Transcript Challenges and Opportunities for Developing Countries

Service Markets: Challenges and
Opportunities for Developing Countries
Jorge Arbache
Seminar “O Brasil e o comércio internacional de serviços”
MRE, June 28, 2016
Jorge Arbache
What are we talking about?
R3
R1
R2
Industrial density (US$) - D2
R4
Share of manufacturing on GDP (%) - D1
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Share of business services on GDP (%) - D3
Industry-space - Dynamics of industrial development
Source: Arbache(2012)
What are we talking about?
8000
SWE
FIN
AUT JPN
DEU
6000
KOR
DNK
USA
NLD
4000
ITA
FRA
GBR
2000
AUS
HUNPRT
POL
TUR
MEX
BRA
0
IDN
.1
Source: Arbache 2015
IND
.2
.3
Business services (% GDP)
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.4
What are we talking about?
Source: Arbache 2015
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What are we talking about?
Source: Arbache 2015
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What are we talking about?
• Manufacturing-services – synergetic and symbiotic
relationship to create jobs and value
• Services -- key component behind manufacturing
competitiveness (Brookings 2014; Arbache 2014; inter alia)
• Service sector development is explained by manufacturing
development (Brookings 2014; Savona 2016; inter alia)
• Key component behind economic growth and
competitiveness (Duarte and Rastuccia 2010; Berlingieri
2013; inter alia)
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What are we talking about?
• Servicification and digitization eras
• New technologies of production and organization of
production (modern manufacturing, artificial intelligence, 3D
printers, robots, nanotechnology, etc)
• Digitization is disrupting everything: the nature of goods, the
universe of potential suppliers and customers, methods of
delivery, capital and scale to operate globally, and capacity
needs
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What are we talking about?
• Digitization catalyzes rapid growth by creating network effect
and reducing marginal costs -- hyperscale platforms enjoy
massive operating leverage – Google, Apple, Amazon…
• Digital powerhouses are taking advantage of their hyperscale
platforms to move from search and networking into new
sectors – a self-reinforcing, endogenous move
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What are we talking about?
• Business models, IT and service technologies lifecycles –
shortening very rapidly
• Services - larger share in productivity growth account
• Behind most of today’s innovation
• Cost services vs value services – highly different impacts
(Arbache and Moreira 2015)
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What are we talking about?
• Services becoming increasingly tradable
• Essential links in GVCs
• 54% of global trade (TiVA) today; 75% by 2025
• 66% of new FDI flows (Delloite 2016)
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What are we talking about?
Source: McKinsey Global Institute 2016
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What are we talking about?
• Global service markets US$5.2 trillion; expected to reach
US$14 trillion over the next 10 years
• In 2014, data flows added US$ 2.2 trillion to GDP directly and
US$ 2.8 trillion indirectly (McKinsey 2016)
• Data flows and services: next frontier of value and job
creation, and growth
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What are we talking about?
• In conclusion, the service sector and the digital
economy are key competitiveness and short term
growth drivers
• But it looks like that owning a modern and dynamic
service sector is becoming critical for long term growth
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Question
• Dani Rodrik (QJE 2013): Industrial development explains
productivity and growth convergence
Is that likely in regard to service and digital economy?
Likely in terms of usage
Unlikely in terms of development and management of
service and digital technologies
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Question
• Service and digital economy expose firms to productivity
growth, ideas, and markets
• However, huge gap between developed and developing
countries
• Fallacy of composition – most prominent characteristic of
service and digital economy (Arbache 2016)
• “Digital commoditization” – access to and usage of services
and digital tech no big deal in the long term (Arbache 2016)
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Brazil: large, but poor service sector
GDP per capita and Services (% GDP), 2014
Services (% GDP) - left axis
Per capita income (constant 2005 US$) - right axis
90%
45,000
80%
40,000
70%
35,000
60%
30,000
50%
25,000
40%
20,000
30%
15,000
20%
10,000
10%
5,000
Source: Arbache 2015
Elaboration based on data from the WDI
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France
United States
United Kingdom
Belgium
Denmark
Italy
Japan
Sweden
Austria
BRAZIL
Costa Rica
Germany
Turkey
Argentina
Mexico
Chile
Russia
Korea
South Africa
*2010 **2012
Colombia
Peru**
Thailand
Malaysia
India
China
Viet Nam
Venezuela*
0
Indonesia
0%
Brazil: large, but poor service sector
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Brazil: large, but poor service sector
• Small, low productivity, poor firms, final consumption driven
• Uncompetitive services (OECD 2016)
• Important factor behind manufacturing and other sectors’
poor competitiveness – value chain and aggregate impacts
(Arbache 2014; OECD 2016)
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Implications for developing countries
• Openness and/or taking part in plurilateral service
agreements -- an opportunity but also a challenge
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Implications for developing countries
• Participating -- “take it or leave it” -- development issues
involved
• Not participating -- risk of being left behind of the digital and
service era; trade and investment diversion risk; risk of being
left behind of the service and digital trade governance
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Implications for developing countries
Smiley curve today
High value added
activities
High value added
activities
Low value added
activities
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Implications for developing countries
High value added
activities
Smiley curve
tomorrow
Low value added
activities
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High value added
activities
Concluding remarks
• The service and digital economy offer unequal opportunities
for developing countries to reduce productivity in the short
term
• However, the huge tech gaps, the fallacy of composition, and
the terms and conditions of service agreements will pose
challenges for late comers countries
• Service and digital economy are likely to change the rationale
for investment localization and the dynamics of global value
chains
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Concluding remarks
• Dilemma – Participating or not participating in service and
digital agreements?
• Participating and/or opening up unilaterally may be a
precipitated move; remaining closed and not participating is
highly risky and may increase the productivity gap in the
short term
• For the service and digital economy to benefit a country
like Brazil, they have to be part of a broader development
strategy
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Concluding remarks
• What to do?
Develop and implement “new industrial policies” –
knowledge agenda, value addition, industrial density,
productivity, diversification of economy, and integration
into the international economy
Improve digital infrastructure, regulatory reforms, new
human capital competencies, and business environment
Industrialization of comparative and competitive
advantages can play an important role – e.g. agriculture,
biodiversity, pharma, renewable energy, mining, ultra
deep water exploration, health, and aerospatial
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Many Thanks
Jorge Arbache