A sleeping giant?
Services already make a substantial contribution to OECD economies, but they could contribute so much more. They need to become more competitive, for a start.
“My name is not Frankenstein, though it rhymes with Einstein, perhaps”. So joked Dutchman, Frits Bolkenstein, a former European commissioner, on a visit to Paris in April to defend his controversial and by then much amended directive on freeing up services in the European Union as part of the single-market programme. Mr Bolkenstein’s particular mission was to reassure worried minds about trade and social effects of services reform in Europe, and his message was plain and serious, to be applied to services generally: like industry two or three decades ago, it was time for a change.Right across the OECD area, services, from plumbing and childminding to financial services and healthcare, have become a new testing ground of policy efforts to reform and free up markets, both at home and abroad.Why now? The answer is twofold: first, unlike most goods, the market for services remains far too restricted, generating costs for operators and consumers alike, and holding down productivity. The second aspect is that, thanks to progress in information and communications technology, many services that are traditionally the preserve of the domestic market are much better placed than they were, say, 10-15 years ago, to benefit from freer access to the international marketplace.There is another key reason why governments are taking services more seriously: jobs. Consider the facts. The services sector now accounts for over 70% of total employment and value-added in OECD economies. And it accounts for almost all employment growth in the OECD area. But despite the high overall share in employment, the proportion of the working-age population employed in services remains low in several countries, e.g. Greece, Italy, Korea, Poland and Spain. Also, the contribution of the services sector to aggregate productivity growth has been low in many countries, including Spain, France, the Netherlands, Italy and Japan.Moreover, with globalisation, OECD countries are confronted with stiffer competition, which is already testing the capacity of some countries to create new jobs. Certain business services, like consulting and legal services, can now quite easily be purchased across borders, OECD Observer No. 249 May 2005 in particular if they involve an intensive use of information technology and require little face-to-face contact.Clearly, to make OECD economies more resilient and improve their competitiveness, the services sector must do better. Can governments help? Yes, through a combination of policies, based on sound macroeconomic fundamentals.Opening up is a good starting point. Many successful services companies owe their existence and success to the freeing up of markets. Indeed, several of the most successful airline companies in recent years, such as Southwest Airlines and EasyJet, would not have existed if formal entry barriers to airline markets had not been removed. In some cases, the threat of foreign competition and access to international markets has spurred firms, such as France’s retailer, Carrefour, to expand abroad and become more competitive.Regulatory reform in services markets can create fresh opportunities, helping firms in meeting new demands, such as for leisure, health and care services. This would help increase employment. It would also sharpen the incentives for companies to innovate and improve their productivity.While much progress has been made in opening services markets, further steps are needed, particularly in reducing public ownership in competitive industries, such as transport. Anticompetitive practices in professional services, such as rules that allow professional associations to regulate entry, conduct and prices in their industry, also have to be curtailed. And governments should do more to make life a little easier for young firms, by removing red tape, simplifying legal requirements, and so on.For the firms themselves, real reform would entice them to look beyond domestic markets for opportunities abroad. Thanks to information and communications technology, firms can now operate internationally more easily. Digital delivery of many services, including healthcare, is now possible. Also, firms benefit because value chains are less constrained geographically, so enhancing innovation, quality and productivity.The advantages may be clear, but entrepreneurs cannot derive these benefits if policymakers do not open their markets to international competition first. Multilateral talks are under way at the WTO to help reduce barriers in services. Their aim is to ensure a broad opening of markets and a wide distribution of the benefits, but in the meantime, OECD governments can benefit from opening their services markets now.Not that opening up markets is cost-free: there are adjustments to be made in terms of policies for human resources and skills, legal frameworks and so on. But if services are to live up to their jobcreating potential, employment frameworks must be made flexible enough to cater for new worker groups, such as those ready to work parttime or even at night, for instance.Governments should be wary of common obstacles, such as high labour taxes. These not only affect the job prospects for low-skilled workers but also increase the costs of personal services, such as childcare or gardening. As a result, many of these services will be provided as do-it-yourself or undeclared work. Overly strict workplace rules are also a problem, as they may hamper the development of certain services, such as tourism, or because they have adverse effects on the kind of labour mobility or organisational change that may be needed to improve productivity.
To help employees cope with family and work demands, governments should pursue family-friendly policies, such as providing better access to childcare facilities–this in itself would be employment-generating–and encouraging more flexible working-time arrangements. All this probably involves fostering new attitudes among all staff, including bosses, and may require new workplace arrangements.The payback will be more effective human capital. Human resources are particularly vital for services, not least because many of them require close interaction with other people, be it colleagues or customers. And a skilled workforce also has the competitive advantage of adapting to new technologies and innovative workplace practices as they emerge. A shift towards a service economy may require changes to human resource and educational policies as a result. Ensuring a good supply of qualified personnel is important, but governments must be sure that education policies will continue to supply such skills over time. A properly functioning system will be one that encourages workers to keep up their skills throughout their lifetimes, and may rely on co-financing by firms, workers and governments, for instance.Curiously enough, in OECD countries, with the exception of financial and business services, innovation policies tend to focus primarily on manufacturers’ needs. Public spending on basic R&D, in both public laboratories and universities, does not typically address the long-term knowledge requirements for services, like improving the understanding of how technology should be deployed and used, management issues or how people might work in groups. Focusing more public R&D on these issues would help and is already being pursued by countries such as Japan and the US for some services, such as software. Stronger links between public research institutions and services firms, in software development or business management techniques, for instance, would also help.An important link running through all this is, of course, information and communications technology. The services sector is being transformed by ICT (or IT as it is also called), as this not only enables innovation and productivity growth, but greater international reach. Some of the most successful services firms in recent years were pioneers in introducing new technology and developing innovative applications, such as airline reservations without physical sales points, interactive TV or digital tracking of postal packages. But they have also been able to profit from effective underlying infrastructure, which has allowed faster, often cheaper, access to better network services and applications, including broadband. Still too many countries lag in this area, and they should not be surprised if their service sectors are struggling, too. Without the right technology, so many services simply cannot reach their potential.Part of the problem is policy and physical investment, but some of it is a matter of building more public trust in electronic networks. But as in any industry, public confidence will rise if the right reliable technology is in place.Regulations and administrative rules, often dating from the days before electronic business, may also be at fault. Payment schemes are not always adapted to digital delivery; in healthcare services, for instance, a face-to-face meeting is often required between physician and patient before payment is approved.The policies we advocate for services are fairly broad and mutually reinforcing. We know that freer, more educated markets work, with governments providing the frameworks and infrastructures needed, and assistance where markets fail. Any mix of policies to suit circumstances is possible, provided they move in this general direction.Getting the mix right is important. After all, a healthy services sector benefits the entire economy. In services, it is indeed time for a change.©OECD Observer No. 249, May 2005ReferencesOECD (2005), Enhancing the Performance of the Services Sector, forthcoming.