Not Your Father's Service Sector

AuthorPrakash Loungani and Saurabh Mishra
Positionan Advisor and is a Research Officer, both in the IMF’s Research Department.

In 1988, General Motors launched an ad campaign with a memorable jingle: “This is not your father’s Oldsmobile. This is the new generation of Olds.” The car’s image had not kept up with its transformation from a staid cruiser to something far more high-tech and stylish. The service sector could use such an ad campaign: it too needs an image makeover to match its transformation over the past decade. The Oldsmobile didn’t make it, but the service sector is here to stay—it already accounts for 60 percent of global employment.

Prejudice against the service sector runs deep. Some regard it as the useless sibling of other sectors of the economy such as agriculture and manufacturing. In The Wealth of Nations, Adam Smith questioned the social value provided by “churchmen, lawyers, physicians, men of letters of all kinds, players, buffoons, musicians, opera-singers, opera-dancers, etc.” To this day, as economist Christina Romer lamented in a New York Times op-ed, there is a “feeling that it is better to produce ‘real things’ than services” (Romer, 2012).

Others have treated services not as socially useless but as somewhat challenged. A famous 1967 paper by U.S. economist William Baumol fostered the view that services is a sector resistant to improvements in productivity. He noted that the provision of services—such as restaurant meals, haircuts, and medical checkups—required face-to-face transactions. These did not lend themselves easily to standardization and trade, the source of growth in productivity and hence income.

This image is no longer a fair representation of the service sector. Service occupations today include a few that even Smith might have considered useful. Trade in services has increased within and across national borders. Many services are now high tech and pay high wages. And increasingly, manufacturing and services, far from being competing siblings, are part of a joint family of value creation. Services are ever more critical to the successful operation of manufacturing, debunking debate over countries’ need to choose between the two sectors.

Tradable and techy

A haircut still means a trip to the local barbershop. But many other services no longer require the provider to be close to the customer. People no longer have to go to the local bank to have access to their money: financial services are global. Many consulting services, such as architectural designs, can be delivered from anywhere. And while most medical care still requires a trip to the doctor, the provision of medical services—including in some cases surgery—from remote locations is increasing. Evidence of this transformation lies in the growing share of the service sector in global exports. Globally, the growth in exports of modern services outpaced manufacturing exports over the past decade (see Chart 1).

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