Structural Change in the 21st Century: The Role of the Modern Services Sector in the Economic Development Strategy

ABSTRACT

Traditional literature on Economic Growth highlights the role of the manufacturing sector in fostering economic growth. This sector, characterized by increasing returns, plays a fundamental role in both static and dynamic scale gains within the economy. Recently, an increasing number of studies have suggested that the increased share of the modern services sector also significantly contributes to innovation, productivity, and increased output. The aim of this paper is to reevaluate growth theories in light of the emerging prominence of the services sector and to outline key components of a research agenda that encompasses this sector as a crucial area of investigation. To substantiate this argument, we apply a GMM (Generalized Method of Moments) model to a dataset spanning from 1990 to 2018, encompassing fifty-one (51) countries, in order to evaluate the impact of modern services on manufacturing performance. An interaction variable is employed to test whether a symbiotic relationship between industry and services is the driving force behind economic growth. The results demonstrate the relevance of the services sector. Finally, we suggest possible research lines to be developed.

KEYWORDS:

• Economic development
• structural change
• and the modern services sector

JEL CODES:

• O0
• O1
• O2
• O4
• L8

Acknowledgements

We would like to use this opportunity to acknowledge and thank the reviewers who reviewed this article and aided in its publication.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 Modern services are defined as a set of dynamic activities based on the generation and dissemination of technical and scientific knowledge, applied across the productive structure through digital means, with the aim of increasing productivity and/or adding value to production (Pereira 2021, 7). By modern services we are considering the classification based on the OECD ISIC Rev. 3 structure (telecommunications, financial intermediation, commercial real estate activities, rental of machinery and equipment, IT and related activities, R&D and other commercial activities). The OECD classification and other classification criteria can be consulted at: Machado, Arbache, and Moreira (2015).

2 Ricardo (1996[1817]) and Say (1983[1803]) would later show that transport and trade services contribute to growth, but only marginally.

3 According to Barbosa (2017), it can be considered that: (i) there is no single model for the determinants of the long-term real exchange rate; (ii) the variables that determine it are different between groups of advanced countries and DECs (Developing and Emerging Countries); (iii) and even considering only the second group, there may be differences between Asian and Latin American countries.

4 Aboal and Tacsir (2018); Vu (2013); Lodefalk (2014).

5 Miles (2008); Muller and Zenker (2001); Miozzo and Soete (2001); Hertog (2000).

6 Giovanini, Pereira, and Saath (2020); Giovanini and Arend (2017); Di Meglio (2016); Dasgupta and Singh (2007).

7 For more details on this form of systematization, see Neuss (2019).

8 Distribution services include the activities of: (a) Wholesale trade, except for motor vehicles and motorcycles; (b) Retail trade, except for motor vehicles and motorcycles; (c) Land transport and pipeline transport; d) Water transport; (e) Air transport, and: (d) Storage and transport support activities. For more details regarding classification, see: Singelmann (1978).

9 The indices are based on Rasmussen (1956) and Hirschman (1958) and the basic input-output model (Leontief model), making it possible to assess which sectors have greater linking power within the economic system. The backward linkage index (dispersion power) -Uj- determines how much a sector demands from other sectors of the economy. If Uj>1 indicates that the unit change in final demand in sector j creates an above-average increase in the economy. In other words, sector j generates an above-average response from other sectors. The forward linkage index (dispersion sensitivity) -Ui- determines how much this sector is demanded by other sectors of the economy. If Ui>1 indicates that a unit change in final demand across all sectors creates an above-average increase in the sector. In other words, sector i has an above-average dependence on the production of other sectors.

10 In other words, we draw attention to the limitations of the proxy used. The unavailability of data on the subject limits the possibilities for analysis.

11 List of countries in Appendix A.

12 Economic activities used in econometric tests in Appendix B.

13 According to Wang et al. (2016, 2), ‘The core idea of Industry 4.0 is to use the emerging information technologies to implement IoT and services so that business process and engineering process are deeply integrated making production operate in a flexible, efficient, and green way with constantly high quality and low cost’.

14 For Kowalkowski et al. (2017, 4) ‘Servitization is defined as the transformation process of shifting from a product-centric business model and logic to a service-centric approach.’

Additional information

Funding

The authors would like to thank Conselho Nacional de Desenvolvimento Científico e Tecnológico — Cnpq — cod 140152/2017-2 for their support. The authors would like to thank Dr. José Gabriel Porcile Meirelles — Director, ECLAC Office, Montevideo – ECLAC/UN and other anonymous reviews for their criticisms and suggestions. Errors and omission are our sole responsibility.