The service economy drives growth in emerging markets

The service economy accounts for 55% of Gross Domestic Product (GDP) in developing countries and 45% of employment. In other words, it is the main driver of growth in emerging markets. In developed countries, it has even more influence: an average of 75% of GDP. This significant gap between economies might narrow in the coming years, thanks to the opportunity that the services sector provides for growing nations. They also see this industry as an extraordinary way of making their economic model more sophisticated, leading to greater growth and consolidation of the middle class. It can also become a great opportunity for investors and an investment trend for the future.

The service economy is one that does not produce goods or food, but services that meet the needs of the population. It is characterized by being much more dynamic and having multiple variants and applications, which allow numerous business models to be created. For example, customer service, legal advice, tourism and mobile app development are included in this category. This small set of examples already demonstrates the many opportunities emerging countries can find if they decide to opt for a more sophisticated economic model. If we expand our focus, the services sector also affects education, dependent care, hospitality, leisure and entertainment, financial activities or transportation and storage.

As mentioned in the Megatrends Opportunities report published by the Pictet Group, an independent investment company with more than 200 years of experience, South Africa can leverage language to provide legal research services to large multinational companies by having cheaper labor, a population with high levels of education and with English as a native language. In addition to this example, it also mentions software robot factories, which consume a large amount of energy and are increasingly necessary to move forward in this new digital age. 

The service economy tends to be driven by the evolution of society itself. Throughout history, agriculture has been the main foundation of the economy in countries with lower incomes. When these countries opt to modernize and grow, industry takes over from the field with cheaper labor. Whilst the final step is growth in the services sector, which is more sophisticated and specific to the richest countries.

This natural evolution can be observed perfectly in the case of China and India. 40 years ago, 32.57% of China's GDP came from agriculture, 44.23% from industry and 23.2% from services. While in 2021, agriculture represented 7.3%; industry, 39.4%; and services, 53.3%. In India, for example, the services sector received the most direct foreign investment (FDI), worth more than $105 billion between April 2000 and June 2023. In other words, much of the successful growth of both countries is due to the tertiary sector.

The growth of the service economy not only creates direct opportunities, but also so many indirect opportunities, which have made it one of the megatrends of the future. In terms of investment, emerging markets have a lot to offer, as they represent 60% of global growth, with 86% of the population and only 12% in the financial markets.

In fact, the latest report by the French asset management firm Lazard AM mentions population growth, health systems and the shift from the industrial economy to services as great opportunities for investment and growth. 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. The latter 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.

The middle class has grown exponentially worldwide in recent years. In 2008, only 1.8 billion people worldwide belonged to this social class, compared to 3.6 billion in 2018 - almost 50% of the global population. The most striking thing is that people in the middle class are expected to total 4.884 billion by the end of the decade. This means that more and more people around the world will have greater wealth and will need more services, such as health care and transport, generating greater economic growth and new investment opportunities.