Why services sector offers best bet for jobs, economic development

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Developing economies such as Kenya have been advised by a United Nations body to pivot their services sectors as the catapult for economic growth, owing to stiff competition in the global manufacturing space from India and China. 

The report published by UN Trade and Development (UNCTAD) notes that the digital economy has expanded the services sector and removed barriers to entry, especially for micro, small and medium enterprises (MSMEs), which are the dominant businesses in these economies. 

The UN report argues that it is an uphill task for economies like Kenya to fight for a share in the global manufacturing space, as there are countries that have perfected and dominated the trade for ages. 

It says technology has made manufacturing more capital and tech-intensive through the use of robots - an edge that least developed countries do not have. 

The other disadvantage is that manufacturing is already concentrated in India and China, with the rest of the world sourcing from these economies.

There is also the reasoning that traditional industrialisation has led to environmental degradation and consequences on human health.  “The consequences of these developments are that entry barriers into manufacturing for latecomer countries have become considerably higher and industrialisation has become an increasingly difficult route for latecomer countries to follow in their quest for structural transformation,” reads the report titled, The Least Developed Countries Report 2025: Are Services the New Path to Structural Transformation?

According to the report, manufacturing export-led growth, which was the route taken by most successful industrialisers in the 20th century, is seen as an increasingly difficult – if not impossible –path to follow.

Under these circumstances, the new thinking suggests low-income countries – including LDCs – to concentrate their efforts on services and attenuate or even forsake the struggle for industrialisation,” the report says.

“These are seen as the feasible and realistic alternative for latecomer countries to follow to achieve their ultimate development goals.” Kenya’s economy has been slowly transitioning - albeit unwillingly - to a services based. Data from the Kenya National Bureau of Statistics (KNBS) shows manufacturing has not been growing at the pace the State and stakeholders foresee, which would be contributing 20 per cent to the economy by 2030.

In the KNBS Economic Survey Report 2025, the sector barely grew by three per cent and held its growth at 7.3 per cent.

However, the services sector, primarily portrayed through the accommodation and food services sector, as Kenya is an agricultural-based economy, had the largest share in growth at 25.7 per cent. This is regardless of agriculture still holding fort in terms of the economic composition at 22.5 per cent.

According to the UNCTAD report, services have collectively become the largest sector of economic activity worldwide, since at present they account for some two-thirds of world output.  Additionally, the services sectors have become the largest generator of jobs globally.  The report says services are the sector where the most dynamic forms of structural transformation are happening in the more advanced economies and, increasingly, also in developing economies.

“Manufacturing-led export growth is declining, while services-led export growth is booming, in both lower-middle-income and upper-middle-income countries,” the report says. It adds that services are the main destination of global flows of foreign direct investment, pointing out that the sectors have become the most dynamic segment of international trade, expanding at a faster pace than that of goods since the late twentieth century. 

Unctad says this presents developing countries with opportunities for raising their exports and reaping the benefits traditionally associated with greater integration into international trade.

 “The services sector is presented as having lower entry barriers to new countries, companies and even individuals that emerge in the market, as it has lower capital costs, lower infrastructure requirements (e.g. in terms of transport and energy) and lower skills requirements as compared with typical manufacturing plants,” the report says.

“Therefore, in developing countries, micro, small and medium-sized service enterprises start exporting earlier than manufacturing firms.”

The report states that services overall, or at least several sub-sectors, present some of the development potentials previously associated with manufacturing, especially the capacity to generate a large number of jobs, and thus absorb excess labour freed from agriculture.

It explains that more modern service sectors quickly incorporate technological advances and therefore contribute to increases in overall labour productivity, and act as a hub for technology diffusion throughout the economy.  

This is through backward and forward linkages with other economic sectors, for example, manufacturing and agriculture, as well as among different service sub-sectors.

“Therefore, services can be a lever for technology diffusion, and overall economic growth and development, analogous to the role that manufacturing had played in traditional industrialisation experiences,” the report says. 

The report recognises the role technology has played in expanding the services sector through the internet, cloud computing and artificial intelligence (AI), giving rise to the digital economy. 

The report says this has transformed the services economy and opened up considerably wider possibilities for enhanced international trade in services.

“The new development thinking argues that developing countries can connect to global services or digital value chains and achieve a new type of structural transformation,” it says. “The basis for this is that the emergence of the digital economy has multiplied the economic impact of services.”