The influence of international trade on labour productivity in services: The case of Brazil in the 1990s

• Published date: 01 February 2023
• Author: H. Stephen Gardner,Lourenço S. Paz,John Ssozi
• Date: 01 February 2023
• DOI: http://doi.org/10.1111/rode.12936

REGULAR ARTICLE

The influence of international trade on labour

productivity in services: The case of Brazil in

the 1990s

H. Stephen Gardner

1

| Lourenço S. Paz

2

| John Ssozi

2

1

McBride Center for International

Business, Department of Economics,

Baylor University, Waco, Texas, USA

2

Department of Economics, Baylor

University, Waco, Texas, USA

Correspondence

John Ssozi, Department of Economics,

Baylor University, Waco, TX 76798, USA.

Email: john_ssozi@baylor.edu

Abstract

In the developing world, services account for a rising

share of domestic employment and international trade.

Thus, it is important to know whether trade liberaliza-

tion contributes to labour productivity in services. We

explore this question, examining the 1990–2000

Brazilian trade liberalization. We find that growth of

imports and exports strengthened labour productivity

in services, but the contribution was smaller in subsec-

tors with more college graduates, and this negative off-

set was larger in subsectors that received large foreign

direct investment (FDI) inflows. Improved access to

imported manufactured intermediate inputs raised

downstream services' labour productivity and down-

stream manufacturing firms benefitting from tariff cuts

enacted by trade partners generated spillovers that

improved the labour productivity of upstream service

subsectors. However, FDI inflows and investments in

human and physical capital modified these down-

stream factors. We conclude that the Brazilian trade

liberalization strengthened productivity in services, but

unequally across subsectors.

Received: 14 January 2022 Revised: 26 August 2022 Accepted: 2 September 2022

DOI: 10.1111/rode.12936

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits

use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or

adaptations are made.

© 2022 The Authors. Review of Development Economics published by John Wiley & Sons Ltd.

268 Rev Dev Econ. 2023;27:268–290.

wileyonlinelibrary.com/journal/rode

KEYWORDS

input tariffs, intermediate inputs, international trade, services,

trade liberalization

JEL CLASSIFICATION

F1, F6, F16, F66, N76, O54

1|INTRODUCTION

The service sector now accounts for more than half of national income in two-thirds of the

world's national economies and in every major region of the developing world. It contributes

more than 60% of GDP in Latin America and above 50% in the developing regions of Africa,

Asia, Europe and the Middle East (World Bank, 2021). In the past, economic growth and wage

rates were primarily dependent on productivity improvements in agriculture and manufactur-

ing, but the centre of gravity has shifted toward services (Pagés & Ludena, 2010; Di Meglio

et al., 2018). Several factors may account for this shift, including technological change, lower

transportation and communication costs, trade liberalization, and demographic changes. Ser-

vices are also the most dynamic component of global trade. The services share of world trade

grew from 9% in 1970 to over 20% in 2019 and is forecast to account for one-third by 2040

(WTO, 2019).

Since the service sector is now the main driver of aggregate productivity growth, it is impor-

tant to know whether international trade liberalization can contribute to productivity gains in

the service sector. This is especially true for many middle-income countries, such as Brazil, that

experienced an expansion of services and a slowdown of aggregate productivity growth in the

1990s (Bacha & Bonelli, 2015; Bresser-Pereira, 2021; Dieppe, 2020). However, because of diffi-

culties in methodology, measurement and data collection, relatively little has been known

about the factors that contribute to productivity growth in the service sector and about the

contribution made by international trade in services (Mattoo et al., 2006).

This study attempts to reduce that gap in the literature by investigating the relationship

between international trade in services and productivity growth in the service sector during the

1990s in Brazil. Most directly, international trade in services exposed the domestic service

industry to new markets and new competitive pressures. More indirectly, international trade in

manufactured goods influenced productivity in the domestic service sector by improving access

to manufactured intermediate inputs and by changing the derived demand for services from

domestic firms that gained better access to foreign markets. This study seems to be the first to

analyse these channels of influence in the context of a trade liberalization episode in a develop-

ing country.

1

Judging by the historical experience of the agricultural and manufacturing sectors, we

would expect international trade to have a positive influence on labour productivity growth in

the service sector. Exposure to global competition should cause a reallocation of resources

toward higher-productivity subsectors and should encourage firms to invest in physical and

human capital and improvements in technology. International trade should also enable firms to

obtain lower-cost and higher-quality inputs.

2

Our findings for the service sector are generally consistent with those in the goods-

producing sectors, but with a few surprises. As expected, we find that industry-level import

GARDNER ET AL.269