In Search of the Lost Balassa–Samuelson Effect : The Changing Role of Services in the 21st Century

Tengely, Veronika (2020) In Search of the Lost Balassa–Samuelson Effect : The Changing Role of Services in the 21st Century. FINANCIAL AND ECONOMIC REVIEW, 19 (2). pp. 5-27. ISSN 2415-9271 (print); 2415-928X (online)

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Abstract

It is a generally observed phenomenon that there is a positive relationship between the level of economic development and the general price level. According to the Balassa–Samuelson effect, the convergence observed in the price level is largely achieved through higher services inflation. Based on the update of our previous regression estimation results on the effect, the textbook Balassa–Samuelson effect can be detected less and less in the case of Hungary. Moreover, the phenomenon also shows a similar shift in the case of a wider group of countries. The structural transformation taking place in the world economy nowadays, globalisation and the infocommunication revolution are fundamentally transforming the role, tradability and productivity of services, which also influences the fulfilment of the assumptions of the theory. These factors – in particular with regard to market services – have been assessed in terms of several aspects: based on growth patterns, the role of the services sector in the growth path of modern economies is becoming increasingly important, which is proved by both international and domestic data. Current megatrends – such as globalisation, digitalisation, technological development and artificial intelligence – are accelerating the rising productivity of services and leading to changes in consumer habits and the globalisation of services. New structural shifts affecting the services sector are also transforming the conditions associated with the theory, thus weakening the practical operability of the Balassa–Samuelson effect.

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