Structural change: There’s no ideal way

Unlike before the global economic and financial crisis, striving for a high share in the service sector is now no longer considered the only way to prosperity. Thus, governments should refrain from steering structural change in a specific direction.

Pragmatism over ideology – if there were a basic formula for Angela Merkel’s political stance, this would likely be it. Pragmatism is often particularly advisable when it comes to economic policy. This also applies to measures for organising and supporting structural change. After all, before the worldwide finance industry started foundering in 2007, many policymakers and economists saw the path to a service economy as the only viable formula for success. In the meantime, the pendulum seems to be swinging more in the opposite direction. The European Commission predicts that the industrial sector’s share of overall value added will increase to 20 per cent in all of the EU countries; the current share in the UK, for example, is just 13 per cent, and in France it is currently at 14 per cent.

But with this objective, policymakers would resume trying to set structural change on a particular course – which a questionable approach. Indeed, a closer look indicates that there is no clear connection between economic structure and key indicators of prosperity. This is supported by two examples:

• Income. A glimpse at the major advanced economies shows that a high per-capita income is not directly linked to the strength of the service sector:

For the years 2005 to 2014, the average share of services in overall gross value was lowest in Norway, with 57 per cent, and highest in Luxembourg, with 86 per cent. And yet both countries are positioned way ahead of the others in the rankings of per-capita income.

A view of changes over time also shows that there is not a conclusive link between economic structure and prosperity. In Germany, for instance, the share of services in overall gross value increased by only 2.4 percentage points between 1995 and 2014 – representing a much lower rate of change that in most other economies. However, Germany’s per-capita income (adjusted to reflect differences in spending power) increased by a yearly average of 3.3 per cent during the same period, corresponding to the median of the 21 countries surveyed.

The UK also reflected mid-range income growth – although its service sector share has increased by 11 percentage points since 1995, making it one of the strongest growing countries in this area.

• Labour market. Here, too, an international comparison does not reveal any advantage on the part of the service industries. On the one hand, there is obviously no substance to the economic notion that labour market mobility is higher in a particularly service-oriented economy – and that structural unemployment is thereby lower. In the years 2005 to 2014, the average unemployment rate of the predominantly industrial Czech Republic was a low 6.5 per cent – similar to that of the UK, itself a predominantly service-oriented country.

On the other hand, the development of unemployment is not dependent on a particular course of structural change.

The unemployment rate in Germany and Norway decreased between 1995 and 2014, while the service share remained nearly constant, even shrinking slightly. But the labour market has also seen positive developments in Ireland, where the service sector has shown dynamic growth.

It is obvious that different paths lead to prosperity. Thus, policymakers must set the right framework conditions on the basis of historically shaped economic structures. In Germany, for instance, the developed sector of small- and medium-sized industrial enterprises must be given the necessary space to continue competing successfully on the international market with innovative products.