Global Policy, 2025; 0:1–13 https://doi.org/10.1111/1758-5899.

70003 1 of 13 Global
Policy POLICY ANALYSIS Servicing Development: Productive Upgrading of Labor-
Absorbing Services in Developing Economies Dani Rodrik | Rohan Sandhu Harvard
John F. Kennedy School of Government, Harvard University, Cambridge,
Massachusetts, USA Correspondence: Dani Rodrik (dani_rodrik@hks.harvard.edu)
Received: 18 September 2024 | Revised: 29 January 2025 | Accepted: 30 January 2025
Funding: This work was supported by William and Flora Hewlett Foundation.
Keywords: growth strategy | industrial policy | services ABSTRACT Manufacturing
generates very little employment in the developing world. Urban jobs are
predominantly informal, unproductive, and in services. It seems unlikely that
manufacturing will be able to absorb the new increments to the labor force or create
more productive jobs for those that are already stuck in petty services. Raising
productivity in services has been traditionally difficult, but is now necessary to achieve
long-term growth in the standard of living. We discuss and provide evidence for four
broad strategies: (a) incentivizing large, productive firms to expand their employment;
(b) enhancing productive capabilities of smaller firms through the provision of public
inputs; (c) providing workers or firm's technologies that explicitly complement low-
skill labor; (d) vocational training with “wrap-around” services to enhance job seekers'
employability, job retention, and eventual promotion. JEL Classification: O40, O17,
O25 1 | From Manufacturing to Labor-Absorbing Services The future of developing
countries lies in services. Enhancing productivity in labor-absorbing services in
particular must be an essential priority, for reasons of both growth and equity. In this
paper we provide a broad overview of what such a strategy might look like, drawing
on a wide range of existing programs on which it might build. Emphasizing a services-
driven model may seem odd in view of the phenomenal success that countries such as
South Korea, Taiwan, and China have had with the strategy of export-oriented
industrialization. Indeed, historically industrialization has been the main vehicle for
modern economic growth. The aptly-named Industrial Revolution in Britain was itself
the product of the application of new technologies to manufactures such as cotton
textiles. Almost all subsequent and sustained cases of economic catch-up, from the
United States to Japan, were the result of industrialization. The conventional recipe for
low-income countries such as those of Sub-Saharan Africa is to replicate these
experiences, by removing obstacles to (or actively promoting) rapid industrialization
so their firms can plug into global manufacturing value chains. Today, even advanced
economies are engaged in industrial and other policies to reinvigorate their
manufacturing sectors, weakened by decades of competition with China. There are
good reasons why manufacturing is distinctive and may deserve special attention. In
advanced economies, manufacturing contributes a disproportionate share of R&D and
innovation and therefore plays a particularly important role in driving economy-wide
productivity growth. In developing countries, formal manufacturing sectors reliably
exhibit “unconditional” labor productivity convergence to the technological frontier.
Manufacturing establishments that are very far from the frontier experience especially
rapid productivity growth, even in economic environments characterized by bad
policies or disadvantageous external conditions (Rodrik 2013). Moreover, © 2025
Durham University and John Wiley & Sons Ltd. 2 of 13 Global Policy, 2025
manufacturing is tradable, meaning that firms do not face domestic demand
constraints; for smaller economies, and especially developing countries, this means
that their manufacturing firms can expand virtually without limit, driving economic
growth. Historically, manufacturing presented an additional advantage for developing
economies—and this one was critical in enabling rapid economic growth through
industrialization. Many if not most segments of manufacturing did not demand
significant skills from production workers, beyond some manual dexterity, punctuality,
learning on the job, and ability to work with others. Machinery and equipment could
be imported from abroad (and eventually produced at home with the requisite
capabilities in place). Governance and regulatory requirements from the state were
either similarly minimal, or when more extensive, could be provided in a targeted
manner (through special zones or customized policy regimes, for example) without
requiring economy-wide institutional improvements. In short, industrialization needed
resources which were plentiful in poor countries (cheap, unskilled labor) and
economized on resources that were scarce (education, physical capital, high-quality
institutions). This in turn meant that industrialization faced few constraints on the
supply side either: manufactures could expand rapidly without driving costs up and
profitability down, at least until countries reached middle-income stage. The features
summarized in the previous paragraph no longer describe the realities of today's
manufacturing (Rodrik 2016). It is well documented that innovation in manufacturing
has taken a predominantly skill-biased form, reducing demand for workers with
relatively low levels of education (Acemoglu and Restrepo 2022). In many
manufacturing segments, new technologies such as automation, robots, and 3D
printing serve to directly substitute physical capital for labor. Of course, given their
relative factor prices, firms in developing countries have the incentive to use more
labor-intensive techniques. But they face a limited range of factor substitution
possibilities. Competing in the global marketplace requires employing production
techniques that cannot differ significantly from those employed in the frontier
countries, because the productivity penalty would be otherwise too high. The need to
produce according to the exacting quality standards set by global value chains restricts
how much unskilled labor can substitute for physical capital and skilled labor (Rodrik
2022). The rising skill- and capital-intensity of manufacturing in turn means that
globally competitive, formal segments of manufacturing in developing countries have
lost the ability to absorb significant amounts of labor. They have effectively become
“enclave” sectors, not too different from mining, with limited growth potential and few
positive effects on the supply side of the rest of the economy. This is why countries,
such as Ethiopia, that were not so long ago touted as the next manufacturing miracles,
have been unable to experience manufacturing-led growth. While overall
manufacturing output and employment shares have increased in Ethiopia, the
aggregate statistics hide a discomforting productive dualism: the productive and
mostly large firms are essentially not creating any employment, while the
manufacturing firms that are absorbing labor are predominantly small, informal, and
productively stagnant (Diao et al. 2024). It is also the reason why countries such as
Bangladesh that have done exceptionally well in certain manufacturing segments, such
as readymade garments, are now finding it very difficult to diversify and move into
more sophisticated segments (as East Asian countries eventually did). As virtually
every report on Bangladesh argues, the country requires a significant investment in
skills and new technologies if it is to continue building on its manufacturing success.
True as far as it goes, this recommendation is also an implicit acknowledgement that
manufacturing is no longer the growth escalator it once was: what made
industrialization special in the first instance was that it allowed productive upgrading
within the limited resource endowments of low-income countries.1 More broadly, all
over the developing world we now see a pattern of structural change that is very
different from what the usual process of economic development is supposed to look
like. As young workers flock to urban areas from the countryside, they find very little
employment in manufacturing (unlike earlier eras, whether under Latin American-style
import-substitution or East-Asian style export-promotion). The urban jobs that are
created to employ them are predominantly informal, precarious, unproductive, and in
services. While we might be tempted to argue that this reflects errors in government
policy, the considerations above suggest there is something more structural, beyond the
government's ability to control, that is at play. In the years ahead, manufacturing will
neither be able to absorb the new increments to the labor force, where the labor force
is still growing rapidly (as in the low-income countries of sub-Saharan Africa), nor
create more productive jobs for those that are already stuck in petty services. This
brings us back to the opening sentence of this paper. The future of developing
countries is in services in the sense that, that is where the jobs will be. Those jobs need
to be productive ones, for reasons of both economic growth and equity. Economic
growth requires that we move people from less productive to more productive
activities. If services are the preponderant source of new employment, they have to be
more productive than the rest of the economy in order for aggregate incomes to rise.
And as for equity, the only sustainable way to lift people at the bottom of the income
distribution is to provide them with better paying jobs. Those jobs will have to be in
services, whether we like it or not (Rodrik and Stiglitz 2024). Here we face a
conundrum though. We do not know much about how to raise productivity in labor-
absorbing services. While some services, such as banking, IT, and business process
outsourcing (BPO) are both productively dynamic and tradable, they are not going to
be labor-absorbing for the same reason that manufacturing is not. These are relatively
skill-intensive services which, even under the best of circumstances, will not provide
the answer to the challenge of productive job creation.2 In India and the Philippines,
two countries where these types of services have been successful (IT in India and BPO
in Philippines), the bulk of employment continues to be generated by informal
services. The challenge is to increase productivity in labor-absorbing services, such as
retail, care, personal and public services, where we 3 of 13 have had limited success,
in part because such services have never been an explicit target of productive
development policies. Industrial policies, as the name makes clear, typically focus on
fostering innovation, investment, and productivity in manufacturing. But if developing
countries are going get richer under present conditions, they will have to adapt these
policies to labor-absorbing services. Services have traditionally been the laggards of
productivity. Will Baumol's (2012) famous “cost disease” argument is predicated on
slow productivity growth in services and explains why the relative prices of services
rises as the rest of the economy become more productive. In manufacturing, the labor
units required to produce steel or cars has been slashed drastically over time,
especially if we adjust for quality improvements. But it takes just as long today for a
barber to cut a customer's hair or a conductor to lead the orchestra through a
Beethoven symphony as it did centuries ago. As we mentioned previously,
technological catch-up has been far easier for developing countries in manufacturing
than in labor-absorbing services. The broad historical record suggests it will be
difficult to achieve comparable rates of productivity growth in areas such as care,
education, retail, or public services. But if we are right about the eroding power of
industrialization as a growth strategy, there is no alternative other than making services
productivity an explicit government priority. The literature on this paper's themes is
not large, in part because the term productive upgrading is not typically associated
with services. It tends to be used in connection with tradable sectors of the economy,
such as manufacturing or agricultural supply chains. The recent survey by Verhoogen
(2023) on firm-level upgrading focuses almost entirely on manufacturing firms.
Magruder (2018) surveys experimental evidence on technology adoption in
agriculture. But there is other work that, while not explicitly focused on services,
covers some aspects of the approaches described above, such as training or fostering
entrepreneurship. McKenzie and Woodruff (2014) and Quinn and Woodruff (2019)
survey experimental interventions—such as the provision of grants or management
training—aimed at improving entrepreneurship among smaller firms, including
microenterprises. Many of the firms covered in these experiments are in services.
Carranza and McKenzie (2024) discuss job training policies in developing countries.
Kremer et al. (2021) present a compendium of interventions, some in services, that
have been evaluated that hold promise for scaling up. We have drawn on this literature
in selecting our cases. Since the bulk of firms in services is informal, this paper also
relates to the extensive literature on informality (Chen 2012; La Porta and
Shleifer 2014; Portes and Haller 2010). This literature scrutinizes the reasons for
informality and its consequences for economic performance. In general, there is a two-
way relationship between informality and productivity. Firms with little opportunity to
expand may not be able to afford the costs of formality, such as registration and taxes.
But barriers to formality may also serve as obstacles to firm expansion and productive
upgrading, by hindering access to credit markets, technology, and new markets for
example. So informality can be both a cause and a consequence of low productivity. In
this paper, we sidestep these questions, focusing directly on strategies that enhance
productivity regardless of firms' formality status. The plan of the paper is as follows.
In the next section we provide a typology of different strategies for creating productive
employment in services. Section III briefly summarizes our cases. Section IV provides
more details on four of the cases, as illustrations of the four strategies in our typology.
Section V presents a discussion and some preliminary conclusions. 2 | A Typology of
Strategies for Productivity Enhancement There are four broad strategies for expanding
productive employment in services. The first focuses on established, large, and
relatively productive incumbent firms, and entails working with them to incentivize
them to expand their employment, either directly or through their local supply chains.
These firms could be large retailers, platforms such as ridesharing services, or even
manufacturing exporters (with potential to generate upstream linkages with service
providers). The second strategy focuses on smaller firms (which constitute the bulk of
firms in developing countries) and aims to enhance their productive capabilities
through the provision of specific public inputs. These inputs could be management
training, loans or grants, customized worker skills, specific infrastructure, or
technology assistance. Given the heterogeneity of firms in this segment, ranging from
micro-enterprises and self-proprietorships to mid-size firms, policies in this domain
require a differentiated approach, to respond to the distinct needs of firms of different
size. Given the numbers involved, often they also require a mechanism for selecting
among the most promising, since most such firms are unlikely to become dynamic and
successful. The third strategy focuses on the provision, to workers directly or firms, of
digital tools or other forms of new technologies that explicitly complement low-skill
labor. The objective here is to enable less educated workers to do (some of) the jobs
traditionally reserved for more skilled professionals and to increase the range of tasks
they can perform. The fourth and final strategy is centered on less-educated workers
and combines vocational training with “wrap-around” services, a range of additional
assistance programs for job seekers to enhance their employability, job retention, and
eventual promotion. Modeled after Project Quest and other similar sectoral workforce
development schemes (Katz et al. 2022), these training programs typically work
closely with employers, both to understand their needs and to reshape their human
resource practices to maximize employment potential. In different ways, these
strategies all aim to increase productivity and/or employment possibilities in services
for workers with limited skills. We want to explore the potential of these kinds of
programs to address the productive service jobs conundrum. To that end, this paper
centers around 20 different initiatives from around the developing world,
encompassing illustrations from each of the four strategies we just described. Our
cases do not constitute a random sample. They have been selected among those 4 of 13
Global Policy, 2025 that are well-documented to indicate the range of programs that is
already in place. Our goal is to highlight the richness of experimentation and to
suggest that there is already a reservoir of practice on what might be called productive
development policies for labor-absorbing services on which future efforts can build
and expand. We shall draw some provisional conclusions from our cases at the end of
the paper. Not all of the programs we will summarize have been formally or rigorously
evaluated; and among those that have, not all have been successful. We are more
interested in suggesting a general direction for future development policy than to pass
judgment on what kind of programs work best. We suspect that local context matters
greatly—as it does in general, but even more so when it comes to the kind of service
activities that are our focus. Even programs that produce superlative results in one
setting may prove difficult to replicate in others. Moreover, regardless of the success
of individual programs, it is important to bear in mind the scale of the challenge a
servicesoriented development strategy faces. A randomized policy intervention that
increased earnings of low-income workers by, say, 20% would normally be judged a
great success (assuming reasonable program costs). Even if it were successfully scaled
up to the economy at large, this gain would not make up even 1% of the income gap
that currently exists between a country like Ethiopia and the U.S. Real success will
require greater ambition, continuous experimentation, and the cumulation of a very
wide range of different programs. 3 | A Brief Description of Cases We cataloged 20
initiatives from around the world to study their respective approaches, experiences,
and results. Table 1 provides a summary. These are initiatives that have been well-
documented in the academic and/or policy literature. Our cases represent a range of
geographies: eight of these initiatives are from Africa, eight from South and East Asia,
four from Latin America, and one from Europe. The initiatives vary based on the type
of implementer, the goals of the program, and nature of intervention. Not all of them
have been formally evaluated. Several of these initiatives are administered by
multistakeholder coalitions, with actors from government, social enterprises, and
multilateral or bilateral funders. In 11 cases, the lead implementer is an international
development actor, including multilateral agencies such as the World Bank and
UNICEF or large non-profit organizations such as Plan International and Swisscontact.
In seven cases, the government (either national or subnational) was a lead player; in
four, a social enterprise was a lead implementing agent. We distinguish programs in
the table according to whether they target (a) employment creation, (b) productivity
improvement, or (c) both. We have tried to identify interventions on both the demand
and supply sides of the labor market, to unpack their mechanisms and approaches. The
specific approaches include business competitions, training, technology tools, financial
assistance, internships, and addressing policy barriers. In many cases, partnership
between different stakeholders—as opposed to policy or “innovation”—was the
primary value add of the initiative. 4 | Illustrative Cases In this section, we provide
summaries of four of the twenty initiatives. These case descriptions are meant to serve
as illustrations of the four broad strategies we outlined previously. The first case
represents an intervention focused on established, large incumbent firms (Uber and
Ola), and their partnership with the state government of Haryana, India, to expand
employment. The second case focuses on the provision of public inputs, such as
management training and financing to small enterprises in Nigeria, through a business
plan competition called Youth Enterprise With Innovation in Nigeria (YouWiN!). The
competition element of this intervention enabled self-selection of the most promising
and dynamic small enterprises. The third case summarizes the use of new technologies
to complement less-skilled labor to enhance the tasks workers can perform. In this
case, frontline health workers, called Accredited Social Health Activists (ASHAs) in
Jhansi, India were provided a mobile phone-based multimedia job aid. This mobile
application served as a combination of a self-learning, client management, decision
support, and reporting tool for ASHAs. Our final case focuses on labor market
intermediation provided by Harambee in South Africa, where less-educated workers
are provided vocational training combined with wrap-around services, including
psychometric data, career counseling, and internships, to enhance employability. 4.1 |
A. Saksham Saarthi Partnership With Uber and Ola in Haryana In 2018, the state of
Haryana in India faced a youth unemployment rate of 9.2%. In July of that year, the
state government launched a unique public-private partnership—called Saksham
Saarthi—with taxi aggregators Uber and Ola, to increase employment opportunities
for youth in the state.3 The partnership was based on mutual benefit rather than a
financial obligation, enabling the government to address youth unemployment and the
taxi aggregators to expand their services in the state. Saksham Saarthi, which translates
to “capable charioteer/ driver,” was initiated via a Memorandum of Understanding
(MoU) between the Government of Haryana and taxi aggregators Ola and Uber. Both
companies responded to a request for ‘expressions of interest’ from the government's
Department of Employment. The Government of Haryana provided the companies
targeted access to their database of registered unemployed youth, enabling the
companies to more efficiently recruit new drivers. In return, Ola and Uber were
requested to provide periodic employment targets to the government; but these
numbers were intentionally flexible with no penalty if stated targets are not met. The
partnership is predicated on a consistent feedback loop between the partners, through
regular calls and meetings, to maintain good faith and goal alignment. The government
also uses its existing resources such as media campaigns and jobs fairs held by district
employment offices to publicize the program. While the program hasn't been formally
evaluated, intermediate reporting reveals several positive trends: 5 of 13 TABLE 1 |
Summary of 20 programs. Name of program Region Dates of operation Strategy typea
Objective (Employment/ productivity) Lead agency Public sector role Partners
Mechanisms Formal or information evaluation results Source Ridesharing cab driver
program (Saksham Saarthi) South Asia 2018– present Type 1 Employment
Government Lead agency Large firms (Uber and Ola) Unemployment data sharing;
policy barriers; Firm recruitment Successful (informal) Muglur et al. (2019)
Shortening Supply Chains for Fruit and Vegetable Vendors in Bogota (Agruppa) Latin
America 2016–2018 Type 3 Productivity Social Enterprise None None Technology
tool Partially successful (Formal) Iacovone and McKenzie (2022) Wage subsidies to
microenterprises in Sri Lanka South Asia 2008–2014 Type 2 Employment Global
Development Actor None None Financial assistance Not successful (formal) De Mel
et al. (2019) Apprenticeship training in Ghana Africa 2012–2016 Type 4 Both
Government Lead agency Trade associations, think tank Internships Partially
successful (formal) Hardy et al. (2019) Business plan competition in Nigeria Africa
2011–2017 Type 2 Both Government Lead agency MSMEs, private firms, think tanks,
educational institutions Business competition Successful (formal) McKenzie (2017)
Recruiting and training community health workers in Zambia Africa 2010– present
Type 3/ Type 4 Employment Government Lead agency Think tanks, international aid
agencies Training Successful (informal) Ashraf et al. (2020) Software for community
health workers in India South Asia 2012– present Type 3 Productivity Government
Lead agency Private firm (Qualcomm) Training; technology tool Successful (informal)
Hamilton and Bora (2015) Harambee Africa 2011— present Type 4 Employment
Social Enterprise Collaborator Philanthropy, Global Development Agency Training;
Technology tool; unemployment data sharing; firm recruitment Successful (informal)
Carranza et al. (2022) (Continues) 6 of 13 Global Policy, 2025 Name of program
Region Dates of operation Strategy typea Objective (Employment/ productivity) Lead
agency Public sector role Partners Mechanisms Formal or information evaluation
results Source Kuza Africa 2014–2017 Type 2 Both Global Development Actor Partner
County government, Community- based organizations, private sector firms Training;
internship; unemployment data sharing; firm recruitment; policy barriers Successful
(informal) ILO 2016 U-LEARN II Africa 2016–2021 Type 2 Both Global
Development Actor Partner Philanthropy, Businesses, Local government authorities,
Directorate of Industrial Training Training; Firm recruitment Yes (informal) Lefebvre
et al. (2018) Youth Building the Future (YBF) Latin America 2015–2017 Type 4 Both
Global Development Actor Collaborator Government (Colombia National Training
Service and Mayors), Philanthropy Unemployment data sharing; Trainings; firm
recruitment Yes (informal) Kleijn et al. (2017) New Employment Opportunities (NEO)
Latin America 2012–2018 Type 4 Both Global Development Actor Partner Private
firms, Government of Panama; intermediaries (Chamber of Commerce, industry
associations), training institutions; and civil society Training; technology tool; firm
recruitment No (informal) Romero and Barbarasa (2017) (Continues) TABLE 1 |
(Continued) 7 of 13 Name of program Region Dates of operation Strategy typea
Objective (Employment/ productivity) Lead agency Public sector role Partners
Mechanisms Formal or information evaluation results Source Generation India South
Asia 2015–2020 Type 4 Employment Social Enterprise Collaborator Community
based organizations, larger firm employers Training; internship; firm recruitment;
financial assistance Yes (formal) Romero and Barbarasa (2017) UPSHIFT Europe
2014–2018 Type 2/ Type 4 Both Global Development Actor Collaborator Government
ministries, NGOs Training; financial assistance Yes (formal) Romero and
Barbarasa (2017) Kenya Youth Employment and Opportunities Project (KYEOP)
Africa 2016–2021 Type 4 Both Global Development Actor Partner Government;
Businesses (trade associations) Training; internships; financial assistance Yes
(informal) Romero and Barbarasa (2017) Little Giants Program Asia 2018– present
Type 2 Productivity Government Lead agency Universities, local think tanks, financial
institutions (e.g., Beijing Stock Exchange, People's Bank of China) Selection (using a
‘pyramid cultivation system’); subsidies; training; policy support Mixed (informal)
Brown et al. (2023) Open Network for Digital Commerce (ONDC) South Asia 2021–
present Type 3 Productivity Government Lead agency National Stock Exchange, banks
Open network e-commerce platform Pilot in progress ONDC (2022) World Class
Suppliers Program Latin America 2009– present Type 1 Productivity Large firm (BHP
Billiton) Partner Codelco (Chile's stateowned mining firm), Chilean economic
development organization, private foundations Collaboration between large firms and
suppliers; selection of highperforming suppliers; mentorship and consulting support;
market linkages Mixed (formal) Navarro (2018) (Continues) TABLE 1 | (Continued) 8
of 13 Global Policy, 2025 • Job creation: Between July 2018 and April 2019, 24,000
youth were on-boarded by Ola and Uber in Haryana and the opportunity to drive bike
taxis with these aggregators was created. • Policy reform: As part of the program, the
Government of Haryana implemented policy changes to reduce the admin - istrative
burden of obtaining commercial licenses, which are required to operate a taxi in the
state. This included reducing the processing time from 4 to 2weeks, standard - izing
the application and requirements, and allowing nonresident migrants to apply for
commercial licenses. These changes were piloted in the district of Gurugram with
plans to scale to the entire state. • Market expansion: The program has facilitated Uber
and Ola's introduction and expansion of two-wheel/bike taxi services in Haryana.
Although not a stated goal of the program, this could also serve to benefit the govern -
ment and public by increasing the availability of low-cost transportation, contributing
positively to local economic development. 4.2 | A. Youth Enterprise With Innovation in
Nigeria (YouWiN!) Youth Enterprise With Innovation in Nigeria (YouWiN!), a busi -
ness plan competition for young entrepreneurs, was launched in 2011, with the aim of
encouraging innovation and job cre - ation through the creation of new businesses and
expansion of existing businesses. 4 The program was developed as a collab - oration
between the Ministries of Finance, Communication Technology, and Youth
Development, with support from the U.K. Department for International Development
(DFID) and the World Bank. At the time YouWin! was implemented, 99.6% of firms
had