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From Tertiary Sector to Services: Some Conceptual Issues and the Indian Scenario

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Part I of this paper attempts to provide an economic identity to the tertiary/service sector and highlights the competing hypotheses which have emerged in the development literature. Part II investigates the tertiary sector in the Indian economy, both in the context of national and regional development. Finally, provides directions for future research in this area.
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The Indian Journal of Labour
Economics,
Vol. 39,
No.
1,1996
FROM TERTIARY SECTOR TO SERVICES:
SOME CONCEPTUAL ISSUES AND THE INDIAN SCENARIO
M. Satish Kumar and Ashok Mathur*
The modern economic system represents a marked continuity of work and
economy;
yet a
signficant paradox
is
that the manufacturing sector is becoming
more service
like
than even services
themselves.
The growth
and
dynamism
of
the service sector is a vital key to economic
growth.
There
is a
need
for proactive
fiscal
policies
to
effectively deal with both public and privately delivered
services.
Services
sector
has become indispensable
for
economic
development.
Tertiary
soctor is
no
longer dysfunctional in
a
modern economy and is
a
major source
of
employment.
It
also allows for greater circulation
of
goods
and
resources.
There
is now a
greater appreciation
of
the functional linkages provided
by the
sen/ice
sector to the
economy
as a whole.
Ai the outset it is useful to underline that "if
the
subject matter of science passes through
different stages of development, the laws which apply to one stage will seldom apply without
modification to others" (Marshall,
1920).
In fact, observers of modern economic sy$tem are now
convinced that services play a crucial role in both production as well as consumption. Ever since
the advent of the Industrial Revolution, the economic virility of manufacturing has been
romanticised, whereas
services were
consigned
to
the background
as
an effete partner in
the
entire
gamut of economic progress (Daniels, 1993).
There have been varying interpretations
on
the question of sectoral shifts that have occurred
in the developed and developing economies. The implications of such sectoral shifts on the
nature of work and employment
have
remained inconclusive. Over time dichotomous viewpoints
have emerged regarding the tertiary
sector.
Part
I
of this paper attempts
to
provide an economic
identity to the tertiary/service sector
and
highlights
the
competing hypotheses which
have
emerged
in the development literature. Part II investigates tertiary sector in the Indian economy, both in
the context of national and regional/development. Finally, in part III this paper would provide
directions for future research in this area.
I ISSUES OF ECONOMIC IDENTITY AND COMPETING HYPOTHESES
It is an axiom of economic history that the tertiary sector becomes distinctly visible as an
economy progresses (Moore,
1984;
Kumar,
1991).
Though some services existed before the indus-
trial revolution, most others emerged with
the
modern processes of growth and change (Lampard,
1954;
Kumar, 1991). The growth of the tertiary sector led to a debate regarding its role in the
development process.
A review of the literature reveals that there are eight distinct views about the function and
feasibility of the tertiary sector in an economy.
* Invited Keynote Paper on the theme , Employment in the Service
Sector,
presented at the 37th Annual Conference
of the Indian Society of Labour Economics, Pondicherry, December 22-24, 1995. The authors are Assistant Professor
and Professor respectively, Centre for the Study of Regional Development, Jawaharlal Nehru University, New Delhi.
Pqrt I is primarily the contribution of the former author, and Part II primarily that of the latter one. The authors
aip indebted to Satyendra Kumar and Kalyan Das for computational assistance in preparing this paper.
34
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According to one view, the tertiary sector is regarded as 'dysfunctional' and 'dysgenic',
being abnormally swollen and 'overdistended' and
hence
a major cause for worry for
policy
makers.
The second view emanating from the experience in the Western countries regards the growth of
the tertiary sector as a concomitant and a natural outcome of economic development. A third
view regards service sector thesis as "unnecessary and a fraud, which only generates fallacious
notion of an economy of barber shops and launderies" (Denison 1979; Walker, 1985). A fourth
view looks at the tertiary sector as an end product in the logic of economic evolutionism. Yet
there
are others who
emphasise
the
persistence and continuity of industrial forms of work (Kumar,
1991).
Fifthly, there are still others who believe that increased division of labour brought about
an increased demand for manufactured
goods
and this in turn would increase the service employ-
ment. Sixthly, changes occurring in the demand for labour in the tertiary sector can be due to
changes in the final demand for services. Seventhly, changes in the demand for labour in the
tertiary sector are also linked to changes in the demand for manufactured and agricultural goods.
Thus,
demand exercises an influence on the level of employed labour through the profitability
of an undertaking and does not concern all the activities in the tertiary sector. Eightly, on the
supply side, changes occur in the employability in the tertiary sector due to increase in supply
of labour because of population pressure, internal migration
as
well as changes in the educational
system. Indeed, the "weight of traditions continue to favour the older perception of haircut view
of services" (Bhagwati, 1987). This view is further strengthened by the urban and economic
historians
who
subscribe
to the
dependency framework of analysis.
Here various
conceptualisations
of the tertiary sector are influenced by the fact that 'production' rather than 'consumption', is
usually regarded
as
an engine of growth (Smith,
1937;
Cowell, 1980; Stren
et.al.,
1988;
Littenberg
1989).
Obsession with the generation of 'wealth' and material progress has constantly under-
played the consumer's sovereignly (Borpujari, 1987).
It is interesting to note that there has been no attempt to provide a standardised definition
£>f a service. In fact, a universally acceptable definition of services has proved to be elusive
(Cowell, 1980).
History of Services ia Economic Thought
Services,
while they were
made
to
appear fragile
and
unimportant, had fundamentally changed
economic and social structures. Between 1600-1750, services were not specifically discussed or
identified. Though the first national accounting was attributed to Geogoiy King (1648-1712) or
to William Petty (1623-1687), yet there was no explicit focus on services. It was
P.
Lepesant de
Boisguilbert (1646-1724)
who
proposed that services contribute to a nation's
wealth.
He
described
services as "doctors, lawyers, circuses... the king, the army, the civil services". Interdependence
in this case was related to final use or consumption. For him "services are like any other ac-
tivities, paid for by consumers and economically useful. Here services were not considered
dif-
ferent from agricultural or industrial production'^ Delaunay and Gadrey, 1992).
The work of Francois Quesnay saw a shift from fiscal emphasis to investment and accu-
mulation of capital. The focus was on accumulation of surplus, rather than simply balancing
expenses and revenues. It
is
here that
a
major shift took place in economic
thought.
The question
of surplus led to problems of accumulation of capital. While a consumption-oriented framework
considers all activities equivalent, it is this production oriented framework which ranks activities
as more or less productive. Thus, "competition for the use of capital appears to have been the
theoretical backbone of the development of concepts on the services in the second half of the 18th
century" (ibid.).
FROM TERTIARY SECTOR
TO
SERVICES
35
Smith (1937), placing emphasis on the accumulation of
capital,
therefore, categorised ser-
vices to be unproductive. This was because sendees could neither be accumulated nor form part
of the capital stock. On the other hand, opponents of Smith's ideas were of the opinion that
services were productive because they were useful and commanded a price.
However, the debate never transcended Smith's crude conceptualisation of productive and
non-productive labour. In essence, the diversity of services and its changes over time are con-
veniently
bypassed.
Thus, much of economic theory developed during the 1850s-1930s was limited
to a further criticism of Smith. Later attempts to restore conceptual uniformity to all economic
activities resulted in the notion of unproductive labour disappearing from economic literature by
the end of 19th century.
Indeed, recent research shows that two trends in economic theory were obvious during
1850-1930. One, that economic relationships in a capitalist society were
more
frequently described
as service relationships (Frederic Bastiat, Clement Colson, Alfred Marshall and Leon Walras).
Second, increasing attention was given to specific services provided by the State. We do find that
by the start of 20th century, every activity was perceived as a service. However, service activities
which were external to firms were largely ignored. The period of inter-war years and the Great
Depression of 1930s changed this perception.
The Marxist theory of services cannot be ignored in this overview. Indeed, the founding
premise of this perspective was that service was work which could not appeal as value neutral
from the work
itself.
Thus, work done at the place where service is provided itself is considered
as the value of services. If at all, it is not the materiality or immateriality of the product, but
an economic relationship that distinguishes services from merchandise production. The produc-
tive characteristic of
work
done is determined by the social context in which it is performed. We
do sense a theoretical inadequacy of
the
identity between services and unproductive labour. Marx
clearly considered work done by the State employees as services.
Economic analysis acknowledged the split of the economy into three sectors. The three
decades during 1935-65 constituted the period when the concept of tertiary sector came of age.
The considerations that were taken up by the classical economists such as those pertaining
to the relationship between production and consumption and of equilibrium or disequilibrium
were largely ignored by the Keynesian and Neo-classical schools. They still do not distinguish
between goods and services in their analysis of economic structures.
The label Tertiary to the Services industries was given by Fisher (1933; 1939; 1946).
'Utility' became the basis for distinguishing services from agriculture and manufacturing.
It was postulated that tertiary sector could be used to channel capital investments as a means
to ameliorating mass unemployment of the 1930s. The case of tertiary sector as a viable
economic sector was also provided by Clark (1940; 1984). Both Fisher and Clark were
concerned primarily with the elaboration of structural change, which was a necessary con-
comitant of economic progress.
Fisher and Clark held divergent views about structural change. Fisher proposed that 'econo-
mies could be classified structurally in terms of wealth'. Clark, on the other hand, after describing
the flow of labour into tertiary production, classified economies according to the proportion em-
ployed in services. Thus, for Fisher economic growth meant the "decline of agriculture, of rural
population and of agricultural labour force". On the other hand, for Clark structural change that
accompanied economic growth was essentially the switching of resources between sectors because
of the productivity differentials between them" (Hartwell, 1973).
The divergence of approach between the two pioneers of the tertiary sector introduced
conceptual dissension and confusion which continues till today. Fisher emphasised the high
income elasticity of demand for services leading
to
relative increase in service employment. Clark
36
THE INDIAN JOURNAL
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on
the
other hand emphasised
the
supply
side
of the
services.
He
focussed on
the low
productivity
of services as a cause for absorbing large proportion of workforce in the tertiaiy sector.
The divergent and ambiguous views adopted by Fisher and Clark about the growth of the
tertiaiy sector introduced a negative image of
it.
Tertiary sector was essentially considered as
residual. This was compounded further when the distinction between service occupations and
service industries
became
blurred.
It
is
common
to
hear
people
referring
to
their jobs as 'service'
While occupation refers
to
the type and
nature
of work
done,
industries refer
to the
actual location
of the
activity.
Thus, one
may be
working in a transport industry as a professional or
as
a manual
worker.
Fisher and Clark attempted to resolve the classical tension between services as utility and
as unproductive activity. However, they added secondary connotations to the intangible and
immaterial quality of
services.
The negative image of
the
tertiary sector was further enhanced
by economic and urban historians. It is clear that such a view can only result from an isolated
view of the sectors, where interlinkages with other sectors of the economy are ignored. It was
in early
19th
century that ideas of interdependence between services and industry
were
formulated
by Heinrich Storch (1766-1835). While the dominant tradition of his time was to criticise Smith
by arguing that all work was productive, Storch concluded that services too were productive. He
distinguished work which produces services from its results. These results, treated as internal
goods or benefits, do not have a price and cannot be bought and sold; one buys not the result
but the work needed to obtain them. It is the nature of
those
results which implies that the work
takes the form of a service (Delaunay and Gadrey, 1992). He also noted that any production of
service is possible with the close cooperation of producer of service and the consumer.
From Tertiary to Service Sector : From Uniformity to Diversity
The three-sector typology, with tertiary being dubbed as residual, could remain relevant
as long as the tertiary sector played only a marginal role in economic activity. In the existing
economic system, the role of this sector is fundamentally different.
Thus,
from the 1960s onwards, as the tertiary sector became more prominent, the relative
heterogeneity of the services became more obvious (Bauer and Yamey, 1951).
We
find that the
substitution of the word services for tertiary sector happened quite early in the
US
and rather late
in other parts of
the
world. Comparing the growth trends of industrial and service sectors led
to the establishment of the notions of a post-industrial society in the West (Bell, 1973). The post-
industrial society is a tertiary, a service, society (Clark, 1984). Here the majority of
the
popu-
lation is engaged in the tertiary sector thereby shaping socio-cultural values and structures.
So we see that during the 1930-60 period, tertiaiy sector
was
defined by default, i.e. a com-
bination of those activities which were neither agriculture nor industry. The period 1965-75 saw
the growing importance accorded to the study of services in a more positive way. The period
1974-75 marks the end of a phase of optimism in the analysis of the services. This period is
marked by unemployment, oil crisis, inflation, and low rates of
growth.
There is the emergence
of an alternative concept which questions the further continuation and development of the service
society. The focus is on the issues of self-service (derived from the neo-industrial theory) and
technological change in
final
consumption. In other
words,
"'production
is
said
to be
more service
intensive" (Delaunay and Gadrey, 1992).
This dominance of goods over services
in
final consumption
leads
to increased employment
in
the
tertiary
sector.
In
all
studies of
the
tertiary
sector,
scholars have
inevitably remained oblivious
of this significant shift in the modern production system. Post-colonial and neo-colonial conclu-
sions
are based
on unrealistic assumptions of modern economic
systems.
Consider the
fact that
FROM TERTIARY SECTOR TO SERVICES
37
services have always been viewed as a lagging sector, exerting a drag on the economy. Studies
have shown that the productivity differentials between goods producing and services industries
have been much smaller. We also find constant assertions being made that service industries
are often viewed as dumping grounds for unutilised workers. This perspective again fails to
appreciate sizeable employment in service industries, which assists in the economic develop-
ment. It has been observed that service industries which appear insignificant and marginal,
generally dismissed by grand theoreticians, often play a significant role in the process of small
business development. Its role in effecting intergenerational mobility to higher income status
is empirically established. It is unfortunate that even now the service sector is considered to
be a collection of low-paying dead-end jobs, incapable of providing any mobility. Service
industries have allowed for the expansion of labour market, the growth of small businesses and
introduced flexible production processes, as well as growth of new markets. It has played a
positive role in the absorption of labour of women, youth, ethnic minorities, immigrants and
displaced workers.
Role of Services in Economic Development
An important proposition provided by the 19th century Engel's curve suggests that with
rising affluence, demand for the primary products increases less than proportionally and the
composition of demand shifts from secondary products towards tertiary
products.
Thus,
the rapid
growth of
service
employment is explained by shifts in demand in the direction of services. This
is now applied to a hierarchy of services.
It
has
become imperative
to
differentiate between the hypotheses emerging from
the
supply-
led and
demand-induced
viewpoints about service sector growth. While the supply-led hypoth-
esis emphasises the unlimited absorptive capacity of the
sector,
it also
highlights
low
productivity,
underemployment and unemployment as endemic features of this sector. The demand-induced
hypothesis on
the
other hand highlights
the positive
features of sectoral linkages and in particular
the generative role of
the
service sector. A review of
studies
since
1963
till date has shown that
majority of the recent studies on the post-war service sector have focussed and highlighted the
demand-induced viewpoints and their relationship with economic development (Kumar, 1991;
Sapir, 1982; Turnham, 1971).
Indeed, lack of appreciation of the real role of services in economic development
encouraged a plethora of pessimistic studies to state that 'services led to economic retardation".
In a large number of studies, petty-trading and domestic
services were
taken
as
an index of service
sector growth. Even
the jobs
in the service sector were termed as low paying and dead-end. The
rudimentary attempts at classifying service industries without giving due consideration to the
nature and stage of economic developent in question has resulted in fallacious reasoning and
conclusions. In recent
years,
several studies
have
empirically established
the
supremacy of demand-
led thesis which states that service sector growth is induced, among other things, by industrial
growth, rising real income, rising urbanization, rising non-farm employment, expanding
consumerism and growth of intermediate producer services.
The idea that economic utilities
are
embodied
in
outward objects
has
remained
deeply
rooted
since long in modern day
economic
perception.
Today, this conventional thinking is undergoing
rapid change. Two fundamental issues are pointers in this direction: employment and techno-
logical change. While service occupations
have become a
dominant source of employment, what
is most striking is the development of
services
within the manufacturing sector. This is purely
an outcome of technological development. For example, ;i computer before it starts to function,
requires input programmes
and
packages.
All modern technologies require essential service inputs
38
THE INDIAN JOURNAL
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'software' for 'hardware'. The most conspicuous aspect of the service economy is the
variety of services that have become essential inputs in the production process (Gershuny,
1978;
Gershuny and Miles, 1983). Services are not distinct from and should not be con-
sidered opposed to industrial products (Riddle,
1985;
1987). It is one of the fallacies of
modern economic analysis to dichotomise the two sectors. Services are no longer consumed
by passive consumers.
Service Identity Issues
The oil shock of 1973 was perhaps the origin of a renewed interest shown towards the
service economy and its utility (not necessarily the value embodied in the object) in the
production process. The quest now is for efficiency, innovation through R&D, product
engineering, finance, transport, distribution and consumption. Applied knowhow is no longer
considered irrelevant and unproductive, even though it is not directly assisting manufacturing
process.
Even though services possess a legitimate economic identity, yet notions of economic gain
still remain within the preserves of the manufacturing sector. What we see is a reassertion of
the Smithian view. Though "services may not necessarily be unproductive, yet their potential
contribution to economic wealth is clearly seen as secondary to the manufacturing sector (Allen
and du Gay, 1994).
A significant research conducted on this theme has traced this line of thought to post-war
reconstruction and growth period. It goes to the credit of Nicholas Kaldor (1966; 1972; 1985)
whose 'stylised' facts led to the freezing of the identity of services. According to him, only
manufacturing achieves successive productivity gains. However, apart from the optimisation of
capacity of larger plants, external economies also arise from new technology, and new ways of
organization, management and greater specialisation. Kaldor was responsible for collapsing all
the complex differences that make up service activities into a simple list of characteristics. This
aided quantification. As has been noted by Allen and du Gay (1994), services in effect became
a mirror image of manufacturing. They were identified as labour intensive, of low technological
base and small scale in production or of petty commodity production
base.
However, this descrip-
tion is applicable only to a limited range of services, rather than to the service industries as a
whole. There is no empirical justification to suggest that service sector growth retards economic
growth.
In the 1980s, we find the ascendancy of services emerging in the economic arena. The
increased role of information-based capital intensive services, of finance and telecommunication,
are prinfti examples of high value-added service industries. Traditional sectors of catering, clean-
ing, and security belonged to the lower value-added service industries. A peculiar phenomenon
has come to the fore, whereby services are judged on terms set by the manufacturing sector. The
identity of services has remained inseparable from that of the manufacturing. Thus, the more
services take on mutant characteristics of the manufacturing sector, the more importantly they
are judged to be as contributors to the national wealth.
With the worldwide recession plaguing most of the countries of
the
developed and devel-
oping world, the question emerges as to whether manufacturing matters
7
. While it has been
reaffirmed that manufacturing
matters,
yet a
major departure has
been made
in that
service activities
enhance the manufacturing capability under any system. They are indispensible to the complex,
modern production system. If services matter, it is onl> through their links to manufacturing
(Cohen and Zysman, 1987). Thus, flight of capital and restructuring of world production base
would inevitably result in
the
flight of high value added services. Maintaining the manufacturing
FROM TERTIARY SECTOR
TO
SERVICES
39
base, its transformation and capability of any nation is totally dependent on the embedded know-
how of the manufacturing sector. There is an urgent need to recognise the intrinsic linkage
between economic sectors (Hill, 1977; Tucker, 1977; Shelp, 1981).
Direct linkages between manufacturing and service industries may have limited spatial
impact, as compared to the indirect linkages. High value-added services which are upstream of
manufacturing—e.g. Finance, Insurance, Banking, Engineering designs, R&D, Telecommuni-
cations, Business and Accountancy services, Computing, etc. are considered essential for the
maintenance of manufacturing capability. Down stream services are those which have direct
linkages to manufacturing but are of
less
value, viz., transport, repair, maintenance, security and
environmental services. What is striking is that the direction of linkage is one way from services
to manufacturing. We can thus say that, firstly, services matter only through manufacturing.
Secondly, some services matter more than others and in connection with manufacturing. In a
sense, services are indirectly productive (Allen and du Gay, 1994). Studies have shown that core
service industries are linked to other services (Allen and du Gay, 1994; Britton, 1990; Riddle,
1985).
There is a systematic downgrading of the contribution of services in the modern economy
and even in the world of employment. Manufacturing metaphors are used to describe service
occupations in terms of mechanisation, routinization, and rationalisation. Majority of the tech-
nical institutions in India, for example those producing engineering graduates, ultimately find
their alumini lodged primarily in marketing, sales and servicing occupations. It is obvious,
therefore, that manufacturing requires research, design, market and finance. The whole notion
of flexible production system elicits the need for continual improvement in business standards,
marketing and sales strategic planning. These clearly highlight significant contribution of ser-
vice activities within manufacturing sector.
Recently, there have been attempts to establish the identity of service work on the basis of
'cultural' relations. The social nature of service work renders all efforts to classify services along
traditional separation between production and consumption as irrelevant. As Allen and du Gay
(1994,
p. 215) suggest, "economic identity is always already cultural because the very act of
servicing is both cultural and economic at one and the same time." So the identity of contem-
porary service work is hybrid. Thus, due to the impact of new technology, services themselves
can be routinised, and standardised. Not all services are intangible. Many take the form of
discrete tangible products such as bank statements, software, a consultant's report, advertising
package, and a TV programme. Besides, intangibility has nothing to do with the productive-
unproductive nature of services.
In effect, therefore, technical change leads to a splintering process whereby goods splinter
from services and services from goods (Bhagwati, 1987). Thus, services splinter from goods
whereby services earlier provided within the secondary sector are now hired from specialised
agencies outside of the manufacturing domain. The reason for this is attributed to the basic
economies of scale operating in a production/servicing unit. At the same time certain stagnant
services retreat
from
the market
to
the household. The
re\
erse splintering of goods from services
takes
place when technical change is rapid. The classic example is the redundancy of gramaphone
records giving way to magnetised cassettes and finally to digitised CD roms. A disembodiment
phenomenon is also visible in the services sector, whereby "splintering of services leads to long
distance services' (e.g. banking, education, insurance). This process bypasses the classic com-
munication between producer and consumer. There is therefore a need to move our focus from
highly aggregative tertiary category to subsets of service industries.
40
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Stylised Service Sector
Any account of the service sector would be incomplete without analysing the stylised facts
on
che
sector. It
is
therefore appropriate to look at
two
divergent approaches which have emerged
in providing empirical regularities over time.
Fuctis (1968) has undertaken a micro accounting analysis which suggests three hypotheses:
(a) Services have an income elasticity of demand greater than one. Thus, as real per capita
income increases, the real per capita services grow more than the proportional growth in income.
Services, therefore, account for an increasing share of employment as well as national income;
(b) With increasing specialisation and automation, it becomes economically efficient to contract
out services to independent
agencies.
This renders higher service quality and lower average cost,
thereby increasing the demand for and production of
services;
and (c) The growing proportion
of service employment can be attributed to the slower relative growth of labour productivity in
services than in the primary or secondary
sector.
If the demand for services is insensitive
to
rising
prices, then
as the
economy
expands,
services share of total employment will
increase.
According
to
Fuchs,
exogenous shifts in demand for services occur
due
to changes in the structure of house-
holds because of increased participation of women outside the households.
Baumol's (1967) macro-economic model distinguishes between a progressive goods sector
versus non-progressive service sector. The progressive goods sector is one where innovation,
capital accumulation and economies of scale allow for a cumulative rise in the nature of produc-
tion process. Whereas, in a non-progressive sector, there is very little room for productivity
gains.
Assuming that demand for the product of the non-progressive
service
sector
is price
inelastic,
increased demand with general standard of living results in a shift of employment from progres-
sive to non-progressive sector.
Thus,
both
Fuchs
and Baumol 's conclusions converge
on
the growing importance of service
employment. This is due largely
to
the lagging labour productivity in the service sector. Further
studies by Saxonhouse (1985) and Summers (1985) also corroborate this conclusion at the
international level.
Another significant contribution to the understanding of the services sector was provided
by Bhagwati (1987). According to him, factor endowments make labour inexpensive in a poor
country. This in turn makes services cheaper in a poor country, since services are labour inten-
sive.
Even studies by Kuznets-Chenery and Syrquin (for the period 1950-70) suggest that low
productivity of the service sector
tends to be
inversely related
to
the per capita income (Kendrick,
1985).
Some services are more expensive in poor countries, which can be attributed to their
increased capital intensity.
Another outstanding contention regarding services is its non-tradeable nature (Tucker and
Sundberg, 1988). This implies that the income elasticity of demand for services is high. One,
therefore, needs to distinguish between sector-of-origin share of services in national income as
distinct from their final demand
shares
in national
expenditure.
Kravis (1983)
suggests
that there
is no significant difference between rich and poor countries in their share of services in final
expenditure. However, there is a significantly greater share of services
by
sector-of-origin in the*
rich than in the poor countries. This is largely due to the fact that as the level of development
progresses, there is a greater reorganization of the production processes. Services previously
treated as part of the value-added in goods now get provided by specialised firms.
Over time services have come to occupy an exciting area of investigation for trade econo-
mists as well. That relative price of services is lower in poor countries than in rich countries
implies that the former has a comparative advantage in some services. Moreover, liberalisation
of temporary labour movements
will add to this
advantage for developing
countries,
which
would
FROM TERTIARY SECTOR
TO
SERVICES
41
enjoy geographical advantage in the provision of services over the more efficient producers in
the developed world. Any form of traditional non-tradeability of services stems primarily from
its nonstoreable nature, its intangibility.
Services and Productivity
Services have been sidelined to the peripheries of economic analysis on the grounds that
it is less capable of achieving rapid productivity gains. This is attributed primarily to the lack
of mechanisation and mass production of
services.
However, as had been discussed above, tech-
nology has assisted in standardisation of services. New organisational forms, growth of fran-
chise, product and marketing innovation
as
also financial
and
sales networking have revolutionised
the services sector. This has definitely improved the productivity of the services sector, a case
in point being the high value-added services.
Baumol (1967) dehomogenised service sector by classifying services into three categories
(Inman, 1985): (a) Stagnant personal services, where the quality is highly correlated with labour
time expended. There is a problem of standardisation of products, (e.g. haircutting, teaching, live
artistic performance). However, technology plays an important role in boosting the productivity
and quality of these services; (b) Progressive impersonal services, where the dependence on
electronic technology is immense. There exists no contact between producers and consumers.
Besides, technological leaps have yielded high productivity growth in this sector. Telecommu-
nication
and
multimedia
are prime
examples;
and (c) Asymptotically stagnant, impersonal services,
which relate to a mixture of
both
progressive and stagnant services. Here productivity growth
is self-extinguishing. Broadcasting, computation and Research and Development are prime
examples of this case. The more rapid is the productivity growth due to technical advancement,
the more rapid does the service come to an end. Thus, computer hardware comes from a pro-
gressive 'manufacturing' sector, whereas software comes from the stagnant 'service' sector.
Kendrick (1985), Fuchs (1968) and Baumol (1967) have shown that differences in produc-
tivity growth between goods producing and service industries have been far smaller than what
conventional wisdom has informed us.
II.
THE INDIAN SCENARIO
A Synoptic Overview
We may now
turn to
the Indian scene of changing role of the tertiary sector service activities
in generating income and providing employment. Before looking within the tertiary sector, it is
imperative to glance at the tertiary sector in relation to the other two main sectors of the economy.
For this purpose we may start
by
taking
a
look at the contribution of the tertiary sector to aggregate
income and employment in the national economy vis-a-vis that of the primary and secondary
sectors over the last few decades (Rao, 1983;Rao, 1985; Ghosh, 1991)
1
. This picture is portrayed
in Table 1, which is based on Population Census data as regards the workforce estimates and on
the CSO for income data
at
1980-81 prices.
Two
points emerge quite clearly
from
this
table.
First,
as among the three main sectors, viz., the primary, secondary and tertiary, both in respect of
income generated as well as labour absorption, the tertiary sector has almost all throughout the
four-decade period 1951-91 held the second position less important than that of the primary
sector, but more important than the secondary sector. Secondly, whereas proportion of income
generated in the tertiary sector has been progressively rising without any interruption and at a
fairly decent
pace,
the same has
not been the
case
in
respect of employment generated (Bhattacharya
42
THE INDIAN JOURNAL OF LABOUR ECONOMICS
and Mitra, 1990, 1991; Mitra, 1988; Nagaraj, 1990, 1991a and b). Given the regular pace of
its advance in terms of income generated, in fact by 1991, the tertiary sector had become the
most dominant of
the
three sectors, surpassing the contribution of
the
primary sector, which had
earlier occupied the prime position.
Table 1 : Sectoral Employment and Income Structure of the Indian Economy
Sector
A:
SECTORAL EMPLOYMENT
PERCENTAGES
Primary
Secondary
Tertiary
B:
SECTORAL
OUTPUT
PERCENTAGES
Primary
Secondary
Tertiary
1951
71.7
10.7
17.5
58.3
15.1
26.6
1961
72.3
11.7
16.0
53.9
18.2
27.9
1971
17.3
11.1
17.6
47.8
21.2
31.1
1981
69.4
13.0
17.7
41.3
23.0
35.7
1991
67.5
12.0
20.5
34.7
26.4
38.9
In terms of employment provided, a very precise inter-temporal comparison is not possible
because of the changing concepts of workforce adopted in different Population Censuses. How-
ever, unlike the tertiary income share, the broad trend here is not that of an uninterrupted and
substantial rise in the proportion of labour absorbed in the tertiary sector, except during the
decade of eighties. Therefore, it appears that structural diversification has been much more
progressive with respect
to
output than with respect
to
employment (Planning Commission, 1990;
NDC,
1992)
This synoptic review conveys only two independent comparative static pictures of sectoral
output and employment structures at a few decadal points of
time.
It cannot give an idea about
the labour absorptive capacity of different sectors of the economy in response to economic growth
in the country. An idea about the degree of employment responsiveness at the sectoral level can
be obtained from decadal sectoral employment elasticities of economic growth, which may be
defined as:
A E/E
g
ti;(OV) = ^— ...(l)
AY
J*-
where:
AE
t
= [E
f
(t) - E
f
(t - 1)] measures change in employment in sector (S) in between any two
decadal points; and
AY - [Y^t - Y^t - 1)] measures change in aggregate national income in between
two decadal points.
We shall call TJ*(OV) 'overall' sectoral employment elasticity of sector (s); the signifi-
cance of epithet 'overall' shall become clear shortly. If in the numerator we measure proportion-
FROM TERTIARY SECTOR TO SERVICES
43
ate change in aggregate employment in the national economy, that is, AE IE instead of AE/
E
g
, we can obtain the aggregate 'overall' employment elasticity in the economy.