No. 68, 2005 - Business services in Hungary

Economic thought has come a long way regarding theories on services. This journey was long not in terms of time, but rather, in terms of the merits earned along the way. For, a couple of decades ago, services were still considered a factor that slowed the rate of economic growth. In other words, this sector was deemed to have a low productivity which could be increased only at a slow pace; it was considered a sector whose mechanization, standardization – all that increases productivity in the manufacturing industry – could only be realized to a limited extent. Service theories held that the continuous growth in the weight of services in the economy was a consequence of economic development – instead of seeing it as one of the causes, i.e., an important element of economic growth.
This judgment is, on the whole, accurate when dealing with household and (state) public services. In line with the rise in incomes, households have more income to dispose of above what they spend to secure their livelihood; they then spend this remainder on different services. Growth in the public services sphere is also a consequence of economic development, since it is connected to the broadening social services of the welfare state. However, if we turn to services provided to businesses, traditional development theories have only recognized the important economic role of infrastructure services (transportation, communication) and that of financial services, primarily their capacity to lessen transaction costs. Business services, however, were far from belonging to this group: in this area, the most that theories would acknowledge was that outsourcing business services increases the efficiency of the manufacturing industry.
The appearance of information technology dealt the first blow to this traditional theoretical approach, as it became obvious that the application of information technology to business services resulted in great gains in efficiency. Further, analysts were challenged by the fact that economic growth of the United States (regarded as the world’s foremost service economy) did not lag behind that of European countries (where the share of services is far lower); actually, in the long run, the economic growth of the United States overtook that of Europe.
The increasingly broad scope of this industry steadily strengthened the realisation that business-related services represent the fundamental element of competitiveness in developed economies. The wide, thick network, as well as the quality of these services, is not only one of the central requirements for growth of both business productivity and efficiency, it is also the guarantee that the entire economy will function as a well-oiled machine.

The paper is available here.