At your service

What is common between India, Britain and America? Not that English is an official language in all the three countries. All three of them have a trade surplus in Services! That, in itself, is a clear and sure sign that something is amiss in India’s development trajectory.

You will find below charts of US overall trade balance, balance in goods and balance in services. The same goes for the chart for Britain.

US Trade Balance.png

UK Trade Balance

Of course, the composition of the Services exports of India and that of these two countries are different. India’s is dominated by Software exports and other IT enabled Services. For these two developed countries, education, entertainment, financial services (banking, asset management, pensions and insurance), legal and accounting services and healthcare (don’t people still go to these countries for treatment?) would be dominant.

Now, we know why in the last ten to fifteen years, the door is being banged upon liberalisation of services in developing countries. These countries are competitive there. Exchange rate undervaluation does not help in exporting services. Well, not as much as it does with respect to export of manufactured goods. Conversely, exchange rate overvaluation would not hurt much either.

Given that their services exports began to grow in the Eighties, some interesting questions arise. Indeed, the 1980s marks the beginning of a lot of things. Global debt levels – private and public – began to accelerate. Globalisation began. The Soviet Union began its disintegration. Long-term interest rates began their long decline and it continues to this day. Reagan and Thatcher arrived in America and Britain respectively. Deregulation and liberalisation became the mantra. Financial services were liberalised. Countries began to open up their capital accounts. EC countries did so in 1988. UK also did so in the Eighties. Volume of derivatives trade began to grow. China was beginning to grow rapidly, having begun its internal reforms in 1979. Well, finally, the Eighties also saw the beginning of the rise of wage and wealth inequality in the developed world. To a large degree, that last development is linked to all the other things mentioned before it.

Clearly, as their manufacturing industry shrank and so did employment in manufacturing (actually, the latter came down faster than the share of manufacturing in GDP), workers in these two countries found their wage growth slowing. Jobs were offshored. Clearly, wages in services were higher but so were the educational requirements. As advanced economies, these two countries offered only higher value-added services to the world. That required educational skills. Blue collars could not retrain themselves that quickly.

So, at first glance, it appears that, for Britain and America, their considerable success and competitiveness in Services had been more of a burden than a blessing in disguise. Will this reverse or can this reverse? More precisely, will this be allowed to reverse? Even if does, will it restore some share of GDP for manufacturing and restore better wage growth for workers in lower income strata? What role/hurdle will robotics pose to that swing of the pendulum back to the past? Interesting questions. I do not have answers.

Gathering data on goods, services and overall trade balance for other countries does not seem that easy. For Germany, with some difficulty, I finally managed to download OECD data. Trade in services data are available only up to 2013. Merchandise trade balance data  are available up to 2015. But, unsurprisingly, Germany has a big trade balance in merchandise goods and a small deficit in services.

Germany trade balance

Based on the Saez, Piketty, et al database of world income and wealth inequality, I got the following data for Germany and for the USA. Germany is less unequal than the US, no doubt. But, is it convincingly so? May be, a decent manufacturing share of GDP is a necessary condition but not sufficient. May be, more importantly, the bargaining power of labour has weakened considerably everywhere, including in continental Europe. Therein may lie the clue.

Income shares

German data are from the year 2010. America data are for 2015.  For America, the income shares of top 10%, 5% and 1% have increased slightly from 2010.

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