Trade in Services and World Economic Growth

Abstract

In economic theory, services have faced a long history of neglect and were long regarded to be of little economic value per se. In his famous treatise “An Inquiry into the Nature and Causes of the Wealth of Nations”, the British economist and father of classical economic thinking Adam Smith introduced the distinction between goods and services and found the latter to be unproductive and incapable of assisting the economy to achieve productivity improvements. Likewise, in his “Principles of Political Economy” John Stuart Mill asserted in 1848 that the economic process was solely directed at producing “utilities fixed and embodied in outward objects”. Engel assumed that services were at best goods of a secondary type purchased only after primary demands have been satisfied. Until a few decades ago, economists did not give much thought to international trade in services, reflecting the perception that services were not tradable. While services have long escaped careful study and analysis, the revival of interest can be traced back to the German economist Friedrich List, who investigated the evolutionary process of growing economies in three stages, culminating in the “commerce”inclusive economic development in the Western world in the last three decades. Services have been the fastest growing component of crossborder trade and investment activity. Dynamic service industries as well as a distinctive service infrastructure constitute major factors in abiding and enhancing economic growth and provide fertile ground for innovation. Service industries facilitate every aspect of social, political and economic life. It is difficult to think of efficient economic activity without the supply of services like transportation, communications, basic utilities, etc. In today’s global marketplace, service industries in developed as well as in developing countries dominate the economic landscape and are indeed of paramount significance for the respective economies in terms of production, investment, international trade, etc. and, in fact, contribute more to GDP and employment than any other sector.