4.3. Structural change burden
Inmany service sectors,thepossibilities forproductivity
growth are limited due to the inherently labour inten-
sive nature of service production. This implies that an
increasing share of services results in a productivity slow-
down (Baumol’s law). Such service sectors include personal
services, restaurants and hotels, health care and medical
services and government. What productivity improve-
ment there is, often takes the place of reducing quality
of output or simply providing less services for the same
price, so it should not show up in productivity indices
if these were correctly measured using hedonic price
indices.
Baumol’s law has recently come under fire, because
there are some very important market service sectors such
as the financial sector, software, retail sales and distribu-
tion where there are major productivity improvements,
often based on ICT technologies.
Nevertheless, the working hypothesis remains that
a country with a larger service sector will tend to grow
at a slower rate than a country with a smaller service
sector. As advanced economies are predominantly service
economies, this creates new possibilities for catch-up
in developing countries where the industrial and the
manufacturing sector have a proportionately larger share
in output.
On the other hand, developing countries are charac-
terised by a very large share of the service sector at early
stages of development. They did not follow the traditional
linear sequence of a shift from agriculture to manufactur-
ing, followed by a shift from manufacturing to services. As
much of the large service sector in developing countries
is accounted for by a large, inefficient and unproductive
government sector, developing countries suffer from a
structural change burden at early stages of development.
Other parts of the service sector consist of activities of ‘sur-
vival entrepreneurs’ in the informal sector, which are also
not very productive or dynamic.