The challenge of services growth in 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.

Services like small kiosks are at the core of the economy, the silent nucleus around which life revolves. From shoe-shine to taxis and food-sellers, the range of such businesses is broad. 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. Factory productivity is higher because physical items can easily be traded and tend to have higher returns to scale.

Services productivity in LDCs is also lower 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 notion 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, and 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 is thus 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.

Although international support like the services waiver is well-intentioned and undoubtedly part of the solution, 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, and 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 data collection, research, analysis and information-sharing 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.

The views in this article are those of the author and do not necessarily represent the views of CDP, its Secretariat, or the United Nations. This document should not be considered as the official position of the CDP, its Secretariat or the United Nations. Any remaining faults are those of the author.

This article has been made possible with financial support from the UN Peace and Development Fund.

[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