Service with a Smile: A New Growth Engine for Poor Countries

Homi Kharas, Ejaz Ghani, and Arti Grover

For more than 200 years, it was argued that economic development and growth was associated with growth of the labor-intensive manufacturing sector (Baumol 1967, Kaldor 1966, UNIDO 2009). Services were considered as menial, low-skilled, and low-innovation (McCredie and Bubner 2010). But today, services can be among the most dynamic sectors in an economy. The policy question is whether this is true even in poor countries.

There is evidence that services contribute more to GDP growth, job creation, and poverty reduction than industry in many developing countries (Ghani and Kharas 2010). Services now account for more than 75% of the global economy (45% in developing economies). Services are the fastest growing sector in global trade. The share of developing countries in world service exports increased from 14% in 1990 to 21% in 2008. The average growth of service exports from poor countries has exceeded that of rich countries during the last two decades. Their service exports are growing faster than goods exports. In brief, the globalisation of services has enabled developing countries to tap into a new, dynamic source of growth.

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Ejaz Ghani

Economic Advisor, South Asia - World Bank