Policy Research Working Paper                                 10382




                      Services-Led Growth
                Better Prospects after the Pandemic?

                                  Gaurav Nayyar
                                  Elwyn Davies




Equitable Growth, Finance and Institutions Practice Group &
Finance, Competitiveness and Innovation Global Practice
March 2023
Policy Research Working Paper 10382


  Abstract
 The service sector accounted for two-thirds of economic                            constrained by the need for physical proximity and the lack
 growth in emerging market and developing economies over                            of opportunities to augment labor with capital. Policies to
 the past three decades. It consists of a wide range of activi-                     support the diffusion of digital technologies could there-
 ties, ranging from high-skilled offshorable services, such as                      fore further raise the growth potential of the service sector.
 information and communications technology (ICT) and                                Policies to improve market access for, and skills in, ICT
 professional services, to low-skilled “contact” services, such                     and professional services could ease important constraints
 as retail and hospitality. The pandemic disrupted many low-                        on growth opportunities in these high-skilled offshorable
 skilled contact services that typically require face-to-face                       services that have best withstood the pandemic. The same
 interactions between providers and consumers. High-skilled                         holds true for policies, including regulatory reforms, that
 offshorable services were the least affected owing to the use                      promote investment in low-skilled contact services, such
 of digital technology that enabled remote delivery. Increased                      as transportation, which have important linkages with the
 digitalization has improved prospects for scale economies                          wider economy.
 and innovation in the service sector that were previously




 This paper is a product of the Equitable Growth, Finance and Institutions Practice Group and the Finance, Competitiveness
 and Innovation Global Practice. It is part of a larger effort by the World Bank to provide open access to its research
 and make a contribution to development policy discussions around the world. Policy Research Working Papers are
 also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at gnayyar@worldbank.org;
 edavies@worldbank.org.




         The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development
         issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the
         names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those
         of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and
         its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.


                                                       Produced by the Research Support Team
               Services-Led Growth: Better Prospects after the Pandemic?

                                    Gaurav Nayyar and Elwyn Davies1




Keywords: Services sector, growth, digitalization, pandemic, COVID-19

JEL Classification: O14, O33, O47




1
 Nayyar (Equitable Growth, Finance and Institutions Chief Economist’s Office, World Bank; gnayyar@worldbank.org)
and Davies (Trade, Investment and Competitiveness Department, World Bank; edavies@worldbank.org). The
authors would like to thank Muneeb Ahmad Naseem and Jiayue Fan for their invaluable research assistance. The
authors would also like to thank Amat Adarov, Valerie Mercer-Blackman, Poonam Gupta, J. Bradford Jensen,
Jeetendra Khadan, Ayhan Kose, Franziska Ohnsorge, and Garima Vasishtha for their invaluable comments and
suggestions. The opinions expressed in the paper are those of the authors and do not necessarily reflect the views
of the World Bank Group or its Board of Executive Directors.
I. Introduction

The services sector is large and has been the main source of global economic growth over the
past three decades. Between 1995 and 2019, services accounted for 66 percent of global output
growth and 73 percent of global employment growth and for 63 percent of global output levels
and 57 percent of global employment levels in 2019. While the services sector represented a
somewhat smaller part of economic activity in emerging market and developing economies
(EMDEs) than in advanced economies (AEs), the difference was small. Even in EMDEs, services
made up 60 percent of output and 52 percent of employment in 2019.

The services sector is diverse. First, it includes high-skilled offshorable services (information and
communication technologies, finance, and professional services) that have been internationally
traded much like goods since the ICT revolution in the 1990s. Second, it includes low-skilled
contact services (transportation, hospitality, retail, personal services, arts, entertainment and
recreation, and administrative and support) that have typically required physical proximity
between providers and consumers. Many services from both these categories provide important
inputs for non-service sector activity. For example, transportation and logistics services form the
infrastructure for international trade in agricultural commodities and manufactured goods, while
ICT services are increasingly central to data-intensive production processes. Third, there is a
group of social services (education and health) that are largely publicly provided and therefore
not a focus of this paper.

The pandemic has dealt uneven blows to services activity. Low-skilled contact services, such as
transportation and hospitality, were hit particularly hard by social distancing regulations and
precautions. But high-skilled offshorable services, such as ICT and professional services, were
much less affected owing to their amenability to home-based work.

The increased digitalization that has been implemented by firms to cushion the impact of the
pandemic’s disruptions can be leveraged to boost growth in the services sector. Baumol (1967)
and Hill (1977) argue that the potential for services-led growth is limited because services
typically require a simultaneity of production and consumption that precludes economies of
scale. In other words, the need for face-to-face interactions between service providers and
consumers inhibits opportunities to serve demand beyond the local market. They also point out
that services have less scope for capital-deepening and innovation than in manufacturing.
Increased digitalization, however, enables greater scale and innovation in the services sector. The
resulting productivity benefits, in turn, can boost overall economic growth owing to the
important linkages between the services sector and other parts of the economy.

Against this backdrop, this paper addresses the following questions:
   •       How has the services sector shaped global economic growth over the past three
           decades?
   •       How has the services sector been affected by the pandemic?


                                                 2
   •       How can digitalization enhance the services sector’s growth as countries recover from
           the pandemic?
   •       Which policies can help harness the services sector’s growth potential?

It presents several novel findings. First, although the services sector has led economic growth
over the past three decades in both advanced economies and EMDEs, there are signi ficant
differences in the composition of services sector growth between the two groups. While the
contribution of low-skilled contact services to GDP growth is similar between the two groups,
that of high-skilled offshorable services increases with per capita income levels. Thus, high-skilled
offshorable services account for around one-third of GDP growth in AEs compared with 15
percent in EMDEs, and for one-half of employment growth in AEs compared with 11 percent in
EMDEs. This matters because the growth of low-skilled contact services has been characterized
by lower dependence on (a) export growth relative to domestic demand growth, and (b) total
factor productivity growth relative to the growth of labor and capital inputs.

Second, the impact of the pandemic on the growth of the services sector has been uneven. Low-
skilled contact services reliant on face-to-face interactions with consumers, such as
accommodation, food, and transportation services, have been among the most adversely
affected sectors, even though there are now signs of recovery. But high-skilled offshorable
services, which tend to be amenable to remote work though digital delivery, such as ICT and
professional services, were among the sectors least adversely affected, and some—especially ICT
services—have even seen growth of output and investment.

Third, the increase in digitalization during the pandemic augurs well for growth prospects in the
services sector. Among high-skilled offshorable services, there is a new momentum; the share of
digitally deliverable ICT and professional services in total services exports of EMDEs increased to
50 percent in 2020 from 40 percent in 2019. Among low-skilled contact services, streaming
platforms such as Netflix and YouTube have increasingly enabled providers of arts and
entertainment services to export their creative content to international markets at low cost. Even
where physical proximity remains important, intangible capital associated with digitalization has
increased opportunities for scale economies. For example, e-commerce platforms have enabled
retailers and restaurants to reach customers beyond their local neighborhoods. Additionally, ICT
and management practices have facilitated the standardization of production across many
establishments.

Fourth, appropriate policy interventions can better enable countries to leverage the potential of
the services sector to drive economic growth. Policies to support the diffusion of digital
technologies in EMDEs, for example, can bring particularly high returns because of the lack of
digitalization in the services sector: the share of firms using email to communicate with clients
was less than one-third in several EMDEs as recently as 2018. Investing in ICT infrastructure,
updating regulatory frameworks (including in relation to data), and strengthening management
capabilities and worker skills can all boost the adoption of digital technologies. Countries can also
promote the expansion of high-skilled offshorable services by reducing barriers to international
trade and taking measures to improve skills. Last, but not least, countries can support investment

                                                 3
and implement regulatory reforms that foster the revival of low-skilled contact services, such as
transportation, that can be large employers and important enablers of growth in the wider
economy.

This paper makes several contributions to the literature. First, it presents stylized facts about the
role of the services sector in overall economic growth over the past three decades. This draws on
and complements a growing literature on structural change and productivity growth in EMDEs
that highlights the changing contributions of the manufacturing and services sectors (Fan, Peters,
and Zilibotti 2021; Kinfemichael and Mahbub Morshed 2019; McMillan and Rodrik 2011; Nayyar,
Hallward-Driemeier, and Davies 2021; Rodrik 2016). The main innovations here are the growth
decompositions: services subsectors are explored; the demand-side contributions of domestic
demand, exports, and government consumption are compared; and the supply side contributions
of the growth of factor inputs and total factor productivity are examined.

Second, it analyzes how the pandemic has affected prospects for services-led growth by tracing
patterns of recovery and assessing future growth opportunities linked to the acceleration of
digitalization. By making a systematic assessment by services subsector, this builds on a spate of
recent studies that examine the effects of the pandemic on growth and distribution (Apedo-Amah
et al. 2020; Beraja and Wolf 2021; Chetty et al. 2020) as well as the literature on how the digital
economy is expanding opportunities to boost productivity.

Third, it discusses policy options and priorities for leveraging the services sector’s potential for
boosting economic growth after the pandemic. This adds to the policy discussion in Nayyar,
Hallward-Driemeier and Davies (2021) by focusing on developments since the pandemic. Policies
considered include the reform of regulatory barriers and the promotion of skill development for
both high-skilled offshorable and low-skilled contact services.

The remainder of the paper is organized as follows. Section II quantifies how the service sector
has shaped economic growth over the past three decades. Section III analyzes how the pandemic
has affected the service sector’s growth. Section IV examines the potential of digitalization to
increase growth in the service sector. Section V identifies policy priorities to leverage this
potential to drive stronger overall economic growth. Section VI presents conclusions.


II. How has the services sector shaped economic growth?

A general feature of economic development is structural change in national economies. The
pioneering work of Fisher (1935), Clark (1940), Chenery (1960), and Kuznets (1971) observed a
common pattern of change in the relative sizes of the agriculture, industry (or manufacturing),
and services sectors among the industrialized or advanced economies in the course of their
development. In the early stages of development, the agriculture sector’s share in both output
and employment was dominant. Subsequently, as industrialization proceeded, the agriculture
sector’s share fell off, and the industry (or manufacturing) sector’s share rose. Once countries

                                                 4
industrialized and reached an advanced stage of economic development, the industry sector’s
share also declined, and the services sector’s share increased. Interestingly, growth in EMDEs
over the past three decades has not conformed to this pattern. In spite of the relatively early
stages of development of most of these economies, the service sector has offset much of the
decline in the share of the agriculture sector in both GDP and employment.

However, there are important differences across services subsectors. Three categories may be
distinguished. First, ICT, finance, and business services comprise a group of high-skilled
offshorable services. Second, there is a group of low-skilled contact services that are not
offshorable. However, some are traded internationally through either their linkages with goods
(cargo transportation and wholesale trade) or tourism-related travel (accommodation and food).
Education and health services (social services) comprise a third group. High-skilled offshorable
and low-skilled contact services differ in two particularly important economic respects. First,
growth in the output of low-skilled contact services has generally been characterized by lower
dependence on export growth, as opposed to domestic demand growth, than high-skilled
offshorable services. Second, growth in the output of low-skilled contact services has generally
been based less on growth of total factor productivity, as opposed to growth of capital and labor
inputs, than high-skilled offshorable services.2 High-skilled offshorable services have expanded
less in EMDEs than in AEs.

II.1 Services and structural transformation
Between 1991 and 2019, the services sector’s share of total employment in EMDEs increased
from 39 to 51 percent, offsetting almost the entire decline in agriculture’s share, with little
change in the share of industry (figure 1.A). Similarly, the services sector’s share of GDP rose from
47 percent to 58 percent, offsetting a substantial decline in the share of agriculture together with
a smaller decline in the share of industry (figure 1.B). These rising shares of the services sector in
employment and GDP reflect its central role in driving economic growth in EMDEs over the past
three decades. Thus, the services sector accounted for more than half of both employment
growth (figure 1.C) and value-added growth (figure 1.D) between 1991 and 2018 across EMDEs.

In the past, the increasing share of the services sector in employment and GDP in industrialized
countries was attributed, at least in part, to rising relative prices of services that resulted from
lower productivity growth than in industry (Baumol 1967). Labor productivity in the services
sector could not be readily increased, either through innovation and capital accumulation, owing
to the “intrinsic role of labor,” or through economies of scale, because the intensity of face -to-
face interactions constrained service providers from reaching consumers beyond the local
market.
This past characterization of the services sector is less relevant for EMDEs today. Labor
productivity growth in the services sector between 1995 and 2018 was similar to, or higher than,
in the industry sector in four of the six EMDE regions—Latin America and the Caribbean (LAC),
2
 The relatively large contributions of export growth and total factor productivity growth to the growth in the output
of high-skilled offshorable services have, nevertheless, been smaller than their contributions to the growth of
manufacturing output.

                                                         5
the Middle East and North Africa (MNA), South Asia (SAR), and Sub-Saharan Africa (SSA; figure
1.E). Only in the East Asia and Pacific (EAP) and Eastern Europe and Central Asia (ECA) regions—
where export-led manufacturing has been the cornerstone of economic growth—did the growth
of labor productivity in industry exceed that in services, as was the case in the advanced
economies.

Furthermore, between 1995 and 2018, labor productivity growth in services in all EMDE regions
except MENA exceeded that in advanced economies, implying narrowing productivity gaps. This
provides encouraging evidence that services growth has been contributing to EMDE s’ catch-up
with per capita incomes in advanced economies. It is also consistent with evidence of
unconditional convergence of productivity across countries: countries starting from lower labor
productivity in the services sector experienced faster productivity growth between 1975 and
2012 than those with higher initial labor productivity in that sector (Enache, Ghani, and O’Connell
2016; Kinfemichael and Mahbub Morshed 2019).

These trends in labor productivity growth, combined with the changing sectoral shares of
employment, underlie the contribution of the services sector to overall labor productivity
growth. This growth reflects both within-sector gains in productivity, as well as between-sector
gains as the labor force shifts from low- to high-productivity sectors. Thus, productivity growth
within the services sector contributed more than productivity growth within industry to
aggregate productivity growth in all EMDE regions other than EAP in the past three decades.
Furthermore, although the relative contribution of the between-sector component did not
exceed one-third in any region, in each case the bulk of it came from the increasing share of
services in total employment (figure 1.F).

Increased productivity-enhancing growth opportunities in the services sector include new
opportunities for larger-scale production, innovation (including through mechanization), and
spillovers through linkages with other sectors—characteristics typically associated with
manufacturing-led growth. For example, digital electronic content has made ICT services more
storable, codifiable, and transferable and therefore more scalable. Similarly, innovation through
research and development (R&D) since the 1990s has been largely concentrated in ICT
multinationals owing to software patents (Branstetter, Glennon, and Jensen 2018). ICT services
have also increasingly benefited other sectors as data analytics have improved the quality and
efficiency of production processes.

II.2 The heterogeneity of the services sector
The services sector comprises a wide range of economic activities.3 They can be grouped on the
levels of skills that they involve and their amenability to being offshored and internationally

3
  Under the United Nations (UN) International Standard Industrial Classification of All Economic Activities (ISIC), the
broad categories of services include, among others, wholesale and retail trade; accommodation and food;
transportation and warehousing; information and communication technology (ICT) services; financial services; real
estate; professional, scientific, and technical services; public administration and defense; education and research;
health services; arts, entertainment, and recreational services; administrative and support services; and other social,

                                                          6
traded. Three groups may be distinguished: high-skilled offshorable services, low-skilled contact
services, and social services.

The first group, high-skilled offshorable services, comprises ICT, finance, and professional,
scientific, and technical services that employ a smaller share of workers in manual task-intensive
occupations and that involve tasks more amenable to offshoring (figure 2.A). These services are
more offshorable because they rely less on face-to-face interactions with customers and suffer
less from losses in quality when delivered remotely. They are also often used as intermediate
inputs by other firms in the domestic economy, creating opportunities for domestic as well as
international trade. For instance, three-fourths of the output of professional services constituted
intermediate inputs in other sectors (figure 2.B).

The second group, low-skilled contact services, relies more on manual labor and are less
amenable to offshoring. This group includes transportation; hospitality; wholesale trade; arts,
entertainment, and recreation; retail trade; administrative and support services; and personal
services. Some of these services—notably transportation, hospitality, and wholesale trade—are
highly traded internationally (figure 2.C). Transportation services and wholesale trade are often
intermediate inputs into internationally traded goods. In contrast, hospitality services —
accommodation and food provision—are mostly traded through “consumption abroad” owing to
tourism-related travel (figure 2.D).

The third group, social services, consists of education and health services that are both relatively
skill-intensive and less amenable to offshoring. This group of services is outside the focus of this
paper since they are largely provided by the public sector.

Low-skilled contact services accounted for about one-third of GDP growth between 1990 and
2019 in each major country group—AEs, EMDEs, and low-income countries (LICs). The
contribution of social services to overall GDP growth over the past three decades, at about 15
percent, was also similar in each of these groups. However, the contribution of high-skilled
offshorable services to GDP growth increased with levels of per capita income, ranging from 10
percent in LICs to 15 percent in EMDEs and almost 30 percent in advanced economies (figure
3.A).

The contribution of high-skilled offshorable services to employment growth between 1990 and
2019 was also larger at higher levels of per capita income, ranging from 4 percent in LICs to 11
percent in EMDEs and more than 50 percent in AEs. In contrast, the contribution to employment
growth of low-skilled services, at around 40 percent, was similar across LICs, EMDEs, and AEs
(figure 3.B).




community, and personal services (United Nations 2008). Mining; utilities such as electricity, gas, and water; and
construction are typically classified within “industry,” together with manufacturing.

                                                        7
II.3 The nature of services-led growth


       The contribution of demand-side factors
The output of a sector caters to either intermediate demand from other sectors in the domestic
economy or to final demand that comprises domestic private consumption and investment,
government expenditure, and exports. Among the components of final demand, domestic private
demand plays the largest role in many low-skilled contact services, accounting for one-half of
output in retail trade and three-fourths of output in hospitality services (figure 3.C). International
trade in these services has typically been constrained by the need for physical proximity between
service providers and consumers (Hill 1977). Among low-skilled contact services, exports play a
larger role in transportation and wholesale trade, where they are linked to trade in goods.

The share of exports in final demand is also quite large for some high-skilled offshorable services,
such as professional services and ICT, where digital electronic content has made them more
storable, codifiable, and transferable. Because the constraint of physical proximity between
consumers and providers has become less binding, professional services now have trade costs
comparable to those in manufacturing industries (Gervais and Jensen 2019). Yet, even for these
services, the share of exports in final demand is considerably lower than for manufactured goods.
This may be attributable to a range of policy impediments that have constrained services trade.
Government consumption matters most in education and health services, which are often
publicly provided.

Intermediate domestic demand—sales to producers in other sectors of the domestic economy—
matters greatly for many services, accounting for more than half the output of both high-skilled
offshorable services and some low-skilled contact services, such as transportation, wholesale,
and administrative and support services (figure 3.C). These links with other goods-producing
(tradable) sectors also mean that services might be exported indirectly.

Value added by services accounted for 43 percent of world exports in 2009, up from 31 percent
in 1980. In fact, more than two-thirds of the growth in services value-added in exports between
1995 and 2011 was due to an increase in services embodied in other exports rather than services
exported directly (Heuser and Mattoo 2017). This suggests that services such as transportation,
telecommunications, finance, and business services have increasingly been used as intermediate
inputs in the production and export of goods. In France, Germany, Italy, the United Kingdom, and
the United States, services contribute more than half the total value-added embodied as inputs
in exports. Even in China, often viewed as predominantly an exporter of manufactured goods,
more than a third of the value-added in its exports comes from services (World Bank 2020).
Furthermore, there is evidence that services embodied as inputs improve the productivity of
downstream manufacturing (Arnold et al. 2015). These forward linkages highlight the important
enabling role that many services play.




                                                 8
        The contribution of supply-side factors
The growth of output can be decomposed into the contributions of the growth of factor inputs,
such as capital and labor, and the contribution of the growth in the productivity of these factors,
known as total factor productivity (TFP). Estimates based on data for 15 EU countries indicate
that growth of factor inputs, particularly labor, accounted for most of the growth of output of
most services subsectors between 1991 and 2018 (figure 3.D). The low, even negative,
contribution of TFP growth may reflect, at least in part, Baumol’s “cost disease” hypothesis.
Baumol (1967) argued that the productivity of many services sector activities cannot be readily
increased through innovation because of their inherently labor-intensive nature. With
technological progress in other sectors, the prices of manufactured and agricultural products
would tend to fall relative to the price of services, leading to an increasing share of services in
total output.4

However, high-skilled offshorable services have contradicted Baumol’s hypothesis with higher
labor productivity than in manufacturing. Labor productivity in financial services is 3.5 times
higher than in manufacturing in EMDEs (and about 2.5 times higher in AEs), while labor
productivity in ICT services is about 2 times higher in EMDEs (and 1.3 times in AEs) (figure 3.E).
Labor productivity in professional services is below that of manufacturing, but TFP —which
corrects for differences in physical capital—is slightly higher than in manufacturing (figure 3.F).
Low-skilled contact services tend to have lower labor productivity and TFP than manufacturing.

However, productivity gains still occur in low-skilled contact services. Fan, Peters, and Zilibotti
(2021) show that the growth of such contact services—employing large numbers of low-skilled
labor—in India over the past three decades has been characterized by productivity gains.
Furthermore, firm-level data from Côte d’Ivoire, North Macedonia, Moldova, and Vietnam show
that productivity growth in firms across several low-skilled contact services during their initial
years often exceeds productivity growth in manufacturing firms (Aterido et al. 2021).

The relatively large contribution of capital accumulation to output growth in the services sector
reflects increasing investments, including through foreign domestic investment (FDI).5 For
example, outward FDI from the U.S. in high-skilled offshorable services outpaced that in
manufacturing between 2011 and 2020 (figure 4.A). Furthermore, employment in U.S. foreign
affiliates (outward FDI) has increased across all services groups, while employment growth in
manufacturing remained more stagnant (figure 4.B), despite increasing investment.


III. How has the COVID-19 pandemic affected the services sector’s growth?



4
  The challenges of measuring outputs and inputs in the services sector also raise concerns about the
mismeasurement of productivity (Nayyar, Hallward-Driemeier, and Davies 2021).
5
  Foreign direct investment is the most prevalent “mode” of trade in services (“mode 3” under the General
Agreement on Trade in Services [GATS] framework).

                                                   9
In previous recessions, the services sector was resilient despite sharply contracting
manufacturing activity (figure 5.A). However, this resilience was missing during the pandemic
(figure 5.B). In fact, the economic contraction following the COVID-19 pandemic was particularly
salient for the services sector (Apedo-Amah et al. 2020; Chetty et al. 2020; OECD 2021; World
Bank 2022).

Unlike in previous downturns, the consumption of durable goods was resilient, but the
consumption of many services declined owing to lockdown measures and increased caution by
consumers (Tauber and Van Zandweghe 2021). This unusual shift in consumption patterns may
carry implications for the ongoing recovery: whereas reduced spending on durables in earlier
downturns might just have represented postponed spending, consumers are less likely to catch
up on reduced services spending (Beraja and Wolf 2021).

However, the impact of the pandemic on the services sector has not been uniform across either
subsectors or countries. The effects have been particularly severe on many services in the low-
skilled contact services group, especially those most reliant on face-to-face interactions, such as
accommodation, food, and transportation services. But the high-skilled offshorable services
group, consisting of ICT, professional and financial services, has generally withstood the
pandemic as well as, if not better than, manufacturing, largely because digitalization has helped
to make these services amenable to remote delivery and home-based work. Even among some
low-skilled contact services, the pandemic has accelerated digitalization, including in countries
where the use of digital technologies was low.

III.1 Patterns of impact and recovery
         Differences across services subsectors
Overall, the impact of the pandemic on output was somewhat larger in the services sector than
the manufacturing sector. In 2020, the growth rate of the services sector was lower than that of
manufacturing in more than half (87) of the 157 countries with available sectoral value-added
data (World Bank 2021). In 136 countries, value-added of the services sector fell in 2020,
compared with 116 countries where there was a decline in manufacturing (figure 6.A).

However, the overall impact of the pandemic conceals considerable heterogeneity among the
various services groups. In the low-skilled contact services group, hospitality (accommodation
and food services) and transportation services were the most negatively affected. Gross value
added in these sectors declined by 40 and 21 percent, respectively, in the year to April 2020 in a
representative group of EMDEs with available national accounts data (figure 6.B). Estimates
based on data from firm surveys similarly indicate that the largest negative impacts on sales in
2020 and 2021 occurred in accommodation, food services, and transportation ( figure 6.C),
together with “other” services (including personal services).6 Negative impacts in these sectors
continued through 2021 in EMDEs (figure 6.D), but some recovery became visible in advanced

6
 In classifications of economic activities, personal services are often grouped under “other services” (under ISIC Rev
4, this corresponds to section S).

                                                         10
economies (figure 6.E). The concentrated impact of the pandemic contrasts with the more even
effects of the global financial crisis and associated recession across services subsectors.7

Similar patterns can also be seen in FDI inflows into EMDEs (figure 6.F). For most services
subsectors, announced greenfield FDI was lower in 2020 and 2021 than pre-pandemic levels, with
the largest declines being in hospitality and “other” services (including personal services). High-
skilled offshorable services performed slightly better, although both professional services and
financial services saw significant declines. ICT services was the only group that saw an increase in
greenfield FDI—of one-third between 2019 and 2021.

        The intensity of face-to-face interactions and amenability to remote work
The importance of physical proximity in delivering services in different sub-sectors is correlated
with the pandemic’s adverse impact on sales. Such low-skilled contact services as hospitality took
the biggest hit, reflecting their high dependence on face-to-face interactions and the limited
possibilities for remote or home-based work.8 In many countries, hospitality is also highly
dependent on tourism-related international travel, which declined significantly; the UN World
Tourism Organization estimates a decline of 97 percent at the height of the pandemic ( figure
7.A).

In contrast, the ICT sub-sector—part of the high-skilled offshorable services group— was the least
adversely affected, being more amenable to home-based work. In EMDEs, output of ICT services
grew by 20-25 percent in 2020, while other sub-sectors contracted or stagnated. Among EMDEs
with available data, Ghana and Türkiye have seen the largest expansion of ICT services (figure
7.B). As mentioned earlier, ICT is also the only services sub-sector that has seen positive
investment growth, with FDI in ICT in EMDEs growing by a third between 2020 and 2022.

In general, firms engaged in service activities dependent on face-to-face interactions between
providers and consumers experienced the largest decline in sales. In addition to hospitality
services, this applies to education services (figure 7.C). Similarly, firms engaged in activities that
are more amenable to home-based work typically experienced smaller declines in sales. This
applies to ICT, financial services, and professional services—all high-skilled offshorable services
(figure 7.D).

The transportation sector, which is moderately dependent on face-to-face interactions between
providers and consumers and among the least amenable to home-based work, has been
adversely impacted too. This holds not only for passenger transportation services, but also for
freight transport, which has been affected not only by border closures but also by impacts
upstream in the manufacturing sector, which led to reductions in the capacity of freight


7
  For example, in the United States, in the first quarter of 2009, subsectoral impacts in the services sector ranged
between -11 percent (for retail and wholesale) and -6 percent (for ICT). In the first quarter of 2020, U.S. services
subsectoral impacts ranged from -47 percent (for hospitality) and +1 percent (for ICT).
8
  Except for takeaway and home delivery services, physical proximity has remained central to their provision.

                                                        11
transportation. Given the important linkages between freight transportation and goods-
producing sectors, this has contributed to prolonged supply chain disruptions.

Since 2020, hospitality and transportation services have experienced partial recoveries,
attributable, at least in part, to the phasing out of government restrictions on in-person
gatherings and travel. Yet continuing restrictions and social distancing precautions mean that full
recovery has some distance to cover. For example, at end-2021, international tourist arrivals
were still two-thirds lower than before the pandemic. Furthermore, recovery has been slower in
EMDEs than in advanced economies. Thus, while hospitality services in the U.S. in the third
quarter of 2021 were about 8 percent lower than in the same quarter of 2020, they were close
to 40 percent lower in a group of EMDEs with available data.

III.2 The advent and growth of digitalization
The adoption of digital technologies has increased during the pandemic. The World Bank COVID-
19 Business Pulse and Enterprise Surveys show that nearly 44 percent of businesses globally
started or increased their use of digital technologies and that 29 percent invested in digital
technologies during the initial months of the pandemic (Apedo-Amah et al. 2020). Even as
restrictions were relaxed and firms experienced fewer adverse impacts from the pandemic,
increases in the use of digital technologies as reported by firms were sustained (figures 8.A and
8.B).

The adoption of digital technologies was higher in services than in manufacturing, agriculture,
mining, construction, and utilities. In these non-service sectors, only roughly one-third of firms
reported an increase in the use of these technologies. There are also differences across services
subsectors. The high-skilled offshorable services reported the largest proportions of firms
increasing the use of digital technologies, including financial services (61 percent in late 2021)
and ICT services (60 percent in late 2021).9

There has also been an increased use of digital technologies in some low-skilled contact services.
The share of firms starting or increasing the use of digital technologies in accommodation, food
services, and retail trade—services that are among the most dependent on face-to-face
interactions—was 35-45 percent in the most recent (late 2021) survey round. In fact, these
services have seen the largest accelerations in digitalization during the pandemic. Thus, the
change in the frequency of firms increasing the use of digital technologies between the first and
second waves of the survey, at 14 percentage points, was highest in food preparation and
accommodation services among all industries. Similar patterns can be seen in data for increases
in investment in digital technologies. This digitalization reflects adjustments in business models.



9
 The patterns across sectors are similar when looking at firms’ investment in digital technologies. The frequency of
such investment ranged from around 40 percent of firms in ICT and financial services; 25 percent in wholesale and
retail trade, food preparation, and accommodation services; and 20 percent in agriculture, mining, construction,
manufacturing, and transportation.

                                                        12
For example, digital platforms enabled restaurants to offer their food services outside their
premises through home-delivery and takeaway meals.10

In sum, high-skilled offshorable services, where digital technologies allow remote delivery, have
been less adversely affected by the pandemic than low-skilled contact services that are more
reliant on face-to-face interactions with customers and have little scope for remote delivery.
Among the former group, ICT services have actually experienced positive growth. However, even
firms in low-skilled contact services increased their use of, and investment in, digital technologies
at a faster pace than firms in manufacturing and agriculture. Furthermore, firms report that they
continued to increase digitalization even after pandemic-related restrictions were relaxed.


IV. How can digitalization transform opportunities for future services sector
    growth?

The acceleration of digitalization during the pandemic augurs well for growth prospects in the
services sector. In particular, it has shown how digitalization can expand opportunities for scale
economies and innovation that were previously hampered by dependence on face-to-face
interactions between providers and consumers and by limits to combining labor with physical
capital. Even before the pandemic, increased digitalization had expanded these opportunities,
albeit mostly for high-skilled offshorable services and a limited number of countries. The recent
acceleration raises the question of how much potential there may be for the bene fits of
digitalization to spread more widely in the services sector.

IV.1 Digitalization and exporting opportunities in the services sector
         High-skilled offshorable services
The ICT revolution has, since the 1990s, enabled the offshoring of ICT and professional services
to lower-cost destinations. Much like global value chains for manufactured goods, the production
of these services is fragmented across countries, such as when preliminary architectural designs
and tax returns are put together in one country and finalized and delivered to customers in
another (World Bank 2020).11 This labor cost arbitrage is reflected in the inverse relationship
between the share of cross-border delivery (mode 1 trade) in total exports of ICT and professional
services and per capita GDP. Service providers in EMDEs with English-language skills, such as
India, the Philippines, and Ghana have particularly benefited (figure 9.A).




10
   For example, in the U.S., food delivery apps reported that their revenues more than doubled in 2020 (Sumagaysay
2020).
11
   Freund and Weinhold (2002) provided the earliest assessment of the relationship between digital technologies
and trade in services, finding that the growth in U.S. service exports and imports increased by 1.1 percentage points
as internet penetration in a partner country increased by 10 percent.

                                                         13
The rapid expansion of bandwidth with the fifth-generation technology standard (5G) for
broadband cellular networks is expected to further increase the quality of data streaming. And
new collaborative digital platforms such as Skype for Business, Slack, Trello, and Basecamp have
enhanced the remote (digital) delivery of global innovator services. These digital platforms are
associated with a new form of online outsourcing for office and other professional services,
whereby low search costs enable clients to contract third-party individuals as freelancers.
Developing economies have the edge in exporting these services through digital platforms
(Baldwin and Dingel 2021).

Based on data from five of the largest English-language online outsourcing platforms between
June 2017 and October 2020, the Oxford Internet Institute’s iLabour Project estimates that much
of the global demand for online outsourcing came from high-income countries while two-thirds
of all online freelancers were in EMDEs. Approximately one-quarter of freelancers are based in
India and another quarter in Bangladesh and Pakistan. In per capita terms, the big suppliers are
Bangladesh, Pakistan, Sri Lanka, and several countries in Eastern Europe (figure 9.B). Suppliers in
Eastern Europe likely benefit from their integration with the European Union market, while those
in South Asia leverage their advantage of English being the preferred language for business
transactions. This pool of online freelancers is likely to widen geographically as the importance
of knowledge of the English language diminishes with the di ffusion of AI-enabled machine
translation (Baldwin 2019; Brynjolfsson, Hui, and Liu 2019).

The share of these digitally deliverable services in total services exports increased steadily
between 2005 and 2019 in both EMDEs and advanced economies. Their robustness during the
COVID-19 pandemic is indicated by the fact that this average share in EMDEs increased from 40
to more than 50 percent in 2020 alone (figure 9.C).

       Low-skilled contact services
Among low-skilled contact services, streaming platforms such as Netflix and YouTube have
enabled providers of arts, entertainment, and recreation services from EMDEs to export their
creative content to international markets at low cost. And COVID-19 has provided an impetus for
performing artists to devise new ways of sharing their talents with audiences virtually. Even in
low-skilled contact services where in-person delivery has remained important, digital tools have
boosted export opportunities. Digital platforms that reduce the costs of searching for, matching,
tracking, and verifying information (Goldfarb and Tucker 2019) are particularly relevant here. The
digital platforms that are increasingly used by travelers and businesses to transact
accommodation and transportation services are good examples. These digital tools may help less
traditional destinations overcome information obstacles and reduce travel costs, and thereby
attract more visitors. Indeed, countries with higher business-to-consumer (B2C) internet use
have also had higher levels of international tourist arrivals (figure 9.D). Analyzing population-wide
internet use in origin countries and business-to-consumer (B2C) internet use in destination
countries, Lopez-Cordova (2020) finds that digital platforms have boosted the demand for
international tourism services in Africa.


                                                14
IV.2 Digitalization and innovation in the services sector
       High-skilled offshorable services
In the case of high-skilled offshorable services, innovation has occurred largely through the
accumulation of ICT capital—computer equipment, telecom equipment, computer software, and
database assets. Since the 1990s, among OECD countries, the share of tangible ICT capital in total
capital increased the most in financial and professional services (figure 10.A).

The diffusion of digital technologies has also been associated with accumulation of intangible
capital—not only computer-related software and data, but intellectual property acquired
through R&D and design, and company competencies such as branding, firm-specific training,
and business process engineering. Here too, at least in the United States, the largest shares of
intangible capital in firms’ investment have been in ICT, finance, and professional services (figure
10.B). The accumulation of intangible capital in these high-skilled offshorable services is likely to
increase further given that AI-driven machine learning (ML) algorithms have dramatically
increased predictive power in many cognitive tasks such as problem solving, speech recognition,
and image recognition (Nayyar, Hallward-Driemeier, and Davies 2021).

       Low-skilled contact services
The share of intangible capital in investment is also higher than in manufacturing in several low-
skilled contact services, such as commerce and hospitality. For example, in OECD countries in
2018, the share of businesses with a website allowing online ordering was highest in hospitality
and retail trade, and almost all services subsectors had higher rates than in manufacturing (figure
11.A). The increasing sophistication of ICT, such as through the advent of AI and ML, is likely to
spawn complementary investments in intangible capital (Brynjolfsson, Rock, and Syverson 2021).
While ICT services stand out as having the largest share of firms using ML algorithms, the diffusion
of these technologies is as widespread across many low-skilled services as in manufacturing, if
not more so (figure 11.B).

There are similar opportunities for organizational and marketing innovation among low-skilled
services through new or improved company competencies that accompany digitalization. For
example, the share of firms that introduced new methods for product placement (figure 11.C) or
new methods for organizing external relations (figure 11.D) was higher in most service subsectors
than in manufacturing, and not very different in low-skill services from high-skilled offshorable
services.

Increased digitalization and related investments in intangible capital bring opportunities for
innovation and productivity gains in low-skilled contact services in three main ways. First, they
enable improvements in the efficiency of internal business processes, such as inventory
management, accounting practices, marketing, and payments. For example, big data analytics
can increase the efficiency of transportation services by making possible the tracking of
shipments in real time, while improved and expanded navigation systems may help route trucks
more efficiently on the basis of current road and traffic conditions (World Bank 2020). Second,

                                                15
ICT-related investments can substitute for missing and scarce skills. For example, ICT apps enable
Uber drivers to function with limited geographical knowledge and numeracy skills. Third, the
expansion of company competencies associated with digital technologies, such as marketing and
branding, facilitates the scaling up of low-skilled contact services that are less amenable to
remote delivery. For example, restaurant chains have invested in ICT and management practices
that help determine optimal staffing, daily food purchases, and new menu items for each
restaurant. This standardization of production over many establishments has enabled
restaurants and retail stores to scale up by replicating the same production process in multiple
locations near consumers (Hsieh and Rossi-Hansberg 2020).

IV.3 The adoption of basic ICT in the services sector remains low across EMDEs
Despite the diffusion of digital technologies, the use of basic ICT such as computers and email,
which is positively associated with countries’ per capita incomes, is far from widespread in
EMDEs. In many EMDEs, less than one-third of firms used email to communicate with clients as
recently as 2018 (figure 12.A). The share of firms using a website was even lower (figure 12.B).

The positive relationship between the share of firms using email and countries’ per capita
incomes is much stronger in low-skill contact services (where it is similar to that of the
manufacturing sector) than in high-skilled offshorable services (figure 12.C). Firms in retail and
hospitality services in EMDEs still rely mostly on manual processes for a range of business
functions. For example, in Senegal, 60 percent of such firms use manual costing most frequently
for pricing, 80 percent use manual selection most frequently for merchandising, and 62 percent
use handwritten records for inventory management (Cirera et al. 2020a). In Senegal, the
sophistication of the most widely used technologies across a range of business functions,
including business administration, marketing, and inventory management, is similar for firms in
retail trade and firms in apparel manufacturing (Cirera et al. 2020b). The share of firms having
their own website is also positively related to countries’ per capita incomes, with the relationship
being more similar across sectors (figure 12.D).


V. What policies can best harness the services sector’s growth potential after
   the pandemic?
To build on the momentum of digitalization in the services sector, and for the services sector’s
growth potential to be fully harnessed, policies can play a useful role. First, policies can be used
to support the adoption of digital technologies across the services sector, including through
promoting investment in ICT infrastructure, reforming regulatory frameworks, and strengthening
firms’ capabilities. The role that policies can play is especially important for EMDEs and smaller
firms because the greater intensity of digitalization among advanced economies and larger firms
during the pandemic has widened the digital divide between countries and firms (Cirera, Comin,
and Cruz 2022).




                                                16
Second, policies can help promote the revival of some low-skilled contact services that have been
hardest hit by the pandemic. The revival of travel-related transportation and hospitality is likely
to benefit from the faster rollout of vaccinations and the expansion of related health services.
Supporting infrastructure investments and regulatory reforms in transportation and related
distribution services can further help recovery and lay the ground to minimize supply chain
disruptions in the future. Third, policies can be designed to promote the further growth of high-
skilled offshorable services that have shown greater resilience to the pandemic, by removing
barriers to market access and improving the skills of the workforce.

V.1 Supporting the adoption of digital technologies
The use of digital technologies contributed to the resilience of firms in the pandemic. Firms with
higher levels of technological sophistication pre-pandemic saw larger increases in sales and were
also more likely to increase the use of digital technologies (Comin et al. 2022). While new
technologies have recently been spreading to EMDEs and LICs faster than in the past, they are
adopted by only a small share of firms at the technology frontier (Comin and Mestieri 2018).

Policies that support widespread adoption of the most-basic digital technologies in EMDEs can
lay the foundation for firms to leverage software applications, digital platforms, and even more
advanced ML algorithms. But policies supporting investment in broadband infrastructure, while
necessary, are not sufficient for greater uptake of digital technologies. Also needed are the
updating of regulatory frameworks to expand market access, and policies to strengthen worker
and management skills (Cirera and Maloney 2017). Precise policy requirements will vary among
countries and across different services subsectors. For example, management practices tend to
be particularly weak (but with the most potential for improvement) among firms in low-skilled
contact services, while advanced digital skills matter most for high-skilled offshorable services.
Updating regulatory frameworks governing digital markets is especially relevant for high-skilled
offshorable services where tech giants have increasingly dominated markets.

       Expanding access to digital infrastructure
Expanding access to the internet is crucial for the services sector. Hjort and Poulsen (2019) show
that the arrival of internet cables in Africa predominantly benefited the services sector, spurring
the formation of new firms and boosting productivity. Although many countries have been
accelerating the rollout of internet access, reliable and affordable access to broadband internet
is still not widely available in many EMDEs, and generally much less so than in AEs ( figure 13.A).
Fiber optic cables now reach most countries, but there are big gaps across countries in the
provision of “last mile” connectivity. To achieve widespread internet access, public investment
may be needed to overcome market failures inherent in the private provision of internet
infrastructure (essentially a public good). These failures stem from externalities (including
network externalities) and costs that decrease with scale (tending to lead to natural monopolies).
Policy interventions can also catalyze complementary private investment by ensuring enough
competition between providers, targeting subsidies carefully, and enforcing appropriate


                                                17
performance requirements to ensure coverage in more remote and lower-income locations
(World Bank 2021).

         Reforming regulatory frameworks for digital markets
The incentives and ability to use digital technologies are also affected by the regulation of digital
markets. Restrictions on digital trade tend be more stringent, on average, in EMDEs than in AEs
(figure 13.B). Competition authorities face new challenges in the regulation of digital trade in the
services sector, particularly in high-skilled offshorable services. In this sector, many tech
companies own valuable intangible assets (such as software, advertising space, and branding),
which derive value from strong network effects and access to data. Ownership of data and the
portability of data, especially across international borders, raise issues of privacy and innovation.
For example, content providers could restrict the provision of some services to countries where
intellectual property rights are inadequately protected (Hallward-Driemeier and Nayyar 2017).

Digital trade in services also poses new challenges for taxation. Traditional tax treaties tend to
focus on the question of whether a firm has physical presence in a country. As a result, firms that
have “presence without mass” through digital business models can avoid significant taxation,
denying governments a growing source of potential revenue. International negotiations are
seeking to address this issue, including through possible formulas for minimum tax payments by
multinationals that serve markets only virtually (World Bank 2021).

         Upgrading management and worker skills
Low levels of use of digital technology stem partly from shortcomings in the capabilities of firms,
at both management and staff levels. Sound management practices facilitate worthwhile change
in production processes, including the adoption of new technologies, which can often be
disruptive. Thus, management practices have played a role in the ways firms have, or have not,
adapted to the pandemic. Firms with more structured management practices are more likely to
adjust their product mix or to adopt online work arrangements, including in the services sector
(Grover and Karplus 2021). Management practices in the services sector are weaker in EMDEs
than in AEs (figure 13.C). Further, evidence for EMDEs and AEs shows that structured
management practices are particularly uncommon among firms in low-skill services, such as retail
trade and hospitality (Nayyar, Hallward-Driemeier, and Davies 2021). Governments can support
technological innovation and the adoption of structured management practices by addressing
information failures at the management level—either through the direct provision of training and
other business advisory services or through vouchers and awards (Bloom et al. 2013).12

Also important for increasing the adoption of digital technology are the skills of a firm’s labor
force. Digital skills are weaker in EMDEs than AEs (figure 13.D). Many workers report that their
lack of ICT skills is a constraint on employment and higher earnings. For example, about 40

12
   Not all firms are well-positioned to take advantage of management training. Efforts to provide management
training to informal enterprises have shown that only a few have the capabilities to use such training (or tap external
consulting services) to raise performance significantly. See, for example, Anderson and McKenzie 2022.

                                                          18
percent of workers in Vietnam reported in 2013 that deficient ICT skills prevented them from
finding a job or getting a better-paying job (Nayyar, Hallward-Driemeier, and Davies 2021). This
is less of a priority in firms providing low- skilled contact services, where basic knowledge of how
to use a computer and email is generally sufficient. A skills agenda that is broader than basic IT is
needed for workers to embrace technological change, particularly in high-skilled offshorable
services. Education, and particularly tertiary education—where enrollment rates are lower in
EMDEs than in AEs (figure 13.E)—plays an essential role in equipping workers with the cognitive
skills needed for complex problem solving, critical thinking, and adaptability. Tertiary education
systems can meet these demands by incorporating more general education in technical degree
programs and facilitating lifelong learning through adult education programs (World Bank 2019).
Public investment in education and training can also be supplemented, at advanced levels, by
tuition and training paid for by employers or by households if access to finance is not a barrier.

V.2 Promoting the revival of low-skilled contact services
Investing in widespread vaccination rollouts and related health care services is particularly
important to enable travel-related services, such as accommodation and passenger
transportation, to operate safely again at pre-pandemic scale. The uneven recoveries of these
services from the pandemic thus far—with stronger recoveries in advanced economies than in
EMDEs and LICs—is attributable, at least in part, to differences in the pace of vaccine rollouts
(World Bank 2022).

While the low vaccination rates in LICs primarily reflect procurement challenges, efforts to rapidly
scale up inoculations are also being hampered by logistical challenges in vaccine distribution,
including insufficient cold chain capacity (Hall et al. 2021). These need to be addressed.
Furthermore, vaccine rollouts will need to be supplemented by testing and access to treatment
facilities, especially given the uncertainty about the possible emergence of more transmissible or
more lethal variants of the virus that could escape protection from existing vaccines. All this
highlights the importance of investing in better health service systems, including through public-
private collaboration.

Evidence suggests that countries most dependent on tourism, such as small island economies,
often have among the lowest Global Health Security Index scores (AIIB 2020). Increased
digitalization, building on the momentum provided by COVID-19, could improve the performance
of health services in such resource-constrained countries by supporting efforts to revamp health
provider education; redesign platforms for care delivery; institute strategic purchasing and
management strategies; and develop patient-level data systems (Nimako and Kruk 2021).

Apart from addressing vaccination and other health-related issues, investment in infrastructure
(including through public-private partnerships) and measures to remove obstacles to
competition and associated market distortions can minimize future disruptions in transportation
and distribution services. Services trade faces significant regulatory barriers, which are generally
higher in EMDEs than in advanced economies (figure 13.F). In low-skilled services, such as retail
trade, there are both large EMDEs (such as Argentina, India, Indonesia, Malaysia, Thailand, and

                                                19
Vietnam) and advanced economies (such as Belgium, Finland, France, and Greece) among those
with the highest trade restrictions, and many have made little progress in reducing them in the
past decade (Nayyar, Hallward-Driemeier, and Davies 2021).

The pandemic has highlighted how disruptions in shipping, air transport, trucking, and
distribution services at critical trade gateways and hubs can hinder activity in goods-producing
sectors (Celasun et al. 2022). In fact, transportation and distribution services are among the
sectors with the most intensive forward linkages to producers in other sectors—that is, with the
largest shares of value-added forming inputs to economywide production (Nayyar, Hallward-
Driemeier, and Davies 2021). Reducing regulatory restrictions in these upstream services can
therefore bring cascading benefits to many downstream sectors. In India, for example, the
productivity of downstream manufacturing firms increased following the liberalization of
transportation services, including through greater foreign direct investment in the 1990s (Arnold
et al. 2015).

V.3 Promoting the expansion of high-skilled offshorable services
High-skilled offshorable services are more amenable to remote delivery and, as a result, have
better withstood the COVID-19 pandemic. These are also the services sectors with the highest
total factor productivity, implying that reallocation of resources toward them can raise an
economy’s total output. In EMDEs, high-skilled offshorable services are 2.7 times more
productive than low-skilled services, which account for two-thirds of total services employment.
If the composition of the services sector in LICs matched that in advanced economies, overall
services productivity would be 35 percent higher. Policy interventions that alleviate constraints
on the growth of high-skilled offshorable services may therefore be beneficial.

On the demand side, policy measures could support the growth of trade in ICT, finance, and
professional services. These include the easing of trade restrictions. Professional services are
among the most protected industries in both EMDEs and AEs (Borchert, Gootiiz, and Mattoo
2014). EMDEs stand to gain from liberalizing import restrictions. By allowing more imports of
services, with associated foreign know-how and investment, these economies could raise
competitive pressures, productivity, and innovation (Fernandes, Rocha, and Ruta, 2021; World
Bank 2020). Furthermore, trade agreements can provide opportunities for reciprocal reductions
in barriers to services. Some progress has already been made through bilateral or regional trade
agreements; more than 50 percent of all preferential trade agreements filed with the World
Trade Organization (WTO) through 2017 covered the services sector (Hofmann, Osnago, and Ruta
2019). At the multilateral level, 67 WTO members recently concluded negotiations on a new set
of rules aimed at slashing administrative costs and creating a more transparent operating
environment for service providers in foreign markets.

On the supply side, shortages of technical skills are an important barrier to the growth of high-
skilled offshorable services. Education, particularly tertiary education, and technical training are
key to equipping workers with the necessary advanced skills. Expansion of public-private
partnerships could make tertiary education and training programs more responsive to changing

                                                20
industry demands. The use of private providers and incentive contracts (where participant
placement is a condition for payment) can help align incentives in improving the effectiveness of
training programs. Having private sector actors involved in setting curricula can also help
programs reflect the types of skills future employees will need. Links with industry are a feature
of many tertiary education systems that are centers of innovation (World Bank 2019).



VI. Conclusion

The development community’s attention to the manufacturing export-led model of growth can
detract from the fact that the services sector has been the main driver of economic growth in
EMDEs over the past three decades. Today, half of all workers in EMDEs are employed in the
services sector. However, except for in the high-skilled offshorable services—ICT, finance, and
professional services—this services-led growth process has been fueled more by increases in
domestic consumption than by exports, and by the growth of factor inputs rather than
productivity growth. As a result, scale economies and innovation —which formed the basis for
growth in the export-led manufacturing model—have been relatively limited in the services
sector, especially in low-skilled contact services that employ a large share of low-skilled labor in
EMDEs. This has led to pessimism about the longer-term prospects of services-led growth.

In the short term, social distancing regulations and precautions associated with the COVID-19
pandemic have particularly affected low-skilled contact services—many of which are dependent
on face-to-face interactions between providers and consumers. Service providers have
responded by turning more to digital technologies, including for online sales in low-skill contact
services where in-person delivery remains important. Meanwhile digitalization has enabled high-
skilled offshorable services to withstand the adverse effects of the pandemic by facilitating
remote delivery.

Increased digitalization during the pandemic has provided new momentum to services- led
growth and its prospects. For one thing, it has improved opportunities for international trade in
services, not only in high-skilled offshorable services, but also, for instance, through streaming
platforms that enable the remote delivery of arts, entertainment, and recreation services. For
another, it has made possible new and greater efficiency gains: digitalization can allow otherwise
labor-intensive services to be combined with ICT and intangible forms of capital, reduce the
importance of physical proximity in market transactions, improve business processes, and
facilitate scaling up. The use of even the most basic digital technologies in EMDEs, however, is
far from widespread.

To harness the potential of the services sector in shaping the recovery from the COVID-19
pandemic and strengthening future economic growth, policy makers in EMDEs need to prioritize
the wider diffusion of digitalization. Policies to promote digitalization include supporting
investment in digital infrastructure, updating regulatory frameworks, and fostering the

                                                21
development of firms’ capabilities through education and training. The revival of low-skilled
contact services, such as transportation and hospitality, will likely bene fit from the expansion of
vaccination rollouts and related medical services. Promoting infrastructure investment and
regulatory reforms in such services as transportation, which shares important links with goods-
producing sectors, is also likely to benefit the wider economy. Last, but not least, policies that
improve market access and develop relevant skills can support the expansion of high-skilled
offshorable services.

The prospect of long-term services-led growth will also depend on climate change
considerations. The impetus for policy makers in EMDEs to enable structural transformation will
be even stronger going forward; agriculture is more vulnerable to changes in climate than non-
agricultural sectors (Casey 2020) and rising temperatures are associated with lower shares of
workers outside agriculture (Liu, Shamdasani, and Taraz 2019).

The choice between a services-led or manufacturing-led growth path might be influenced by
what they imply for a transition to net-zero emissions by 2050-60. In the United States, services
produce less than 5 percent of total greenhouse gas (GHG) emissions directly and their direct
GHG emission intensities per dollar of output are much less than those of physical products (Suh
2006). However, the energy intensity of services might increase with digitalization. Moreover,
once household consumption is considered, the distinction between the services and
manufacturing sectors is less clear. Large environmental impacts can be traced to consumption
by services workers. Together, they account for half of all wages globally, with the highest share
of highly paid workers of any sector (Greenford et al. 2020). Simulation models based on shadow
carbon prices show a limited impact of the net-zero transition on the shares of manufacturing
and services in GDP (Chepeliev et al. 2022). There may also be important differences across
services subsectors. On the one hand, travel-related services might contribute more to emissions
because of their dependence on transportation. On the other hand, high-skilled offshorable
services might contribute more to emissions through consumption because the workers they
employ tend to be more affluent.

The services sector can also play an important role in climate mitigation (reducing greenhouse
gas emissions) and adaptation (building resilience to climate change). For instance, financial
services can play a fundamental role in mobilizing the resources needed for necessary
investments (Grippa, Schmittmann, and Suntheim 2019). Similarly, engineering and
environmental consulting services will likely be central to enabling energy e fficiency
improvements (World Economic Forum 2022). The global environmental consulting services
market size is expected to almost double from $56.4 billion in 2021 to $93.6 billion in 2026 (TBRC
Business Research 2022).

Future research can explore how climate goals are impacted by structural change driven by the
manufacturing and services sectors. Analyzing sectoral differences in vulnerabilities to climate
change, intensity of emissions, and contributions to climate mitigation and adaptation could help
clarify the contribution of the services sector to economic growth in the future.


                                                22
References

AIIB (Asian Infrastructure Investment Bank). 2020. “Strengthening Healthcare to Revive
Tourism.” AIIB (blog). July 22, 2022. https://www.aiib.org/en/news-events/media-
center/blog/2020/strengthening-healthcare-to-revive-tourism.html.

Anderson, S. J., and D. McKenzie. 2022. “Improving Business Practices and the Boundary of the
Entrepreneur: A Randomized Experiment Comparing Training, Consulting, Insourcing and
Outsourcing.” Journal of Political Economy 130 (1): 157-209.

Apedo-Amah, M. C., B. Avdiu, X. Cirera, M. Cruz, E. Davies, A. Grover, L. Iacovone, et al. 2020.
“Unmasking the Impact of COVID-19 on Businesses: Firm-Level Evidence from across the World.”
Policy Research Working Paper 9434, World Bank, Washington, DC.

Arnold, J. M., B. Javorcik, M. Lipscomb, and A. Mattoo. 2015. “Services Reform and
Manufacturing Performance: Evidence from India.” Economic Journal 126 (590): 1–39.

Aterido, R., E. Davies, M. Hallward-Driemeier, and G. Nayyar. 2021. “Revisiting the Size-
Production Relationship in Services.” Unpublished manuscript, World Bank, Washington, DC.

Avdiu, B., and G. Nayyar. 2020. “When Face-to-Face Interactions Become an Occupational
Hazard: Jobs in the Time of COVID-19.” Economics Letters 197 (December): 109648.

Baldwin, R. 2019. The Globotics Upheaval: Globalization, Robotics and the Future of Work. New
York: Oxford University Press.

Baldwin, R., and J. Dingel. 2021. “Telemigration and Development: On the Offshorability of
Teleworkable Jobs.” NBER Working Paper 29837, National Bureau of Economic Research,
Cambridge, MA.

Baumol, W. J. 1967. “Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis.”
American Economic Review 57 (3): 415–26.

Beraja, M., and C. K. Wolf. 2021. “Demand Composition and the Strength of Recoveries.” NBER
Working Paper 29304, National Bureau of Economic Research, Cambridge, MA.

Blinder, A. S., and A. B. Krueger. 2013. “Alternative Measures of Offshorability: A Survey
Approach.” Journal of Labor Economics 31 (S1): S97-S128.

Bloom, N., B. Eifert, A. Mahajan, D. McKenzie, and J. Roberts. 2013. “Does Management Matter?
Evidence from India.” Quarterly Journal of Economics 128 (1): 1–51.

Borchert, I., B. Gootiiz, and A. Mattoo. 2014. “Policy Barriers to Internat ional Trade in Services:
Evidence from a New Database.” World Bank Economic Review 28 (1): 162-188.

                                                23
Branstetter, L., B. Glennon, and J. B. Jensen. 2018. “Knowledge Transfer Abroad: The Role of US
Inventors within Global R&D Networks.” NBER Working Paper 24453, National Bureau of
Economic Research, Cambridge, MA.

Brynjolfsson, E., D. Rock, and C. Syverson. 2021. “The Productivity J-Curve: How Intangibles
Complement General Purpose Technologies.” American Economic Journal: Macroeconomics 13
(1): 333-72.

Brynjolfsson, E., X. Hui, and M. Liu. 2019. “Does Machine Translation Affect International Trade?
Evidence from a Large Digital Platform.” Management Science 65 (12): 5449–5956.

Casey, G. 2020. “Structural Transformation and Climate Damages”. Unpublished ma nuscript,
Williams College (Department of Economics) and CESifo (Energy and Climate Economics).

Celasun, O., N.-J. Hansen, M. Spector, A. Mineshima, and J. Zhou. 2022. “Supply Bottlenecks:
Where, Why, How Much, and What Next.” IMF Working Paper 22/31, Int ernational Monetary
Fund, Washington DC.

Chepeliev, M., M. Maliszewska, I. Osorio-Rodarte, M. F. Seara e Pereira, and D. van der
Mensbrugghe. 2022. “Towards Net-zero Emissions: Impacts on Trade and Income across and
within Countries.” Unpublished manuscript, World Bank, Washington DC.

Chenery, H. B. 1960. “Patterns of Industrial Growth.” American Economic Review 50 (4): 624–54.

Chetty, R., J. N. Friedman, N. Hendren, and M. Stepner. 2020. “The Economic Impacts of COVID-
19: Evidence from a New Public Database Built Using Private Sector Data. NBER Working Paper
27431, National Bureau of Economic Research, Cambridge, MA.

Cirera, X., and W. F. Maloney. 2017. The Innovation Paradox: Developing-Country Capabilities
and the Unrealized Promise of Technological Catch-Up. Washington, DC: World Bank.

Cirera, X., D. Comin, M. Cruz, and K. M. Lee. 2020a. “Technology Firm -level Adoption of
Technologies in Senegal.” Unpublished paper, World Bank, Washington, DC.

Cirera, X., D. A. Comin, M. Cruz, and K. M. Lee. 2020b. “Technology Within and Across Firms.”
Policy Research Working Paper 9476, World Bank, Washington, DC.

Cirera, X., D. Comin, M. Cruz. 2022. Bridging the Technological Divide: Technology Adoption by
Firms in Developing Countries. Washington, DC: World Bank.

Clark, C. 1940. The Conditions of Economic Progress. London: McMillan & Co.



                                               24
Comin, D., and M. Mestieri. 2018. “If Technology Has Arrived Everywhere, Why Has Income
Diverged?” American Economic Journal: Macroeconomics 10 (3): 137–78.

Comin, D., M. Cruz, X. Cirera, K. M. Lee, and J. Torres. 2022. “Technology and Resilience.” NBER
Working Paper 29644, National Bureau of Economic Research, Cambridge, MA.

Corrado C., J. Haskel, C. Jona-Lasinio, and M. Iommi. 2016. "Intangible Investment in the EU and
US before and since the Great Recession and Its Contribution to Productivity Growth." EIB
Working Paper 2016/08, European Investment Bank, Kirchberg, Luxembourg.

Dingel, J. I., and B. Neiman. 2020. “How Many Jobs Can Be Done at Home?” Journal of Public
Economics 189 (2): 104235.

Enache, M., E. Ghani, and S. O’Connell. 2016. “Structural Transformation in Africa: A Historical
View.” Policy Research Working Paper 7743, World Bank, Washington, DC.

Fan, T., M. Peters, and F. Zilibotti. 2021. “Service-Led or Service-Biased Growth? Equilibrium
Development Accounting across Indian Districts.” NBER Working Paper 28551, National Bureau
of Economic Research, Cambridge, MA.

Fernandes, A., N. Rocha, and M. Ruta. 2021. The Economics of Deep Trade Agreements.
Washington, DC: CEPR Press.

Fisher, A. G. B. 1935. The Clash of Progress and Society. London: Macmillan.

Freund, C., and D. Weinhold. 2002. “The Internet and International Trade in Services.” American
Economic Review 92 (2): 236–40.

Gervais, A., and J. B. Jensen. 2019. “The Tradability of Services: Geographic Concentration and
Trade Costs.” Journal of International Economics 118: 331-50.

Goldfarb, A., and C. Tucker. 2019. “Digital Economics.” Journal of Economic Literature 57 (1): 3–
43.

Greenford, D. H., T. Crownshaw, C. Lesk, K. Stadler, and H. D. Matthews. 2020. “Shifting Economic
Activity to Services Has Limited Potential to Reduce Global Environmental Impacts Due to the
Household Consumption of Labor.” Environmental Research Letters 15 (6): 1-11.

Grippa, P., J. Schmittmann, and F. Suntheim. 2019. “Climate Change and Financial Risk.”
Finance and Development (December): 26-29.

Grover, A., and V. J. Karplus. 2021. “Coping with COVID-19: Does Management Make Firms More
Resilient?” Policy Research Working Paper 9514, World Bank, Washington, DC.


                                               25
Hall, S., L. Kaplow, Y. S. Sun, and T. Z. Holt. 2021. “‘None Are Safe until All Are Safe’: COVID -19
Vaccine Rollout in Low- and Middle-Income Countries.” McKinsey & Company.

Hallward-Driemeier, M., and G. Nayyar. 2017. Trouble in the Making?: The Future of
Manufacturing-Led Development. Washington DC: World Bank.
Heuser, C., and A. Mattoo. 2017. “Services Trade and Global Value Chains.” Policy Research
Working Paper 8126, World Bank, Washington, DC.

Hill, T. P. 1977. “On Goods and Services.” Review of Income and Wealth 23 (4): 315–38.

Hjort, J., and J. Poulsen. 2019. “The Arrival of Fast Internet and Employment in Africa.” American
Economic Review 109 (3): 1032–79.

Hofmann, C., A. Osnago, and M. Ruta. 2019. “The Content of Preferential Trade Agreements.”
World Trade Review 18 (3): 365–98.

Hsieh, C.-T., and E. Rossi-Handberg. 2020. “The Industrial Revolution in Services.” NBER Working
Paper 25968, National Bureau of Economic Research, Cambridge, MA.
Kinfemichael, B., and A. K. M. Mahbub Morshed. 2019. “Unconditional Convergence of Labor
Productivity in the Service Sector.” Journal of Macroeconomics 59 (March): 217–29.

Kuznets, S. 1971. Economic Growth of Nations: Total Output and Production Structure.
Cambridge, MA: Harvard University Press.

Lopez-Cordova, E. 2020. “Digital Platforms and the Demand for International Tourism Services.”
Policy Research Working Paper 9147, World Bank, Washington, DC.

Liu, M., Y. Shamdasani, and V. Taraz. 2019. “Climate Change, Structural Transformation, and
Infrastructure: Evidence from India.” Paper presented at the annual meeting of the American
Economic Association, January 2020, San Diego.

Sumagaysay, L. 2020. “The Pandemic Has More than Doubled Food Delivery Apps’ Business. Now
What?” MarketWatch, November 27, 2020. https://www.marketwatch.com/story/the-
pandemic-has-more-than-doubled-americans-use-of-food-delivery-apps-but-that-doesnt-
mean-the-companies-are-making-money-11606340169

McMillan, M. S., and D. Rodrik. 2011. “Globalization, Structural Change and Productivity Growth.”
NBER Working Paper 17143, National Bureau of Economic Research, Cambridge, MA.
Nayyar, G., M. Hallward-Driemeier, and E. Davies. 2021. At Your Service? The Promise of Services-
Led Development. Washington D.C: World Bank.

Nimako, K., and M. E. Kruk. 2021. “Seizing the Moment to Rethink Health Systems.” Lancet (12):
E1758-E1762.

                                                26
OECD (Organisation for Economic Cooperation and Development). 2021. OECD Employment
Outlook 2021: Navigating the COVID-19 Crisis and Recovery. Paris: OECD Publishing.

Rodrik, D. 2016. “Premature Deindustrialization.” Journal of Economic Growth 21 (1): 1–33.

Suh, S. 2006. “Are Services Better for Climate Change?” Environment Science Technology 40 (21):
6555–6560.

Tauber, K., and W. Van Zandweghe. 2021. "Why Has Durable Goods Spending Been So Strong
during the COVID-19 Pandemic?" Economic Commentary, No. 2021-15, Federal Reserve Bank of
Cleveland.

TBRC Business Research. 2022. Environmental Consulting Services: Global Market Report 2022.
Hyderabad, India: The Business Research Company.

United Nations. 2008. International Standard Industrial Classification of All Economic Activities.
Revision 4. New York, NY: United Nations.

World Bank. 2019. World Development Report 2019: The Changing Nature of Work. Washington,
DC: World Bank.

World Bank. 2020. World Development Report 2020: Trading for Development in the Age of
Global Value Chains. Washington, DC: World Bank.

World Bank. 2021. World Development Report 2021: Data for Better Lives. Washington, DC:
World Bank.

World Bank. 2022. Global Economic Prospects: Slowing Growth, Rising Risks. Washington, DC:
World Bank.

World Economic Forum. 2022. “Carbon-neutral Manufacturing is Possible: Here's How.” January
12. Davos Agenda 2022.




                                               27
FIGURE 1. The services sector and structural transformation

 A. Share of individual sectors in employment B. Share of individual sectors in value added

 Percent              Services              Agriculture                Industry                   Percent             Services                Agriculture                  Industry
 100                                                                                              100
  80                                                                                               80
  60                                                                                               60
  40                                                                                               40
  20                                                                                               20
   0                                                                                                0




                                                                                                        1990
                                                                                                               2000
                                                                                                                       2010
                                                                                                                              2020
                                                                                                                                      1990
                                                                                                                                              2000
                                                                                                                                                      2010
                                                                                                                                                             2020
                                                                                                                                                                    1990
                                                                                                                                                                            2000
                                                                                                                                                                                   2010
                                                                                                                                                                                          2020
                      2010




                                           2000
       1991
               2000


                             2019
                                    1991


                                                  2010
                                                         2019
                                                                1991
                                                                        2000
                                                                               2010
                                                                                      2019
              Advanced                     EMDEs                         LICs                               Advanced                         EMDEs                           LICs
              economies                                                                                     economies


 C. Contributions of individual sectors to                                                    D. Contributions of individual sectors to
 employment growth, 1995-2019                                                                 value added growth, 1995-2019

 Percentage points                                                                                Percentage points
  3.0              Services   Agriculture                               Industry                  5                Services                          Agriculture              Industry
  2.5
                                                                                                  4
  2.0
  1.5                                                                                             3
  1.0                                                                                             2
  0.5
                                                                                                  1
  0.0
 -0.5                                                                                             0
         Advanced           EMDEs                                        LICs                           Advanced                             EMDEs                          LICs
         economies                                                                                      economies


 E. Labor productivity growth in services                                                     F. Contributions of individual sectors to
 compared to manufacturing, 1995-2018                                                         labor productivity growth, 1995-2018

 Percent                                                                                          Percentage points                              Within agriculture
 3.5                                              Industry              Services                    3.0                                          Within industry
                                                                                                                                                 Within services
 3.0                                                                                                2.5                                          Agriculture to industry
 2.5                                                                                                2.0                                          Agriculture to services
                                                                                                    1.5
 2.0
                                                                                                    1.0
 1.5                                                                                                0.5
 1.0                                                                                                0.0
 0.5                                                                                               -0.5
 0.0
       AEs            EAP       ECA         LAC          MNA           SAR       SSA                        AEs       EAP            ECA        LAC          MNA           SAR       SSA


Sources: Nayyar, Hallward-Driemeier, and Davies (2021); World Bank.
Note: EMDEs = emerging market and developing economies; LICs = low-income countries.
A. Sample includes 35 advanced economies, 143 EMDEs, and 26 LICs. Data until 2019.
B. Sample includes 31 advanced economies, 140 EMDEs, and 23 LICs. Data until 2020.

                                                                                             28
C. D. Sample includes 30 advanced economies, 116 EMDEs, and 21 LICs. Bars represent an
individual sector’s contribution to growth, averaged over 1995-2019.
E.F. AEs = advanced economies, EAP = East and Asia Pacific, ECA = Europe and Central Asia, LAC
= Latin America and Caribbean, MNA = Middle East and North Africa, SAR = South Asia, and SSA
= Sub-Saharan Africa.
E. Average compounded annual growth rates in labor productivity (value added per worker)
across each region between 1995-2018.
F. Bars represent labor productivity growth attributed to each sector as well as movement
between sectors for the period 1995-2018.




                                             29
FIGURE 2. The heterogeneity of the services sector

 A. Offshorability and skill intensity in the                                                                                                                    B. Inter-sectoral linkages in the European
 United States                                                                                                                                                   Union

 Offshorability                             High-skilled offshorable                                                                                                 Percent
                                            services
 70                                                                                                                                                                  80
                                                                Professional
                                                                                                                                                                     60
 60                                                    ICT
                                                            Finance                                                                                                  40
 50                                                                                                                                                                  20
            Low-skilled contact               Social services
 40         services                                                                                                                                                  0




                                                                                                                                                                           Professional




                                                                                                                                                                                                                        ICT




                                                                                                                                                                                                                                                                                    Hospitality

                                                                                                                                                                                                                                                                                                         Real estate




                                                                                                                                                                                                                                                                                                                                                         Health
                                                                                                                                                                                                  Financial




                                                                                                                                                                                                                                Administrative
                                                                                                                                                                                                                                                 Wholesale and




                                                                                                                                                                                                                                                                                                                                     Recreation
                                                                                                                                                                                                                                                                  Transportation




                                                                                                                                                                                                                                                                                                                                                                   Education
 30          Recreation  Transport
                               Wholesale
 20               Retail                     Health




                                                                                                                                                                                                                                                     retail
                          Administrative                          Education
 10    Hospitality

  0
     0            20              40         60               80           100
                                                                                                                                                                               High-skilled                                                                      Low-skilled                                                                            Social
                                 Skill intensity                                                                                                                               offshorable                                                                         contact                                                                             services


 C. Intensity of exports in the United States                                                                                                                    D. Trade by mode of supply

 Percent                                                                                                                                                             Percent
  30                                                                                                                                                                       Movement of natural persons                                                                             Consumption abroad
                                                                                                                                                                           Cross-border supply                                                                                     Commercial presence
  20                                                                                                                                                                 100
  10
   0                                                                                                                                                                 50
                                                                                                                 Retail
          Professional



                                     ICT



                                                            Wholesale

                                                                        Hospitality



                                                                                                   Real estate




                                                                                                                                                       Health
                         Financial




                                                                                      Recreation
                                           Transportation




                                                                                                                          Administrative

                                                                                                                                           Education




                                                                                                                                                                       0


                                                                                                                                                                                                                                                  Transport
                                                                                                                                                                                                                              ICT




                                                                                                                                                                                                                                                                     Commerce
                                                                                                                                                                                   Professional




                                                                                                                                                                                                                                                                                                                       Hospitality


                                                                                                                                                                                                                                                                                                                                                  Education
                                                                                                                                                                                                              Finance




                                                                                                                                                                                                                                                                                                                                                                  Health
                                                                                                                                                                                                                                                                                            Recreation
               High-                                                      Low-skilled                                                       Social
               skilled                                                      contact                                                        services                                          High-skilled                                                         Low-skilled                                                                      Social
            offshorable                                                                                                                                                                      offshorable                                                            contact                                                                       services



Sources: Blinder and Krueger (2013); Organisation for Economic Co-operation and Development;
U.S. Department of Labor; World Trade Organization.
Note: The services sub-sectors above are divided by skill intensity and whether the tasks can be
done remotely or offshored. ICT = information and communications technology.
A. Offshorability is measured by the share of worker tasks in the United States that (a) do not
involve face-to-face contact with people other than coworkers; (b) can be done without being
physically present; and (c) will not experience a decline in quality if they can be delivered
remotely. It reflects the possibility for tasks to be offshored from the United States to emerging
and developing countries where labor costs are lower. Skill intensity is measured by the inverse
of the share of workers in manual-task-intensive occupations among 23 major occupational
groups in the U.S. Department of Labor’s Occupational Information Network (O*NET) database
in 2018. The use of data from the United States provides a lower bound; if a sector’s jobs are
predominantly filled by unskilled workers in the United States, they are almost certainly likely to
be intensive in emerging and developing countries.
B. Share of sales to other domestic sectors in output in European Union countries in 2015. This
shows the upside potential for linkages between sectors since advanced economies have more
diversified production structures. Data from OECD Trade in Value Added database.

                                                                                                                                                                30
C. Share of value added exported in the United States in 2015. This show the upside potential for
scale since advanced economies have more sophisticated services sectors that are more likely to
be traded internationally. Data from OECD Trade in Value Added database.
D. Share of global trade in services by four modes of supply in 2017. Commercial presence refers
to foreign direct investment. Data from the World Trade Organization’s Trade in Services by
Mode of Supply (TiSMoS) database.




                                               31
FIGURE 3. Employment, value added, and productivity in services sub- sectors

 A. Sectoral contributions to value added                                                                                                                                                                                                                          B. Sectoral contributions to employment
 growth                                                                                                                                                                                                                                                            growth

 Percentage points                                                                                                                                                                                                                                                     Percentage points
            Agriculture                                                                                                                                                          Low-skilled services                                                                              Agriculture                                                                                                             Low-skilled services
 6          Industry                                                                                                                                                             High-skilled services                                                                 3           Industry                                                                                                                High-skilled services
            Social services                                                                                                                                                                                                                                                        Social services
 4                                                                                                                                                                                                                                                                     2

                                                                                                                                                                                                                                                                       1
 2
                                                                                                                                                                                                                                                                       0
 0
                     Advanced                                                                                                   EMDEs                                                                                     LICs                                         -1
                     economies                                                                                                                                                                                                                                                              Advanced                                                                       EMDEs                                                          LICs
                                                                                                                                                                                                                                                                                            economies


 C. Shares of intermediate and final demand                                                                                                                                                                                                                        D. Contributions of growth of labor, capital,
                                                                                                                                                                                                                                                                   and TFP to output growth in advanced
                                                                                                                                                                                                                                                                   economies

 Percent                                   Intermediate consumption                                                                                                              Domestic final consumption                                                            Percentage points
                                           Government                                                                                                                            Exports                                                                                                                                                                   Labor                                     Capital                                        TFP
  100                                                                                                                                                                                                                                                                   3
   80                                                                                                                                                                                                                                                                   2
   60                                                                                                                                                                                                                                                                   1
   40                                                                                                                                                                                                                                                                   0
   20                                                                                                                                                                                                                                                                  -1
    0                                                                                                                                                                                                                                                                  -2
                                                                                                                                                                                                                                                  Manufacturing
                     Professional



                                                           ICT



                                                                                                         Wholesale

                                                                                                                                  Transport

                                                                                                                                                     Retail



                                                                                                                                                                                         Hospitality
                                    Financial



                                                                           Administrative




                                                                                                                                                                    Recreation



                                                                                                                                                                                                            Education

                                                                                                                                                                                                                          Health

                                                                                                                                                                                                                                   Agriculture




                                                                                                                                                                                                                                                                                                                                     Manufacturing




                                                                                                                                                                                                                                                                                                                                                                                                                    services
                                                                                                                                                                                                                                                                                            Agriculture




                                                                                                                                                                                                                                                                                                                                                                              High-skilled




                                                                                                                                                                                                                                                                                                                                                                                                                                                    Low-skilled
                                                                                                                                                                                                                                                                                                                                                                                                                     Social




                                                                                                                                                                                                                                                                                                                                                                                                                                                     services
                                                                                                                                                                                                                                                                                                                                                                               services
                                                                                                                                                                                                                                                                                                                                                                               tradable



                       High-skilled                                                                                     Low-skilled                                                                        Social                     Other
                       offshorable                                                                                        contact                                                                         services



 E. Labor productivity compared to                                                                                                                                                                                                                                 F. Total factor productivity compared to
 manufacturing                                                                                                                                                                                                                                                     manufacturing

 Percent                                                         Advanced economies                                                                                                                                     EMDEs                                          Percent                                             Advanced economies                                                                                             EMDEs
 4                                                                                                                                                                                                                                                                     4

 2                                                                                                                                                                                                                                                                     2
 0                                                                                                                                                                                                                                                                     0
                                                                                                                                                                                 Vehicles trade




                                                                                                                                                                                                                                   ICT
                           Retail


                                                             Real estate
     Manufacturing


                                          Administrative


                                                                                            Recreation
                                                                                                                     Other services
                                                                                                                                              Wholesale
                                                                                                                                                              Transport


                                                                                                                                                                                                       Hospitality
                                                                                                                                                                                                                        Finance


                                                                                                                                                                                                                                                 Professional




                                                                                                                                                                                                                                                                                                                                                     Recreation
                                                                                                                                                                                                                                                                                              Retail




                                                                                                                                                                                                                                                                                                                                                                                   Wholesale
                                                                                                                                                                                                                                                                                                          Administrative
                                                                                                                                                                                                                                                                                                                           Real estate


                                                                                                                                                                                                                                                                                                                                                                  Other services


                                                                                                                                                                                                                                                                                                                                                                                               Transport




                                                                                                                                                                                                                                                                                                                                                                                                                                                    ICT
                                                                                                                                                                                                                                                                            Manufacturing




                                                                                                                                                                                                                                                                                                                                                                                                           Vehicles trade
                                                                                                                                                                                                                                                                                                                                                                                                                            Hospitality
                                                                                                                                                                                                                                                                                                                                                                                                                                          Finance


                                                                                                                                                                                                                                                                                                                                                                                                                                                              Professional




                                                             Low-skilled contact                                                                                                                                        High-skilled                                                                                       Low-skilled contact                                                                                            High-skilled
                                                                                                                                                                                                                        offshorable                                                                                                                                                                                                       offshorable


Sources: European Commission; Groningen Growth and Development Center (GGDC); Nayyar,
Hallward-Driemeier, and Davies (2021); World Input-Output Database (WIOD).

                                                                                                                                                                                                                                                                  32
Note: EMDEs = emerging market and developing economies; LICs = low-income countries; TFP =
total factor productivity.
A. Bars represent the average contribution of individual sectors to value added growth between
1990-2018. Sample from GGDC’s Economic Transformation Database includes 6 advanced
economies, 39 EMDEs, and 6 LICs.
B. Bars represent the average contribution of individual sectors to employment growth between
1990-2018. Sample from GGDC’s Economic Transformation Database includes 6 advanced
economies, 39 EMDEs, and 6 LICs.
C. Intermediate consumption measures sales to other sectors, based on WIOD data from 42
countries in 2014.
D. Based on the European Union KLEMS database due to constraints on data availability in
EMDEs.
E.F. Productivity in the manufacturing sector in the same country is normalized to 1 (red line).
Data are from 56 countries, including 35 EMDEs, are for the latest available year between 2010-
17.




                                              33
FIGURE 4. Outward foreign direct investment in the services sector from the United States

 A.        Outward FDI from the United States                                     B. Employment in foreign affiliates of U.S.
                                                                                  multinational enterprises
 Percent           Manufacturing                                                      Percent                    Manufacturing
  250              Low-skilled contact services                                       200                        Low-skilled contact services
                   High-skilled offshorable services                                                             High-skilled offshorable services
  200
                                                                                      150
  150
                                                                                      100
  100

      50                                                                               50
           2011

                  2012

                         2013

                                2014

                                       2015

                                              2016

                                                     2017

                                                            2018

                                                                   2019

                                                                          2020




                                                                                            2007
                                                                                                   2008
                                                                                                          2009
                                                                                                                  2010
                                                                                                                         2011
                                                                                                                                2012
                                                                                                                                       2013
                                                                                                                                              2014
                                                                                                                                                     2015
                                                                                                                                                            2016
                                                                                                                                                                   2017
                                                                                                                                                                          2018
Source: Organisation for Economic Co-operation and Development.
Note: FDI = foreign direct investment. FDI position reflects the value of the stock at the end of
the reference year. The destination of the outward FDI from the United States is not available in
the data but includes both advanced economies and emerging market and developing
economies. Data from the OECD Affiliates of Multinational Enterprises database.




                                                                                 34
FIGURE 5 Services and manufacturing activity through recessions

 A. Recessions before 2020                               B. Recessions in 2020

 Index, 100=Pre-recession value added                        Index, 100=Pre-recession value added
  104                                                        102        Services Manufacturing
                      Services    Manufacturing
                                                             100
 100
                                                              98
  96
                                                              96

  92                                                          94
          t-2       t-1       t0       t+1        t+2                t-2       t-1       t0         t+1   t+2



Source: World Bank.
Note: Recessions are defined as output contractions in which output growth is one standard
deviation or more below the long-term average. This definition yields 185 recession events that
ended before 2020 in 103 countries (with available data since 1960) and 76 recession events in
2020 in 76 countries. The average number of events is 1.7 per country. Charts show the
unweighted average level of real value added in services (blue) and manufacturing (red) in the
years around the recession year t0, indexed to 100 for the year preceding the recession.




                                                        35
FIGURE 6. The impact of COVID-19 across sectors

 A. Value added growth in manufacturing                                                                                                                                                                             B. Change in value added by services
 versus services, 2019-20                                                                                                                                                                                           subsector, April 2020 compared with April
                                                                                                                                                                                                                    2019

 Percentage change (services)                                                                                                                                                                                           Percent                                         Advanced economies                                                                                           EMDEs
 20                                                                                                                                                                                                                       20
                                                                                                                                                                                                                           0
 10                                                                                                                                                                                                                      -20
                                                                                                                                                                                                                         -40
  0
                                                                                                                                                                                                                         -60




                                                                                                                                                                                                                                                                      Transport


                                                                                                                                                                                                                                                                                                    Hospitality


                                                                                                                                                                                                                                                                                                                           ICT




                                                                                                                                                                                                                                                                                                                                                                                      Public A, E & H


                                                                                                                                                                                                                                                                                                                                                                                                                        Industry
                                                                                                                                                                                                                                          Commerce




                                                                                                                                                                                                                                                                                                                                                        Professional
 -10

 -20

 -30
       -25                 -20    -15   -10     -5    0       5                                                                                                                                               10
                                                                                                                                                                                                                                          Low-skilled contact                                                              High-skilled                                                                 Other
                             Percentage change (manufacturing)                                                                                                                                                                                                                                                             offshorable


 C. Change in sales as reported by firms                                                                                                                                                                            D. Value added by sector in EMDEs

 Percent                                     Mid-2020                                       Early 2021                                                                 Late 2021                                        Percent                       Industry                                                    Commerce                                     Hospitality
    0                                                                                                                                                                                                                   130                           Transport                                                   ICT                                          Professional
  -20
  -40                                                                                                                                                                                                                   110
  -60
  -80                                                                                                                                                                                                                    90
                             Manufacturing




                                                                                                                 Transportation
                                                                   Accommodation




                                                                                                                                                                                                             ICT
                                                                                                                                                                     Health

                                                                                                                                                                                  Commerce

                                                                                                                                                                                                 Financial
             Agriculture




                                                Construction




                                                                                        Food services




                                                                                                                                           Other services




                                                                                                                                                                                                                         70

                                                                                                                                                                                                                         50
                                                                                                                                                                                                                                   2019Q1

                                                                                                                                                                                                                                                     2019Q2

                                                                                                                                                                                                                                                                          2019Q3

                                                                                                                                                                                                                                                                                               2019Q4

                                                                                                                                                                                                                                                                                                                  2020Q1

                                                                                                                                                                                                                                                                                                                            2020Q2

                                                                                                                                                                                                                                                                                                                                         2020Q3

                                                                                                                                                                                                                                                                                                                                                                       2020Q4

                                                                                                                                                                                                                                                                                                                                                                                     2021Q1

                                                                                                                                                                                                                                                                                                                                                                                                               2021Q2

                                                                                                                                                                                                                                                                                                                                                                                                                              2021Q3
                           Other                                                         Low-skilled contact                                                                                   High-skilled
                                                                                                                                                                                               offshorable



 E. Value added by sector in advanced                                                                                                                                                                               F. Greenfield FDI in EMDEs
 economies
 Percent                                 Industry                                                       Commerce                                                              Hospitality                               Percent                                                   2019                               2020                2021
 120                                     Transport                                                      ICT                                                                   Professional                              150
                                                                                                                                                                                                                        100
 100
                                                                                                                                                                                                                         50
  80                                                                                                                                                                                                                      0
                                                                                                                                                                                                                                                                                                                           Hospitality
                                                                                                                                                                                                                                                       Professional




                                                                                                                                                                                                                                                                                                             ICT




                                                                                                                                                                                                                                                                                                                                                                            Retail


                                                                                                                                                                                                                                                                                                                                                                                                        Transport
                                                                                                                                                                                                                                  Manufacturing




                                                                                                                                                                                                                                                                                   Financial




                                                                                                                                                                                                                                                                                                                                           Administrative




                                                                                                                                                                                                                                                                                                                                                                                                                            Other services




  60

  40
             2019Q1
                            2019Q2
                                              2019Q3
                                                               2019Q4
                                                                                   2020Q1
                                                                                                        2020Q2
                                                                                                                                  2020Q3
                                                                                                                                                            2020Q4
                                                                                                                                                                         2021Q1
                                                                                                                                                                                      2021Q2
                                                                                                                                                                                                    2021Q3




                                                                                                                                                                                                                                                                 High-skilled                                                                               Low-skilled
                                                                                                                                                                                                                                                                 offshorable                                                                                  contact



Sources: Financial Times fDi Markets; Haver Analytics; UN World Tourism Organization; World
Bank.
Note: ICT = information and communications technology.


                                                                                                                                                                                                                   36
A. Vertical axis reports percent change in services value added, whereas horizontal axis presents
percent change in manufacturing value added for each individual country in the scatterplot.
B.D.E. Sample of advanced economies includes Australia, Canada, Norway, Sweden, and the
United States.
Sample of EMDEs includes Brazil, Ghana, Indonesia, Kenya, Morocco, and Vietnam. Not all
countries in the Haver Analytics database report granular sectoral disaggregation.
B. “Public A, E, & H” refers to public administration, education, and health.
C. The change in sales reported by firms are conditional values based on a regression of the
change in sales on sector, size, month of interview, and age. Sample from the World Bank
Business Pulse Survey and Enterprise Surveys includes 47 countries (countries with data for three
waves). Weights have been applied such that every country carries an equal weight.
F. Greenfield FDI from the fDi Markets database represents the value of new announcements,
relative to 2019.




                                               37
FIGURE 7. COVID-19 and the performance of services sub-sectors

 A. Global tourist arrivals                                                            B. Value-added of the ICT sector

  Percent                                                                                  Index, 100 = 2019Q4
   20                                                                                      200         Brazil                               Indonesia
    0                                                                                                  Vietnam                              Morocco
  -20                                                                                                  Ghana                                United States
                                                                                           160
                                                                                                       Kenya                                Türkiye
  -40                                                                                                  Germany
  -60                                                                                      120
  -80
 -100                                                                                       80
                                        Nov
         Jan
               Mar
                      May
                            Jul
                                  Sep


                                              Jan
                                                    Mar
                                                          May
                                                                 Jul
                                                                       Sep
                                                                             Nov




                                                                                                       2019Q1
                                                                                                                2019Q2
                                                                                                                         2019Q3
                                                                                                                                   2019Q4
                                                                                                                                              2020Q1
                                                                                                                                                         2020Q2
                                                                                                                                                                  2020Q3
                                                                                                                                                                           2020Q4
                                                                                                                                                                                    2021Q1
                                                                                                                                                                                             2021Q2
                                                                                                                                                                                                      2021Q3
                        2020                                2021


 C. Face-to-face index and change in sales                                             D. Home-based work index and change in
                                                                                       sales
 Percent change in sales                                                                   Percent change in sales
  -20                                                                                      -20
                     Agriculture &                                                                     Agriculture & mining
                         mining                                                                                                                        Retail and
  -30                                                                                      -30                                                                                               ICT
          Construction /                            Financial                                                                     Health               wholesale
                            ICT                                                                    Construction
  -40     utilities                                             Retail and                 -40        / utilities                                                      Other                  Financial
                                               Health
                                                                wholesale                                                                                             services                services
          Manufacturing                                                                                                             Manufacturing
  -50                             Transportation                                           -50
                                  & storage                                                        Restaurants
                      Other                                            Restaurants                                          Transportation &
  -60                services                                                              -60 Hotels                           storage
                                              Education                Hotels
  -70                                                                                      -70
        0.0           0.2       0.4        0.6                   0.8            1.0              0.0                     0.2       0.4         0.6                                                             0.8
                             Face-to-face index                                                                            Home-based work index


Sources: Avdiu and Nayyar (2020); Dingel and Neiman (2020); Haver Analytics; World Tourism
Organization; World Bank.
A. Change in tourist arrivals compared to same month in 2019.
C.D. Year-on-year change in firms’ sales between 2019 and 2020, drawn from the first wave of
high-frequency data from World Bank Business Pulse and Enterprise Surveys in 47 countries
conducted between March and September 2020. The face-to-face index and home-based work
index are, respectively, based on Avdiu and Nayyar (2020) and Dingel and Neiman (2020).




                                                                                      38
FIGURE 8. Adoption of digital technologies in EMDEs

 A. Firms increasing use of digital                                                            B. Firms investing in digital technologies
 technologies

 Percent                   Mid-2020               Early 2021            Late 2021                  Percent                   Mid-2020               Early 2021      Late 2021
 80                                                                                                50
 40                                                                                                25
  0                                                                                                 0




                                                                  Transport
                              ICT
           Manufacturing




                                      Financial


                                                       Commerce




                                                                              Food services




                                                                                                             Manufacturing




                                                                                                                                                                    Transport
                                                                                                                              ICT




                                                                                                                                                         Commerce
                                                                                                                                        Financial




                                                                                                                                                                                Food services
      Other                  High-skilled              Low-skilled contact                                                   High-skilled                 Low-skilled contact
                             offshorable                                                                                     offshorable



Source: World Bank.
Note: ICT = information and communications technology. Balanced panel of 47 countries
(comprising EMDEs as well as Poland) for which three waves were available. Each column
corresponds to a survey wave. For most countries, wave 1 was conducted in Q2 or Q3 of 2020,
wave 2 in early 2021, and wave 3 in late 2021. Data from World Bank Business Pulse and
Enterprise Surveys.




                                                                                              39
FIGURE 9. Digitalization and services exports

 A. Share of cross-border delivery in exports                   B. Largest number of online freelancers per
 of high-skilled offshorable services versus                    capita, top economies, 2021
 per capita income, 2017
 Percent                                                            Number of online freelancers per capita
 100                                                                400
                PHL       LBN          ROU                          300
  80
           GHA
                             CRI                                    200
  60          IND
                                                                    100
  40
                                                                      0




                                                                                                          Armenia




                                                                                                                                                    Lebanon




                                                                                                                                                                                                                                         Moldova
                                                                          Serbia

                                                                                   Bangladesh

                                                                                                Ireland




                                                                                                                                 Cyprus

                                                                                                                                          Estonia




                                                                                                                                                                               Bosnia and Herzegovina

                                                                                                                                                                                                        Malta



                                                                                                                                                                                                                              Pakistan



                                                                                                                                                                                                                                                   Bulgaria

                                                                                                                                                                                                                                                              Sri Lanka

                                                                                                                                                                                                                                                                          UAE

                                                                                                                                                                                                                                                                                Romania



                                                                                                                                                                                                                                                                                                    Latvia
                                                                                                                    Costa Rica




                                                                                                                                                              United Kingdom




                                                                                                                                                                                                                Isle of Man




                                                                                                                                                                                                                                                                                          Ukraine
  20
   0
       8              9          10           11          12
                           Natural log of GDP


 C. Share of digitally deliverable services in                  D. Index of internet use for B2C transactions
 total services exports                                         and international tourist arrivals, 2017

 Percent          Advanced economies       EMDEs   LICs             Number of tourists, thousand (log)
  70                                                                12
                                                                    11
  60
                                                                    10
  50                                                                 9
  40                                                                 8
  30                                                                 7
  20                                                                 6
  10                                                                 5
   0                                                                 4
                                                                       2             3             4            5                                                                                                                                                                                    6
       2005
       2006
       2007
       2008
       2009
       2010
       2011
       2012
       2013
       2014
       2015
       2016
       2017
       2018
       2019
       2020




                                                                                     Internet use for business-to-
                                                                                     consumer transactions


Sources: Lopez-Cordova (2020); iLabour index, United Nations Conference on Trade and
Development (UNCTAD); World Trade Organization; World Bank.
A. Cross-border delivery refers to services trade through mode 4 of the General Agreement on
Trade in Services. Data are from the WTO’s Trade in Services by Mode of Supply (TisMoS)
database.
B. Based on data from the five largest English-language online outsourcing platforms from the
University of Oxford’s iLabour project, representing at least 60 percent of the global market.
C. EMDEs = emerging market and developing economies; LICs = low-income countries. Digitally
deliverable services are defined by UNCTAD as an aggregation of insurance and pension services,
financial services, charges for the use of intellectual property, telecommunications, computer
and information services, other business services, and audiovisual and related services.
D. B2C = business-to-consumer. Results show that digital tools may help less traditional
destinations overcome information obstacles and reduce travel costs, and thereby attract more
visitors. Indexes are based on Lopez-Cordova (2020). Each scatter point indicates a country. The
number of tourists is expressed in natural logarithms.


                                                               40
FIGURE 10. ICT and intangible capital

 A. Shares of ICT capital in total capital across                           B. U.S. investment in tangible and intangible
 sectors, advanced economies                                                capital, 2015

 Percent     Manufacturing               ICT                                    Percent          Intangible                Tangible excl. ICT                                    ICT tangible
 35          Financial                   Professional                           100
 30          Low-skilled contact                                                 75
                                                                                 50
 25                                                                              25
 20                                                                               0




                                                                                                                                                                                           Transport
                                                                                      Industry

                                                                                                  Professional

                                                                                                                 ICT




                                                                                                                                                            Hospitality
                                                                                                                       Financial

                                                                                                                                   Commerce

                                                                                                                                              Recreation




                                                                                                                                                                          Administrative




                                                                                                                                                                                                       Other services
 15
 10
  5
  0
     1970

            1974

                   1978

                          1992

                                 1996

                                        2000

                                               2004

                                                      2008

                                                             2012

                                                                    2016
                                                                                                        High-skilled                                       Low-skilled
                                                                                                        offshorable                                          contact




Sources: INTAN Invest (database); Organisation for Economic Co-operation and Development.
A. Includes capital as measured in national accounts and excludes most forms of intangible
capital.
B. Intangible capital includes software and databases, intellectual property, and economic
competencies, following the methodology of Corrado et al. (2016). The sample is drawn only for
the United States from the INTAN Invest database owing to data constraints, but the data may
be viewed as indicating the upside potential of ICT-related capital in EMDEs.




                                                                           41
FIGURE 11. Digitalization and innovation in the services sector

 A. Share of businesses with a website                                                                                B. Share of businesses using artificial
 allowing online ordering                                                                                             intelligence

 Percent                                                                                                                  Percent
 50                                                                                                                       15
                                                                                                                          10
 25                                                                                                                        5
  0                                                                                                                        0




                                                                                                                                 ICT


                                                                                                                                       Professional




                                                                                                                                                                                                Transport
                                                                                                                                                       Retail




                                                                                                                                                                                                              Wholesale
                                                                                                                                                                               Administrative




                                                                                                                                                                                                                               Manufacturing
                                Hospitality




                                                                        Administrative
       ICT


                 Professional




                                                          Wholesale




                                                                                         Transport


                                                                                                     Manufacturing




                                                                                                                                                                 Hospitality
                                               Retail




      High-skilled                Low-skilled contact services                                                                 High-skilled             Low-skilled contact services
      offshorable                                                                                                              offshorable
       services                                                                                                                 services


 C. Share of businesses introducing new                                                                               D. Share of businesses introducing new
 product placement methods                                                                                            ways of organizing external relations

 Percent                                                                                                                  Percent
 60                                                                                                                       50
 40
                                                                                                                          25
 20
  0                                                                                                                        0
                                                                                                                                 ICT


                                                                                                                                        Professional


                                                                                                                                                       Finance




                                                                                                                                                                                Commerce


                                                                                                                                                                                                Hospitality




                                                                                                                                                                                                                               Manufacturing
                 ICT


                                Professional


                                               Commerce


                                                          Hospitality




                                                                                                     Manufacturing




                                                                                                                                                                 Transport




                                                                                                                                                                                                              Administrative
                                                                                         Transport
       Finance




                                                                        Administrative




         High-skilled                                Low-skilled contact                                                           High-skilled                           Low-skilled contact
     offshorable services                                services                                                              offshorable services                           services




Source: Organisation for Economic Co-operation and Development.
Note: The sample is drawn from advanced economies, owing to constraints on data availability.
A.B. Sample includes OECD countries in 2018.
C.      New product placement methods help position a firm’s product on the market, with the
objective of increasing the firm’s sales.
C.D. Sample, drawn from the EU Community Innovation Survey, includes EU countries and the
U.K. in 2018.




                                                                                                                     42
FIGURE 12. Diffusion of ICT among services firms

 A. Share of firms using email, by country                B. Share of firms using their own website, by
                                                          country

  Percent                                                     Percent
  100                                                         100
   80                                                          80
   60                                                          60
   40                                                          40
   20                                                          20

    0                                                           0
        4       6            8            10        12              4       6           8            10   12
                     GDP per capita (log)                                       GDP per capita (log)


 C. Share of firms using email, by sector                 D. Share of firms using their own website,
                                                          by sector
 Percent            Manufacturing                             Percent
                    Low-skilled services                                Manufacturing
 100                                                          100       Low-skilled services
                    High-skilled services
                                                               80       High-skilled services
  90
  80                                                           60
  70
                                                               40
  60
                                                               20
  50
  40                                                            0
        5   6        7      8         9        10   11              4       6           8            10   12
                    GDP per capita (log)                                        GDP per capita (log)


Source: World Bank.
Note: Calculations based on World Bank Enterprise Survey data and World Development
Indicators. GDP per capita is in natural logarithms.
A.B. The question on whether firms use email or their own website was not asked in most high-
income countries included in the Enterprise Surveys. Data are for latest available year, ranging
from 2006 to 2018. Each dot represents a country. The red line represents a trendline (a kernel-
weighted local polynomial regression) of the data points shown.
C.D. The lines represent trendlines (a kernel-weighted local polynomial regression) of the share
of firms in a country using email or websites for three sector groups. Individual country data
points are omitted for visual reasons.




                                                         43
FIGURE 13. Digital technology enablers

 A. Mobile broadband connections per 100          B. Digital trade restrictiveness index
 inhabitants
 Percent                2007    2019                  Index, 0-1, 0 = fully open
 120                                                  0.4


  90                                                  0.3

  60                                                  0.2

  30                                                  0.1

   0                                                  0.0
           Advanced economies          EMDEs                  Advanced economies            EMDEs


 C. Management practices index                    D. Digital skills index

 Index, 1-5, 5 = best                                 Index, 1-100, 100 = highest
  2.5                                                  70
  2.0                                                  60
                                                       50
  1.5                                                  40
  1.0                                                  30
                                                       20
  0.5                                                  10
  0.0                                                   0
     Advanced economies    EMDEs          LICs                 Advanced           EMDEs        LICs
                                                               economies


 E. Tertiary enrollment rates                     F. Services trade restrictiveness index

 Percent                                              Index, 1-100, 100 = highest
  80                                                  40

 60                                                   30

 40                                                   20

 20                                                   10

   0                                                   0
           Advanced        EMDEs          LICs                Advanced              EMDEs      LICs
           economies                                          economies


Sources: European Center of International Political Economy (ECIPE); International
Telecommunications Union (ITU); World Bank; Nayyar, Hallward-Driemeier and Davies (2021);
World Economic Forum.
Note: EMDEs = emerging market and developing economies. LICs = low-income countries.
A. Sample from the ITU includes 37 advanced economies and 141 EMDEs in 2019.


                                                 44
B. The ECIPE’s Digital Trade Restrictiveness Index provides information on transparency of
applied digital trade restrictions across 36 advanced economies and 28 EMDEs in 2017-18.
C. Covers 18 key management practices, across 21 advanced economies, 17 EMDEs, and 3 LICs in
2018 or latest available year.
D. Sample from World Economic Forum includes 34 advanced economies, 71 EMDEs, and 6 LICs
in 2019.
E. Sample includes 33 advanced economies, 70 EMDEs, and 7 LICs in 2019.
F. The World Bank’s Services Trade Restrictiveness Index covers five sectors
(telecommunications, finance, transportation, retail, and professional services) and key modes
of delivery across 22 advanced economies, 67 EMDEs, and 6 LICs in 2008.




                                             45