Everything that grows also changes its structure. Just as
a growing tree constantly changes the shape, size, and configuration
of its branches, a growing economy changes the proportions
and interrelations among its basic sectors- agriculture,
and between other sectors- rural and urban, public and private,
domestic- and export-oriented (Chapters 10,
11, and 12).
Are there common patterns in how growing economies change?
Which changes should be promoted and which should be discouraged?
Think about these questions while reading this chapter and
the three that follow it.
One way to look at the structure of an economy is to compare
the shares of its three main sectors-agriculture, industry,
and services- in the country's total output (Figure
9.1) and employment1.
Initially, agriculture is a developing economy's most important
sector. But as income per capita rises, agriculture loses
its primacy, giving way first to a rise in the industrial
sector, then to a rise in the service sector. These two
consecutive shifts are called industrialization
(or "deindustrialization"). All growing economies are likely
to go through these stages, which can be explained by structural
changes in consumer demand and in the relative labor productivity
of the three main economic sectors.
As people's incomes increase, their demand for food- the
main product of agriculture- reaches its natural limit,
and they begin to demand relatively more industrial goods.
At the same time, because of new farm techniques and machinery,
labor productivity increases faster in agriculture than
in industry, making agricultural products relatively less
expensive and further diminishing their share in gross
domestic product (GDP). The same trend in
relative labor productivity also diminishes the need for
agricultural workers, while employment opportunities in
industry grow. As a result industrial output takes over
a larger share of GDP than agriculture and employment in
industry becomes predominant.
As incomes continue to rise, people's needs become less
"material" and they begin to demand more services- in health,
education, entertainment, and many other areas. Meanwhile,
labor productivity in services does not grow as fast as
it does in agriculture and industry because most service
jobs cannot be filled by machines. This makes services more
expensive relative to agricultural and industrial goods,
further increasing the share of services in GDP. The lower
mechanization of services also explains why employment in
the service sector continues to grow while employment in
agriculture and industry declines because of technological
progress that increases labor productivity and eliminates
jobs. (Figure 9.2). Eventually the
service sector replaces the industrial sector as the leading
sector of the economy.
countries today are postindustrializing-
becoming less reliant on industry- while most low-income
countries are industrializing- becoming more
reliant on industry (Figure 9.3).
But even in countries that are still industrializing, the
service sector is growing relative to the rest of the economy
(Data Table 2). By the mid-1990s
services accounted for almost two-thirds of world GDP (Map
9.1), up from about half in the 1980s.
The service sector produces "intangible" goods, some well-known-
government, health, education- and some quite new-modern
communications, information, and business services. Producing
services tends to require relatively less natural
capital and more human
capital than producing agricultural or industrial
goods. As a result demand has grown for more educated workers,
prompting countries to invest more in education- an overall
benefit to their people. Another benefit of the growing
service sector is that by using fewer natural
resources than agriculture or industry, it
puts less pressure on the local, regional, and global environment.
Conserving natural capital and building up human capital
may help global development become more environmentally
and socially sustainable.
Growth of the service sector will not, however, be a miracle
solution to the problem of sustainability,
because agricultural and industrial growth are also necessary
to meet the needs of the growing world population.
In formerly planned economies the service sector was previously
underdeveloped because governments controlled supply and
failed to respond to growing demand for services. In addition,
many modern services that play an important role in market
economies- such as financial, business, and real estate
services- were not needed under socialism. During these
countries' transition to market economies, their service
sectors have grown rapidly to meet previously unfulfilled
demand and the needs of the emerging private sector.
Growth of services in transition economies is particularly
important because it allows these economies to employ a
share of the educated labor
force that might otherwise be unemployed
due to the economic crisis. So, in addition to continued
public support for health and education, growth of services
can help formerly socialist countries preserve the stock
of human capital that will be crucial to their postindustrial
Think of the service industries that you consider particularly
important for your country's sustainable development from
different perspectives- economic, social, and environmental.
1 Agriculture here refers to crop cultivation,
livestock production, forestry, fishing, and hunting. Industry
includes manufacturing, mining, construction, electricity,
water, and gas. Services cover all other economic activities,
including trade, transport, and communications; government,
financial, and business services; and personal, social, and