Jorge Arbache
Vicepresidente de Sector Privado, CAF -banco de desarrollo de América Latina y el Caribe-
Latin America was the region hardest hit by the Covid-19 recession, and estimates suggest that recovery will be relatively slow. The crisis pointed to business opportunities for a faster, stronger and more lasting recovery in such areas as climate change and digital transformation. These are agendas with special relevance for the region due to the enormous business potential associated with the environmental area and the immense spaces to be filled with the productive sector’s digital transformation.
But modernizing the service sector can also be one way to revive the economy and promote a more sustainable and sustained growth pattern. And there is no shortage of reasons for this. On the one hand, the service sector accounts for at least 60% of the value added for economies in the region and are home to the vast majority of companies (at least 9 out of 10 micro, small and medium-sized enterprises), representing at least 69% of employment and 8.4 out of every 10 new jobs created.
On the other hand, labor productivity in the sector is low and has stagnated, accounting for only 18% of US productivity. Part of the explanation for this gap is the concentration in low dynamism sectors, such as those aimed at the final consumer, and the fact that many of those businesses are informal. Given the size and potential for productivity gains, service sector modernization programs could bring broad and immediate benefits to the recovery.
But the benefits could be even more potent. First, services have become the most important infrastructure that facilitates production and investment through the servitization of production. Outsourcing, subcontracting and new business models have led services to occupy important roles in manufacturing and even agricultural and mining value chains, thus becoming determining factors in the geography of investments and productive diversification and sophistication. These not only include financial, logistics, telecommunications and insurance services, but also many other services, such as those involving research and development, production and value chain support, sales, distribution and after-sales.
A second reason why the benefits could be even more potent is that services have become the most important hotbed of innovation and entrepreneurship as well as the new frontier for disruptive businesses. A third reason is that services are an important link between the region’s economies and the global economy. 48% of the content exported by Brazil are services “integrated” into the products; for Mexico it is 44%, and for Argentina, 38%. In Mexico, services, including imported ones, are key elements in the country’s integration into global industrial chains. But services are also important for commodity trading, accounting for 22% of the value added for agricultural products and 35% of mineral products exported by Brazil.
During the boom years of the 2000s, services imports in the region’s four largest economies grew at an annual rate of more than 17%, well above GDP growth. In 2014, corresponding imports reached a record USD 159 billion and a deficit of USD 74 billion. In the years of stagnation that followed, imports fell significantly; in 2020 alone, contraction reached 31%. And so imports of services are vital not only for production, but also for external accounts, highlighting the sector’s contribution to economic dynamics and the importance of access to services for the region’s recovery.
The pandemic also demonstrated that a modern and efficient service sector is the backbone for tackling disaster situations. In fact, countries with better service infrastructure obtained better results in the implementation of emergency public policies and proved to be more resilient. From basic health services, clinical analysis and rehabilitation to logistics and distribution, financial, e-government and digital services, all have proven to be critical elements in combating the pandemic and the economic and social crisis. But the pandemic also helped to raise awareness of the importance of services for the SDGs and for tackling climate change, which requires a specific set of services to support countries in risk adaptation and mitigation.
Lastly, the recent crisis has also shown that market structure and geopolitical issues can have serious repercussions on the functioning of international services markets and, consequently, on access to key productive services. Such threats have led authorities in advanced countries to promote services that are considered strategic and to reform regulations to safeguard their interests. As the current global crisis in logistics services illustrates, market disruptions can be very detrimental to the economic recovery of countries in the region, whose growth is so dependent on imports.
The region’s sustained and lasting growth through services requires policies that aim at a modern, efficient, diversified and competitive service sector, allied to the productive sector. This, in turn, requires a sense of priority, the identification of service nodes that limit production, the training of workers and companies, access to finance and technologies, investment policies, trade agreements, support for R&D and entrepreneurship agendas, modern regulation and plenty of international collaboration.
