Goods in Their Implications for Productivity and Jobs, but These Are Changing with the Advent of Digital Technologies

TABLE 1.1 Key Characteristics of Services Have Distinguished Them from Manufactured Goods in Their Implications for Productivity and Jobs, but These Are Changing with the Advent of Digital Technologies

Sectors’ key characteristics and their implications for productivity and jobs

Sectors and effects Market size and location (What is produced and for whom?) Ability to leverage labor with capital and technology (How do firms operate?) Linkages (With whom do firms operate?)

Key characteristics Manufacturing Storable, transferable, tradable goods so production can be separated from consumption

Analog services (pre-ICT) Simultaneity of production and consumption Amenable to mechanization

Inputs into other manufactured goods

Inherent role for labor Important enablers for goods-producing sectors

Digitally enhanced services Reduced need for proximity Labor-augmenting potential

Expanded roles for economywide enabling services

Implications Productivity

Jobs (number, skill mix) Scale Innovation Spillovers

Number of jobs Skill mix demanded Multipliers that boost job creation and skill mix

Source: Summary based on chapter 1. Note: Arrows indicate which of the three key characteristics contribute to scale, innovation, and spillovers. ICT = information and communication technology.

Firms in the services sector are also innovating more than before. The increase in research and development (R&D) since the 1990s has been largely concentrated within ICT multinationals through software patents (Branstetter, Glennon, and Jensen 2018). When innovation is defined to take forms other than R&D—including management techniques, organizational practices, marketing procedures, and adoption of existing technologies—the share of innovating firms is relatively similar across manufacturing and services in most countries (Pires, Sarkar, and Carvalho 2008). Based on data from six LMICs, Nayyar, Cruz, and Zhu (2018) classify both information technology (IT) services and the manufacture of electronics as “high” in their extent of product and process innovation.18 The diffusion of ICT and related intangible capital is also expanding the ability of services firms to innovate (as further discussed in chapter 3).

Spillovers from growing linkages with other sectors. The share of services in world gross exports has remained about 20 percent since 1980. In terms of value added, however, services accounted for 43 percent of world exports in 2009, rising from 31 percent in 1980. In fact, more than two-thirds of the growth in services value added in exports between 1995 and 2011 was due to an increase in services embodied in other exports

(Heuser and Mattoo 2017). This suggests that services such as transportation, telecommunications, finance, and business services are increasingly used as intermediate inputs in the production and export of goods.

In France, Germany, Italy, the United Kingdom, and the United States, services contribute more than half the total value added embodied as inputs in exports. Even in China, traditionally viewed as an exporter of manufactures, more than a third of the value added in its exports comes from services (World Bank 2020). Furthermore, evidence indicates that services embodied as inputs improve the productivity of downstream manufacturing (as discussed in chapter 4).

The Question of Jobs in Services The extent to which the manufacturing sector combined scale, innovation, and spillovers with employment, especially for low-skilled workers, was also central to its potential advantages for development. However, the services sector’s emphasis on human capital might constrain the ability of dynamic services to absorb surplus labor from agriculture. It is easier to turn a rice farmer into a garment factory worker than a software engineer, entailing a manageable investment in physical capital but without significant investment in human capital. This limitation raises the concern that, unlike manufacturing, a given services subsector might not deliver the twin gains of productivity growth and job creation together.

The counterfactual scenario—the job-creation prospects for manufacturing exportled development—must also take a dynamic view. The nature of international competition and sources of comparative advantage are changing. Established centers of manufacturing, characterized by dense ecosystems of suppliers and rising industrial automation, are raising the bar in terms of what it will take for hitherto lessindustrialized countries to enter GVCs (Hallward-Driemeier and Nayyar 2018). Therefore, LMICs stand to lose considerable potential for generating low-skilled manufacturing jobs as high-income countries adopt new technologies and keep more manufacturing within their own borders.

Alternatively, if the only way LMICs can compete in global manufacturing is by adopting quality-enhancing and labor-saving processes, that, too, will eliminate potential jobs. Rodrik (2014) argues that employment deindustrialization is virtually inevitable in middle-income countries as well. Similarly, Stiglitz (2018) argues that the declining share of manufacturing in global employment means that the sector’s growth will not suffice to meet the needs for new jobs, especially in Sub-Saharan Africa with its burgeoning population.

In sum, although manufacturing will likely continue to deliver on productivity, scale, trade, and innovation, its unique desirability in terms of the twin wins of productivity and large-scale job creation for low-skilled labor is eroding.

Indicators of Innovation, Scale, Spillovers, and Job Creation

The growth and productivity benefits associated with scale, innovation (mechanization that augments low-skilled labor), spillovers across sectors, and low skill intensity can be summarized in the combination of six indicators of these pro-development characteristics—which can, in turn, be used to categorize services subsectors:

• Trade intensity: The share of a sector’s value added that is exported19 indicates the potential to access larger markets.20 • Offshorability: Services are traded through different modes that either enable remote cross-border transactions or require that producers or consumers travel to a joint location (box 1.1). Whether a sector is amenable to offshoring through cross-border transactions is indicative of additional opportunities to achieve scale because it eliminates the need for physical proximity between consumers and producers. Survey-based estimates of such “offshorability” are based on the prevalence of tasks that require such face-to-face interactions. • R&D intensity: The share of businesses’ R&D expenditure in value added indicates their investment in the expansion of knowledge, technology, and productivity. • Capital intensity: Measured as gross capital stock per worker, capital intensity combines with R&D intensity to proxy the scope for innovation and for contributing to scale economies by leveraging labor’s contributions. • Linkages: A sector’s linkages, measured as the share of its output from (domestic) sales to other sectors in the economy, indicates the scope for spillovers. • Low skill intensity: The share of low-skilled workers in a sector’s employment (based on occupation-level data) reflects its skill bias or the lack thereof.

These measures are quantified using data from European Union (EU-15) countries21 and the United States—high-income countries that are at more advanced stages of structural transformation than LMICs and where there are fewer policy distortions. The aim is to show the upside potential for scale, innovation, and linkages, since these countries have more-sophisticated services sectors that are more traded internationally; are home to firms where much of the business R&D takes place; and are characterized by stronger, more numerous linkages between sectors, owing to diversified production structures. As for skill intensity, these high-income countries provide a lower bound; if a sector’s jobs are predominantly filled by unskilled workers in the United States, they are almost certainly likely to be intensive in low-skilled labor in lower-income countries.22

Table 1.2 illustrates the differences between agriculture, manufacturing, and services in terms of these pro-development characteristics, as commonly perceived. The manufacturing sector stands out in its absorption of unskilled labor combined with its trade intensity in international markets, R&D intensity, capital intensity, and linkages with other sectors. The services sector has lower levels of capital intensity and R&D intensity, is less traded internationally, is more skill-biased, and has fewer linkages with other sectors.

BOX 1.1 Trade in Services: A Tale of Four Modes

Trade in services can assume many forms, including international transactions as varied as a consumer buying a foreign movie to watch on a computer, a shipping company transporting goods over the sea, a tourist buying a meal abroad, a supermarket chain selling products through a foreign branch, or a management consultant advising a customer abroad. The most common classification of services trade is the one applied in the World Trade Organization (WTO) treaty, the General Agreement on Trade in Services (GATS), which breaks down services trade into four “modes”:

• Mode 1: Cross-border supply. A provider delivers these services to a customer in another country without any movement of persons or commercial presence. This mode includes digital delivery to a customer abroad. • Mode 2: Consumption abroad. The customer obtains services after traveling to the provider’s country. This mode includes services provided to foreign tourists as well as for medical tourism and students studying abroad. • Mode 3: Commercial presence. These are services provided through commercial presence in the consumer’s country, such as through foreign direct investment (FDI) that establishes a local subsidiary or affiliate company. • Mode 4: Movement of natural persons. Under this mode, service delivery involves the travel of a service provider (an employee or the business owner) to the consumer’s country.

Because of their intangible nature, services trade volumes can be hard to measure. Statistics usually rely on balance of payments (covering modes 1, 2, and 4) and FDI (covering mode 3) data that have been compiled from firm surveys, bank transactions, and administrative records. However, data availability and collection practices vary between countries. Furthermore, trade statistics usually follow GATS definitions. For example, mode 4 statistics usually follow the narrow view of what counts as “movement of persons” (mode 4) trade in services, excluding most forms of employment abroad and out-migration. The challenges in measuring trade in services are further explored in “Spotlight: Bringing Services to the Surface: The Measurement Challenge,” following chapter 2.

Based on an experimental dataset—Trade in Services Data by Mode of Supply (TiSMoS)a—the WTO estimates that across countries and sectors, on average, the dominant mode of services trade is commercial presence (mode 3), which accounted for 59 percent of world services trade in 2017 (WTO 2019). The corresponding shares of other modes were 28 percent for cross-border supply (mode 1), 10 percent for consumption abroad (mode 2), and 3 percent for movement of natural persons (mode 4).

a. TiSMoS is an experimental dataset produced by the WTO and funded by the Directorate-General for Trade of the European Commission.

The difference in trade intensity between the manufacturing and services sectors reflects the latter’s physical proximity burden between producers and consumers, which results in disproportionately high trade costs (Anderson, Milot, and Yotov 2014; Fontagné, Guillin, and Mitaritonna 2011; Francois and Hoekman 2010; Gervais 2018; Miroudot, Sauvage, and Shepherd 2013). And even though the services sector experienced a cumulative decline in trade costs of about 9 percent between 2000 and 2017 (comparable to the manufacturing sector), it still accounted for only about 20 percent of cross-border trade in 2017 (WTO 2019).