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MAY 13

Myth of services - a post-industrial fantasy

In the minds of some exists what I refer to as the post-industrial fantasy: that in advanced economies there exists a natural and inevitable decline in manufacturing and a compensating growth in services. The thinking goes on to suggest, as a result, we should not worry about the decline in manufacturing, it is after all natural and inevitable, and not really that much of a worry as services will naturally and inevitably fill the void. That same thinking goes further to characterise the decline of the real economy as natural and inevitable, something that is not a worry and therefore should merit next to zero policy attention.

As you might imagine I have a major problem with this line of single loop thinking, thinking that grasps the simplistically obvious but carries no critical examination or testing of the conclusion. In a few words what is the economy about? What demonstrates a successful economy? What should be the tests that are applied? There are many, but I would suggest success is measured in growing complexity, increasing capability and manifest in generally improving living standards. The latter is perhaps obvious, but complexity and capability might need a word or two of explanation Complexity, in products and services, monetises the creativity of our people while capability refers to the ability to deliver whatever is necessary to capture that creativity.

If we look at those economies, such as UK and US, that have adopted the post-industrial fantasy and ignored manufacturing, what do we see? What do we see when we look at those that have seen manufacturing worthy of a clear policy focus, for example Germany, Switzerland, Singapore and Korea? It is clear that economies that have valued manufacturing and supported their exporting sector have done much better in recent times than the post- industrialists.

That said, there is another layer of complexity. The division between manufacturing and services is not clear cut; complex products, if you like, are combinations of devices and services. Manufacturers themselves consume producer services, for example ICT provision, so the simple thinking; as one falls (manufacturing) the other rises (services), fails early under critical consideration.

As manufacturing becomes more elaborate, devices are bundled with different services to form a product. Product services can be ICT or support for the products upgrade, use, repair, marketing and sale over the products life and could well involve interactions that support the products on-going development, sale and distribution. Some products have no bundled device, for example software, but need a device to operate. Products, bundles of devices and services, increasingly blur the distinction between services and products. All products share the need for distribution of one sort or another.

Producer services are those services in service supply chains consumed by producers. In the absence of producers there would be no demand for producer services in an economy. This interdependence is important to consider to avoid the simple conclusion that producers do not matter, and services will somehow take up the all the slack in the economy. The post-industrial service economy is a fantasy. Consumer or personal services are, for the most part, supplied and consumed at the same time in the place. These are important conceptual distinctions when considering long term economic development and associated policy settings.

Classification is also a key matter for meaningful metrics, for example due to differences in ACC levies, many companies have restructured into different entities, a production company plus a sales and marketing company, separating the people employed in an office environment compared to the “factory”. After the change there exists a producer and a producer service provider as opposed to a single manufacturing company – statistics around this trend might misrepresents the true picture of the economy; adding to observed decline in manufacturing.

The tradable sector provides a significant portion of the demand for services. As the manufacturing sector struggles and if we let it fade, there will be a lasting negative effect on the service sectors which supply services to these goods producing firms.

Why is it important to keep a strong tradable sector, rather than focusing more on services?

Simply put, exporting is how we pay our way in the world. For many years we have a reported a current account deficit and manufactured goods represent one third of our merchandise trade; we need all the exports we can get. Furthermore elaborate products, bundles of devices and services, offer the opportunity to monetise creativity and a pathway for innovation. If we allow these sectors to disappear, instead relying on more domestic services, we would see our current account deficit continue to expand and with an increased reliance on overseas debt, up to the point, where we can no longer borrow more.

Those policy makers who see their manufacturing sector as a critical part of their export economy have been much stronger through the crisis as individual nations, the belief shows in their policy frameworks and political decisions. Policy makers in New Zealand need to adopt this mindset.

Services are important to any economy; there is a mutual dependence between the service and goods producing sectors. Services are not a viable replacement for employment losses in the goods producing sector, services are part of the goods producing sector and services are supplied to the goods producing sector. A policy framework that fails to understand that mutual dependence will ruin our productive sector and ultimately our economy will have to learn to exist on much less.

tags: manufacturing, services, exports, employment, tradable
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