Are services different?

Jan 18 2013, 03:56 IST
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SummaryIt is fair to say that there is now a broad consensus among economists that policies encouraging exports can have a positive impact on growth.

The effect of the real exchange rate is even stronger for exports of services than exports of goods; yet it needs to be accompanied by strong institutions, sound macroeconomics, a disciplined labour force and high savings rate to be successful

poonam gupta & Barry Eichengreen

It is fair to say that there is now a broad consensus among economists that policies encouraging exports can have a positive impact on growth. The marginal product of labour tends to be higher in the production of exports than other activities. Reflecting this productivity differential, export-oriented industries pay higher wages than other sectors. Exports tend to be labour intensive in developing countries, consistent with the comparative advantage implicit in factor endowments.

Exports relax the balance-of-payments constraint on growth, facilitating imports of capital goods and technologies. Export industries are centres of learning by doing and sources of externalities that raise the productivity of other sectors. These and related observations have spawned a large literature concerned with the policies and circumstances conducive to export growth.

The new frontier today, including in developing countries, is trade in services. The exports of services have grown by about 10% annually worldwide between 2001 and 2010. Since the mid-1990s, exports of services have grown by at least 15% annually in 20 developing countries. The share of developing countries in global trade in services rose from 14% to 21% between 1990 and 2008 (Goswami, Mattoo and Saez 2012). Exports of engineering, health, legal, accounting and management services, constituents of the modern or non-traditional category, have been the fastest growing component of service exports in recent years. All this points to the question of whether the same policies and circumstances that are conducive to the growth of exports of merchandise are similarly conducive to the growth of exports of services.

In earlier papers we considered the determinants of the size of the service sector. In this one we focus on service exports, distinguishing between modern and traditional services.

Traditional services include trade and transport, tourism, financial services and insurance. Modern services include communications, computer, information and other related services. We consider both the growth of export volumes and so-called export surgesperiods of unusually rapid sustained growth.

Freund and Pierola find that large sustained depreciations of the real exchange rate, implying improvements in competitiveness, typically precede surges of merchandise exports. In some of their specifications they find that low levels of exchange rate volatility and high levels of economic openness

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