiveness.
- Local Innovators: Services ripe for domestic demand unlocked through innovative business models and technology adoption.
- Value Chain Catalysts: Essential service inputs that enhance the local value addition by connecting with existing industrial demand.
- Domestic Heavyweights: Large service segments that already provide substantial employment, presenting opportunities to boost labor productivity.
Strategic Approaches for Development
Effectively harnessing the potential of the services sector in LMICs requires proactive measures from both public and private sectors. Here are two overarching strategies that could facilitate this growth:
1. National and Regional Services Growth Strategies
Policymakers need to adopt targeted services growth strategies, akin to industrial policies but tailored for the services sector. This entails prioritizing specific opportunities, aligning workforce development initiatives, and consequently enhancing productivity across significant employment sectors.
2. Services Catalyst Programs
Implementing catalyst programs can spur the private sector’s engagement in the services economy. Suggested initiatives include:
- Business Building Programs: Helping enterprises capitalize on unique market opportunities.
- Deal Facilitation Programs: Accelerating the flow of investment to stimulate growth.
- Sector Transformation Initiatives: Creating partnerships between stakeholders across government, industry, and civil society to develop and implement collaborative efforts.
Conclusion: Embracing Services for Economic Advancement
While manufacturing continues to play a crucial role in economic growth, LMICs have a significant opportunity not only to replicate but potentially surpass the progress of higher-income nations by advancing their services sector. By cultivating a vibrant services economy, these countries can create quality jobs that foster greater productivity and wage growth, effectively expanding the middle class and enhancing overall economic resilience.
As these nations look toward the future, prioritizing services could be the key to unlocking unprecedented growth and sustainability in the global economy.
