A reassessment of the relationship between services and economic growth in low-income and lower-middle income countries: a non-linear approach

We test whether the service sector can contribute to economic growth in low-income and lower-middle income countries despite the likely presence of Baumol’s ‘cost disease’. We employ the non-linear auto-regressive distributed lag method, which investigates whether growth responds differently to a positive and negative change in the service sector’s share. By employing a sample of 62 countries from 1970–2019, we find that an increase in the sector’s share reduces short-run growth implying cost disease. In the long run, however, the results show that an increase in the sector’s share positively contributes to economic growth. Thus, the results support policy reforms that may strengthen service sector in these countries.