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Services drive production and trade in ways that are poorly understood and under-appreciated. Photo: AFP
Opinion
Macroscope
by Patrick Low
Macroscope
by Patrick Low

A loaf of bread’s well-serviced journey

Inputs at 30 stages make up the services chain that lands it on the shelves, highlighting the role of a sector that turns the economic wheels

The impressive display of edibles at the Hong Kong Trade and Development Council's Food Expo this week focused attention on elegant presentation and delighting the taste buds.

But behind the sensory gratification is a complex value chain that transforms primary ingredients into the offerings that appear on shop shelves and our tables.

At the Fung Global Institute (FGI) we are analysing value chains for goods and services, including for food and other products. The objective is to gain insights into why value chains are configured in particular ways, how inputs enter production, what those inputs are, and how government policy influences value chain design and outcomes.

Services are multi-functional in production and trade, more than a source of income and jobs

The particular emphasis of FGI's current work in this domain is on services. Services drive production and trade in ways that are poorly understood.

Services account for around 70 per cent of global production, and a similar share of trade when correctly measured. Those shares typically grow as people become richer and enjoy consumption baskets less dependent on physical products. Increased output results in disproportionate demand for services.

All economic activities in modern economies need them, and every expanding sector requires a core bundle of producer services including telecommunications, transport, distribution, financial and business services.

The technology-driven shrinkage of distance and time across the globe has also increased international demand for services. Services are multifunctional in production and trade, more than merely a source of income and jobs. They articulate production processes and provide the glue that holds everything together. Contrary to earlier perceptions, services turn out to be a significant source of productivity growth.

At FGI we recently studied the journey and short life of a loaf of bread, starting with primary ingredients from the mainland and other origins, to manufacture on the mainland and final consumption in Hong Kong.

No fewer than 30 services are required to get the loaf into a shopping basket, and these services comprise a full 72 per cent of what the consumer pays. This services-intensity will surprise many who typically think of bread in terms of its edible ingredients.

The 30 services include managerial and administrative functions, running and maintaining the factory and its machinery, transport and related services, distribution and retail services, and a host of back-office support services.

More than half of the services are outsourced to external suppliers. Many factors explain why firms decide to outsource elements of production - or not to - including a range of efficiency and cost factors, technical capacities, reputation, trust, and the value of proprietary information.

When firms outsource they intensify the networked nature of production and consumption. They may also provide additional opportunities for small and medium-sized enterprises to participate in the economy, including in trade.

Bundling is another key feature illustrated by the bread chain. In outsourcing transport services, for example, the lead firm making the bread was in effect buying a package of services, including the driver, insurance, vehicle maintenance and repairs, financing and so on.

Productivity gains accrue to the lead firm from not having to contract all these services separately. Moreover, by being bundled together in a single offering, some of those services become tradeable.

Finally, policy affects the configuration and operation of value chains and associated costs. Every one of the 30 services needed in the bread chain is connected to at least one government policy.

If policy is efficient and serves the public interest its value contribution is positive.

When it is not, and is characterised by bad design, administrative and governance shortcomings, and protectionist intent, policy makes a negative contribution to value that could even swamp the positive contribution. The costs of poor policy fall on society at large as well as on business.

More case studies will help to further clarify the role of services and policy in our complex and rapidly changing global economy.

This article appeared in the South China Morning Post print edition as: Grainy view of services clearer with loaf of bread's journey
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