Challenges and opportunities of services sector for less developed economies
The services sector is becoming more transcendental in the economy. According to online statistics from the World Bank, the percentage service’s shape overworld Gross Domestic Product (GDP) has been increasing in the last thirty years from 54.2% in 1995 to 65% in 2017. As a result, countries are offering new services to win a bigger piece of the pie. This change is driving the companies to explore new ways to gain a place in the service sector. Even so, for some analysts it isn’t an easy way to follow since countries have many challenges to overcome. In the present article, I will discuss this idea with arguments to support and controvert it.
The service sector has an advantage: it has the highest level of productivity over agriculture or other traditional ones like the industrial sector. For instance, financial services have a productivity index around 2 (Greenwald, Kohn and Stiglitz, 1990). It means that if you invest one dollar in financial activities, it will return you almost twice your initial amount. It’s the reason why financial services are one the most profitable in the economy.
Some kinds of services, as green ones, offer an opportunity for poor countries with huge green inventories but without resources to sell added-value services. For instance, ecotourism is an activity that lets people share their culture and natural landscapes with foreigners (see Ahmad, Abdurahman, et., al, 2014). Natives have financial and cultural incentives to care for nature. At the same time, they earn some money to support their expenses. This kind of tourism is popular in several in Center American countries like Costa Rica and Mexico and it offers many opportunities for less developed economies like Latinamerican one.
Moreover, tourism creates dynamic in the economy owing to it’s an activity connected to others like financial services, transportation, catering, hosting, and many more. It means that economies with a developed services sector have an additional advantage over those without it. Central American countries have this advantage. According to graphic 1, Cuba, Curacao, Belize and Costa Rica have a percentage of the shape over GDP of 65% higher than the most developed countries in the region as Brazil, Chile, Argentina and Colombia. Central American countries found a better way to get benefits from internationalization using the service sector as a critical part of their economic growth strategy.
Graphic 1. Percentage weight of services sector over GDP
Other countries have developed more sophisticated services linked to technology. Software development or artificial intelligence are good examples. In graphic 2, Singapore leads the ranking of the most successful countries to export high tech. In the 70’s and 80’s, this country was one of the poorest countries in the Asian world. However, they made institutional changes to their economy to make it more productive for the coming years. Specifically, they invested in education, quality of social services and improved the institution’s quality. Nowadays, they enjoy a stronger high tech sector with excellent behavior as an exporter in contrast with Latin American countries.
Graphic 2. High tech exports per country:2007-2018
On the other hand, countries like Colombia, Bolivia, Ecuador and Chile are specialized in traditional products with less added value. These nations have the lowest levels of high technology exports as graphic 2 shows. For these economies, it is complicated to reach high levels of technological progress. As a result, they have been investing a low piece of their income in Research and Development (R&D) , they have weak institutions to support the development and lower levels of cumulative human capital.
Furthermore, a technological switch requires highly qualified human resources in different fields such as engineering, mathematics, computational science, physics and science in general. Nonetheless, people don’t like to study those careers. Graph 3 shows a sample of the applicants for undergraduate programs in Colombia during 2018. Young people don’t like to study engineering or mathematics but they prefer business administration. It creates a deficit of human resources which compromises even more to adopt a strategy to sell services with high levels of added value.
Graphic 3. Applicants for undergraduate programs in Colombia during 2018
Finally, for some countries it is problematic since they have been specialized in producing and exporting a specific product. For example, countries with huge oil’s reserves like middle east economies, Russia or Venezuela in Latin America. Even though they could produce anything else, they have a powerful incentive to keep exploding fuel for a longtime. It is the same situation for countries with too many natural resources.
To conclude, the service sector represents a new option for development in many countries. Poor economies have an opportunity with green services, and if they can to create high added goods and services. Countries like Singapore are one of the successful cases from the poorest countries in the Asian world to be a leader in technology. Nonetheless, there are some drawbacks as the low levels of cumulative human capital, low quality in education and high levels of public investment to get a broad shape in the services sector pie.
In addition, some countries are specialized in commodities like fuel, gold or coffee, as a result, they have generous stockpiles of oil & gas, green resources (appropriate weather, temperature, high quality in the roof, large extensions of the green forest to breed, rich mineral reserves). It creates a tough incentive to keep doing the same.
Nonetheless, I believe countries have to innovate and gain more participation over their GDP with more added value either goods and services. Poor countries have a wonderful opportunity with software development considering they have two preconditions: a big shape of the labour force are young people and they are unemployed. On the other hand, the software development industry has a deficit in human resources. It is the time to enroll more people in the software sector as part of a strategy to reduce the unemployment rate, get a better performance in the GDP and increase welfare.
Bruce C.,Greenwald, Meir Kohn, Joseph E. Stiglitz (1990). Financial market imperfections and productivity growth. In Journal of Economic Behavior & Organization. Volume 13, Issue 3, June 1990, Pages 321-345.
Ahmad Johanna Adlin, Abdurrahman Abang Zainoren Abang, et.,al (2014). Social Entrepreneurship in Ecotourism:An Opportunity for Fishing Village of Sebuyau, Sarawak Borneo. In Tourism, Leisure and Global Change, volume 1 (2014), p.TOC-38