The services sector is emerging with respect to the demands created by industries to support its development. Banks, for example, need industry for financial transactions. When there are no substantial industry sector to be catered for, why is the services sector expanding in many developing economies?
Services use to show high income-elasticity. So, as income increases (and it is increasing worldwide but specially in emerging economies), the demand of services increases.
This income-elasticity emerges both in personal services (hair-dressers, dentists, lawyers) as in business services (nowadays the ouput of the manufacturing sector includes more and more services as design, quality controls, sophisticated financial schemes,....)
Hope to have been useful
Actually the catergorization of employment into three; agriculture, manufacturing, and services, is not very illuminating. In rich countries, currently almost everybody is working in services. I suggested in my recent book (MIssing a Decent Living for Everyone: Success and Failure in 143 Countries) another catergorization based on human activities.
Thank very much Veil,
How can I access to your book through RG?
Go to RG, click publications, search for Veli Himanen, click the cover of the book and there it is.
I believe that the main factors that determine the services sector fast growing, in comparison to the industry sector, reside from the microeconomics and macroeconomics orientation of each entrepreneurial activity and the accompanying policy incentives for each region. In parallel, the accomplishment of economies of scale, the growth into a competitive marketplace, the know-how changes’ spur, as well as the setting goals of profitability and growth in an operational (short-term) and innovative (medium-term) level of reference are more viable and prosperous aspects of success in the services sector than in the industry/manufacturing sector worldwide.
Your question implies that services mainly cater to a local manufacturing industry. But I think today, services can be exported more easily , e.g software, BPO, tourism [consumers are non-local] so that business services can exist without a domestic industrial base. Then with income rising from these activities, consumer-oriented services are also growing.
I agree. But can you cite an example any service without an industry (except services industry).
Upananda
You mean services that only have clients from the service industry? There's quite a lot, actually. And of course, there's all the services that serve consumers, and not firms. Let's take a software firm (which belongs, of course, to services). It produces software to manage banking transactions of a bank (also a service). The bank itself does only do banking for individuals, and not to any industry firms. The clients of the bank may have earned their money in agriculture, some other service (tourism) or software firms. So, you have a circulation of money without any manufacturingindustry.
My dear Benjamin,
Thanks for explaining things that are against your argument.
How banks originated. to provide funds for investment in agriculture and industry, perhaps, for consumption. Early day in England, goldsmith issued receipts for gold at his safe. Later, people used these receipt for other transactions.
,Next, software firm. Isn't software a industry based on software engineering. Industry is not necessarily a building with machinery and people (Auto Industry). All software services are developed through advancement of computer industry. If not computers, where you are going to use Software?
Moreover, Industry does not mean only manufacturing. Collection of small firm is called industry.
I apologize if you get hurt.
Upananda/Sri Lanka
Dear Benjamin,
Finally you are paving way to plausible answer.
My question is 'Why is the services sector growing faster than the industry sector even in economies where there is no substantial production sector'. Production sector may link to manufacturing sector but not confined only to tangible products (e.g., software).
for example, software industry in India is growing faster and contribute to GDP substantially. But that industry is developing in parallel with the computer industry (hardware ) as a result of this complementary industries, both industries are growing faster.
Think about other Asian countries for example, Sri Lanka. Although Sri Lanka tops human resource development indices in South Asia, software industry is not developed as good as in those of developed countries or India. Reason, I argue, no substantial development in computer industry sector.
Your suggestion may be plausible. A country can developed services for an industry developed elsewhere. But it is not sustainable. This argument could be supported when the structure of the economy of Sri Lanka and similar countries is analyzed over time.
Growth of service sector is phenomenal in those countries. but contribution to real GDP is substantial.
Some countries are not living up to expectations in terms of exploitation of maximum production capacity.
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