The role of the services sector in growing the Australian economy

Abstract

In today's global economy the service-producing sector increasingly plays a dominant role in promoting growth and improving living standards. While this is now well understood, early theorists initially struggled to recognise explicitly the importance of services, due in part to the difficulties of incorporating the characteristics of services within economic frameworks that were devised for goods. French economist Jean Fourastie was one of the first to propose a concept of economic development that describes how a society eventually moves to a post-industrial services economy, even though the services sector now plays a much more integral role than originally proposed in Fourastie's three-sector hypothesis. Understanding whether structural change may occur within an economy, and in particular which sectors will be impacted in what way, is a vitally imp01iant tool for economic planners to comprehend. The concept of multi-sector growth models, such as that proposed by Ngai and Pissarides, has enabled the incorporation of new theory into traditional growth models and explained how and why sectors rise and fall over time, albeit still in a closed economy setting. Analysing the structure, conduct and performance of each sector of the economy, and most importantly, the ability to calculate and consider multifactor productivity (MFP) on a sector-by-sector basis, is important for understanding whether an economy has reached its "steady state" or whether it is likely to experience continued structural change. History tells us that European settlement of Australia immediately transformed the continent into a services economy, with services being the dominant sector from around 1840 onwards. The objective of the research contained in this thesis is to determine whether the current economic contribution of the services sector in Australia is at a "steady state", or whether there is likely to be a continuation of structural change into the short-to-medium term. Backward and forward sectoral linkages using official input-output tables suggest the services sector has deepened its connection to consumers, and that Australia has experienced what I call a "servicification" of its primary sector rather than a servicification of its manufacturing sector, which has been the broad macro experience of many other countries. Analysis of capital, labour and output shows Australia's secondary sector achieved the highest rate of MFP growth, with MFP growth for the services sector less than, and considerably less volatile than, that experienced by the secondary sector. A cross-country empirical analysis suggests Australia's services sector as a whole is "unde1weight" compared to the theoretical proportion of Gross Domestic Product (GDP) it should represent. On a sub-sector level, producer services represent a greater proportion of GDP than they theoretically should, while distributive, social and personal services represent a lower proportion of GDP than they theoretically should. An extension to the cross-country empirical analysis has also suggested that government industty policy can positively affect the structure of an economy. An assessment of the national and state government industry policy environment in Australia suggests there is a relationship between the quality of the approach taken to suppo1t the services sector through industry policy and the proportion of Gross State Product generated by the services sector within each jurisdiction. The combination of the findings of this thesis strongly suggests, that despite the services sector holding a dominant position within today's economy, it is likely to continue to increase in importance within Australia's future economic strncture. Substantially improving the quality of industry policy supporting the services sector at both Commonwealth and State levels will ensure this anticipated growth not only materialises as expected, but is maximised.