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Understanding the economy of a country is critical for the economic planners and the government of that country to plan and govern the economy better and take it towards a consistently higher path of growth. A consistent higher economic growth is essential for any country as it helps its citizens have a better living standard and also create enough surpluses to take on adversities like natural calamities and to defend it from threats from other countries and disgruntled elements.
Therefore, to understand an economy better scholars like Colin Clark and Jean Fourastié have developed the three - sector hypothesis, dividing the economy in to three sectors of activity, viz.,
1. The primary sector, where economic activity is centred from extraction of raw materials from mother earth, be it agriculture, forestry, fishing, mining or quarrying.
2. The secondary sector, where the economic activity is centred around manufacturing, i.e. production of goods and construction, and
3. The tertiary sector, where it is all about services, which includes sub-sectors like Trade; Hotels and Restaurants; Transport; Storage & warehousing; Communication; Banking and Insurance; Real Estate; Business services; Public administration and defence; Social and personal services; and Other services including Education, Medical and Health, Religious and Other Community Services, Legal Services, Recreation and Entertainment Services.
Countries normally move from primary to secondary and then to tertiary
This hypothesis says that all economic activities start initially from primary sector, then builds up the secondary sector and then the tertiary sector comes in to play. Fourastié saw the process as essentially positive, and in The Great Hope of the Twentieth Century he writes of the increase in quality of life, social security, blossoming of education and culture, higher level of qualifications, humanisation of work, and avoidance of unemployment. As the economic development of a country progresses, the percentage contribution of tertiary sector increases, followed by the secondary sector with primary sector remains at third. This is despite the fact that overall contribution in gross terms keeps on increasing in all the three sectors. For example, in 1947, India's primary sector contribution was 65 per cent, secondary sector 25 per cent and tertiary sector 10 per cent. In 2013, it has changed to primary sector is 15 per cent, secondary sector remains at 25 per cent where as the contribution from tertiary sector is 60 per cent, whereas the economy has grown 20 times. This type of sectoral growth and contribution is similar across the world.
During early civilization all economic activity was in primary sector. When the food production became surplus people's need for other products increased, as their most basic need was fulfilled. This led to the development of secondary sector. The growth of secondary sector spread its influence during industrial revolution in nineteenth century. After growth of economic activity a support system was needed to facilitate the industrial activity. Certain sectors like transport and finance play an important role in supporting the industrial activity. Moreover, more shops were needed to provide goods in people's neighbourhood. Ultimately, other services like hospitality, travel, communication, education, administrative support developed.
Interdependency of the economic sectors
As it would be obvious, all the three sectors are interdependent. The secondary sector derives its raw materials from the primary sector and uses the tertiary sector to deliver its products to the end consumers. The primary sector uses tools produced by the secondary sector for agriculture, mining etc. The tertiary sector again uses produce of the secondary sector (trucks, trains) to deliver goods and uses produce of the secondary sector (computers, telephones) to deliver services as well. It therefore goes without saying that economic planners should pay adequate attention to the development of all three sectors of an economy.
Growth of all sectors is not always balanced
While a balanced growth is the desire of all economic planners, the reality is that some countries have natural advantages that make them very efficient in one of the sectors. They then go on to leverage that sector to spur growth across the economy. Some, who may not have any particular strength, make one sector their strength by becoming internationally competitive, and thus spur growth of their economy. This line of thought of becoming internationally competitive in one sector, is thanks to the development of the tertiary sector. Without efficient transport and communication systems, it would be impossible to rely on one sector, export in a big way and import what you are not very efficient in producing at home. International trade has paved the way for specialisation at a country level.
Leverage your key competency to spur growth
Canada and Australia are two good examples of developed countries who have extensive natural resources and have become strong economies by developing their primary sectors like agriculture, fishing, mining and petroleum. They became developed countries because they leveraged these strengths well and then focused on value addition through secondary and later tertiary sectors. The general pattern of development for wealthy nations was a transition from a primary industry based economy to a manufacturing based one, and then to a service based economy. Canada did not escape this pattern. Canada is also one of the world's largest suppliers of agricultural products, particularly of wheat and other grains. Canada is a major exporter of agricultural products, to the United States and Asia. Today, however, the primary sector accounts for only 9 percent of the GDP, secondary sector 13 percent and services sector 78 percent. The Australian economy is also dominated by its service sector, comprising 68% of GDP. The mining sector represents 10% of GDP; the "mining-related economy" represents 9% of GDP - the total mining sector is 19% of GDP. Agriculture contributes 3% of Australia's GDP at the farm gate and when value-added processing beyond the farm is included this figure rises to 12%.
In contrast, there are several African countries that are rich in mineral resources (just as Canada and Australia are), but have not been able to leverage this for the benefit of their citizens, to develop vibrant secondary and tertiary sectors. Unstable political and social environments are perhaps the biggest reason why many of these countries remain under-developed.
Development need not always be balanced
The Gulf countries offer a different example of a growth model. Even till date they are dependent upon petroleum products (primary sector), but have leveraged their resources to move vigourously into the tertiary sector without much development of their secondary sectors. The Gulf countries are not known for manufacturing capabilities, but are regional powerhouses in tertiary sectors like retail, financial services and tourism.
Singapore is a text book case of a country that had no strengths bestowed by nature, but which built a powerful economy by building on one opportunity that it saw. This is a country that continues to import the most basic commodity - water. The one advantage that the country saw however was that because it was strategically placed in terms of geography, it could become a trans-shipment hub for all international trade between the Western world and Far East / South East Asia. It went on to build capabilities in this one segment and then systematically built on this to eventually become a developed country - even as it continues to import water daily from Malaysia.
The Indian experience
Services sector has become more dominant in India, though the presence of primary and secondary sector is also significant. The constraints in the operating environment in secondary sector (labour laws, poor infrastructure, power scarcity, land acquisition issues) make manufacturing quite a cumbersome and inefficient activity, and are thus dissuading entrepreneurs from investing more actively in this sector. The services sector, which is relatively less regulated, has seen more entrepreneurial activity and thus more growth. Lack of vibrancy in the secondary sector robs the country of many job opportunities, which a country with such a large population cannot afford.
Performance of these three sectors in Indian Economy
We give below the share of Gross Domestic Product (GDP, which means the monetary value of all the finished goods and services produced within a country's borders in a specific time period, usually on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory) at constant (2004-05) prices for the various sectors/ sub-sectors for the year 2004-05 (Base Year) and for latest available years 2010-11 and for the year 2011-12.
We can see from the above figures that in India the share of primary sector is declining, manufacturing or secondary sector has been maintained, whereas the tertiary or service sector is increasing. Out of various sub-sectors of primary sector, it is mainly agriculture which is losing its traditional share. Within services, it is mainly banking & insurance and communication followed by trade who at present arevincreasing their share in the economy.
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