The rise of the service sector in the global economy
Solomon Owusu, Adam Szirmai & Neil Foster-McGregor
#2020-056
The paper takes a two-pronged approach to examine the implications of
the rapid rise of the service sector in the economies of the world.
First, it analyses tertiarization in the global economy touching on key
issues such as Baumol's hypothesis of a stagnant service sector, the
contribution of the service sector to aggregate productivity growth, and
the potentially positive contributions of services to other sectors. The
second half of the paper focuses on tertiarization trends in sub-Saharan
Africa, representing the role of the service sector in low-income
economies. Using a long series of sectoral employment and output data,
IO tables and multiple statistical analysis, we find that perceptions of
services as stagnant and productivity resistant do not apply to all
service sub-sectors. Productivity growth in modern, dynamic, and
tradable services is equal to or higher than that in manufacturing and
other sectors. These service sectors are innovative and might act as new
or alternative engines of growth alongside manufacturing. The
manufacturing sector in Africa still generates the strongest
multipliers, including to market services. However, much of the
manufacturing linkages are captured by foreign countries. While the
multipliers in market services are relatively lower than those of
manufacturing, they are comparable to those in many other regions of the
world economy and more of the gains are captured by domestic firms which
could encourage a self-reinforcing pattern of market service
development. We also find robust evidence of strong inter-sectoral
linkages between the service sector and manufacturing. Given the
sector’s mutually reinforcing interaction with the manufacturing sector,
the growing service sector could potentially play a significant
complementary role in the prospects for industrialization of Africa. But
this potential remains to be realized.
Keywords: Service Sector, Sub-Saharan Africa, Global Economy, Structural
Change, Baumol’s Hypothesis
JEL Classification: O11, O14, O41, O47, C67, N17