Export of services and its exponential potential

Services-sector growth can help reduce deficit, alleviate poverty

KARACHI: Pakistan has always faced issues in achieving the balance of payments equilibrium and the current account deficit has remained a persistent source of concern.

Achieving an increase in exports seems an insurmountable challenge. Yet, it is the panacea that a deficit-stricken economy needs. We have traditionally focused on the export of manufactured goods but to increase export of manufactured goods, we would need considerable time. In this scenario, the export of services offers an easier and much more doable alternative.

According to the World Bank database of the past 40 years, global exports of manufactured goods have increased with compound annual growth rate (CAGR) of 15% whereas export of services in the corresponding period increased at CAGR of 17%.

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Furthermore, if we dig deep, we come up with more meaningful information. From 2000-17, the export of goods in our region (China, India, Pakistan and Bangladesh) increased by a CAGR of 16% whereas Pakistan’s exports of goods increased by just 6%.

On the other hand, the export of services in this region increased by a CAGR of 8% and export of services from Pakistan kept pace with the region’s average at 8%. Hence, in recent times, we have performed well on the export of services front as compared to the export of goods.

Furthermore, basic economic theory also promises a prosperous future for the export of services. It says as per capita income in the world increases, consumption of services also increases. When people become rich, they consume more services.

This can be seen from the mushroom growth of banks, restaurants and beauty parlors in urban centres.

Furthermore, in recent times, the internet has become a game changer. Through increased connectivity, the highly rich developed world is consuming more and more internet-based services (call centres, tuitions, etc). These services are generally provided by the developing countries.

For most of the export of services, we just need an English-speaking service provider, an internet connection and a mobile phone or laptop. Since Pakistan is one of the largest producers of O level and A level graduates, we have no dearth of English-speaking service providers.

Furthermore, the positive externalities arising from the increase in the services-sector exports are commendable. In a landmark research paper titled “The Service Revolution” by Ejaz Ghani and Homi Kharas, it has been highlighted that the services-sector growth has a very strong correlation with reduction in poverty.

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Generally, the service providers are from the lower echelons of society and margin cuts of the rich and greedy middlemen are avoided. Furthermore, for a single job created in the services sector, four other jobs are created due to increased incomes and higher resultant consumption.

Apart from the reduction in poverty, the services-sector exports also contribute to female employment, which is also a major challenge for developing economies like Pakistan.

The convenience offered by the services-sector employment includes work from home with flexible timings, which makes it practically possible for housewives to participate in the workforce. Hence, the services-sector growth also leads to increased female employment.

This increase in female employment, in turn, raises the social status of women and makes them financially independent. This independence also has a positive correlation with reduction in the population growth rate.

A natural question that arises from the above arguments is that why are we not utilising this services-sector exports already? Why are we lagging behind? Our services export amount to almost $6 billion whereas China has reached $206 billion and India $185 billion. Why not us? The primary reason behind this is the lack of institutional focus. We have not taken this business seriously and I think it is time to pin our unadulterated focus on this sector.

Our entrepreneurs need to get this business and manage the supply chain. Secondly, the government needs to incentivise this sector like other sectors of exports. The government needs to ensure availability of payment channels like Paypal so that fruits of services export reach the service providers.

Previous finance minister had announced that he would take the next flight to Paypal headquarters but efforts did not succeed and Paypal refused to come to Pakistan. Now, the government should again try to convince Paypal and address its grievances so that the payment gateway for services export is established.

The export of services can quickly provide the national economy with precious foreign exchange. It will also help in alleviating poverty, which is a grave concern. Furthermore, these exports will also increase female participation in the labour force and hence will provide a much-needed boost to the country’s gross domestic product (GDP).

The writer is a banker and teaches economics

Published in The Express Tribune, June 24^th, 2019.

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