The service economy drives the growth of emerging markets

The service economy drives the growth of emerging markets

Communications

A feature of economic growth is the weight of the service economy, one that does not produce goods or food but does produce services to meet the needs of a booming middle class. Experts situate this economy as one of the main investment trends. The keys are demographic growth, healthcare systems, fintech and blockchain technology.

The service economy represents 55 % of Gross Domestic Product (GDP) in developing countries and 45 % of employment. Or rather, it is the main driver for growth of emerging markets. It has an even greater presence in developed states: its average weight is equivalent to 75 % of GDP. This significant gap between economies may narrow in the coming years thanks to the opportunity that the service sector offers growing states, who may also see in this business an outstanding way to make their economic model more sophisticated leading to a greater flourishing and consolidation of the middle class. It can also become a great future investment opportunity and trend for investors.

What is the service economy?

The service economy is that which does not produce goods or food, but rather services to meet the needs of the population. It is characterized by being far more dynamic and having multiple variants and applications that help create numerous business models. For example, customer services, legal advice, tourism and development of mobile applications fall within this category. This small cluster of examples provides a glimpse of the many opportunities that emerging countries can find if they decide to opt for a more sophisticated economic model. If we broaden the focus, the service sector also affects education, care of dependent adults, hospitality, leisure and entertainment, financial activities and transport and storage.

As mentioned in the Megatrends Opportunities report, published by the Pictec Group, independent investment company with more than 200 years of experience, South Africa can play the language card to provide legal research services to large multinational companies by having a cheaper workforce, a population with high educational levels and English as a native language. Apart from this example, also mentioned are the robot software factories, which consume a high amount of energy and are increasingly necessary to be able to progress in this new digital era. 

The natural evolution of the service economy

The service economy usually comes about with the evolution of society itself. Throughout history, agriculture has been the main basis of the economy in lower income countries. When these countries have decided to modernize and grow, industry takes over from the countryside with cheaper labor. The final step is the rise of the service sector, more sophisticated and typical of richer countries.

This natural evolution is perfectly evidenced by China and India. 40 years ago, 32.57 % of China’s GDP was from agriculture, 44.23 % from industry and 23.2 % from services. However, in 2021, agriculture represented 7.3 %, industry 39.4 % and services 53.3 %. In India, for example, the service sector was the largest recipient of foreign direct investment (FDI) flows worth more than US$105 billion between April 2000 and June 2023. In other words, a major part of the explosive growth of both countries is due to the tertiary sector.

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Opportunities in fintech and blockchain

The growth of the service economy not only creates direct opportunities, but also many indirect ones, making it one of the future megatrends. From an investment perspective, emerging markets have much to offer, as they already represent 60 % of global growth, with 86 % of the population and only 12 % in financial markets.

In fact, in the latest report from the French management firm Lazard AM, demographic growth, healthcare systems and the transition of the industrial economy to services are mentioned as major investment and growth opportunities. Three aspects related to the service economy.

As reflected in the Pictect study, the blockchain technology networks and fintech companies are a specific growth opportunity. These are companies that use new technologies to provide financial services. With a high percentage of unbanked people, but with access to the Internet and smartphones, these types of companies can represent a major lever both for investors and for improving personal finances, encouraging saving, providing new ways for consumption and improving access to investment.

Growth of the middle class as key 

The middle class has grown exponentially worldwide in recent years. In 2008, just 1.8 billion people around the world were part of this social class, compared to 3.6 billion in 2018 –almost 50 % of the global population–. Most striking is that, by the end of the current decade, it is expected that 4.884 billion people will belong to the middle-class social stratum. This means that an increasing number of people around the world will be better off and need more services, such as healthcare and transport, generating higher economic growth and new investment opportunities.