Factors Affecting Service Sector's Contribution To GDP in Pakistan.


Byline: Kashif Rathore, Rubab Shahid, Kashif Ali and Aamir Saeed

  1. Introduction

    Service sector is an integral wheel of growth and development for the global economy. Services are becoming more and more important for country's development, which also include achieving the Millennium Development Goals (MDG'S), such as poverty reduction and access to basic services, education, and water and health services. Service sector has become a major contributor of growth to the global economy. It accounts two-third of world Gross domestic product (Zeb, 2017). One of the main characteristics of a developed nation includes more service-dominated economy, whereas less developed nations are more employed in agriculture and mining (Jalil, 2016). Service sector is the fastest growing sector with an increasing percentage of employment and total productivity. Service sector in low-income countries produces annually 47 percent of share in GDP, 53 percent in middle-income countries and 73 percent in high income countries.

    The GDP share of service sector is growing at higher rate which is therefore attracting more foreign direct investment (Ahmed, 2011). Service sector is "heterogeneous", since the activities ranges from capital-intensive to labor intensive. The sector serves intermediate and final demands, produced and used by both: private and public market (Elfering, 1988).

    World Bank has shown its clear interest for the growth in service sector to eradicate poverty as compared to other agricultural or industry sector. The 2011 World Development Indicators show that the service sector increased to 71% of overall GDP. The main reasons behind the service sector's significant contribution to GDP is advanced urbanization, growth of public sector, highly increased demand for consumer centered services and intermediate services. The growth of activities in an economy is based on the services that are provided by trade, business activities, banking, insurance, equipment maintenance and to other subsectors of service sector (Soni, 2013). Services are used regularly by the economy from health to education, food to finance investment, travel to entertainment, research and marketing so on.

    The advancing development of service sector has brought about its significance to the world's economies and economic liberalization is a major reason for the rapid growth of service industry (Singh, 2014).

    1.1 Pakistan's Trend in Service Sector

    Over the time period, the share of service sector in Pakistan is expanding in all sectors. In fact, the rate with which service sector is developing is higher than the agriculture and industrial sector, contributing 59.6 % to the GDP. The sector gives fundamental contributions to both sectors (agriculture and industry) which explain that it have strong linkages throughout the economy (Government of Pakistan, 2016-2017). In 2012, this sector experienced 5.10 percent but in 2014 this sector saw a major back lag as a lot of factors played role in this cause. The sector saw boost back again in 2015-16, accounting for 5.70 % of growth and finally reaching to 5.98 % growth in 2016-17 (Figure 1).

    Service sector has become one of the most important factors for providing a solid base for the growth and maintaining development in Pakistan. Since 2008, service sector has developed at a high rate. Due to this sector, Pakistan experienced a major change in its structure like the different economies of the world. The total growth contributed by service sector was 58.8 percent in 2014-2015, which increased from the 58.1 percent of GDP in 2013-14. In high-income nations the service's share in final GDP is around 75 percent (Government of Pakistan, 2017).

    1.2 Service Sector's Contribution to the Economy:

    The service sector of Pakistan contributes almost two-third to the final economic share. Over the last years, Pakistan's economic structure has changed with the significant results, starting from 57.1% of contribution to GDP in 2009-2010 and increasing gradually to 59.6 % in 2016-2017. This sector has become the major contributor for the growth of Pakistan (Table 1).

    Table 1 Sectorial Contribution to the GDP

    Sector###2010-11###2011-12###2012-13###2013-14 2014-15 2015-16 2016-17 P




    The service sector provides employments that are diverse for example, from unskilled to high skilled that includes specialists, manufacturers, and money related experts and beauticians etc. Employment's share in service sector has been developing over the time (Johnston, 2017). In 2009, 2.76 million individuals were utilized in the service sector (Ahmed, 2011). In Pakistan, the unskilled employed workers are 326,765 and highly qualified workers are 16,510 (Government of Pakistan, 2017).

    While most literature consider service sector growth and its role in economy as dependent on specific social, economic and structural factors, it can be argued that service sector has evolved in the historical context of Pakistan. Fig 2, depicts the services sector's contribution to overall economic growth in Pakistan increasing over time. Starting from the 'Golden Era', Ayub's policies like green revolution and better industrialization environment was in the favor of agricultural sector and industrial sector of Pakistan which explains a fall in Service sector's contribution to GDP in 1950's. In 1950's, Pakistan's growth was heavily dependent on the crops, and industrial sector was growing. In Ayub's era, Pakistan's had the highest growth in South Asia which declined over the years. One of the main reasons are the policies introduced By Zulfikar Ali Bhutto in his regime. He nationalized all the manufacturing industries, insurance, banking etc.

    This policy discouraged the foreign investments to cut short, which explains the fall in private sector. Zia-ul-Haq's rule did not uplift the damage of nationalization, though his regime's GDP was mostly because of the large funding like Tarbela dam, and foreign aid and remittances. By 1990's there is a major shift in Service sector's contribution to GDP (fig 2). From 1990's-2005, Pakistan's IT and telecommunication sector started to grow given to the privatization and growth of commercial banking. Economic liberalization policies helped Pakistan's economy to grow with the rest of the world.

    The objectives of the study are:

    * To examine the pattern of service sector's contribution to GDP in Pakistan.

    * To find out the relative importance of factors affecting the service sector's contribution to GDP in Pakistan.

    Rationale and Significance

    Since the beginning of time, civilization has evolved its turns to progress, first it was agricultural sector for one's needs, then industry sector and now the world has moved to the third; Service Sector. Services sector provides 69 percent of total global output and a total of 35 percent to global employment. This sector plays an important role in the progress of an economy and affects the economy in a positive way. The study's focal zoom is to unveil the factors affecting the service sector...

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