0.6 Investment in human capital: education and health  (Page 11/16)

The role of human capital in the services sector

Until very recent years, Human Capital investments were viewed as important only for industrial sectors of emerging nations. But by 2010, economists began to pay closer attention to the role of Human Capital in generating growth in service industries, such as finance, trade, and health.

Conventional wisdom in economics has long held that in moving from a poor to a less poor economy, entrepreneurs and workers must move out of low productivity services (such as subsistence farming and services), and into manufacturing, where economies of scale prevail.

This path was taken by several nations from the fifties through the turn of the century, in such nations as South Korea and more recently, China.

Stress was laid upon the industrial sector, manufacturing. The Services Sector was seen as a graveyard for productivity. Especially since it was assumed that in services there were no economies of scale.

But is this true in a world where Human Capital investment is important?

Services now increasingly require not only infusion of new technology but better educated workers. In fact, according to one prominent economist, the Services Sector has contributed more to growth in the U.S. since the eighties than has the Industrial Sector.

Jagdish Bhagwati (2012, February 9), The Financial Times .

In Nepal, Pakistan and Sri Lanka the level of productivity is higher in services than in industry. [M.G. need reference]

1. The Services Sectors can more readily employ women, partly because upper body strength is largely immaterial in software development.
2. The Services Sector tends to be kinder to the environment than is Industrial Sector-less effluents (smog, chemicals, etc.)
3. The Services Sectors subject to fewer stifling regulatory rules

   See Jadgish Bhagwati&Arvind Panagariya, (2013), Why Growth Matter, Washington, DC: Council on Foreign Relations, p.118.

Lessons: If a country is going to take advantage of the opportunities offered by services sector, a growing supply of skilled workers is needed. That requires of course, stress on Human Capital formation.