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Research Paper
Historically, manufacturing has served as the primary pathway to economic development, offering strong scale economies, learning-by-doing effects, and the capacity to generate the foreign exchange necessary to import capital goods and technology. However, advances in robotization and artificial intelligence (AI) are fundamentally undermining manufacturing’s traditional role, making it increasingly skill- and capital-intensive while limiting its ability to absorb labor. This technological transformation forces developing countries to consider service-led development strategies, but most services exhibit low productivity, limited tradability, and minimal capacity to generate foreign exchange.
This paper is the first in a series to develop a methodology to identify and assess which specific services can serve as drivers for growth and structural transformation for the Global South. It proposes an analytical framework that classifies services into three categories: i) Knowledge Services (ICT and professional business services) which exhibit manufacturing-like characteristics such as tradability and foreign exchange generation capacity; ii) Enabling Services (transport, logistics, finance) which facilitate trade but generate limited independent value capture; and iii) Local Services (retail, hospitality, health, education, arts, and personal services) which absorb labor but cannot drive export-led growth. Critically, the paper addresses the education and health sectors separately, recognizing that, while they function as Local Services, they constitute essential foundational investments that enable the development of Knowledge Services. A companion paper applies this framework to assess the performance of the services sector of three North African countries: Egypt, Morocco, and Tunisia.
To establish a benchmark against which developing countries can be assessed, we apply this framework empirically to EU15 economies over the period 2010–2022 using OECD Trade in Value Added (TiVA), Trade in Employment (TiM), and inter-country input-output tables, measuring performance across sectoral GDP and employment shares, productivity levels, external integration indicators, employment embodied in external demand, Hirschman-Rasmussen backward and forward linkages, and Leontief employment multipliers. The EU15 evidence shows that successful service-led development is not simply about expanding services in aggregate, but about shifting the internal composition of services toward Knowledge Services while maintaining efficient Enabling Services—precisely the pattern absent in countries that participate in GVCs without capturing significant value.
