Can the Service Sector Unlock Central America’s Development Potential?

Developing countries can leverage the potential of services to transform their growth prospects and ensure improved standards of living. Indeed, the service sector contributes to 63.5% of global GDP and constitutes a key driver of economic growth and poverty reduction.[1]

In addition, services are essential inputs to other areas of economic activity, particularly in the spheres of finance, business, transportation and logistics. Thus, strengthening the links between services, on the one hand, and the primary and secondary sectors of the economy, on the other, is crucial to a successful development strategy. In this article, we present some of the lessons learned in the Central American experience and a few ideas about how to move forward.

Value Chains in Tourism

Services are the most dynamic sector in the economies of Central American countries. The sector contributes to 66% of its GDP, slightly above the 63% in Latin America and the Caribbean (LAC). This is largely due to the region’s trade-driven growth model, but service exports generate slightly more revenue than exports in goods[2] and experienced an average growth of 5.6% between 2011 and 2015.

Tourism, the main service sector in Central America, generates $11.1 billion dollars in revenue and represents 40.56% of total services’ exports in the region.[3] The strength of this sector is partially due to strong support from governments in the region through proactive promotion strategies.

The competitive advantage is there –Central America’s destinations have the potential to be more fully positioned among overseas tourists, for example–, but to fully materialize the potential gains, comprehensive policies that stimulate more investment and entrepreneurship in the sector are needed.

Thus, it is thus important to build tourism supply capabilities and link the sector to infrastructure, employment, trade, investment, and education policies. This might be easier said than done, but the potential benefits include increased foreign exchange earnings, higher income and employment levels –including spillover effects to other sectors of the economy– and much-needed economic diversification.

Leveraging Human Capital for Business Services

Similar holistic approaches have paved the way for the region’s successful insertion in the value chains of business process outsourcing (BPO).

For example, Costa Rica has effectively linked its export and investment promotion strategies with its investment in human capital: the country has one of the highest public spending in education and health services as percentage of GDP in Central America. This has prompted the growth of the business services sector,[4] which now offers broad spectrum services including call and contact centers specialized in IT and back office services to companies seeking to perform these operations offshore. Further boosting its workforce skills could help the country diversify into the higher value-added process of knowledge outsourcing (KPO), which includes legal, research, and other sector-specific subcontracting.

Investments in education are also an essential aspect of Panama’s successful participation in the BPO sector. A few years ago, for example, the Commerce and Industries Ministry led an effort to consolidate the medical BPO sector, coordinating with the academic sector and the Ministry of Health to train workers with the necessary skills to perform their jobs.

Panama is different from the rest of the region in that it depends mostly on its service economy –transportation, tourism, and financial services are its main three sources of income. But its approach, which has also involved efforts to create a business ecosystem within special economic zones, and easing conditions to attract large multinationals to enter the country, could easily be replicated elsewhere in the Americas.

Improving Trade in Services Statistics

These experiences point in the right direction. But in order to fully take advantage of the opportunities afforded by the services sector, it is important to generate more awareness of its potential among policymakers, economists, and the private sector itself –including exporters and importers.

In order to do this, it is crucial to improve our data collection: we need to bolster the quality, availability, and comparability of our services statistics. This is why alongside UNCTAD, the Secretariat for Central American Economic Integration (SIECA) is preparing a study of the services component in regional value chains in Central America. Both institutions will also map technology-enabled services exports. As we move forward, however, it is of utmost importance for developing countries to engage more actively in the international trade system –especially as it focuses more strongly in services. An additional benefit of this might be a stronger bond between emerging economies and a larger say in international governance.

*Javier Gutiérrez is Executive Director of SIECA.

[1] United Nations Conference on Trade and Development (UNCTAD). Exploiting the Potential Trade in Services for Development (UNCTAD/DITC/TNCD/2013/4), 24 Dec 2013, available at: https://unctad.org/en/PublicationsLibrary/ditctncd2013d4_en.pdf

[2] Central America’s service exports totaled $28.2 billion in 2015, according to UNCTAD Statistics, compared to a total $28.04 billion in exports in goods, according to SIECA.

[3] SIECA (Regional Value Chains Project Documents, Publication Withheld).

[4] Karina Fernández, Penny Bamber and Gary Gereffi, “Costa Rica in the Offshore Services Global Value Chain”, Duke, Center on Globalization, Governance and Competitiveness, August 2013, available at: https://www.cggc.duke.edu/pdfs/2013-08-20_Ch5_Offshore_Services.pdf