sophistication than technology measures alone, such as the superior market knowledge, design and logistics present in high-income countries.

Adapting either technology or sophistication based classification of manufacturing activities into a modern and traditional framework is relatively straightforward. High technology trade can be viewed as modern trade, whereas resource-based and low-technology trade is evidence of traditional trade. Because the sophistication measure does not align well with such a discrete division, we rely on country positions relative to a cross-country fit of this export sophistication index and levels of per-capita GDP.

On the services side, Baumol (1985) outlined a taxonomy within the services-producing industries based upon their assumed productivity performance: 1) stagnant personal services, such as education, in which output is highly correlated with labor-time expended; 2) progressive impersonal services, where there is virtually no contact between customers and the production process, an example being telecommunications; and 3) asymptotically stagnant impersonal services, which is an amalgam of the previous two, an example of which is broadcasting. In the discussion that follows, we use a simplified adaptation of Baumol’s services classification that separates out service-activities by industry into “modern” and “traditional” sectors.

Using IMF Balance of Payments data on services trade, we define “modern” services as communications, insurance, financial, computer and information, and other business services; and “traditional” services as travel, transportation, construction, personal, cultural and recreation, royalties and license fees and government services (see World Bank 2009 report on Service Revolution and Mishra et al. 2011 for details). This distinction roughly coincides with the level of international competition and education requirements of the labor force in the service industries. In addition, modern services can be characterized as those activities which can be produced, stored, and transported digitally, and therefore do not need to cross physical borders. For details on the recent transformation in service activities see Box 2.

An alternative context for the distinction in services is given in the WTO Agreement on Trade in Services. Under the GATS agreement service exports can be delivered in four different ways:

- Services being provided remotely across borders, such as IT and IT-enabled service exports (mode 1), which account for some 28 percent of global trade in services;

- Consumption abroad such as tourism and travel (mode 2) which account for some 14 percent of global trade in services;

- Commercial presence through foreign direct investments (mode 3) which account for some 57 percent of global trade in services;

- Movement of natural persons which brings in remittances (mode 4) which account for some 1 percent of global trade in services.

Hence, modern services are inclusive to mode 1 and to some extent mode 3, whereas mode 2 and 4 require movement of people to deliver the services. Similar to the case for goods, classification of services on the production side is more difficult. Detailed industry-level data on value-added and employment tends to be limited. However, for a rough approximation we classify 10