Growth of the Service Economy

The service economy is the dominant part of the economy of most developed countries. Across the 30 countries of the Organisation for Economic Co-operation and Development (OECD), the proportion of services of total national gross value added ranges from the lows of 51.8% in Korea, 54.5% in Ireland, 55.1% in the Czech Republic and 55.4% in Turkey, to the highs of the UK at 71.6%, Switzerland at 72.1%, the US at 75.6% and Luxembourg at 79.4%.

The World Bank illustrated this trend to service economies as shown. The rate of growth of the services economy is like a wave. The historic track across three countries is shown below.

From the Organisation for Economic Co-operation and Development figures referred to above, it is clear that the rate of growth of services as a proportion of the economy has increased. The US economy added nine percentage points in the services proportion during the 37 years between 1950 and 1987, but it increased by 4.3 percentage points in only ten years between 1991 and 2001. In the same period between 1991 and 2001, the UK services proportion increased by 6.5 percentage points, moving from 65.1% of gross domestic product to 71.6%.

This analysis supports the proposition that the growth of the service economy is a major economic wave. While its impact is clearly visible to consumers and planners, there has not been any commensurate effort in developing the effectiveness of the sector compared to the continued efforts in enhancing the productivity of the manufacturing sector.

The service sector is 69% of the UK’s economy and is at least one third less productive than manufacturing, according to the UK Treasury. Wholesale and retail reaches only 66% of the level of output per person that the US achieves. Financial intermediation (savings/investments) has little more than 50% of the productivity per head of the US. The heart of the problem is that services have simply evolved. They have not been designed with the rigour applied to activities such as engineering.