Services and economic recovery
Latin America was the region most affected by the Covid-19 recession, and estimates suggest that recovery will be relatively slow. The crisis highlighted business opportunities for a faster, stronger and more resilient recovery in areas such as climate change and digital transformation. These agendas have a special relevance for the region due to the huge potential for business linked to the environment and the immense spaces to be filled with the digital transformation agenda in the productive sector.
But the modernization of the services sector can also be a way to reactivate the economy and promote a pattern of more sustainable and sustained growth. There are many reasons that back tis assumption. On the one hand, services make up at least 60% of the added value of the region's economies, host the vast majority of companies -at least 9 out of 10 micro, small and medium size companies are in the service sector-, account for at least 69% of job stock and by 8.4 of every 10 new jobs created.
On the other hand, labor productivity is low and stagnant and accounts only for 18% of US productivity. This gap can be partially explained by the concentration in low dynamism segments, such as those aimed at the final consumer, and to the fact that many of those businesses are informal. Given the size and potential for increased productivity, service sector modernization programs could bring broad and immediate benefits to recovery.
But the benefits can be even more important. Services have become the key infrastructure enabling production and investment due to the servicification and servitization of production. Outsourcing, subcontracting and new business models have led services to fit important roles in the manufacturing and even agriculture and mining value chains, thus becoming key factors in the geography of investments and productive diversification and sophistication. We are talking about financial and logistics services, telecommunications and insurance, but also many other services, such as those focused on research and development, production support, sales, distribution, and after-sales.
A second reason is that services have become the most relevant hotbed of innovation and entrepreneurship and the new frontier of disruptive businesses. And third, because services are an important link between the region's economies and the global economy. 48% of the content exported by Brazil is services “embedded” in the products; in the case of Mexico, it is 44% and, in Argentina, 38%. In Mexico, services, including the imported ones, are key elements in the country's integration into global industrial chains. But services are also important for commodities' trade, as they account for 22% of the value added of agricultural commodities and 35% of mineral commodities exported by Brazil.
During the economic boom of the 2000s, imports of services in the region's four largest economies grew at an annual rate of over 17%, much higher than GDP growth. In 2014, corresponding imports reached a record figure of US$159 billion and a deficit of US$74 billion. In the years of stagnation that followed, imports dropped significantly – in 2020 alone, the contraction reached 31%. Thus, service imports are relevant not only for production, but also for external accounts, and highlights the sector's contribution to economic dynamics and the relevance of access to services for the region's recovery.
The pandemic also showed that a modern and efficient service sector is the backbone for dealing with disaster situations. In fact, countries with better service infrastructure did better in implementing emergency public policies and proved to be more resilient. From basic health services, clinical analysis and rehabilitation to logistics and distribution services, financial services, e-government and digital services, all have proved to be critical elements in fighting the pandemic and the economic and social crisis. But the pandemic also contributed to alerting about the importance of services for the SDGs and for the confrontation of climate change, which requires a specific set of services to support countries in adapting and mitigating risks.
Finally, the recent crisis has also shown that market structure and geopolitical issues can have non-negligible implications for the functioning of international service markets and, thus, for access to key productive services. Such threats have led authorities in advanced countries to promote services considered strategic and to reform regulations to safeguard their interests. As the current global crisis in logistics services well illustrates, market disruptions can be highly damaging to Latin America's economic recovery, which growth is so dependent on imports.
The region's sustained and resilient growth through services requires policies that aim at a modern, efficient, diversified and competitive service sector that is an ally of the productive sector. This requires a sense of priority, identification of service nodes that constrain production, training of workers and companies, access to finance and technologies, investment policies, trade agreements, support for R&D and entrepreneurship agendas, regulation, and a lot of international collaboration.
