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9

Growth of the Service Sector

Everything that grows also changes its these questions while reading this chap-
What are the structure. Just as a growing tree con- ter and the three that follow it.
stantly changes the shape, size, and con-
economic
figuration of its branches, a growing
reasons behind economy changes the proportions and Industrialization and
industrialization interrelations among its basic sectors— Postindustrialization
and postindustrial- agriculture, industry, and services and
between other sectors—rural and urban, One way to look at the structure of an
ization?
public and private, domestic- and economy is to compare the shares of its
export-oriented (Chapters 10, 11, and three main sectors—agriculture, indus-
12). Are there common patterns in how try, and services—in the country’s total
growing economies change? Which output (Figure 9.1) and employment.1
changes should be promoted and which Initially, agriculture is a developing
should be discouraged? Think about economy’s most important sector. But as

Figure 9.1 Sectoral structure of world economies, 1995


Percentage of GDP

70
66%

60
52%
50

40 38%
35% 35%
32%
30
25%

20
11%
10
2%
0
Low-income Middle-income High-income
countries countries countries

Agriculture Industry Services

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9 GROWTH OF THE SERVICE SECTOR

income per capita rises, agriculture loses because of new farm techniques and
its primacy, giving way first to a rise in machinery, labor productivity increases
the industrial sector, then to a rise in the faster in agriculture than in industry, mak-
service sector. These two consecutive ing agricultural products relatively less
shifts are called industrialization and expensive and further diminishing their
postindustrialization (or “deindustrial- share in gross domestic product (GDP).
ization”). All growing economies are The same trend in relative labor produc-
likely to go through these stages, which tivity also diminishes the need for agricul-
can be explained by structural changes in tural workers, while employment
consumer demand and in the relative opportunities in industry grow. As a result
labor productivity of the three main industrial output takes over a larger share
economic sectors. of GDP than agriculture and employment
in industry becomes predominant.

Industrialization
Postindustrialization
As people’s incomes increase, their
demand for food—the main product of As incomes continue to rise, people’s
agriculture—reaches its natural limit, and needs become less “material” and they
they begin to demand relatively more begin to demand more services—in
industrial goods. At the same time, health, education, entertainment, and

Figure 9.2 The changing structure of employment during economic


development

Percentage of employment
100

Agriculture

Services

50

Industry

0
Low High
Per capita income over time

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BEYOND ECONOMIC GROWTH

many other areas. Meanwhile, labor pro- economy (Data Table 2). By the mid-
ductivity in services does not grow as 1990s services accounted for almost
fast as it does in agriculture and industry two-thirds of world GDP (Map 9.1), up
because most service jobs cannot be from about half in the 1980s.
filled by machines. This makes services
more expensive relative to agricultural
How can growth of and industrial goods, further increasing Service Sector Growth and
the share of services in GDP. The lower Development Sustainability
the service sector
mechanization of services also explains
help make why employment in the service sector The service sector produces “intangible”
development more continues to grow while employment in goods, some well known—government,
sustainable? agriculture and industry declines because health, education—and some quite
of technological progress that increases new—modern communications, infor-
labor productivity and eliminates jobs. mation, and business services. Producing
(Figure 9.2). Eventually the service sec- services tends to require relatively less
tor replaces the industrial sector as the natural capital and more human capi-
leading sector of the economy. tal than producing agricultural or indus-
trial goods. As a result demand has
Most high-income countries today are grown for more educated workers,
postindustrializing—becoming less prompting countries to invest more in
reliant on industry—while most low- education—an overall benefit to their
income countries are industrializing— people. Another benefit of the growing
becoming more reliant on industry service sector is that by using fewer nat-
(Figure 9.3). But even in countries that ural resources than agriculture or indus-
are still industrializing, the service sector try, it puts less pressure on the local,
is growing relative to the rest of the regional, and global environment.
Figure 9.3 Industrial output as a percentage of GNP, 1980 and 1995

Percent
40

High-income 38%
(postindustrializing)
37%
countries

35

Low-income
32% (industrializing) 32%
countries

30
1980 1995

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9 GROWTH OF THE SERVICE SECTOR

Map 9.1 The share of services in GDP, 1995

60% or more 50–59% 40–49% 30–39% Less than 30% No data

Conserving natural capital and building veloped because governments con-


up human capital may help global devel- trolled supply and failed to respond to
opment become more environmentally growing demand for services. In addi-
and socially sustainable. Growth of the tion, many modern services that play
service sector will not, however, be a mir- an important role in market
acle solution to the problem of sustain- economies—such as financial, busi-
ability, because agricultural and industrial ness, and real estate services—were not
growth are also necessary to meet the needed under socialism. During these
needs of the growing world population. countries’ transition to market
economies, their service sectors have
grown rapidly to meet previously
Challenges for Transition unfulfilled demand and the needs of
Economies the emerging private sector.

In formerly planned economies the Growth of services in transition


service sector was previously underde- economies is particularly important
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BEYOND ECONOMIC GROWTH

because it allows these economies to different perspectives—economic, social,


employ a share of the educated labor and environmental.
force that might otherwise be unem-
ployed due to the economic crisis. So, in
addition to continued public support for Note
health and education, growth of services
can help formerly socialist countries pre- 1. Agriculture here refers to crop cultivation,
serve the stock of human capital that livestock production, forestry, fishing, and hunt-
will be crucial to their postindustrial ing. Industry includes manufacturing, mining,
development. construction, electricity, water, and gas. Services
cover all other economic activities, including
Think of the service industries that you trade, transport, and communications; govern-
consider particularly important for your ment, financial, and business services; and per-
country’s sustainable development from sonal, social, and community services.

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