Services, not manufacturing, best bet for nations to fight poverty, says research

India's service-led growth model seems to be scoring over the manufacturing-led Chinese model as the way to go for developing countries. A new research concludes that though manufacturing has been widely held as the model for poor countries due to its ability to create jobs and uplift the masses, services may offer a better model.

The paper, ‘Service with a smile: A new growth engine for poor countries', by Mr Ejaz Ghani and Ms Arti Grover, both from the World Bank, and Mr Homi Kharas from the Brookings Institution says globalisation of services has enabled developing countries to tap into a new source of growth.

“Globalisation of services provides many opportunities for late-developing countries to find niches where they can be successful…Services may provide the easiest and fastest route out of poverty for many poor countries,” say the authors.

They studied the contribution of services and industry to the growth of gross domestic product, a measure of economic growth, in the last 30 years for rich and poor countries. They found that the contribution of services to growth is higher than the industry's contribution. In poor countries, services and industry have contributed more to growth than in rich countries.

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Relying on data of 94 countries, they concluded that in 58 countries productivity growth in services exceeded that in industry.

The paper recommends that poor countries, especially those smaller and less populated, can take advantage of a trend that India has pioneered. By comparing labour productivity across sectors, they also show that the rise in services' contribution to growth is linked to a rise in productivity growth in the sector. Labour productivity growth in rich countries has been higher in services than in industry, and it remains positive.

That, the study says, “implies that the global technology frontier for services is still shifting out, while that for industry has stagnated. At the same time, productivity growth in poor countries in services is accelerating and appears to have outstripped productivity growth in industry”.

Development in information and communication technology has made modern services more tradable for all countries, but especially for the poor ones, the authors contend. While conceding that India is the popular example of a major modern service exporter, they show that during the last decade poor countries such as Rwanda, Swaziland and Burundi have experienced growth rates in aggregate service exports that are higher than India's. “For the period 1990-2009, poor countries' exports of modern commercial services have grown by 14.6 per cent per year. Excluding India and China, the figure is still a respectable 9.1 per cent.”

The Indian growth model, apart from its thrust on services rather than on manufacturing, is distinct from the Chinese model in other ways as well. For instance, it relies more on domestic consumption rather than exports, and private enterprise rather than State-owned companies and their investments.

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