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Services make countries rich, says Bank

The world's most successful economies are those where services make the biggest contribution to growth. Poorer economies are those where growth depends substantially on manufacturing, according to a paper to be published in the Bank of England's Quarterly Bulletin on Wednesday.

The paper concludes: "The term `industrialised countries' no longer carries any resonance. Now, no advanced and growing country is dependent on production industries."

As developed economies grow, more and more of their GDP depends on economic activities that have little physical manifestation, ranging from haircuts and stocking supermarket shelves to financial services and software. Author Danny Quah, a professor at the London School of Economics, calls them "increasingly weightless economies".

He writes in the Bank's Bulletin: "Some economists doubt if the basis of a strong, growing economy can be provided by services in general or information technology in particular." He addresses the question by calculating what share of growth across a range of rapidly developing countries since 1972 has been due to services as opposed to industry - the closest available split in existing figures between "heavy" and "weightless" activities.

The US provides a benchmark, with its GDP growth slowing from more than 10 per cent in 1972-77 to just under 6 per cent in 1987-92. Services accounted for 57 per cent of the growth during the first period, but 81 per cent in the latest five years. The US manufacturing sector could account for as little as 15 per cent of the economy within 10 years.

The figures show that, contrary to popular perception, services have also accounted for between a third and nine-tenths of the economic growth in countries such as Korea, Singapore and the Philippines. The "newly industrialising" tiger economies have also relied heavily on services. In Singapore, for example, this sector contributed nearly two-thirds of the 18 per cent growth from 1972-77 and a similar proportion of the 20 per cent growth in 1987-92.

In general, across a wide range of developed and developing countries, the higher the contribution of services to growth, the higher per capita GDP.