The service sector makes an important contribution to GDP in most countries, providing jobs, inputs and public services for the economy. Trade in services can improve economic performance and provide a range of traditional and new export opportunities. However, services liberalisation also carries risks, and appropriate regulation and other complementary policies help to ensure that liberalisation delivers the expected benefits. We have reviewed the literature on these issues for 6 service sectors (tourism, financial services, energy services, information and communications technology, and Mode IV), and produced a summary Briefing Note on each.
The contribution of services to development
The service sector is an important component of any country‟s economy. It makes a direct and significant contribution to GDP and job creation, and provides crucial inputs for the rest of the economy, thus having a significant effect on the overall investment climate, which is an essential determinant of growth and development. Some service sectors such as the health, education, water and sanitation sectors, are also directly relevant to achieving social development objectives. The service sector accounts for a significant proportion of GDP in most countries, including low income countries, where it frequently generates over 50% of GDP. The process of development usually coincides with a growing role of services in the economy (alongside a reduced role for agriculture). Thus services constitute an increasing percentage of GDP in nearly all developing countries. Services contributed 47% of growth in Sub-Saharan Africa over the period 2000-2005, while industry contributed 37% and agriculture only 16%. Recent growth in Africa is due to services as much as natural resources or textiles (even in countries benefiting from trade preferences in these products). The question is nor whether to move into services, but how and at what speed to move into services.
Many services are key inputs to all or most other business e.g. infrastructure services such as energy, telecommunications and transportation; financial services which facilitate transactions and provide access to finance for investment; health and education services which contribute to a healthy, well-trained workforce; and legal and accountancy services which are part of the institutional framework required to underpin a healthy market economy. These service sectors are thus a key part of the investment climate, and can have a much wider impact on overall business performance and the level of investment, and hence growth and productivity in the economy.
The potential benefits of services trade liberalisation
Trade in services can help create opportunities for countries to expand their outputs of services in sectors where they have a comparative advantage, thus creating jobs, contributing more to GDP and generating foreign exchange. This can be especially important for those countries which are relatively isolated from world goods‟ markets, e.g. due to poor transport infrastructure, or being landlocked, such as many subSaharan African countries. Services exports can be an important part of a developing country‟s growth strategy. For example, India has been capitalising on a boom in exports of IT enabled services as firms have increasingly outsourced certain administrative functions to lower cost countries. And (labour-intensive) tourism is now a significant part in the economy of many low-income countries. In addition, imports of services can significantly improve performance by bringing greater competition, international best practice, better skills and technologies, and investment capital. The entry of foreign service
This Briefing Note is based on work funded by DFID and written by Massimiliano Cali, Karen Ellis and Dirk Willem te Velde. The authors alone are responsible for the views expressed. This...
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