What percentage of the value of the US economy is generated by the service sector?

journal article

Scientific American

Vol. 244, No. 3 (March 1981)

, pp. 48-55 (8 pages)

Published By: Scientific American, a division of Nature America, Inc.

https://www.jstor.org/stable/24964326

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Manufacturing has been the surest way for low- and middle-income economies to reduce poverty and create good jobs. But developing nations have increasingly been redirecting their focus to the services sector to catch up with their developed counterparts.

Will the shift work?

Our research shows it can—provided countries expand trade in services, accelerate the adoption of new technologies, upgrade the skills of their workers, and pay special attention to services that can also boost manufacturing.

Countries at all levels of industrialization and income can exploit transformative opportunities from services.  In the past three decades, the services sector has grown faster than manufacturing in many developing economies. By 2019, services accounted for 55 percent of GDP and 45 percent of employment in developing economies. In developed economies, services account for an even larger share of economic growth—fully 75 percent on average. A few low- and middle-income countries were among the top 10 global exporters of services between 2005 and 2017.  

Services-driven economic transformations offer new opportunities for scale, innovation, and spillover effects similar in scope to those that made manufacturing more productive in the past. Remote delivery, branching, and franchising enable service providers to tap larger markets and providers who offer services digitally are no longer restricted to face-to-face engagements with their customers. Digital technologies are improving business processes, introducing new features to products, and creating new markets.  Far more R&D is now happen in services than in industry: big data is enabling the improvement of transportation systems and it also is spurring retail outlets to improve their offerings.

A vibrant services sector is also increasingly important for manufacturing competitiveness: manufacturers bundle goods with services (such as financial credit, advertising, and warranties), which increases value for customers. As the demand for services rises from manufacturing, agriculture, and other sectors, more workers benefit from growth.

Information technology, professional, scientific, and technical services are growing in importance. They accounted for more than half of all services exports in Ghana, India, Pakistan, and the Philippines —all countries that offer a pool of relatively low-wage English-speaking workers. Today, around 68 percent of all online freelancers worldwide are based in lower- and middle-income countries.

The increasingly blurred lines between manufacturing and services are making exports more competitive for many countries. This process—known as servicification—is illustrated by the remarkable success of Amazon Echo, a music player powered by artificial intelligence that can also perform a host of other functions, such as allowing users to order groceries with a voice command, acting as a personal assistant by keeping track of its owner’s schedule, and calculating the length of a commute. The manufactured device is even more valuable when bundled with service.

For policy makers, it’s no longer a question of whether to support manufacturing or services, but rather how they should act to take advantage of the growing potential for services to contribute to productivity and jobs. 

So, what can governments do to supercharge this force for employment and boost to economic recovery?

Our study recommends relying on “4Ts”: expanding services trade, fostering technology adoption, training workers to upgrade skills, and targeting services that provide benefits to the wider economy for public support.

First, we need to mirror the progress made on trade in goods to do more in trade in services— especially by expanding digital trade. 

Second, science, technology, and innovation policies should focus more on services.  Digital technologies expand the potential for services even more than they do for manufacturing and farming. Consider, for example, how much the pandemic has accelerated the move to more remote work and online delivery of many services.

Third, strengthening worker skills is essential to enable people to gain more productive and better-paying jobs.  In low- and middle-income countries, job creation tends to be concentrated in low-skilled work, although productivity growth is rising in high-skilled occupations.

Fourth, a policy approach that addresses the constraints faced by all the relevant activities in a particular manufacturing value chain will be more fruitful than just picking manufacturing industries for attention. In fact, enabling services that provide inputs to multiple industries can result in large-scale benefits.  

Finally, government agencies, international institutions, and private sector organizations should prioritize the collection of better data for services to enable rigorous analysis . Given the contribution of services to development, being unaware of this agenda is no longer an option. 

To learn more, download the full report: At Your Service: The Promise of Services-led Development

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