Economic Sectors

To help simplify an economic system, it can be theoretically divided into three "sectors." Each of these sectors—primary, secondary, and tertiary—represents a phase in the life and distribution of goods and services within an economy. This paper provides an in-depth analysis of each sector of an economy, first as an independent component and then as part of an overall economic system.

Keywords Gross Domestic Product (GDP); Global Economy; LDC; Primary Sector; Secondary Sector; Tertiary Sector

Economic Sectors

Overview

President Harry Truman, like so many of his predecessors and successors, had a problem getting a concurring set of opinions from his economic advisors. Each seemed to offer a different view on any given issue, frustrating the man whose mantra of leadership seemed to be "the buck stops here." He once complained out loud, "All my economists say, 'on the one hand … and on the other hand ….' Someone give me a one-handed economist!" ("Out on a limb?," 2008).

The source of Truman's befuddlement is the fact that economics is extraordinarily complex. The study of the relationship between business and consumers, how entrepreneurs develop economies as well as how buyers purchase goods and services, is subject to a myriad of external and internal factors, giving it a vast, often convoluted, and certainly fluid nature.

Helping simplify an understanding of economics is the theoretical division of a given economic system into three "sectors." Each of these sectors—primary, secondary, and tertiary—represents a phase in the life and distribution of goods and services within an economy. This paper provides an in-depth analysis of each sector of an economy, first as an independent component and then as part of an overall economic system.

The Primary Sector

Daniel Webster once said, "When tillage begins, other arts follow," adding, "The farmers therefore are the founders of human civilization" (Bartlett, 1919). Indeed, in these comments, Webster could have been speaking of all of the professions that make up what is known as the "primary sector" of the economy.

The primary sector involves the harvesting, mining, Quarrying, and collection of natural resources. Those professions that contribute to this sector of the economy include farming and other forms of agriculture, mining, forestry, and fishing. These professions are time-honored traditions, with families often engaging in such practices over generations.

In the fishing industry, for example, the profession is a way of life, one that many see as the only life they have ever known. In southern California, the sardine fishing industry is one that spans generations. One fisherman practices his art just as his father and his grandfather did, and the company to which he sells his fish also dates back three generations. As this particular industry has fallen on hard times, many are contemplating moving into another field and are telling their children to do the same. Then again, the sea is not a workplace one can easily leave behind. One child, who spent his school vacations helping the crew on his father's boat, went against his mother's wishes to stay in school and left the 10th grade to fish full time ("San Pedro," 2008).

Farming is another primary sector industry that is not just a job—it is a way of life handed down from generation to generation. One New Jersey farming family, for example, has operated their farm since 1720. In fact, in 1988, dozens of farming families from Maine to Delaware were honored for successfully operating their farms for at least 200 years (Ginzburg, 1988). A third-generation farmer in Minnesota best describes a feeling that farming is in his blood, and he can think of no other pursuit in life: "I had other jobs in the winter. But by January I couldn't wait to come back. It just sticks with you" (The Reporter, 2008).

In industrialized nations like the United States, primary sector vocations like the ones just described are entered into by choice. However, mining, fishing, farming, and other forms of activity are a matter of survival. In truth, in industrialized nations, fewer people tend to participate in primary sector jobs than in secondary or tertiary sector areas. In the US, for example, farm employment dropped precipitously in the 20th century, from 12.5 million in 1930 to 1.2 million in the 1990s. Additionally, 60 percent of those farmers only worked on farms part-time, holding other jobs to supplement their incomes ("American agriculture," 2008).

While primary sector jobs seem to be waning in volume in the wealthier states, industries that fall under this heading appear to be greater in size and economic percentage in developing nations. In South Africa, for example, the mining industry remains a vibrant economic contributor, directly accounting for 8.8 percent of the nation's gross domestic product (GDP) in 2011. In Uzbekistan, a nation in which 60 percent of the population resides in rural areas, agriculture contributed 18.5 percent of the nation's 2012 GDP. In the Philippines, nearly one-third of the country's work force was employed by the agriculture industry in 2012, but because of faltering industry infrastructure, farming only contributed 11.8 percent of that country's GDP.

The Primary Sector in Less-Developed Countries

Significant research has uncovered a connection between the primary sector and less-developed countries (LDCs). In the case of the Philippines discussed above, for example, the major contingent of Filipinos who work in the agricultural industry do so despite a lack of sizable return on their toil. In fact, many residents of LDCs working in the primary sector are undereducated, poor, and undertrained. In some situations, the work performed in this sector is reflective of a lack of national support and/or infrastructure in the face of changing socio-economic and political conditions.

In one 15-year study, the realities of faltering LDCs contributed to the heavy and unsustainable practice of deforestation. A survey of 40 LDCs cited their respective governments' inability to address expanding populations as a major contributor to unsustainable logging practices. Interestingly, such practices were mitigated after the introduction of international non-governmental organizations in forested areas (Jorgenson, 2008).

The sociological realities of a given LDC may also provide a profile of the primary sector worker. As stated above, a great many of those in such countries lack government support and/or vocational training, allowing them to continue their work (some of which is not sustainable over the long term) in the fields, on the boats, in the woods, or in the mine shafts. In some cases, however, the lack of access to secondary or tertiary sector employment is not based on poverty—it is based on social norms.

In rural India, for example, government sponsored reforms are enabling many men to move upward in terms of pay and opportunity. Women, meanwhile, continue to toil in the agricultural sector. By the end of the 20th century, about 55 percent of the women who worked did so in agriculture. The wage gap between men and women in India, therefore, continues to grow (Kanungo, et al., 1998).

As shown here, the primary economic sector is by no means localized entirely to the developing world. However, the development of the secondary and tertiary sectors in the post-industrial age suggests that those who gather and harvest the natural resources necessary for a global economy's needs are increasingly visible in poorer countries with less capability of developing the latter two sectors.

The Secondary Sector

Alexander Chase once said, "When a machine begins to run without human aid, it is time to scrap it—whether it be a factory or a government" ("Alexander Chase quotes," 2008). Indeed, in the economic world, the secondary sector represents the link between the collection of natural resources and those who manage the non-industrial aspects of an economy. The secondary sector also underscores the link between humans and machines within this economic context. As Chase suggested, in the modern era, one cannot operate without the other.

The secondary sector of the economy refers to vocations in which products are assembled and finished. Manufacturing, chemical production, shipbuilding, construction, energy distribution, engineering, and similar industries all fall into the secondary sector.

In many ways, the development of the secondary sector coincides with the industrialization of the modern world. For millennia, the human race excelled in farming, fishing, and other manifestations of the primary sector. In every country (but, as shown earlier, particularly in the developing world), the primary sector continues to serve a purpose in the continuing growth of the global economy, yet humanity has undergone a significant transformation from an agriculture-based to an industry-based economic system.

The Effects of Secondary Sector Development

The evolution of economies from an agrarian primary-sector level to an industrial secondary-sector level has two important benefits for the society in question. First, an increase in the secondary sector leads to greater economic development. One study indicated that increases in industrial development (and a concurrent increase in contributions to the GDP) within the construct of the secondary sector also lead to an increase in individual income levels (Balassa, 1961).

Vietnam provides an excellent representation of this theory. Since its colonial occupation during the mid-20th century and the subsequent US-led war that lasted until the early 1970s, Vietnam's people have been mired in poverty. Then again, since the last American forces left, the fortunes of Vietnam have recovered from their war-torn years. In the late twentieth and early twenty-first century, Vietnam took steps to mitigate poverty and, as part of its efforts, increase its manufacturing base. Its industrial sector has grown significantly, and its output has clearly improved. In the early 1990s, Vietnam's manufactured exports hovered below 20 percent. By the turn of the 21st century, that figure had more than doubled (National Economic University, 2003). In 2012, Vietnamese manufacturing generated about 18.9 percent of the nation's GDP, and industrial production increased 6.5 percent over the previous year.

That industrialization leads to economic development in a given nation-state or region is a widely held conclusion. The examples of the wealthiest nations, such as the United States and the European Union countries, provide evidence of this ideal, as do the examples of LDCs that have embarked on similar industrialization routes (such as Vietnam). However, whether the results of increased secondary sector investment has positive implications for workers and their wages (as opposed to the nation as a whole) is a more challenging issue. Indeed, in an era of globalization, wherein national economic systems are becoming conjoined within one "global economy," this question becomes all the more relevant.

The Secondary Sector in a Global Economy

A recent study of 47 countries over a ten-year period (1971-1981) provides an interesting glimpse into this issue, even in the years before the global economy began to form. Industrialized, developed nations like the United States saw their own industrialization take shape with native capital investment—that is, these countries' industrial development has taken place with investment that, in general, comes from in-country sources. LDCs, however, have relied on foreign development assistance to create secondary-sector-friendly environments and, to a large degree, continue to rely on foreign investment to maintain those industries.

Foreign corporate investment in LDC industrial development is, of course, not a philanthropic pursuit. Rather, capital investors expect a return on their investment, and in the case of LDC expansion, that return is production at a cost that is less than what it would be if it took place in the corporation's home base. This study reveals that in such "dependent development" relationships (wherein an LDC or target region relies on consistent external capital infusions in order to continue successful operations), labor is not a major participant in the transactions between the parties in question. Rather, governments, domestic industrialists, and foreign investors are all motivated to keep wages low in order to ensure that production facilities are built and that economic development can occur (Kyung-Sup, 1991).

As the world continues to become more connected via globalization, the secondary sector in particular will remain an important industrial arena to study. While there remains a consistent gap between industrialists and those who toil in their factories and production facilities, increased attention to the issues facing secondary-sector workers will no doubt take place.

The Tertiary Sector

In "Thinking Through Technology," a philosophical review of engineering, Carl Mitcham speaks of the differences between those who work with machines and the engineers who design the systems. In many ways, he is referring to the differences between the primary and secondary sectors and the tertiary sector. "The engineer works with nature and its laws as revealed by science, whereas the technologist focuses on the actual construction," he said. "The engineer makes with the mind, the technician with his hands" (Mitcham, 1994).

The tertiary sector is, in essence, the industries that employ the "white collar" worker. Whereas the primary and secondary sectors involve, to a large degree, manual labor, tertiary sector workers are more involved in general administration and management. Among the tertiary-sector industries are insurance, health care, finance, business management, communications, and public administration. In international economics theory, the "products" of the tertiary sector are not as tangible as the natural resources gathered in the primary sector or the manufactured products of the secondary sector. The output of the tertiary sector is what one author calls "invisible goods" (Jennequin, 2008).

While the tertiary sector's production is not as easily quantifiable as a bushel of corn or a quota of new automobiles, its importance to an economic system is anything but invisible. Most developed nations rely heavily on the service industries. In the United States, for example, the service sector constituted nearly 80 percent of the country's economy in 2012.

In developing economies, the tertiary sector of the economy is also taking root as a vital set of industries that can truly bring life to a fiscally stagnant region. In China, the services have helped that country's economy roar to life since the 1970s. In one of that nation's most vibrant economic centers, Shanghai, the tertiary sector has been a boon to that region's fiscal health. In 1978, the city restructured itself to focus on this sector, and the results have been astounding. The contributions of finance, banking, real estate, and high technology to the nation's overall GDP increased from 18.6 percent in 1978 to 26.1 percent in 1985, 37.9 percent in 1993, and 43 percent in 1996. Shanghai's stock exchange continues to be one of the fastest growing exchanges in the world, garnering foreign investment in great volume (Sassen, 2002).

The tertiary sector has also had an influence on the global economy. In India, for example, $149 billion in commercial services were exported in 2011, and the service sector accounted for 56 percent of the nation’s GDP ("India’s growing services sector," 2012). India's dominance in this arena has caught the attention of other participants in the global economy, as former colonial occupier Great Britain remains heavily invested in a bilateral tertiary-sector-based trade agreement that, in 2008, was predicted to generate $60 billion US by 2020 ("Growth to hit $60 billion by 2020," 2008).

The Tertiary Sector Labor Pool

Of course, the tertiary sector is a more specialized field of industries than the primary and secondary sectors. While primary and secondary sectors require minimal professional training and may therefore have much larger labor pools from which to draw workers, the tertiary sector is somewhat hindered by smaller pools. The tertiary sector, after all, requires professional training and/or higher education degrees. Service-sector employees must be well trained and, by virtue of their schooling, better compensated. Creating such a pool, therefore, is a difficult undertaking, particularly in a globalizing world.

In Australia, for example, a stated desire among leaders is to develop the financial services industry. However, in an increasingly competitive global economy, Australia's talent pool has been shrinking somewhat. Fewer women have been entering the industry, and the ranks of seasoned workers within the field are, naturally, thinning without replacements. Australia has spent a great deal of effort to minimize regulatory oversight and strengthen the financial services infrastructure, but remains at risk of losing its competitiveness without attracting more workers to the industry (Super Review, 2008).

The contributions of the tertiary sector to the economy are, as seen earlier in this paper, certainly positive in terms of return, but shifting emphasis toward a tertiary-sector-based economy remains a challenge for any system.

Conclusion

J.A. Schumpeter once said, "There exists no more democratic institution than the market" ("Market system quotes," 2008). Indeed, a democracy is a system that is diverse in many ways, governed by the will of the people. A market system is equally diverse, comprised of many different systems, or "sectors."

This paper has given greater clarity to three general groups of industries within economic systems. By grouping these sectors into primary, secondary, and tertiary arenas, a simpler model becomes manifest. Still, just like democratic institutions, national economies (and even the developing global economy) must adapt the proportions of each of these sectors to suit not only their fiscal goals but the needs of the workforces from which they draw economic benefit as well.

The primary, secondary, and tertiary sectors, in many ways, represent the flow of business. From the very fundamental level, the primary sector brings forth the natural resources needed to construct, build, and sustain commercial systems. The secondary sector draws together these resources to create marketable products for consumers. The tertiary sector helps develop and maintain the systems in which the products are sold while at the same time lending to the stability of societies.

Each sector has played an integral role in meeting the challenges of economic development, from the wealthiest systems to the developing world. More challenges are surfacing in a world that is becoming increasingly and extensively integrated. As the global economy continues to evolve, each sector, individually and in conjunction with one another, will likely evolve with it.

Terms & Concepts

Gross Domestic Product (GDP): Total market value for goods and services produced in a given national system.

Global Economy: Economic concept in which international commerce creates a worldwide economic system rather than national-based systems.

LDC: Less developed country.

Primary Sector: Economic arena encompassing industries that extract and collect natural resources.

Secondary Sector: Economic arena encompassing manufacturing, assembly, and production industries.

Tertiary Sector: Economic arena encompassing service industries.

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Suggested Reading

Bolleboom, S. (2008). Primary sector conference tackles big issues. Chartered Accountants Journal, 87 , 6-8. Retrieved September 4, 2008, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=33186296&site=ehost-live

Chakraborty, C. & Nunnenkamp, P. (2008). Economic reforms, FDI, and economic growth in India. World Development, 36 , 1192-1212. Retrieved September 4, 2008, from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=32558193&site=ehost-live

Dhillon, P., & Ladusingh, L. (2011). Economic activity in post retirement life in India. Asia-Pacific Population Journal, 26, 55–71. Retrieved October 25, 2013, from EBSCO Online Database SocINDEX with Full Text. http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=86176384&site=ehost-live

Education and training: Boosting and adapting human capital. (2006). OECD Economic Surveys: Poland, 2006 , 87-114. Retrieved September 4, 2008, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=22274795&site=ehost-live

Hagner, D. (2000). Primary and secondary labor markets. Rehabilitation Counseling Bulletin, 44 , 22-30. Retrieved September 4, 2008, from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=3678732&site=ehost-live

Neal, D. (1993). Supervision and wages across industries. Review of Economics and Statistics, 75 , 409-418. Retrieved September 4, 2008, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=9410170542&site=ehost-live