Turning Back on Service Exports

Why Exports of Ethiopian Services Remain Stagnant

The service sector in Ethiopia has suffered from a lack of government attention for a long time. It is still not part of the government’s strategy, even though it contributes close to 40Pct of the country’s gross domestic product. In Ethiopia, earnings from service export have long been dominated by traditional sectors- mainly travel and tourism services. This has undermined the competitiveness of firms that export services and the country’s ability to boost its service export earnings. Although service exports have potential, they have not grabbed the attention of policy makers so far, as EBR’s Samson Berhane reports.

In the last decades of the 20th century, the role of exports, in particular service exports, as an instrument to achieve broader economic and social development gained momentum, especially in developing countries. This gave a window of opportunity to those who want to capitalize on the advantages brought about by service exports. Tadesse Tilaye, managing director of Hemisphere Bridge Consultancy, is one of them. Registered by the government as a consultancy firm four years ago, his company has carried out several market research studies. The economics graduate joined the service export sector hoping to leverage profit from the area where he wants to excel. It has not been easy. “The level of attention given by the government is too low for businesses like us,” said Tadesse.

His business is part of the 11 sectors classified under trade-in-services sectors by the International Monetary Fund (IMF). Transportation, travel, communications services, construction services, insurance services, financial services, advisory services, and computer and information services are the major sectors listed. The exports of such services have grown at a rapid rate over the past few decades. Yet many developing countries such as Ethiopia have been left behind while some nations have benefited greatly from the boom in service exports.

In the developing world, and Ethiopia, the trade-in-services has long been dominated by traditional sectors, mainly travel services. More attention was given to exporting commodities by Ethiopia especially in the last decade, while exports of modern services, including advisory, medical, communications and technology-based provisions, are low.
Particularly, the growth of businesses that exports high-value, skill-intensive services, such as computer and information technology had been limited by several factors. Beyene Rusom, a software engineer, is a witness to this. “While we are capable of competing with professionals in other countries, some of us are unable to compete because of the unavailability of online credit card payment systems in Ethiopia,” he told EBR.

Tadesse shares this opinion, saying that despite its long experience in the business, his company is having trouble being competitive in the global arena because of the lack of attention given to the service exports. “Even though we export services by providing advisory and consultancy work, our company doesn’t get the same privileges as businesses that export goods,” Tadesse argues. “This makes us less competitive and limits our projects.”

This is a concern shared by other people and companies engaged in exports of services, including freelance writers and consultants. Daniel Alemu, IT expert of Libral Technology, is one of them. “Even after winning a project, it is impossible to download software inputs and devices as well as books that are essential to our work. This has undermined our competitiveness,” he says, mentioning that the government must learn from the experience of countries like India that achieved remarkable economic growth by boosting the exports of modern services.

For a long time, what drives growth has been a point of debate in research, and with the recent growth of China and India, it has been renewed. The two countries achieved remarkable growth rates using different routes. China’s growth was driven by a manufacturing based export strategy, whereas India in particular followed a services exports growth strategy.

Although the benefits of service export are mostly associated with developed countries, the trend holds true in low income countries. With the advent of new technologies, many developing countries showed their potential in successfully supplying and exporting services, even better than trade in goods. Ejaz Ghani, an economist who was formerly a lecturer at Oxford University, published a study entitled “The Service Revolution’, which showed that the success of some countries in exporting services seems to be unrelated to their performance in trade in goods or to their industrial development.

Exports of services in developing countries in Asia, such as Sri Lanka and India, are growing faster than goods shipments and contribute to export diversification. Over the past 18 years, the value of service exports grew tenfold to USD184 billion in India, while it grew by eight times to USD7.7 billion in Sri Lanka. In both countries, close to half of the exports are on account of software services.

According to a study entitled ‘Exports of Services and Economic Growth in Developing Countries’ conducted by Alberto Gabriele, Economic Affairs Officer, at UNCTAD, many Asian developing and transition countries are leading exporters of transport services a.k.a maritime transport services. Korea, which experienced rapid growth in the past three decades, is the largest developing exporter of transport services with the total earnings of USD11 billion in 2013, which accounts almost four percent of the world market.

Generally speaking, Asian developing countries expanded services exports by six percent in 2000s on average while Asia’s share of world services exports accounts for18Pct of the total. On the contrary, developing nations in Africa, including Ethiopia, registered a below-average services export performance during the 2000s. As a result, Africa’s share of total world services exports remained very low around two percent since 2000.

Although it is difficult to get an accurate figure, in Ethiopia service exports, which amounted to around USD2.8 billion – almost equal to exports of goods, is dominated by traditional sectors, mainly travel services, more specifically earnings by the tourism sector—from foreigners visiting the country. On the other hand, the share of modern services exports is significantly low.

Beyene thinks it is impossible to increase the earnings from services exports in Ethiopia without overhauling the finance sector. “There are thousands of IT professionals graduating from colleges and universities every year. But few of them work in the area because there aren’t enough IT jobs available,” he says. “This would not be an issue if people were allowed to transact via credit card payments.”

It is not only the underdevelopment of the finance sector that deterred the service export to thrive in Ethiopia. The tax system is another hurdle. “We are asked to add value added tax (VAT) on every service our company provides, making us less desirable in the eyes of clients,” argues Tadesse, who has complained to the respective tax office, but to no avail. “Because of this, we lose many projects to competitors in Kenya and South Africa.”

Dawit Tadesse, who runs a tax advisory business, agrees. “Although the government acknowledged that service exports are free of value added taxes, there is an implementation gap,” he explains. The Ethiopian Revenues and Customs Authority admits it. Service exporters are free from value added tax obligations to encourage them bring more foreign currency to the country. But there might be a gap in effecting the law and corrective measures, such as amendment of the law to close it to subjective interpretation, are underway,” said Berhanu Getahun, a tax expert at the Authority.

But for many, this just the tip of the iceberg. The lack of an institution that is mandated to follow how service exports are performing has a big impact on the sub-sector. “The unavailability of an entity to coordinate and report all service trades with businesses outside the country undermines the competitiveness of the nation in the global arena,” says Wondimu Filate, director of Communications Directorate at the Ministry of Trade. Amin Abdella (PhD), however, argues differently, saying that the issue is beyond institutionalization. “The nation has no tradable modern services,” he says.

Over the past decade, the economic structure of the country shifted from traditional agriculture to the modern service sector, while the industry sector showed marginal growth during the same period. In the past fiscal year, the service sector, which employs more than 4.6 million people throughout the country, accounted for close to 40Pct of the economy, while agriculture and industry contributed the rest.

In fact, the service sector remained dominant for over the past decade despite the government’s plans, to contain it. Many argue that it is impossible to transform the economy and be a middle income country with a higher share of the GDP contributed by the service sector. “The government cannot overlook the bulging service growth and the benefit it could bring if it is traded properly,” Amin explains.

Although the drastic growth of the sector resulted in many tradable services, it has not sufficiently captured the attention of policy makers, because of the assumption that the comparative advantage of a low-income country like Ethiopia lies in agriculture and labour-intensive manufacturing.

Yet, the role of modern services exports in diversification and export earnings should not be neglected in Ethiopia, according to World Bank’s Fifth Ethiopia Economic Update published earlier this year. The Bank also recommended that the government draft trade and regulatory policies that enable firms to provide services through all modes of supply.

Alemayehu Geda, professor of economics at Addis Ababa University, however, thinks the country is on the right track to boost the modern services export. “The IT park, which is under construction, will pay off in the future. That shows the government paid attention to the sector.”

Amin disagrees. “The country is a net service importer as there is a shortage of skilled manpower. At the current pace, it is impossible to achieve a service trade balance, let alone attain export surplus,” he argues. For him, to be competitive in the global service trade, the government must prioritize technical and vocational training schools to improve the availability and quality of services. “Instead of encouraging only manufacturing firms to thrive, the government must also promote firms, such as insurance companies, universities and logistics service providers that can provide efficient tradable service products to the world,” Amin stresses.

7th Year • Oct.16 – Nov. 15 2018 • No. 67