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What future for the UK service economy?

Updated Monday 4th July 2011

The continued shift from manufacturing to services represents a remarkable transformation in recent years. But is this good or bad news?

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This all depends on whether we can make enough out of our service economy to keep us in the style to which we seem to have become accustomed. But how are services connected to manufacturing? There does seem to be an artificial classification between manufacturing and services, which fails to take account of economic activity throughout a value chain. Indeed, many business theorists see a continuum between pure service and pure commodity good, with most products representing a complex blend of these two extremes.

There is another way that services may be intertwined with manufacturing. There is growing evidence that national prosperity is strongly related to its manufacture of hard tangible products which have a strong export demand, and that the service sector is largely "derivative" and dependent on the prosperity of the manufacturing sector. This implies that the service sector should not be seen as a substitute for the manufacturing sector, but is actually to a very large extent complementary. So the question is not just one of manufacturing or services; though that is part of it. It is also one of comparative advantage - what can we do better than the competition?

Heathrow air traffic control Creative commons image Icon By Mike Turner via Flickr under creative commons license. under Creative-Commons license Air Traffic Control at Heathrow, showing a higher value service activity which draws on technology.
For most of the last decade exports of physical goods accounted for about 40 per cent of our total foreign earnings. The remaining 60 per cent came from a wide variety of services and overseas investments, which when combined, made the UK the most 'virtual' exporter in the world. One strength of this is that, unlike with manufacturing, it seems harder for other nations to replicate the necessary skills to compete. But for how long this will be the case remains to be seen. However, the higher value services tend to rely on more face to face interaction and therefore become less exportable. So it is unlikely that such services will ever generate the level of income to balance our national finances. More worryingly, the simpler it is to commodify and automate a service, the easier it is to copy. The move to overseas call, sorry ‘contact’ centres exemplifies this.

Burj Al Arab Creative commons image Icon By www.belsayimages.com via Flickr under Creative Commons license. under Creative-Commons license Burj Al Arab hotel in Dubai, the architectural design and project management of which was done by British company, Atkins.

A final issue for our dependence on services is that the high value services, highlighted in Episode 3, lead to a concentration of wealth in certain parts of the country and within certain segments of society, most notably those capable of generating value through intellectual property.  This shift is bound to have profound social consequences as our experiment with the service economy continues.

  • Matthew Hinton was writing in response to the BBC/Open University series Made In Britain

Where do you think the future lies for the UK service economy? Share your stories in the comments area.

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