Services drive the global economy. They make up 75 percent of real gross value-added activity in high-income countries and 63 percent of the same measure in low- and middle-income countries (LMICs). Globally, value-added trade in services now exceeds trade in goods, and services are growing faster than the total world economy. Yet economic development efforts in LMICs often still focus on manufacturing and while that may be understandable—it was the path by which most countries transitioned from low to high income in the past century—it requires a rebalancing to include an emphasis on services.
Today, services are increasingly as important as goods to drive economic development in LMICs, for several reasons. Digitalization has made a number of services more tradable. Improvements in education have expanded participation in high-skill services. The labor intensity and job diversity of services enable them to accommodate a large workforce. The lower capital needs required by many services sectors reduce the barriers to entry, and sector productivity is not as correlated to enterprise size as in manufacturing. And women constitute a higher proportion of the workforce in services than in manufacturing in LMICs, improving the attractiveness of the sector in targeting female employment.
Our report identifies pockets of opportunity where services activities could potentially grow faster than GDP and act as growth drivers for LMICs. It proposes steps policymakers could explore to encourage services sector growth and job creation, using four lenses to understand each country’s unique, concrete opportunities:
- Export rockets are tradable services in which a country can become globally competitive, either based on existing endowments, a shared language, cultural or regulatory proximity, or by leapfrogging and fast adoption of new trends.
- Local innovators are services where the adoption of new business models or new technology can unlock new domestic demand.
- Value chain catalysts are service inputs to goods value chains, which can increase local value addition by building on (existing) industrial demand while improving the competitiveness of value chains.
- Domestic heavyweights are the large services segments providing the majority of existing employment in services. The primary opportunity here lies in increasing labor productivity.
Driving economic development additionally through services, though, is unlikely to happen by chance, and the greater diversity of services relative to manufacturing means the process is neither straightforward nor one-size-fits-all. Yet it is worth it: Our research across 26 LMICs identified about 130 dynamic growth pockets distributed evenly between upper middle-income and lower middle-income countries, which could generate additional annual revenue of $1.1 trillion by 2030—around half of the total revenue growth in services in these countries. In many cases, accelerating services growth can also contribute to lower carbon intensity. Yet realizing this potential requires bold action by both the public and private sectors through two broad complementary approaches.
First, policymakers may adopt services growth strategies that are national or regional efforts identifying and prioritizing specific opportunities—the equivalent of “industrial policy” efforts, adapted to the services sector. This approach allows for the mobilizing of enablers, including the alignment of workforce development and reskilling programs with efforts to drive productivity across domestic heavyweights.
Second, alongside government-driven strategies to develop services as a driver of economic growth, countries may implement services catalyst programs supporting concrete private-sector opportunities. We detail three types of programs, which could be undertaken individually or in concert, in whole or in part: business building programs to enable businesses to unlock and capitalize on key opportunities, deal facilitation programs to accelerate investment deal flow, and sector transformation initiatives that build coalitions between private sector stakeholders, government, and civil society to design and jointly implement initiatives.
Manufacturing remains an important, indeed often critical, driver of economic growth and prosperity. Yet there may be a unique opportunity for LMICs to not only emulate but leapfrog high-income countries, empowering the services sector to create good and decent jobs that deliver higher productivity, better pay, and spur the growth of the middle class.
