Service Sector

The term "service sector" refers to an economic sector that, unlike agriculture and industry, produces no goods, but provides a service that satisfies a need. Education, health, finance, government, transportation, and trade are service sectors. Since independence, services have been at least as vital in shaping the historical evolution of Latin America as either agriculture or industry. Often they have generated more income and employment than either or both.

Based on the United Nations' International Standard Industrial Classification of All EconomicActivities, service activities include: (1) wholesale and retail trade; repair of motor vehicles, motorcycles, and personal and household goods; (2) hotels and restaurants; (3) transport, storage, and communications; (4) financial intermediation; (5) real estate, renting, and business activities; (6) public administration and defense; compulsory social security; (7) education; (8) health and social work; and (9) other community, social, and personal-service activities.

Services are classified as individual, semipublic, or collective, depending on which needs they satisfy. Individual (rival and excludable; a service is rival if its consumption by one individual reduces the amount of the service available for consumption by others and it is excludable if its consumption by one individual effectively excludes all other individuals from consuming it) services satisfy individual needs and are consumed by one person only. They are generally produced by private or state-owned enterprises for sale in a market. Examples include transportation (taxi rides), financial intermediation (lending), housing (renting), and retail trade (selling fruit in a supermarket).

Semipublic (partly rival, and partly excludable) services satisfy semipublic needs and are consumed by one or more persons. (A partially excludable service is one whose consumption by one person does not exclude its consumption by members of a group but excludes its consumption by all individuals outside the group.) For example, attendance at a class lecture by one student does not preclude attendance (that is, consumption of the educational service) by other students. It excludes however all individuals who do not belong to the class. Semipublic services are produced by nonprofit institutions, the state, and private enterprise. Education, health, and welfare are semipublic services.

Collective, or public, services (nonrival and nonexcludable) satisfy collective, or public, needs. (A nonexcludable service is one whose consumption by one person does not exclude its consumption by someone else. Once the service is provided, the additional cost of its consumption by another person is zero.) Public administration and the defense agencies of government are typically expected to produce the services that will satisfy the collective needs for political and economic freedom, safety, security and protection of life and private property (law and order), equal treatment by government, social harmony, and environmental protection. Collective services can be provided by the state or in some instances by private enterprise.

THE YEARS 1820 TO 1930

During the period 1820 to 1930, the years between the beginning of Latin American independence and the Great Depression, services may have created as much as 50 percent of income in some countries and employed between 20 and 30 percent of the labor force.

Individual Services

Individual services grew rapidly between 1820 and 1930. Their expansion largely reflected the powerful market forces unleashed by the entrance of Latin America into the international trading system. Phenomenal increases in exports and imports created an unprecedented demand for trade, transport, storage, communications, and financial services. Prosperous trading houses were established throughout Latin America. Railroads linked rural agricultural regions and distant mining centers with ports and major urban centers. Foreign (British, German, French, Italian, and U.S.) and national banks, which served the needs of producers, governments, and consumers, proliferated. Money and capital markets grew rapidly and became closely integrated with those of Europe, especially London, and New York. These services provided vital income components for the composite commodities being traded. In many instances, as much as 50 percent of the price of exports and imports reflected value added (markups) by trade, transport, finance, insurance, and related service activities. The agricultural staples bonanzas of Argentina, Uruguay, Brazil, and Colombia, and the mineral wealth of Chile, Venezuela, Peru, Bolivia, and Mexico, gave rise to corresponding production booms in individual business, personal, and social services. Demand for individual services gained additional momentum as a consequence of rising domestic incomes, urbanization, and industrialization.

In response to these rapid rises in demand by producers, households, and governments, Latin America experienced sharp supply increases, modernization, and turmoil in all individual service activities. Service output increased through domestic production, being supplemented, whenever shortages arose, by imported services. Financial, transport, trade, insurance, and other services were mostly produced locally by private (national and foreign) enterprises and banks. Output increases, including output through import substitution (i.e., domestic production of previously imported services) were largely a result of free market forces. Although often cyclical and precarious, prosperity in service activities was widespread in Argentina, Uruguay, Brazil, Mexico, Chile, and most urban and export centers in the rest of Latin America. Foreigners and immigrants made significant contributions to the development of modern individual services as entrepreneurs, capitalists, managers, professionals, and skilled workers. In few countries, however, did foreigners and immigrants play as important a role as in Argentina and Uruguay—the countries of new settlement.

Incomes in these modern, rapidly growing service activities often matched or even exceeded those of their European and North American counterparts. Socioeconomic inequality inherited from the colonial period was reinforced in much of Latin America as foreigners, immigrants, and skilled nationals earned incomes that greatly exceeded those of indigenous and other populations with limited skills and political power. The parallel existence of very rich, middle-class, poor, and indigent workers and households resulted from plural (i.e., highly differentiated in terms of income and productivity) labor markets in service activities. In Argentina and Uruguay almost all socioeconomic groups benefited from the agricultural, industrial, and service prosperity between independence and the Great Depression. In Brazil, Mexico, Peru, Chile, Guatemala, Bolivia, and Honduras, however, the benefits from the expansion of services, industry, agriculture, and mining accrued primarily to the upper socioeconomic groups.

Semipublic Services

The semipublic services of education, health, and welfare also experienced significant growth between independence and the Great Depression. The degree of illiteracy declined, especially in the cities, as primary education gradually became compulsory. Secondary education also improved, with immigrants and foreigners creating first-rate secondary schools for their children. Furthermore, almost all Latin American countries had established internationally recognized universities by 1930. In many countries, universities, which often received disproportionate shares of governmental expenditures on education, catered almost exclusively to the middle- and upper-income strata. In Brazil, Mexico, Peru, Bolivia, Ecuador, Central America, and Paraguay, indigenous populations, women, and the poor frequently had no access to public education. Furthermore, even though health services improved significantly, mortality rates, especially of infants, remained especially high in rural areas and among the urban poor and the indigenous populations. Welfare services also grew but they covered almost exclusively organized labor, the politically powerful middle classes, and the rich. In Argentina and Uruguay, governments, to use modern terminology, invested heavily in human capital by providing educational, health, nutrition, and other services to all population segments, although not always to the same degree. In much of the rest of Latin America, semipublic services offered by the state to the poor, indigenous, and rural populations, especially women, were minimal, often nonexistent. Almost everywhere in Latin America, the relative distribution of government (and privately) produced semipublic educational, health, and welfare services suffered from extreme inequality. The 40 to 60 percent of households experiencing severe underinvestment in human capital—poor health, inadequate nutrition, illiteracy—neither contributed to nor shared much in the fruits of semipublic service development.

Collective Services

The collective services satisfying the collective needs for political and economic freedom, safety, security and protection of life and private property, equal treatment by government, social harmony and environmental protection, which were produced by public administration and defense agencies, also improved significantly, but by no means sufficiently or equally, between 1820 and 1930. Democratic governments, such as those of Chile and Costa Rica, were the exception rather than the rule. The bundle of political, economic, human, and social rights delivered by governments before 1930 was, in most countries, grossly inadequate. Far too often vast governmental incomes and riches created by the guano, wheat, coffee, tin, copper, and other agricultural and mineral export bonanzas were not invested in either physical (buildings, roads, ports), human (education, health) or civil (political, economic, social capital to the extent necessary to achieve sustainable democracy and economic growth, reduce inequality, and remove poverty.

THE YEARS 1930 TO 1973

Latin America continued to experience a significant increase in the quantity and quality of privately and state produced services between 1930 and 1973. The role of government in the production of services increased. Neither the quantity nor the quality of services produced, however, attained the level required to bring about sustainable democracy and growth.

Income and Employment in Services

Total services continued to grow after 1930. Employment in services increased both in absolute and relative terms. At least in part, service employment growth reflected the inability of manufacturing to absorb the increase in the labor force caused by the post-1940 population explosion and persistent migration of labor from agricultural rural to urban areas. In contrast to the past, labor released by agriculture moved directly into services, as industrial employment growth was slow. In some activities, such as finance, government, health, and education, labor found employment in average- and high-paying service jobs. To a large extent, however, service employment increases materialized in low-paying, often marginally productive, informal activities in transportation (driving taxis and minibuses), trade (selling retail), and personal services (working as household servants or in repair shops). Especially in urban areas, much poverty and deprivation have been associated with the expansion of informal employment in services. The rural poor and destitute who migrated into the cities often joined the ranks of the urban poor and destitute in informal services.

Services' Shares of Income and Employment

As early as 1950, more than half of total income, or gross domestic product (GDP), was being generated in services in Chile (52.2 percent) and Uruguay (57.5 percent). By 1965 services were also creating more than half of income in Brazil (54.6 percent), the Dominican Republic (51.9 percent), El Salvador (50.6 percent), Guatemala (51.1 percent), Mexico (54.0 percent), and Panama (51.9 percent). Services also played important roles as employers. By 1965, they employed more than 40 percent of the labor force in Argentina (48.7 percent), Chile (41.3 percent), Uruguay (52.6 percent), and Venezuela (46.7 percent). Sharp increases in service employment, in relative terms, occurred in all Latin American countries.

Services displayed some new features from 1930 to 1973. Increasingly, individual services in transportation, finance, storage, and trade were provided by state corporations that often competed with or replaced private national or foreign enterprises. Furthermore, as a result of protectionism and nationalism, previously imported services were now produced locally. At least in part, therefore, the growth of services during this period was "artificial"; that is, it was determined by policies of government intervention rather than free market forces. Informal services also acted as a sector of employment of last resort, absorbing labor that was unable to enter the state- or privately-owned formal economy.

In some activities, government intervention and protectionism reduced employment growth, at least temporarily, while permitting rapid expansion of income. Such a pattern, which coincided with high income but low employment shares, characterized trade and banking services, whose contribution to total income (GDP) by 1965 exceeded 20 percent in Argentina (20.8 percent), Brazil (22.0 percent), Chile (25.1 percent), El Salvador (28.3 percent), Guatemala (30.2 percent), Mexico (32.5 percent), and Paraguay (22.6 percent). In contrast, trade and banking services absorbed less than 10 percent of employment in all countries in 1965 except Argentina (15.5 percent), Peru (10.0 percent), and Venezuela (13.6 percent).

Employment in government services in the period 1950 to 1965 was 3 percent or less of total employment in Brazil, Colombia, Costa Rica, El Salvador, Guatemala, Haiti, Honduras, Nicaragua, and Paraguay. It exceeded 5 percent in Argentina (10.3 percent in 1960), Chile (5.6 percent in 1965), and Peru (6.0 percent in 1965). Income generated by government services, which consists of wages and salaries of government employees, regularly exceeded 5 percent of GDP in all of Latin America except Colombia, Guatemala, Honduras, Nicaragua, Panama, and Paraguay.

Individual Services

Individual services, which played a key role as a sector of employment of last resort, experienced a growth in employment that exceeded income growth. By 1965 individual services absorbed at least 15 percent of total employment in Argentina, Chile, Colombia, Costa Rica, and Panama. In Panama personal services created at least 25 percent of total income from 1950 to 1965. Elsewhere, their income share was below their employment share, suggesting low income and productivity, poverty, and possibly indigence.

The transportation sector was also significant in Latin America, employing more than 5 percent of the labor force in Argentina (6.7 percent in 1960), Chile (6.0 percent in 1965), and Venezuela (6.0 percent in 1965). Its income share from 1950 to 1965 was above 5 percent of GDP in Argentina, Bolivia, Chile, Guatemala (1965), Honduras, Nicaragua (1965), Panama (1960, 1965), and Venezuela (1950). Production and private ownership of automobiles also increased the supply of transport services by households. Use of private automobiles manifested itself in large household expenditures on transportation, including the purchase of automobiles. These, however, do not form part of the statistics of employment and income generated by the transportation sector and enterprises.

According to the World Bank, as early as 1965, 50 percent of the regional GDP originated in service activities. By 1990, services generated 54 percent of GDP, much the same as in the whole world. Thus, at least since 1965, Latin America can be characterized economically as a service region. Service production, as measured by the percentage contribution of service activities to GDP, was equal to or exceeded agricultural, industrial, and all goods sectors combined. The increase in regional relative income generated by services coincided with a decrease in relative income generated by agriculture, which was offset only partially (one third) by an increase in relative income generated by industry. Statistics on the percentage of income generated in services in Latin America and the Caribbean in 1970 and 1992 are presented in Table 1.

According to the figures of the percentage distribution of the labor force in Latin America and the Caribbean in 1965 and 1981 presented in Table 2, the size of the total service sector, as measured by its share in the labor force, differed significantly between countries of the region. It was generally larger in richer than in poorer countries, and, with rare exceptions, increased, often significantly, between 1965 and 1981. In the larger and richer countries, services were by far the largest and most rapidly growing economic activity, in terms of labor-force share. In 1981 they accounted for more than half of the labor force in Venezuela, Uruguay, Chile, and Colombia. By 1993 probably at least half of the region's labor force was employed in service activities. Thus, Latin America can be described as a service region, and the largest and medium-size countries as service economies, whether the criterion used is contribution to income (GDP) or share in the labor force.

Semipublic Services

As the provision of educational services improved, most Latin American countries experienced large increases in the levels of educational attainment of the population. Schooling levels have been lower, however, in rural areas, in poorer regions, and among the 30 million indigenous peoples. Improvements in health services have led to significant increases in life expectancy and declines in mortality rates, especially of infants. Welfare services also improved, but rarely have they adequately covered the poorest 40 percent of households operating in the informal economy.

Collective Services

Collective services were guided from 1930 to 1973 by philosophies of intervention, protectionism, redistribution, central planning, and pervasive distrust of private ownership, free markets, and open trade. The proportion of private ownership of productive enterprises declined as both national and foreign properties in agriculture, mining, finance and banking, industry, utilities, and industry were expropriated and state-owned enterprises were created in most economic sectors. In addition, almost all governments in Latin America restricted free internal and external exchange in commodity, labor, capital, and land factor services markets.

By the 1960s, Latin America had started displaying symptoms of acute fatigue with government intervention in the production of individual and semipublic services and goods. State ownership and intervention in the financial sector, which had created a privileged class of bank employees, had contributed to a sharp decline in financial services and private saving, acceleration of inflation, disintegration of money and capital markets, capital flight, and speculation. International and interregional trade had been victimized by excessive protectionism. Rarely did governments assign priority to delivering collective services that would have promoted basic human, political, social, and economic rights and freedoms.

THE YEARS SINCE 1973

Responding to this fatigue with state interventionism, attitudes toward and delivery of services experienced phenomenal, almost revolutionary, changes, beginning with Chile in 1973. (However, in numerous instances, and especially in Chile during the Pinochet dictatorship, satisfaction of the collective needs for economic freedom and private property coincided with the satisfaction of the immoral collective needs for violation of safety, security and protection of life, political freedom, and equal treatment by government.) Governments began actively to promote free markets, private ownership, and trade liberalization. Governments in Chile, Argentina, Mexico, Peru, Colombia, Venezuela, and elsewhere withdrew from the production of individual services and goods through privatization of banks, airlines, railroads, telephone companies, and other state-owned enterprises. The quantity and quality of individual services in finance, transport, storage, communications, and trade improved. Public-sector deficits were reduced or eliminated. Price stability was largely restored, except in Brazil. Money and capital markets gained impressive dynamism. Financial capital returned. Both international and interregional trade recovered some of their dynamism as barriers to trade were reduced or eliminated. Because of improved (liberalized) trade (transport, storage, communications, financial intermediation) services, exports originating in manufacturing increased rapidly, especially in Mexico and Brazil.

Major changes also affected the semipublic services of education, health, and welfare. A consensus emerged that the intractable problems of poverty and inequality could not be solved unless people, in particular the rural poor, women, and indigenous populations, were "put first." Increased emphasis was placed on investment in human capital (education, health, nutrition, and welfare) for the needy. However, even though health, education, nutrition, and welfare standards have improved markedly, according to World Bank statistics, in 1989, 130.9 million people, or 31.0 percent of Latin America's population, lived in poverty. Inequality has also persisted. In the 1970s the poorest 20 percent of households received only 4.0 percent of income. A minor reduction in inequality in income distribution may have occurred in the 1990s. The need for change in public policy was increasingly documented by international organizations, academia, and even Latin American governments themselves.

It has been increasingly recognized that public expenditures on services do not by themselves reveal whether the beneficiaries have been the rich, the middle classes, or the poor. Recent studies have offered ample evidence that throughout the post-independence period, public expenditures on services, which have often been both absolutely and relatively high, have benefited primarily, if not exclusively, high- and middle-income groups. The evidence for recent years on this matter, which is presented below, has been obtained from the World Bank's Poverty Reduction Handbook (1993).

According to a 1988 World Bank analysis of the incidence of major social-service expenditures in Brazil (which include social security, education, health, nutrition, housing, water, sanitation, and other urban services), "19 percent of the population, with per capita annual income below U.S. $180, benefits from 6 percent of social expenditures: whereas the top 16 percent receive 34 percent of social expenditures" (59). In Bolivia, as a consequence of the urban concentration of public services and infrastructure, the very poor had little or no access in the 1980s to health care, education, and training, thus deriving few benefits from public expenditures. Similarly, in Guatemala in the late 1980s, the urban areas and the nonpoor benefited disproportionately from spending on health and education. In Honduras most social programs in 1988 benefited primarily middle- and upper-income groups through spending on curative hospital care, pension benefits, and university education. In Venezuela, Peru, Paraguay, Ecuador, Central America, and Chile, the poorest 40 percent of households received limited or few benefits from social spending by government. With few exceptions, social-services spending by governments in Latin America has been characterized by inequality involving neglect and ostracism of the poorest households. A major effort is underway in much of the region to establish a more equitable distribution of semipublic and collective services.

Household expenditures on individual medical, education, transport, and communication services, the structure of which is presented in Table 3, have also been significant. Expenditures on transport, including automobiles, have been the largest in most countries.

As can be seen from Tables 4 and 5, public expenditure on education and gross and net enrollment ratios have differed widely during the period 2000 to 2004 among Latin American and Caribbean countries.

As can be observed in Tables 6, 7, 8, and 9, Latin America can be considered from 1990 to 2005 to have been a service economy continent in the sense that, in the great majority of the countries, and in the continent as a whole, more people are employed in, and more income is generated by, service activities than in agricultural and industrial goods production activities combined. No Latin American country has as yet recognized and satisfied the moral collective needs for political freedom (the pillar of procedural democracy) and for economic freedom, equal treatment by government, social harmony, safety, security and protection of life and private property, and environmental protection (the pillars of civil society), through the production of the respective collective services, to the extent necessary to attain sustainable democracy and economic growth. Thus, the unfortunate lack of economic convergence of incomes of the continent (reduction of the income gap) to those of the developed countries, as well as the persistent internal inequalities, poverty and indigence, are largely the result of the failure of all participants, and especially of government, in, and of, the collective markets to produce the required quantity and quality of the aforementioned moral collective services.

It is increasingly recognized that achievement of sustained growth, reduction of poverty and inequality, environmental protection, and stable democracy require continued quantitative expansion, qualitative improvement, and a fair distribution of individual, semipublic, and collective services.

See alsoAgriculture; Chicago Boys; Cities and Urbanization; Foreign Trade; Industrialization; Neoliberalism.

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                                  Markos J. Mamalakis