The Globalization of Services: What Has Happened? What are the Implications?

Working Paper
99-12
January 1999

Globalization has affected all facets of the world economy. This includes services, which in most economies are the single largest contributor to economic growth and employment. However, despite its importance to national output, the impact of globalization on services is only recently receiving the attention of researchers and policy-makers.

The aim of this paper is to provide a succinct survey of the process of globalization as it impacts upon the service economy. Specifically, the first section of the paper provides a brief overview of the increasing globalization of service industries by summarizing the available evidence on international services trade and investment levels.

This is followed by a section examining the basic economics of the global market, in particular the frictions that prevent price equalization across borders. This theoretical discussion leads into an analysis of the factors that both facilitate and limit increased globalization of the services sector. Particular attention is paid to reduced technical constraints affecting services trade, coupled with the barriers arising from policy impediments to services trade and investment.

Finally, the implications of increased globalization of services trade and investment are examined. The potential economic gains are considerable. But, there will also be losers from the globalization process. These groups will need to be compensated in the context of lowering the policy barriers to globalization.