Rethinking Industrial Policy for the Services Economy

Industrial Policy’s Latest Chapter 

Few areas of economic policy have made such a spectacular comeback as industrial policy. Long viewed with suspicion by much of the economics profession and by advocates of market liberalization, industrial policy today anchors national economic strategies in countries at all development levels. The search for resilience, technological upgrading, and security in production has pushed governments to re-engage with questions of market structure, policy coordination, and public sector intervention. In the process, the frontier between market and state, long tilted toward the former, has become increasingly blurred. 

Yet amid this revival, one fundamental question is receiving too little attention: What does industrial policy mean in an age dominated by services? 

Services today account for roughly two-thirds of global GDP, the bulk of employment, and an ever-growing share of cross-border trade and investment, including that delivered over digital highways. Services are the main drivers of innovation and productivity. Yet prevailing frameworks of industrial policy—its instruments, institutions, and very vocabulary—remain deeply rooted in the manufacturing paradigm of the past century. 

If industrial policy is about shaping the structure and trajectory of an economy, then services must occupy centre stage. The time has come, then, to think seriously about what an industrial policy for services might look like. 

From “Making Things” to “Making Things Work” 

Economists have traditionally divided economic activity into three pillars—agriculture, industry, and services—assigning industrial policy to the second. The term itself betrays its manufacturing origins. Services were often treated as residual, largely “non-tradable,” or simply as final consumption activities. 

Such a view is no longer tenable. Services today form the backbone of productive life. They are not only final outputs—finance, health, education, tourism—but essential inputs into all that economies produce, sell, trade, and invest in. Logistics, design, communication, finance, and professional services exert far-reaching impacts on the productivity of agriculture and manufacturing alike. 

Simply stated, there is no effective industrial policy without a services policy. Services are the connective tissue of modern production and competitiveness. 

The Return of Industrial Policy—and its blind spots 

The global revival of industrial policy is driven by profound structural shifts: geopolitical tensions and the technological rivalry underpinning them, climate imperatives, and pandemic-era disruptions. The pursuit of just-in-time efficiency through global supply chains has given way to an emphasis on just-in-case resilience and redundancy. 

Most of this new policy energy has focused on manufacturing—semiconductors, batteries, green technologies—reflecting an understandable if at times backward-looking nostalgia for the tangible. Yet, the sources of growth and innovation have moved decisively toward services. A 21st-century industrial policy that clings to 20th-century imagery risks missing where transformation is actually occurring. 

Why Services Sit Uneasily in Traditional Frameworks 

Institutional and conceptual legacies explain why services remain marginal in industrial policy debates. Every country has a Ministry of Industry; none has a Ministry of Services, a sector whose innate heterogeneity implies significant institutional dispersion. Instead, service sectors are regulated through fragmented silos—telecommunication authorities, central banks, education, transport or tourism ministries—each pursuing vertically narrow mandates. 

The traditional tools of industrial policy—tariffs, subsidies, local content rules—were designed for a world of production and trade in goods. The intangible nature of services, the ubiquitous nature of the market failures associated with their supply, and the fact that their delivery across borders implies the movement of factors of production—both capital and labour—all point to the need for a different policy toolkit consisting of regulatory reforms, digital and physical infrastructure, skills development, and open, competitive markets. 

Services as the Hidden Engine of Competitiveness 

Significant (if still imperfect) advances in data gathering are helping us understand just how central services have become. Value-added trade statistics show that intermediate services—those embodied in the production of other goods and services—account for roughly two-and-a-half times the value of trade in final services. 

This insight transforms how we need to think about competitiveness and the role services play in it. Efficient finance, logistics, and communication systems enhance productivity across the economy. The strength of a country’s manufacturing base depends fundamentally on the quality of its services backbone. 

What an Industrial Policy for Services Entails 

Designing policy for the services economy means focusing on the enabling conditions that allow services to flourish and to catalyze economy-wide growth. Five pillars stand out: 

1. Infrastructure: Reliable energy, broadband, transport, and payments systems are the essential plumbing of a service economy. Without them, productivity gains elsewhere stand to be impeded.
2. Investment and foreign direct investment: Most cross-border trade in services occurs through a commercial presence abroad (Mode 3 in trade parlance). Attracting, facilitating and retaining foreign direct investment brings not only capital but also know-how and global connections. Costa Rica and the Philippines demonstrate how strategic openness to foreign direct investment can foster competitive service hubs.
3. Skills and human capital: Services are people- and skill-intensive. India’s information technology (IT) success rests on decades of investment in engineering and technical education. Mauritius and Rwanda likewise illustrate how targeted skills policies can transform small economies into dynamic services exporters.
4. Regulatory quality: Pro-competitive regulation is the oxygen of service innovation. Clear, predictable, and transparent rules encourage entry and efficiency; restrictive licensing and opaque governance stifle them.
5. Connectivity—physical and digital: Efficient logistics and robust digital networks are preconditions for participation in global services value chains. Digital infrastructure today plays the role that roads and ports once played for manufacturing. 

Countries that have aligned these elements—Chile, Egypt, the Philippines, Costa Rica, Uruguay, the UAE, Mauritius, and Rwanda—show that small and medium-sized economies can build competitive advantage in services through deliberate policy effort. 

Digital Industrialization: The new frontier 

The digital revolution has opened a new frontier for services-led development. Digital industrialization—using digital tools to boost productivity, inclusion, and export capacity—is reshaping policy agendas across the globe. 

India’s experience is instructive. Sustained public investments in digital identity, payments systems, and e-governance created a foundation for a vibrant fintech and IT ecosystem. Across Africa, “digital moonshot” initiatives seek to replicate this by combining connectivity, competition, and digital skills. 

Yet, many countries that champion domestic digitalization remain cautious about binding international rules on e-commerce and data flows. Balancing openness with the preservation of domestic policy space is one of the central tensions of digital industrialization. 

The Strategic Case for Services-Led Growth 

For developing economies, a services-centred industrial strategy offers several structural advantages: 

• lower capital intensity: Services typically require less upfront investment than manufacturing.
• smaller minimum scale: Global competitiveness can be achieved through niche specialization.
• employment potential: Many services remain labour-intensive, offering opportunities for inclusive job creation even as automation spreads in industry.
• environmental sustainability: Services generally have a smaller carbon footprint, aligning with green growth goals. 

For many countries, the service economy thus represents a more inclusive and feasible path to structural transformation than traditional manufacturing-led models. 

Policy Space and the Scope for Experimentation 

An often-overlooked fact in policy debates over industrial policy is that governments enjoy considerably greater freedom to pursue industrial policy in services than in manufacturing. The General Agreement on Tariffs and Trade imposes tight disciplines on tariffs and subsidies, whereas the General Agreement on Trade in Services (GATS) remains comparatively flexible. 

Tariffs are all but irrelevant to services trade; subsidies are only loosely disciplined under the GATS, and most investment incentives lie outside its scope. Even domestic regulation is subject to relatively soft disciplines, as reflected in the predominantly hortatory language of recently adopted World Trade Organization rules on domestic regulation of services. This asymmetry creates valuable policy space for innovation and experimentation. 

A number of preferential trade agreements, both bilateral and regional, have gone further in their disciplinary scope—particularly on digital trade, investment protection, performance requirements, and data governance—but there can be little doubt that the multilateral regime still offers ample room for tailored national approaches. 

Lessons for Policy 

A few broad lessons emerge from recent experience: 

• expand the concept of industrial policy. Structural transformation today depends as much on services as on manufacturing.
• integrate services across policy silos. Competitiveness in any sector relies on high-performing service inputs.
• harness digital transformation. Digital services are both enablers and growing sources of export expansion.
• invest in skills and regulatory institutions. Human capital and sound regulation are the new industrial infrastructure.
• use policy space strategically. Flexibility under the World Trade Organization’s General Agreement on Trade in Services and preferential trade agreements provides scope for policy experimentation, but greater developing country engagement in shaping new global norms remains essential. 

Bringing Services to the Core 

For decades, industrial policy conjured images of factories and assembly lines. Today, the sources of dynamism lie elsewhere—in software labs, logistics hubs, hospitals, and classrooms. 

An industrial policy for services is not a contradiction; it is a recognition that making things work can be as crucial as making things. Services are the infrastructure of competitiveness, the carrier of innovation, and the foundation of inclusive growth. 

As the global economy becomes ever more knowledge-intensive and digitally interconnected, bringing services from the margins to the core of industrial policy thinking is not merely desirable—it is indispensable. 

Pierre Sauvé is a Senior Research Fellow and Adjunct Lecturer at the University of Bern’s World Trade Institute ([email protected]).