The Effects of the Shift to the Service Economy on Korea's Inter-Industry Linkages

The Korean economy has shown a rapid shift to the service economy since the 1990s. The share of service industries in the GDP increased from 51.5 percent in 1990 to 58.2 percent in 2012, while that of manufacturing industries increased from 26.6 percent to 31.1 percent during the same period. The service orientation in employment was more prominent. The share of service industries in total employment increased from 46.7 percent in 1990 to 69.3 percent in 2012, contrary to the manufacturing industries’ share, which decreased from 27.2 percent to 16.6 percent in the same period. However, the comparison with advanced countries shows that the service orientation of the Korean economy as a whole has been considerably lagging behind.The shift to the service economy brings out various qualitative and structural changes within industries via changes in the interrelationship between manufacturing and services, as well as increases in the service industries’ share in nominal value-added or total employment.It is known that, in general, the production inducement effect of service industries is weaker than that of manufacturing industries. Therefore, there is a possibility that if the role of services as intermediate inputs increases with shifting to the service economy, the production propagation effect of industries as a whole will also weaken gradually.In this study, we calculate the aggregate linkage measure, which shows the effects of shifting to the service economy on the strength of the propagation effect of the industries as a whole, and examine the role of imported intermediate inputs in enhancing the level of the aggregate linkages. We also analyze the relationship between the degree of the shift to the service economy and the level of the aggregate linkages by carrying out a cross-country comparison.The data for the analysis of Korean industries are the 1995-2000-2005-2009 Linked Input-Output Tables and the 2011 Input-Output Tables by the Bank of Korea. The former is based on 2005 constant prices, and the latter is based on current prices. The World Input-Output Database by the European Commission is also utilized for a cross-country comparison, which consists of ten OECD countries including Korea and China