Will services make the world rich?
American fried chicken can now be served from the Philippines

In April a New York fried-chicken shop went viral. It was not the food at
Sansan Chicken East Village that captured the world’s imagination, but the
service. Diners found an assistant from the Philippines running the till via
video link.
The service is provided by Happy Cashier, which connects American firms
with Filipino workers. Chi Zhang set up the business after his restaurant
failed during the covid-19 pandemic. He says that overseas workers also
answer phone calls and monitor security-camera footage—doing so at a
fraction of the cost of locals.
Virtual cashiers are a visible part of a much bigger trend: the rise of service
exports from the developing world. Exports of goods are familiar. Factories
churn out widgets, which are shipped to customers around the world. Yet
improved international connectivity has made various kinds of outsourcing
and digital commerce much easier. As a result, service exports have jumped
by 60% over the past decade, reaching $7.9trn (7.5% of global GDP) in 2023.
The market for physical merchandise is even bigger, at $24trn, but has
grown far more slowly, staying flat as a share of GDP.
What does this mean for countries hoping to get rich? Speaking in 2005 Lee
Kuan Yew, Singapore’s first prime minister, observed that, “since the
industrial revolution, no country has become a major economy without
becoming an industrial power.” But since 2005, the world has changed.
Manufacturing is now more capital-intensive, making it easier for China to
retain its role as the world’s factory. In the past few years, Western countries
have embraced industrial policy and protectionism in an attempt to boost
domestic manufacturing. Policymakers in emerging markets are arguing
about how best to respond.

At present, services are mostly exported by rich countries, where whitecollar
professionals often work across borders. Although China surpassed
America as an exporter of goods in 2009, Uncle Sam still exports two-and-ahalf
times more services than his rival. Britain, which has fallen to 14th
place in the global rankings when it comes to goods exports, remains the
world’s second-largest services exporter.

But developing economies are starting to make a mark in the more advanced
types of services that can be sold overseas. Many countries export
audiovisual, computer and telecommunication services. In Bulgaria, Estonia,
Latvia, Moldova, Romania and Ukraine these run to more than 3% of GDP.
India is the best-performing Asian country in this category; its exports fall
just short of 3% of GDP. In an economy of India’s size, that means a sizeable
industry. The country’s five largest IT firms have a joint market capitalisation
of nearly $350bn. It is also home to 1,600 global capability centres—
technology and research centres for multinational firms—that employ 3m
people. All told, India’s service exports account for nearly 5% of the
world’s, up from 3% a decade ago.
The less techy category of “business and trade-related services”, which
covers things such as accounting and human resources, is another area of
growth. Estonia and the Philippines top the table here, with such exports
accounting for over 5% of their GDP. Like India, the latter offers low labour
costs, as well as a large English-speaking population. In many countries
workers also take casual gigs online. These are hard to measure, but twothirds
of the freelancers on English-speaking platforms such as Upwork and
Fiverr are based in emerging economies.

The barnet formula
Then there is tourism. Not every country can replicate Japan’s temples or
Mexico’s beaches, but many are finding ways to entice visitors, such as with
medical services. Dentistry, hip replacements and hair transplants are among
the treatments on offer. Costa Rica, Croatia and Moldova export health
services worth between 0.2% and 0.5% of their economic output. Armenia
and Jordan manage 1% each. A few hours in Istanbul airport provides a
display of the thriving industry, as men return home with their heads
wrapped in plastic, fresh hair taking root underneath.

In the short term, it seems likely that service exports will keep growing. In
1992 Stan Shih, founder of Acer, a Taiwanese computer-maker, coined the
term “smile curve” to describe how value added in the manufacturing
process was rising faster in the first and third parts of making a product
(design and distribution, respectively) than in the second stage
(manufacturing). As manufacturing has become more competitive, the smile
has deepened. Think of Apple, which designs and distributes iPhones, and
collects the rents from its brand, but produces none of the devices itself. Its
market capitalisation is more than $3trn, whereas Foxconn, which makes
70% of the firm’s iPhones, is worth just $91bn. Even more cheerful is the
fact that the rise of remote work has made firms far more comfortable with
outsourcing operations. After all, a remote employee is not that different
from an outsourced one.


But will service exports raise living standards in the manner of
manufacturing? As Dani Rodrik of Harvard University notes, industry has
historically possessed advantages in three areas: it is more technologically
intensive, produces internationally tradable goods and creates lots of jobs.
Although services is closing the gap in the first two areas, manufacturing
still offers more employment.
Start with technological growth. A factory in a poor country brings man and
machine together, placing an unskilled worker at the tech frontier. Then, as
the tech improves, the worker becomes still more productive. Tradable
services cannot absorb unskilled workers in this manner. Yet as the World
Bank has observed, since the 1990s labour-productivity growth in emerging
economies outside of East Asia has risen at roughly the same rate in services
as manufacturing—and services productivity has grown faster in emerging
economies than rich ones. Moreover, artificial intelligence may soon provide
service workers with another lift. Two experiments have found that AI tools
help the least skilled knowledge workers catch up with more skilled ones
when writing marketing copy and providing customer service.

Services are also closing the gap with manufacturing when it comes to
tradability, albeit slowly. Before the internet, the ability to send products
overseas was the main way in which goods differed from services. Trade
allows exporters to reach much larger pools of demand and achieve
economies of scale that would otherwise have been beyond them. Because
goods trade has been stagnant as a share of global GDP since 2010, it has
become more difficult for newcomers to compete. Services trade is
booming, and thus more welcoming. But even at the growth rate of the past
decade, it will take 15 years to reach half the value of trade in manufactured
goods.
Job creation is an even thornier issue. Marc Lautier of the University of
Rennes has calculated that, despite automation, the number of
manufacturing jobs in 160 countries for which he has data has remained
stable since 1991, accounting for 14% or so of total employment. The
problem is that it has become more difficult for governments to attract these
jobs. Manufacturing is not moving away from East Asian powerhouses at
the same pace as it moved to them in the late 20th century, in part because
modern factories require more capital and skill to build. Our analysis of
labour-market data from 51 mostly emerging markets finds that only five—
China, Sri Lanka, Taiwan, Turkey and Vietnam—have 18% or more of their
population employed in manufacturing, compared with 16 in 1990.

Growth in services offers only some consolation, because services do not
tend to provide labour density. The World Bank notes that, since 1990,
service jobs have risen from 40% to 50% of global employment, as workers
left agriculture. But just 5-10% of emerging-market service jobs are in
tradable, techy industries, compared with 15-20% in rich countries. India’s IT
industry may garner $250bn in annual exports, worth nearly 8% of national
GDP, which is on a par with manufactured exports. Yet it employs less than
10m people from a working-age population of around 1bn.
In the longer run, AI might cause problems. Models are best at well-defined
tasks that do not need in-person context. That makes business services
vulnerable. A report by Capital Economics, a consultancy, argues that AI
could lead to the “slow demise” of India’s service exports, cutting growth by
0.3-0.4 percentage points a year over the next decade. The spread of
communication tech has facilitated services outsourcing. Fresh technological
change could, in time, be its undoing.
Despite the downsides of a services-oriented approach to development,
especially when it comes to providing decent jobs in large numbers,
developing economies simply have fewer choices today than they once did.
Governments that want to boost growth will therefore have to focus on
different things. Whereas they once had reason to ensure that workers could
easily move from farms to factories, today they would be better off paying
attention to human capital among future white-collar workers. Richard
Baldwin of IMD Business School says that large, well-functioning cities will
take on greater importance, too, because services often depend on
agglomeration. Getting services right, especially those which can be sold
overseas, is now a crucial condition for growth.

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