Economic development

Economic development relies on the strength of business and professional services. Services in general are a part of our economies and our lives that are consistently misunderstood, reflecting in part a continued attachment to the duality of valuing “male” attributes over those attributed to “females.” In this dualistic mythology, the “productive” part of an economy is characterized by the production of tangible products – agricultural, mineral, or manufactured. Everything else (the service sector) is dismissed as being less important or as detracting from productivity. In parallel, “service” in everyday life becomes equated with “being servile” or engaging in demeaning work. This bias leads to several myths:

Myth #1: Service jobs are low pay, low skill.

Media images about “mac-jobs” are common when referring to the service sector, showing a basic ignorance about the function and composition of service industries. The range of pay in the service sector is similar to that of the manufacturing sector, with the caveat that many business and professional jobs are very well paid. When “mac-jobs” are denigrated, people are forgetting that young people need entry-level jobs where they can learn how to function effectively in a work environment. “Mac-jobs” can serve this purpose. As well, companies like MacDonald’s have excellent management training programs for their staff.

The current challenge is the increasing application of manufacturing principles in the service sector, resulting in a just-in-time approach to staffing. The number of part-time, precarious jobs is rising rapidly due to companies wanting to make labor costs “variable” rather than part of general overhead. In the long run, this pattern will prove counterproductive as successful service firms need skilled and motivated staff to interact with customers in creating the service.

Myth #2: Vibrant economies are manufacturing economies.

For years the media has focused on manufacturing, either as an economic driver or as the route through which developing economies will grow. The fact is that all “vibrant” economies are primarily service economies. For example, the U.S. economy went from being primarily an agricultural economy to a primarily service economy in 1923. The manufacturing sector is important since it creates goods that are inputs to other manufacturing processes, to service sector industries, and for consumer consumption. However, economies can function very well with little to no manufacturing activity, but they cannot function without an effective infrastructure, business and professional services, and quality of life services.

Myth #3: The retail sector is the most important sector to measure in the service sector.

In a well-balanced economy, the retail sector accounts for approximately 7% of economic activity. Research has shown that the portion of the service sector that drives grow is business and professional services, which typically form 20% of a well-balanced economy. Other key portions of a well-balanced economy include 30% infrastructure services (construction, utilities, transportation, telecommunications, finance), 8% wholesale service, 20% quality of life services (health, education, recreation), and 10% public administration.

Myth #4: Tourism is the key to economic growth.

Some economies are highly dependent on tourism trade, and changes in their economic conditions reflect the vulnerabilities of that activity. Weather, foreign exchange rates, and perceived political instability are just some of the factors that are outside the control of communities relying on tourism and yet are factors that can have a dramatic negative effect on tourism traffic. In a well-balanced local economy, tourism accounts for no more than 5% of economic activity.

Myth #5: Trade volumes are best measured by goods traded.

Historically “trade” has implicitly meant trade in goods. While trade in services is now receiving attention, both the United Nations Statistical Office and the International Monetary Fund maintain separate reporting for international trade in services. When services and goods are combined, we see that at least 20 countries have a higher overall percentage of export revenues from services than from goods. Tourism and transportation services often rank high in the list of exports. For many developed economies, business services is in the top five exports. So looking only at good traded provides a distorted picture of a country’s economic activity and can lead to inappropriate trade policies.

Myth #6: The health of an economy can be measured by consumer spending.

Led by the United States, a focus on consumer spending has become a benchmark of economic activity. However, the consequence is that, in order to stimulate growth, consumers have to buy…buy…buy. In reality only 20% of economic activity is due to end consumers. 80% is “intermediate” – that is, companies doing business with other companies. The true measure of an economy’s health is the vibrancy of its business and professional services sector.

Selected related publications by Dr. Riddle:

 

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