Services and a World Class Economy

The world economy is going through major changes.[1] In the aftermath of the global financial crisis the process of economic globalization lost dynamism. By 2016, global cross-border capital flows had declined roughly 65% vis-à-vis the peak (of US$12.4 trillion) reached in 2007.[2] Foreign direct investment (FDI) flows also fluctuated significantly over the last few years and are still below the level achieved at the eve of the financial crisis. Trade in goods has also plateaued as a proportion of global GDP and in some years exports of goods increased below the expansion of world output.


These trends, however, do not hold in the case of services. Trade in services has not only increased as a share of global GDP, but also the services sector has become the main destination for FDI flows around the globe. The share of services in global trade is also increasing, reflecting the increased tradability of services in the digital era. Moreover, all over the world, but particularly in high-income economies, one observes the growing “servicification” of manufacturing activities, as services inputs embodied in the production process (e.g. R&D, design, and professional services), as well as services activities at the point of sale (e.g., financing, training, after-sales support), become increasingly important. 


This trend towards the growing importance of the services sector in the world economy is now entering a new phase. Throughout modern history one can identify waves of innovation that marked the beginning of a new era.  These “waves” are typically associated with so-called general purpose technologies (GPTs) that had dramatic implications for wealth creation, income distribution, jobs and wages.  The steam engine (the lever behind the first Industrial Revolution, 1760-1830), electrification (the lever behind the second Industrial Revolution, 1870-1914), and information and communication technologies (ICT, the levers behind the current digital age) had significant impacts on productivity, international trade, and the economic structure of nations.  The next “wave” of GPTs is centered around artificial intelligence (AI) technologies.  


It is difficult at this stage to estimate the impact that AI will have on the labor market.  This GPT, however, will affect both manual labor and cognitive activities.  Concerns about a “robocalypse” are popular in science-fiction and in Hollywood movies.  The reality, however, is that disruptions will be driven mainly by software and digital platforms based on AI.  Productivity impacts may be exponential, but these innovations will tend also to foster income inequality and job displacement.  Some of the policy solutions being discussed include the adoption of universal basic income schemes and the reduction of work hours as mechanisms to reduce the social impact of AI.  These policies may help, but they raise a series of challenges in terms of financing and how to implement a new social contract.


There is a policy, however, which has broad support among researchers.  This involves retraining the workforce with a view to explore new partnerships between humans and AI-based innovations.  Such a strategy is inevitably services-intensive and it requires a rethinking of how education systems will adapt to this new world.  A good example are the efforts of the Finnish government to train 1 percent of its population on the basics of AI.  This effort is not designed to create a new generation of AI-software developers, but its aim is mainly to prepare Finland to the inevitable democratic debate on how to adjust to an AI-led economy.


For a country like Barbados, which is already a services-intensive economy, these discussions may look too esoteric for the population at large.  Moreover, one could argue that Barbados’ comparative advantage is based on exports of services, like tourism, that have a strong human-veneer (a hotel receptionist, a bartender, …) and that are less likely to be affected by AI.  The reality, however, is that in the AI-led economy, competitive advantage at the level of firms will be increasingly determined by the capacity of economic agents to work with these innovations.  By leveraging AI-based platforms, Barbados can, for example, brand itself as an ideal place for matching compassionate caregivers with the growing international demand generated by the aging population of industrialized countries.  In short, service-focused impact investments exploring generosity and volunteer activities will become an important source of dynamism in the AI-based era.[3]

[1] See, for example, Primo Braga, C.A., 2018, “Foreign direct investment and ‘peak globalization’”, Columbia FDI Perspectives, no. 230 (July).

[2] See Lund, S. et al., 2017, “The new dynamics of financial globalization,” McKinsey Global Institute (August).

[3] For a detailed discussion of such a proposition see Lee, K.F., 2018, AI Superpowers. New York: Houghton Mifflin Harcourt Publishing Co.

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Barbados Coalition Of Service Industries

Barbados Coalition Of Service Industries

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