The service industry employs a large percentage of the global workforce and is the primary engine of GDP in emerging countries. However, little study has been done to determine its breadth, prospects, and consequences for long-term, inclusive economic growth. This is particularly true for Africa, which has experienced rapid expansion in recent years. This opens up a new field of study, providing unique insights into the service sector’s 21st-century realities and their impact on Africa’s economic progress (Wamboye et al.,2020).
Almost all services include direct engagement between providers and customers, whether it’s in person (as in commerce, personal services, health care, or live entertainment) or through the internet (as in the case of Internet access or television broadcasting). Some forms of services, such as national security and policing, can help us indirectly. Wholesale and retail trade, health care and social assistance, accommodation and food services, professional, scientific, and technical services, educational services, finance, insurance, real estate & leasing, transportation & warehousing, information, culture & recreation, public administration & defense, business, building & other support services are all examples of sub-sectors within the service sector (British Columbia, 2022).
The services sector is the largest section of the economy in many African nations, and it generated a rising amount of GDP, commerce, and jobs from 2000 to 2012. The growth of efficient and competitive service economies and trade, particularly in infrastructural services like telecommunications, transportation, energy, and banking, might greatly boost Africa’s economic prospects (UN,2015).
A developing country’s ability to structurally restructure in a way that yields higher levels of long-term economic development and employment absorption is one of the most pressing economic challenges it faces. We analyze the services sector’s prospects for growth and employment in Africa. First, there are several high-productivity, skill-intensive businesses, such as banking, business, communication, and, in certain circumstances, retail services, that have export potential—primarily through foreign investment. Second, there are a variety of low-productivity businesses, such as informal retail and temporary employment services, that have lower skill requirements. Third, tourism has the potential to be a high-wage, export-oriented business with low-skill prerequisites (Bhorat et al., 2018).
Many East Asian economies, notably China, have undergone dramatic transformations as a result of a process of secondary industry growth, with the rise of internationally competitive manufacturing exports as the main driver. As a result, manufacturing is frequently viewed as the key to raising national per capita income levels. Recent data shows, however, that global demand for manufactured products is dwindling, and economic conditions are making it more difficult to construct a growth path based on rapidly rising manufacturing exports (Rodrik, 2014).
Manufacturing, and manufacturing exports, in particular, may play a less significant role in setting the economic growth trajectories of emerging nations in the future if current global demand patterns in manufacturing persist. In this spirit, as the potential for manufacturing-led development dwindles, the services sector as a growth engine should be scrutinized more closely (Bhorat et al., 2018).
Service businesses must have export potential to produce long-term economic growth. Traditionally, services have been viewed as either input into the manufacture and exchange of goods, or as outputs primarily intended for domestic consumption. Globalization, combined with technological advancements, has facilitated a rapid rise in the trade of services over the last two decades, driven primarily by trade in modern services such as business, finance, and communication, as opposed to traditional services such as transportation and tourism (Mishra, Lundström, and Anand 2011). As a result, services exports have grown in importance as a source of export differentiation and global competitiveness (Saez et al. 2014), as well as a vital driver of economic growth (Mishra et al. 2011).
The transfer of employees from agriculture to the industry was a key aspect of most countries’ successful structural transformations in the twentieth century. In this context, a key stylized fact is that low-income developing nations are shifting into services sooner and at a quicker rate than East Asian economies did in the 1970s and 1980s. The accompanying ‘premature deindustrialization’ is a source of concern since it suggests that low-income nations can no longer rely on an increasing manufacturing sector to produce jobs for relatively unskilled individuals, drive economic development, and raise per capita incomes. Others suggest that services-led sectoral restructuring can help to drive long-term growth (Baccini et al.,2022).
Even though services constitute a significant source of employment in Africa, little is known about their features and composition. Services workers are on average better educated, work in higher-skilled jobs, and are more likely to be women than manufacturing workers — 40 percent of employees are women, twice as many as in manufacturing. Some of the highly skilled jobs, such as teaching, are concentrated in the service sector. Overall, 8.9% of people employed in services have a bachelor’s degree (compared to 2.8 percent in manufacturing) and 27.6% have a high school diploma (compared to 15.1 percent in manufacturing) (Baccini et al.,2022).
Africa is set to capitalize on its fast-expanding services industry, but it will need to boost its analytics game to participate more actively in global and regional value chains. This was the conclusion reached by African nations taking part in a combined UNCTAD-UNECA initiative on services trade. The initiative is assisting in the training of African specialists to do just that: evaluate the impact of services on regional value chains and investigate the involvement of indigenous and international enterprises. The emphasis was on how to assist African nations to unleash capability in three service sectors — transportation, financial services, and tourism – and develop the expertise needed to assess and manage service trade value chains.
“Services provide a significant opportunity for African nations to broaden their output away from conventional industries and engage in higher-value-added activities,” says Paul Akiwumi, UNCTAD’s division head for Africa, LDCs, and Special Programmes. “Some services, such as transportation, banking, and information and communication, are important contributors to commerce and make conducting business across borders easier.”
The African Continental Free Trade Area (AfCFTA), which African leaders agreed to in March 2018, can also benefit from services trade. The AfCFTA aims to create a unified market for goods and services throughout Africa. However, UNECA regional integration and trade division head Stephen Karingi adds that bringing the AfCFTA goal to life has been difficult, particularly in the area of services trade. “The lack of knowledge and quantification of services trade, and more broadly, the contribution services play in regional and global value chains, is one of the key biggest hurdles to the execution of trade services-related policies,” Mr. Karingi adds. Raising the prominence of services in Africa might provide exciting potential for export diversification, transformation, and growth through services trade.
Sharpening Africa’s ability to assess and evaluate service value chains will benefit the continent. That is why policy makers are pledging to improve their services analysis abilities to develop policies targeted at improving regional and global value chain integration. Claudia Roethlisberger, a UNCTAD economist, believes that services have become critical to a country’s capacity to partake in global and regional value chains. Ms. Roethlisberger stated, “The continental market has enormous prospects for influencing Africa’s services trade, building and sustaining services regional value chains, and regional integration.” In practice, tapping this potential necessitates a deeper understanding of and support for services trade in policy-making processes. The UNCTAD and UNECA seminar series, which includes a seminar for African trade analysts and policymakers, aims to achieve this through user-friendly technologies and capacity-building efforts.
Given that many women work in the service industry, the services trade may have substantial gender implications and provide new possibilities for women in Africa, ensuring that no one is left behind, Mr. Akiwumi stated. “To realize the full benefits of today’s international commerce, nations must incorporate into value chains and develop their service sectors to engage in higher-value-added areas.” “This will improve their ability to generate revenue, improve their development results, and help them achieve the Sustainable Development Goals,” he added.
According to UNCTAD, services accounted for nearly 55 percent of Africa’s GDP in 2016. Following a rapid expansion and catch-up process to the world average of 24 percent, the percentage of services in Africa’s commerce reached 22 percent in 2016. In 2017, Africa contributed only 3% of global services imports and 2% of global services exports. Tariff barriers will be removed, resulting in a 50% increase in intra-African commerce. The service industry employed 41.6 percent of Africa’s overall workforce in 2020. According to projections, the percentage of persons engaged in services across the continent has been gradually growing. In 2010, the tertiary sector accounted for 36.7 percent of the total workforce in Africa (Faria, 2022).
Using per capita nightlight brightness as a proxy, an exploratory investigation of the link between services and economic development indicates significant variability. We delineate between high- and low-skill service businesses by categorizing them according to the frequency with which individuals with a university degree are employed and their participation in more difficult activities. We also show that location, institutions, and technology all play a role in the significant positive relationship between high-skill service sectors and development (Baccini et al.,2022).
The services sector’s export potential is divided into two categories. To begin with, contemporary commercial services such as banking, communications, and information and communication technology (ICT) do not have a substantial presence or growth in cross-border commerce. The high presence of innovative African enterprises participating in both regional and worldwide markets, however, reveals these industries’ export potential. The provision of adequately qualified labor is a major limitation for businesses in these traditionally skill-intensive sectors.
Second, there is evidence that tourist services have a lot of promise. Tourism services account for similar percentages of GDP and employment to agriculture, which, despite its modest size, has large export potential. Most crucially, tourism-related sectors have low skill requirements, indicating that they have more export potential and are better linked with Africa’s labor market (Bhorat et al., 2018).
A key unanswered question is whether there is a trade-off between the ability of multiple services to boost productivity and employment. While lower-skilled service activities may have less development potential, they do provide employment and consequently revenue. While recent analysis shows that using new technologies, certain service firms can scale up while working to improve productivity, and that “industries without smokestacks” often have above-average productivity, more evidence from African firms is needed to fully comprehend the longer-term time and opportunity and potential ramifications of restructuring towards services.
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