Implications of the Growth of the Services Sectors - Essay Example

Implications of the Growth of the Services Sectors Introduction In any modern economy, the three primary elements which combine to make the overall structure of the primary economic system are the agricultural sector, the industrial sector and the services sector. The services sector is the one which most countries seek to develop since it represents the heights of economic achievement which seems to represent a highly evolved agriculture and industrial sector although this is often not true in the developing world (Wikipedia, 2006). In the UK, the development of the services sector has taken many decades and the services based economy revolves around provision of services like transportation, distribution or transfer of goods and money from one point to another. In more concrete terms, the services sector includes things like the provision of insurance, banking, retail operation, information access and entertainment or leisure services. The services sector is strongly linked to the other two sectors, for example, the provision of public utilities like water and electricity is often considered a part of the services sector while the installation, creation and development of means to provide those services come from the industrial economy. Moreover, an industrial economy can only be developed if there is a food surplus in the agricultural sector of the same country. This is the reason that the normal economic progression of a nation might go from a complete dependence on agriculture, to a boost in industry and finally towards a service based economic system. The Services Sector Historically speaking, the UK holds the position of being the first country to develop and exist as a services based economic system (Wikipedia, 2006). While it took the British Empire a few centuries to develop a services economy (helped in no small part by the colonies), modern economies are developing a services sector much faster than England. India for instance, is moving towards a services based economy at a rapid pace while the industrialisation of India is slower than the growth of the services sector (Economist, 2006). However, the UK is much more interested in the services sector since more than 70% of the British economy is based in services which means any dip in the economic indicators there will have a drastic effect on the overall economic conditions of the country (Economist, 2005). Similarly, the growth potential of the economy in the services zone is stunted because marginal growth would not only be difficult, it would also mean that government resources are being utilised inefficiently if the same resources could enhance production levels to a much greater extent had they been used in the industrial sector (Economist, 2006). The growth of the services sector is largely connected with the Single European Act which was signed on February 17th in 1986. More than twenty years ago, these laws were expected to make companies more productive and bring down inflation by lowering prices for goods and services across Europe. As estimated by the European Commission this plan created an additional 2.5 million jobs across Europe and raised the average income by nearly 2% (Economist, 2006). Current Situation The Bolkestein Directive was geared more towards the services sector across Europe but it was crippled in many ways since it did not take into account important sectors of the services industry e.g. banking, telecommunications or health. However, the laws and policy recommendations of the directive have their advantages since they will reduce the amount of red tape involved in doing business across Europe (Economist, 2006). In terms of government policy, it favours liberalised economies and should have the same effect as the Single European Act did on the industrial sector. The services sector has to be taken seriously because it is the sector on which the economy of Europe and more importantly the economy of the UK is dependant upon (more or less) completely. Some of the most important service providers in the world economy are located in Europe, for instance, the old and trusted banks in England, mobile phone manufacturers in Finland, retailers from Sweden. Yet most people do not realize the fact that In America, UK and Australia, services make up 75% of the people’s income and nearly 80% of the job market (Economist, 2006). However, in comparison to other nations of the world, European service providers and the services sector is less productive and less dynamic. In the last twenty years, productivity improvement in services has been less than 0.5% per annum in the Euro zone while America has stayed at 3% per annum. While Europe claims to be completely unified, trade in services between countries in the Euro zone is negligible (Economist, 2006). The services sector therefore, is stagnant in much of continental Europe. The reasons for this include the historical influences of Europe. Europeans consider services to come from low tech industries like plumbing. The French and the Danish, in an effort to protect the historical outlook of their cities and plazas, have made it nearly impossible to create new shopping plazas or markets within cities. Additionally, the fondness of state supported or state provided services like healthcare and education also limit the availability of competition or innovation within these sectors (Economist, 2006). A policy recommendation can be made here which suggests that privatization time tables should be accelerated to the level where these services can be brought to the private sector in a more efficient manner. This is because a lack of growth in the services sector leads to social problems which certain European countries can not handle, for example, there are 19 million people without jobs in Europe and seventy percent of job creation has been in the services sector. If Europe does not do anything to sustain and develop this growth unemployment could likely be a problem for the future decades to come (Economist, 2006). Luckily, England has managed to stave off this problem and as a matter of fact, has one of the lowest unemployment rates of the developed countries in the world (Capell & Cohn, 2004). As a policy matter, a focus on the information and telecommunication industry is essential for the growth of the services sector. A comparison between Europe and America is necessary since it shows that Europe has failed to keep pace with America in terms of productivity growth and that almost all the discrepancies between American and European productivity since 1995 can be accounted for by the services sector sections which are connected with communication technology. While Europe had a lead on America in the early 90s, after 1995, the communications sector grew at double the rate in America as compared to Europe (Economist, 2006). At the same time, encouraging services is not and should not be the only focus of the government since there are other sectors to be mindful of as well. The industrial and manufacturing sector has been in decline since the 70s and the subsequent governments have failed to raise its levels despite their best efforts (Economist, 2006). A choice must be made by the policy makers as to what they can save and what they need to spend on improving resources and benefits for other sectors of the overall economy. Banking Sector The growth of the services is intricately connected with the growth and development of the banking sector and technology. Technology itself provides the means for banks to attain greater levels of efficiency that help both the industry and the economy (Botín, 2006). In this scenario and to help the policy makers improve the overall level of the services industry, there are several recommendations which can be made for the increase in productivity of both the sectors in the economy, for example, training for skills used in the services sector industries like banking (Campbell, 2005). In the last 10 years, the banking sector has shown considerable growth due to the increasing macroeconomic demands for credit. Low interest rates have also helped UK banks in competing with other continental lenders (Economist, 2006). The situation is not entirely the same across Europe since there are some countries where inflation is quite high and the banks are not doing as well. Overall, the Euro zone has shown growth in the credit market at nearly 10% per annum which have led to the banking sector being largely profitable and showing signs of positive growth (Botín, 2006). Presently, the government policies are such that interest rates are experiencing an upwards trend which could curb the growth of the banking sector. The total level of debt on the public is raising itself to alarming levels and it seems that micro credit and good management will be the order of the day for the banks who will come out unscathed in future years to further develop this critical part of the services sector in the UK economy (Economist, 2005). While deregulation is an excellent policy to help banks in a liberal economy, it is often not the best solution for a welfare country. Since complete deregulation is not an option, the governments of Europe and particularly of the United Kingdom have to take a close look at using technology and even mandating the use of technology for certain areas of the banking sector. Botín (2006) suggests that efficient, integrated banks can boost their productivity and output by up to 1% which would in turn create a significant addition to the services sector and the overall economy of the country. Integration and efficiency which comes from the use of technology leads to an increase in the supply of funds, reduces the cost of lending and maintaining capital assets and lowers the overall cost of lending for the banks and the cost of borrowing for the consumers (Botín, 2006). The EC is certainly aware of these facts and knows the benefits to be gained from integrating banks but there is still no solid creation for a single market for retail banks in Europe. The regulations of each country often are more of a hindrance in bank operations rather than a supportive tool. Therefore, banks and other players in the services industry (especially those connected with finance) have been seeking other ways to overcome these barriers and have discovered that one way of beating these regulations is to indulge in a flurry of mergers and acquisitions which are spread across countries in the Euro zone (Economist, 2005). Acquisition itself is a rather innovative tool which allows finance giants to often sidestep the regulations and acts as a guiding force for a more integrated banking sector across Europe (Botín, 2006). Technology Innovation is not only limited to banks, since other players in the services sector including pharmaceutical research companies have also accepted mergers and acquisitions as one way to get across borders and seek more efficiency where the regulations and regulatory bodies restrict the transfer of information or technology between companies. Such mergers often render the regulations arbitrary if the companies involved become one and are able to operate with their head offices in another country altogether (Economist, 2005). Other than the influence of innovation on the services sector, there is also the impact of technology which allows differentiated business models like the ones being used in America. Apple Computers is one of the leading innovators in the world and the technology companies in Britain could learn a lot from their business model which has given substantial boosts to both the company and the media services sector of the American economy (Shell, 2006). An additional reason for this situation is that conventional technology models are becoming costly and inefficient compared to the newer ones being developed by innovative companies in America and elsewhere (Shell, 2006). Therefore the government should seek to use various ways and means by which those models can be effectively translated to British or the European context. Current technological models in Europe are considered dated by American standards and do not allow the commercial agility which American companies can enjoy. Even something as basic as the right operating system, or the right communication software, can become important for any country or services related enterprise. Especially in the case where it is seeking operational and competitive advantages (Botín, 2006). Essentially the services sector needs a multi-channel technology architecture that allows lets companies obtain integrated customer management solutions, reduced time-to-market totals and increased productivity. Similarly, the development and coherence of the quality of information is also important for the services sector. This was clearly exemplified in the case of Partenon which was developed by Banesto as an application for multinational banks. The users of this system have reported a reduced cost in transactions, higher productivity, better customer service and the success of the product has led to its acceptance as a desired banking application in the UK, Spain and Portugal (Botín, 2006). Conclusion In conclusion, the governments of the Euro zone and particularly of the UK need to focus on the development of the services sector with the feeling that anything which is good for the economy should be good for the services sector and vice versa (Campbell, 2005). With the majority of activity being focused in the services, the government simply can not afford to ignore it. At the same time, any attention which is given to the services sector must not create more problems than it solves since red tape and bureaucratic regulations do little more than to hinder the running businesses which are doing fine without intervention. Overall, the services sector for the British and the European economies have a bright future if the government is able to ensure that current policies which hinder explosive growth are modified and the modifications do not restrict business to take place both on the European level and the international level. Given that such precautions are present in the future policies which are currently being developed, the services sector can continue to represent the bulk of the economy of Europe as a fully developed and modernized economic system which acts as an example for the rest of the world. Word Count: 2,451 Works Cited Botín, A. 2006, ‘Bankings technology revolution’, Global Agenda, vol. 4, no. 1, pp. 120-121. Campbell, M. 2005, ‘What I want from the new Government: A workforce fit for the future’, Adults Learning, vol. 16, no. 9, pp. 9-11. Capell, K and Cohn, L. 2004, ‘Jobs: Whats Britains Secret?’, Business Week, vol. 3878, no. 1, pp. 50-51. Economist. 2005. ‘A world of opportunity’, Economist, vol. 376 no. 8443, pp. 14-17. Economist. 2006, ‘Not yet free to serve’, Economist, vol. 378, no. 8465, pp 52-53. Shell, A. 2006, ‘Apple helps push Nasdaq to 5-year high’, USA Today, 6 Apr, p. A5. Wikipedia. 2006. ‘Tertiary sector of industry’, Wikipedia.org, [Online] Available at: http://en.wikipedia.org/wiki/Service_sector Read More