Archived — Discussion Paper Number 13: Services in the New Economy: Research Issues

by Brian R. Copeland, University of British Columbia, October 2003


Globalization and the growth of the knowledge-based economy are perhaps the two key forces at work in the economy today. They are inducing changes in the economy and the nature of work that we do not yet fully understand. Although the effects of these changes are pervasive throughout the economy, there is a particularly pressing need to understand how the service sector is being affected. The purpose of this paper is to stimulate discussion on research priorities on the interaction between globalization, the new economy and the economics of the service sector. It is important that policy debates and policy formulation be based on a good understanding of the issues and the underlying economic forces at work. Although research in this area has been increasing, there is still much that we need to learn.

The service sector encompasses a wide and varied range of economic activity, including banking, janitorial services, education, entertainment, transportation, health, and much more. Services are the dominant employer in developed economies. Any analysis of the effects of globalization and new information technologies on the economy must, therefore, unavoidably include the service sector. The need to focus on the service sector goes beyond the simple fact of size, however. The global trade policy agenda has been shifting toward services, and we need to ensure that we have a good understanding of the economics of the sector before embarking on trade agreements in this area. As well, economic analysis of many aspects of the service sector sometimes has tended to lag behind that of the goods sector because of difficult issues of data and measurement that present significant challenges for researchers. The need for research with a focus on the service sector, therefore, arises from a combination of its central importance to the economy, the international policy agenda and the gaps in our knowledge about the sector, that have been caused, in part, by a lack of data.

Globalization is inextricably linked with services. Services both facilitate globalization and are subject to the pressures and benefits of globalization. The key linkages between countries occur via telecommunications and transport, both of which are services. Changes in technology, competition policy and trade policy in these industries have helped to lubricate the channels of global economic integration. Services are also becoming increasingly open to international trade. Although most world trade is still in goods, global international trade in services recently has been growing faster than trade in goods, and more than half of new direct foreign investment is in services. This creates new opportunities for consumers and producers of services; but it also creates new challenges.

Much of the public policy affecting the service sector has been considered an issue of domestic rather than trade policy. There are a couple of reasons for this. Historically, the bulk of international trade has been in goods; and so trade agreements have traditionally focussed on goods rather than services. As well, many services are provided by governments and so quite naturally are viewed as instruments of domestic policy.

In recent years, this has begun to change. International trade agreements are now being extended to cover trade and investment in services. Some regional trade and investment in services were covered by the North American Free Trade Agreement (NAFTA). As well, under the auspices of the World Trade Organization (WTO), member countries have committed to the General Agreement on Trade in Services (GATS), which is a framework for the development of a liberalized rules-based regime for international trade and investment in services. While previous rounds of trade liberalization that focussed on goods were backed up by a wide array of studies of their potential effects, there is still very little known about the size or costs of current barriers to trade in services and the consequences of different approaches to trade liberalization.

New developments in information technology are also having a large impact on the service sector. The top five industries in terms of computer purchases are all services (Triplett and Bosworth, 2001). Telecommunication costs have plummeted and the quality and variety of services have increased dramatically over the last 15 years. These and other changes have altered the nature of work for many in the service sector, as the pace of change has required firms and their workers to adapt and innovate to remain competitive. The pace and importance of innovation in a world that is becoming more integrated creates significant challenges for policy. Regulation and policy need to evolve to reflect changes in technology and global markets, and this requires that we develop a better understanding of the underlying economics.

The last major research initiative in services in Canada took place about 15 years ago (Grubel and Walker, 1988). Given the major developments in information technology that have occurred since that time, and the ongoing international negotiations by the GATS members, it is a good time to consider research priorities in this area.

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