Services growth in the least developed countries
Published on the UN International Support Measures Portal for Least Developed Countries.
In Maseru, the capital of Lesotho, a roadside stall sells drinks, fruit and mobile phone top-up cards. Half a dozen pairs of trousers hang from a peg above a row of shoes. Passers-by pause briefly to buy what they need.
Enterprises like these small kiosks are at the core of the economy, the silent nucleus around which life revolves. Ranging from shoe-shine to taxis, supermarkets to food-sellers, Lesotho’s tertiary sector has grown to 55% of gross domestic product, according to UN data, employing 42% of the workforce.
The story is typical. In the least developed countries (LDCs), formal and informal services are expanding fast, accounting for nearly half of output and a third of employment as shown by the latest figures.[1]
Although services are increasingly important worldwide — and a sign of entrepreneurship — this trend isn’t necessarily a good thing. Services productivity tends to be lower than manufacturing because intangibles can’t easily be traded and tend to have lower returns to scale.
LDCs also feature lower services productivity than in many other countries. Companies tend to be smaller, less efficient and far from the technological cutting-edge. A market stallholder generates much less output than a software company employee.
In many LDCs, particularly in Africa, people are increasingly leaving behind traditional low-paid or subsistence rural work. But manufacturing isn’t growing fast enough – or even at all – to take up the slack. ‘Premature deindustrialisation’ means that unlike in the traditional idea of development, a move out of the fields isn’t a guaranteed route to the production line.
Instead, many people pick up semi-formal or informal services work in or near the city. In Maseru the garment sector isn’t big enough to accommodate all those looking for employment; hence the proliferation of roadside kiosks.
Even in countries where manufacturing is growing, it mostly isn’t doing so fast enough to offset the expansion of the low-productivity tertiary sector where most jobs are created. The task of development involves not just the shift away from agriculture, as conventionally understood, but narrowing this gulf between manufacturing and services.
You can’t export a taxi ride
Not only are many LDC services companies small and create little value – often reselling finished goods — they usually don’t export. You can’t sell a taxi ride overseas. Phone cards are only for domestic use. This lack of tradeability further limits productivity growth.
Sales of LDC services abroad have risen over the past decade but only to less than half a percent of the world total. A handful of countries dominate, alongside a few sectors – mostly tourism, transport and distribution. Knowledge and tech-intensive services hardly feature. Linkages with the rest of the economy are minimal.
In a sensible attempt to boost LDC services export growth, a decade ago World Trade Organisation (WTO) member countries agreed the so-called ‘services waiver,’ which allows WTO members to grant preferential treatment to services and service suppliers from LDCs.
This is the main source of international support for services in LDCs. It was supposed to better integrate these countries into services trade. But despite some progress, not much has changed.
LDCs just can’t produce enough to meet international services demand – emphasising the need to build productive capacity, broadly defined. Other obstacles include a lack of visas and work permits; fees, charges and taxes; as well as insufficient funds or representatives to sell things in destination markets.[2]
But a wider issue is that the services sector is simply such a large category that it effectively acts as a ‘catch-all’ for anything that doesn’t count as agriculture or manufacturing. In that sense it’s quite badly-named.
An increasing amount of economic activity takes place in the grey area where intangible activity overlaps with manufacturing or farming. Many manufacturers now ‘servitize’ production, charging for a product based on the number of hours it is used instead of selling it wholesale, or adding a range of services beyond production such as location tracking or preventative maintenance. Most modern producers now use services in production, and a large number of employees engage in services activities.
Some things are just difficult to define. A mobile telephone sold with a subscription could be seen as both a product with a service and a service with a product.
Consider 3D-printing or additive manufacturing, whereby polymers are used to ‘print’ a variety of finished items. It isn’t pure manufacturing since most of the know-how comes via software, often traded online. It isn’t a pure service since the output is a physical object.
It’s therefore hard to isolate and discriminate purely in favour of an LDC – or any – ‘service’ export. Integrating LDCs into services trade may be important, but it’s only part of the challenge facing the sector.
The services waiver is well-intentioned and part of the solution, but the difficult conclusion is that because the line between different types of economic activity is increasingly fuzzy, the vital task of boosting productivity in LDCs means considering the economy as a whole, which implies modernising production and adopting new technologies, both secondary and tertiary. Targeting either manufacturing or services alone is no longer straightforward.
Simply allowing WTO members the freedom to prioritise LDC exports isn’t enough. Not all members will do so consistently. Supply constraints affect LDCs’ ability to benefit. More direct and concrete measures are needed to address the structural challenges of low incomes, vulnerability and limited education and skills. Services must be prioritised not just as exports in themselves, but also as lubricant in the machinery of production – as an indispensable part of contemporary economies.
In this sense a full range of support is needed, including more detailed, specific and practical measures to support LDC exports; broader geographical coverage; a renewed push to build productive capacity, and collaboration among LDCs themselves.
And the age-old yet always pressing challenges remain: technology transfer, entrepreneurship and human and physical capital accumulation in an attempt to narrow the dualisms within developing economies. Plus ça change, plus c’est la même chose.
[1] Source: UNCTAD Least Developed Countries Report 2020, https://unctad.org/system/files/official-document/ldcr2020_en.pdf
[2] UNCTAD (2020) ‘Effective Market Access for Least Developed Countries’ services exports: An Analysis of the World Trade Organization Services Waiver for Least Developed Countries,’ https://unctad.org/system/files/official-document/ditctncd2019d1_en.pdf
This article has been made possible with financial support from the UN Peace and Development Fund.
Emergent Economics 
Dan,
A great post that has stimulated me to examine this further, when I get the time. I agree with you about the poorly defined “services”. For that reason, I think a drill down into what is actual just the selling of commodities, as against the provision of actual services is required, though for the reasons you describe, that is not straightforward.
But, for the same reasons I’m not sure that your conclusion that an expansion of services relative to agriculture/manufacturing necessarily follows either. In terms of foreign earnings it might, but what about the growth of the Indian services sector in relation to the provision of call centres? The Internet, and global communications systems means that a lot of services now can be “exported”. And, NIC’s have stepped over developed economies in relation to some of these things, for example use of mobile phones for payments and so on, so that a growth of such services, acts to increase productivity, and the rate of turnover of capital.
The fact that other labour intensive services – in so far as they are services not simply selling – are not subject to foreign competition, also means that high rates of profit are produced in these sectors, which is probably why they are attracting more capital, and growing faster than manufacturing, which is more subject to foreign competition, and is also, therefore, subject to lower prices of production, as a result of a higher composition of capital.
Thanks for your kind comments. I fully agree with you that an increasing number of services are exportable, and India (not an LDC) is a good example. The problem is that for the reasons stated in the post, in most LDCs and low-income countries the traditional route to development, agriculture to manufacturing, isn’t easy any more, and the growth that used to come from manufacturing now comes from low-value or low-employment services.
I’m not saying that the expansion of services is always a good thing — quite the opposite — it’s more the inevitable outcome of the challenges of manufacturing growth. Someone like Ha-Joon Chang is quite right to point toward the intrinsic advantages of factories. It does seem, though, that realism means looking toward the incorporation of services in production, and shaping the economic environment toward higher-employment or value-adding services. I increasingly agree with Rodrik about premature industrialisation, but clearly if you’re a government policymaker in an LDC you’re going to be thinking a lot about hybrid or servitised manufacturing, or manufacturing-orientated services; whatever, employment is the key.
You’re also right to highlight the definitional problems associated with what is a ‘real service’ and what is ‘simply selling’. New categories are needed, or at least these things need to be talked about in a more disaggregated way.
In most low-income countries and LDCs people start basic services or retail outfits because they don’t need much capital and they’re perceived as low-risk (because so many other people have shown they work), which is necessary since the consequences of failure are so severe. To some extent these trends are a result of the failure of planning and the shift away from industrial policy in recent decades, but they’re also unfortunate consequences of the way that globalisation has proceeded, and particularly, I think, core-periphery relations.
Dan,
Thanks for your response. There were some communication problems due either to my keyboard sticking, or me mistyping. What I intended to say was that I’m not sure the conclusion that service development, rather than manufacturing was a bad thing, was correct. In fact, I’d say it was incorrect.
There is a danger of making the same mistake as the Physiocrats, by now seeing services as somehow not productive, which is not correct, if services is properly defined, in fact, as Marx sets out in Capital III, Chapter 17, merchant capital, in selling, and reducing the costs of circulation, whilst not productive of surplus value, is productive of higher realised profits, higher rate of turnover, and so higher annual rate of profit, facilitating greater growth and capital accumulation.
Service industry itself can be the generator of not only surplus value, but also of new manufacturing industry. It may be stimulation of local construction and maintenance companies that build and maintain new office buildings from which the services are provided, or local small engineering companies that provide and maintain equipment, and so on. Many of these can grow, because they do not face external competition from larger, more efficient capital, for whom such activity may be de minimus.
I realise that India is not an LDC. My point, however, is that it illustrates the way an LDC, can also export services, in the age of the Internet. It also extends to other forms of service industry, for example, it becomes possible for artists, musicians, writers and so on from LDC’s to sell their output to a global audience, at virtually zero marginal cost. And, because service industry is labour rather than capital intensive, it produces a higher rate of profit.
A look at the changes in earnings and living standards between different countries over the last thirty years shows that it is amongst these less developed economies and middle income countries that the biggest improvements have arisen, as against the position of the developed economies. That is not so in every case, obviously, but is an indication of this process of development within which the ability to skip over or at least foreshorten the stage of manufacturing – now mostly capital rather than labour intensive, and certainly as far as the types of manufacturing established on a large scale in NIC’s is concerned – and go straight to the higher profit area of service industry.
Hi Boffy, sorry not to reply earlier. Services growth in LDCs is clearly high and higher than manufacturing in the last 20 or more years. Unfortunately it’s mostly lower value-adding and informal, not ICT or new technologies. In an ideal world LDCs would be following the likes of the Asian tigers into high-employment sustainable manufacuturing (perhaps of a modern, ‘servitised’ type), which is clearly a better route — manufacturing features higher returns to scale, higher productivity, tradeability and learning-by-doing — but few see any chance of that happening in most LDCs. The second-best option seems to be services, which I by no means discount as the basis of a development strategy. What would be most unfortunate is if it was of the informal, sole-trader type common in countries like Lesotho. In my experience it’s much harder than most commentators seem to think for LDC governments, especially small ones, to enact the industrial policy necessary for successful services upgrading and formalisation. ‘Skipping stages’ is much, much harder than it seems. This makes something like what Bhutan did doubly impressive: https://www.un.org/development/desa/en/news/policy/thimphu-techpark.html
A further issue about the difficulty in dividing services from manufacturing: Ha-Joon Chang makes the important point that the distinction between services and manufacturing was always often only a formal divide because both activities were often carried out in the same company or conglomerate. It was just a formal division inside the corporation – the output may have been a physical product but plenty of different activities occurred to make that product, some of them ‘tertiary’. Making too much of a big deal about whether an activity falls in a particular sector may be unneccesary, because so many different types of work happen to contribute to the final output. it may be the robot or worker on the production line that physically puts the thing together but all sorts of jobs go into production – accounting, planning, law, design, management, etc.