The services economy: Service sector growth and the information society

The services economy: Service sector growth and the information society

Phuah Eng Chye (16 September 2017)

I have tried to cast new light on the role of the service sector as the main engine of growth in an economy. In this regard, one common error is to apply the planning model used for an industrial economy to a services economy. The services economy has its own unique dynamics such as the relationships between sector growth, service costs, debt and financialisation and the inclination towards wage stagnation and inequality. Government interventions to address these challenges using traditional paradigms have resulted in the anorexic and financialised economy.

The services economy thus requires its own unique paradigm. Such a paradigm would need to explain the interactions between profits and the wage share of GNP; corporate development and behaviour; and asset returns, prices and financial balance sheets. In this regard, it is important to note that service sector growth challenges differ between developing economies and matured economies.

Developing economies do not face service cost challenges, asset (property) prices are relatively cheap and the lead sector driving growth tends to be the manufacturing sector. They have opportunities to strengthen the service sector role in growth; e.g. in tourism or in offshoring but the contribution of these services to the domestic economy is dependent on how well an economy is able to harness the income (profits and wages) generated from services.

For example, profits may leak offshore because much of the profit is captured by multinationals (hotels, retail) or are unrecorded because they are black market transactions. These leakages imply the developing economy will be more reliant on wage growth rather than profits to drive GNP.

Within the context of a global wage levels, there is substantial upside for wage growth in a developing economy. But wage growth can only take a developing economy so far. Further progress may be hampered by the low levels of domestic corporate formation, low profit and therefore low tax contribution to GNP. This, in turn, limits the amount of fiscal revenues available to build infrastructure.

Hence. positioning the service sector as a growth driver requires building physical and information infrastructures that can enable the developing economies to capture a larger proportion of economic activities in the form of profits and wages. In this context, privatisation exercises have acted as an important economic growth catalyst in several developing countries because the corporatisation and public listing requires reforms to support public ownership, disclosure, governance which in turns increases the country’s ability to monetise activities and increase profits. The contribution of privatisation to economic development is due to how it helps to increase the quantity, reliability and certainty of information.

As economies mature, the complexion of service-growth challenges change. In a matured economy, profits would already account for a large proportion of GNP. A slowdown in GNP growth implies profits can only be grown at the expense of wages or vice-versa. This implies profits and economic growth are more likely to move in the opposite rather than in the same direction. Attempts to redistribute income from profits into wages will therefore need to consider the trade-offs between asset price effects and wage effects.

The service sector’s ability to drive growth can also be gauged by whether its share of GDP is continually rising. If the service sector’s share of GDP stalls, this could indicate the economy has run into structural obstacles. For example, service costs may have hit a ceiling and without further increases in service costs, the service sector would not be in a position to create jobs and income.

A service slowdown thus poses different challenges from a manufacturing slowdown. Often, policy tends to focus on raising output or income as a means of combatting the slowdown. But there is likely to be excess supply of output and capital in a service economy. The service growth hiatus is therefore not likely to be caused by physical constraints.

In this regard, there is considerable overlap between service sector growth and an economy’s evolution into an information society. A large service sector implies that much of the economic value generated is intangible or information based. Therefore, the service slowdown must be caused by problems in monetising ever-increasing value from intangible assets or in using information to organise resources to generate and share income.

In this context, the information effects are disrupting existing structures and behaviours and creating new patterns of ownership, industry, markets, consumption, investment, risks, savings and income distribution. In particular, the information effects are combining with rising service costs to have severe consequential effects on the organisation of households, work, business, the supply of public goods and the levels of social cooperation. A robust economic model could shed light on the most effective ways to tackle the major economic and societal challenges of the day.

Overall, the services phase is a precursor in the transition to an information society – where the information effect of intangibility is particularly dominant. We are entering into the next phase, the sharing economy, where the full range of information effects (speed, size and transparency) are kicking in. If it was difficult to understand the workings of the service economy, then the sharing economy will present even greater challenges.



Phuah Eng Chye (2015) Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society

Phuah Eng Chye (29 July 2017) “Macroeconomic frameworks for the information society”.

Phuah Eng Chye (12 August 2017) “The services economy: Macroeconomic overview.”

Phuah Eng Chye (19 August 2017) “The services economy: deindustrialisation and global unbundling”.

Phuah Eng Chye (26 August 2017) “The services economy: Revisiting Baumol’s cost disease.”

Phuah Eng Chye (2 September 2017) “The services economy: Comparing the manufacturing and service paradigms”.

Phuah Eng Chye (9 September 2017) “The services economy: Policy challenges and the Japanese experience”.


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