Service Trade Liberalization and Economic Growth

Originally published in The Journal of Developing Areas

This paper empirically examines the relationship between services trade liberalization and economic growth. Services trade currently comprises approximately 20 percent of total world trade, with more than half of the world’s labor force employed in service sectors. The possibility that reducing barriers can enhance global production is increasingly receiving attention. The impact of liberalization on growth is empirically assessed by including services trade restrictiveness as the key variable of interest in cross-sectional estimations of a global production function. Income dummies were interacted with levels of services trade restrictiveness to discern variations of influence across countries at different income levels. Services trade restrictiveness is captured using a World Bank index for a pooled cross-section of countries. Robustness of results are evaluated using a similar services trade restrictiveness index recently constructed by the OECD for member countries. The results suggest that services trade liberalization has a positive impact on a country’s per capita GDP. This benefit of service liberalization is larger in countries with greater services export values. In addition, service liberalization in low income countries has a greater impact on per capita income levels than does service liberalization in high income countries. While positive and statistically significant, the scale of the effect appears small. The robustness of the results were tested using an alternate measure of services trade restrictiveness for OECD countries. These robustness results validated the benchmark results and also suggested, for high income countries, the liberalization of services trade may have a non-linear influence on per capita income growth. These findings underscore the importance of including service trade liberalization as a part of trade policy discussions and development agendas, as liberalization of services restrictions may stimulate growth in per capita income and highlights that removing the barriers to services trade can positively impact income levels, especially in low-income countries. Currently, policies surrounding services trade liberalization largely occur at the bilateral agreement level. However, as knowledge grows about the possible benefits of services trade liberalization, movement towards multilateral recommendations may be optimal.

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