Productivity Growth in the 21st Century is Still Driven by Industrialisation

(30 July 2021) What drives economic growth? Economists give a variety of answers to this question, ranging from cheap labor or endowment with ample natural resources to institutional environment and the development of digital technologies. The answer policymakers choose determines economic policy, which ultimately affects how different sectors of the economy develop.

Since the industrial revolution, development of the real sector (which includes agriculture, manufacturing, construction and transportation) has been the key to rapid growth in productivity and fast economic growth. Today the real sector's share in most countries' GDP has substantially declined, while the service sector, even in many low-income countries, accounts for the largest share of GDP. The question for economic policy today is: Can the service sector, which includes trade, business, professional, and government services as well as healthcare and education, play the same role today as the real sector did in the past as an engine for economic growth?

Some economists insist that deindustrialisation doesn't affect economic growth negatively, since the real driver of growth is now the service sector. Let's look at what data shows.

In this dashboard, we investigate which major sectors of the economy drive the growth of per capita income — a proxy for productivity, which, together with the growth of population, determines overall economic growth. We focus on productivity here because this component of growth is susceptible to the influence of economic policy, while government policy is less likely to significantly influence demographic trends.

• Development of the service sector, which contributed to high per capita income growth in 1980-2000, has decelerated the growth of personal wealth in the last two decades. Since 2000, per capita income has been growing more slowly in economies where the service sector has the highest share in GDP.
• Data shows that in the last two decades per capita income grew faster in economies where the real sector represents a higher share.
• The contribution of mining activities to productivity growth is determined by long-term commodity price movements. Periods of positive correlation between per capita income growth and the mining sector's share in GDP coincide with periods of rising energy prices.

On the one hand, this result is expected. By its very nature, the service sector provides less opportunity for productivity growth: how do we increase the productivity of a school teacher who graduates 60 students each year throughout his or her working life? Accurate measurement of productivity in many service industries is a major headache for economists. On the other hand, it is interesting to note that despite all the expectations that the services sector can be an "unlimited" source of high-paid jobs creation, real sector seems to constitute the strongest basis for sustained productivity growth.