GLOBAL SERVICESLesson 1: Shift from Manufacturing to Service Oriented Economies 

INDUSTRIAL REVOLUTION/MANUFACTURING-BASED ECONOMY • National economy founded

centrally on the family economy.

• Family production (agriculture in this example) is more or less a subsistence economy—most production is oriented around keeping the family alive.

• The logic of a manufacturing economy is a surplus economy.

• Advances in agricultural technology and practice -> increased food supply and raw materials -> food surplus -> more disposable income.

• Increased efficiency in the production of manufactured goods -> reduced the costs of commodities for consumers -> many items once considered luxuries to became attainable for vast segments of our population. Tile factory

EFFECTS OF INDUSTRIAL REVOLUTION

• The industrialization of Europe, left a permanent mark on society. Life in the 18th century changed drastically. Classes shifted, wealth increased, and nations began assuming national identities

• Jobs were created to fill the needs of assembly lines and machinery operation. Vast majority of the jobs though were low-wage positions that barely allowed workers to subsist.

• Investors and owners of the companies and factories flourished in this era.

EFFECTS OF INDUSTRIAL REVOLUTION Development of unions:

overworked and underpaid workers tried to remedy their situation through unions. These unions gave many workers a loud voice, which often resonated in the ears of bosses, which coerced (usually with the threat of strikes) them to ameliorate the workers' situation.

Gave women the opportunity to work outside of the home.

Eventually manufacturing jobs became more skilled. Wages rose and, partially due to the power of the unions, those involved were able to become part of the middle class.

Assembly-line in U.S. during WWI

SHIFT FROM MANUFACTURING-BASED ECONOMY TO SERVICE-BASED ECONOMY

• Traditional development path: runs from agriculture through manufacturing and only later to services.

• Shift began in developed countries in the last quarter of the 20th century

• In 1950, in the U.S. 30% job in manufacturing and 63 percent in services. In 2011, only 9% in manufacturing and 86 percent in services.

• One reason for shift is that long-established industrialized countries (i.e. Germany, the USA, Japan and the UK) faced increased competition as more countries industrialized.

• Second, productivity increased in manufacturing sector -> need less workers

• Third, many people in industrialized countries have a wide range of consumer goods but lack time -> growth in personal consumer services, such as leisure and fitness

• Can you think of other reasons?

SHIFT FROM MANUFACTURING-BASED ECONOMY TO SERVICE-BASED ECONOMY• Service sector is very

diverse.• In the U.S. this shift has

resulted in more low-wage service sector jobs (vs. middle class manufacturing jobs)

• For example there are 2.7 million people working at fast food restaurants earning $18,000/year.

• There are high-end service jobs though – such as market analysts, accountants, auditors, public relations specialists, etc.

GLOBAL SERVICES AS PERCENT OF GDP

US: in 2010, 76.7 percent of GDP Kenya: in 2010, 62 percent of GDP China: in 2010, 43.6 percent of GDP

Traditional services (hotel and restaurant management): People consume more services when the country has reached a level of affluence that satisfies most of their other needs.

Modern services (software development, call centers) can exploit economies of scales (similar to manufacturing). Technology allows many of these services to be done abroad for a lower cost.

SHIFT TO OFF-SHORING AND OUTSOURCING• There is a growing trend in developing countries to bypass

manufacturing and shift directly into service-based economies.

• Traditional services (hotel and restaurant management): People consume more services not when technological advances lowers the price, but when the country has reached a level of affluence that satisfies most of their other needs.

• Modern services (software development, call centers) can exploit economies of scales (similar to manufacturing). Technology allows many of these services to be done abroad for a lower cost

• So, now service sector in the developed world is vulnerable to competition from developing countries (as corporations take advantage of these countries’ comparative advantage – i.e. cheap labor)

• India for example has become a hub for the supply of globally sources services (i.e. call centers, IT support, etc.)

• What services do you think can be outsourced, and what ones must remain at home?

GLOBAL TRADE IN SERVICESMode 1: Cross-border

There is thus a clear geographical separation between the buyer and the seller. For example, a US stockbroking firm may buy or sell shares for a Japanese resident over the Internet.

Mode 2: Consumption abroad

Services can be traded by the consumer moving or travelling to the foreign market. For example, a US fee-paying student may travel to Japan to study at a Japanese university.

Mode 3: Commercial presence

Services can be traded by the capital of the exporter moving to the foreign market. For example, a US telecommunications company may establish a company in Japan. Most services are traded in this way.

Mode 4: Presence of natural persons (or movement of people)

Services can be traded by the producer or service supplier moving to the foreign market. For example, an accountant who is a United States citizen may temporarily work for a Japanese company in Japan.