KARACHI: The services sector, which according to the World Trade Organisation (WTO) is the fastest growing sector of the global economy, contributes 70% to the global output. It also accounts for a quarter of the total global trade and employs one third of global employment.
In Pakistan, the sector has immense importance, since it constitutes 58% of the country’s GDP. The country exported services worth $5.3 billion with a deficit of $3 billion in 2014.
The sector also has strong backward and forward linkages with other sectors of the economy and contributes significantly to the cross border trade. It complements the production process and is considered the glue that binds the various segment and components of the finished goods.
In the production process, services can be found at various stages from the inception to the final consumption. As the production process shows increasing fragmentation, the services sector is also scattered globally where advancement in information technology and communications have made it mobile and cost effective.
Challenges faced by the sector
The increasing importance of services sector in the global value chain has created challenges for policymakers to understand its role and enable policy to support competitiveness of national firms.
One of the biggest challenges is statistics of the services sector which are difficult to measure.
Countries usually measure trade in services through the balance of payment maintained by the central banks. However, the content of the domestic services in the goods manufacturing for export is difficult to quantify.
The WTO Secretariat in collaboration with Organisation for Economic Co-operation and Development (OECD) has developed Trade in ‘Value Added Database’ that sheds some light on the content of services in trade in goods.
In the developed economies, the value addition or content of the services in exported goods is as much as 45%. For developing countries, this averages around 35%. However, for some developing countries such as India and China, the value addition done by services in the exported goods is around 50%.
This trend where services sector, domestic and imported, being a significant enabler in the manufacturing and production of goods, has led to the servicification of manufacturing and reclassification of industrial activities such as purchase, production, marketing, sales and customers relationship.
A number of scholars consider the servicification of manufacturing as a “game changer” where the research has shown sufficient empirical evidence that share of services in the industrial output has doubled in the last decade for the developed countries.
The data from OECD research shows that contribution of services to manufacturing accounts for 50% of exports from the USA and the EU in 2014.
This study also quantified the impact on barriers on import of services and concluded that there was a direct relationship between restrictions on the import of services and trade in manufacturing goods.
It means that countries that have placed restrictions on the import of services have undermined the capacity of their national manufacturing firms in exporting goods.
We can thus conclude that manufacturing and export of goods is dependent on the availability of competitive services both domestic and foreign. The scholarship on the subject has sufficient empirical evidence that just by reducing import tariff are not sufficient for export competitiveness. There is also need to liberalise and open up services sector to be able to create opportunities for national firms competing globally.
In Pakistan, there has been an ongoing debate on the competiveness of local firms where increasing challenges form competitors have prevented Pakistan to realise its export potential. It is important for the policymakers to realise that global competiveness is achieved not by defensive or protective approaches but through aggressive and bold steps by liberalising trade (both goods and services), particularly in Mode 3 and 4 of the supply of services. Mode 3 is the service by firms through physical presence in a foreign country and Mode 4 involves movement of professionals from one country to another for rendering services.
This would require Pakistan to facilitate foreign direct investment and take measures for ease of doing business. Pakistan would also be required to liberalise visa regime and work permits so that professional from abroad can visit Pakistan and render professional services for national firms.
Every year, the World Bank publishes the ‘Ease of Doing Business Index’ that ranks countries as per business friendly environment. This ranking is an important barometer used by public and private sectors globally to make economic and investment decisions.
In 2014, the ranking of Pakistan slipped from 106 to 110 in the list of 189 countries. This does not augur well for attracting FDI and should be a cause concern for the policy makers.
The writer is a civil servant with 20 years of experience on issues related to Pakistan’s trade and development
Published in The Express Tribune, May 11th, 2015.