Impacts on the Macroeconomy


Where does this evidence on the rising importance of both ICT production and use leave us? The impact of ICTs on the macro-economy, on growth and productivity, has been hotly debated. The recent slowdown has seriously challenged some of the more optimistic assertions regarding the new economy: the digital revolution has not meant the death of the business cycle, nor has it changed some fundamental laws of economics. Stock market valuations must be realistic and backed by sound profit expectations, and the information and communications technology sector is not immune to downturns. But this should not distract from the economic benefits that have already accompanied the spread of ICT over the past decades and the continued importance of ICT for growth in the years to come.

ICT Impact on Growth

Recent work by the OECD on the sources of growth examined the contribution of ICT capital to GDP growth over the 1980s and 1990s, and concluded that the strong expansion of the capital stock as a result of investment in ICT has made a rising contribution to overall output growth (Table 1). The ICT contribution to output growth was still relatively small in the 1980s in several countries. However, during the second half of the 1990s, the contribution of ICT capital (IT, communication, and software) to output growth increased in most countries, particularly in Australia, Canada, and especially the U.S., where it reached 0.9 percentage points per year and accounted for about 20% of total output growth (OECD, 2003a).

Table 1: Contribution of ICT Capital to GDP Growth

Business Sector, Based on Harmonized ICT Price Index

GDP growth

Percentage point growth due to ICT capital

Share of output growth due to ICT capital

1990–1995

1995–2000

1990–1995

1995–2000

1990–1995

1995–2000

United States

2.64

4.40

0.43

0.87

16.3%

19.8%

Japan

1.33

1.10

0.31

0.38

23.3%

34.5%

Germany

2.22

1.06

0.30

0.38

13.5%

35.8%

France

0.97

2.81

0.18

0.35

18.6%

12.5%

Italy

1.44

1.93

0.21

0.36

14.6%

18.7%

United Kingdom

2.12

3.55

0.27

0.48

12.7%

13.5%

Canada

1.79

4.20

0.30

0.57

16.8%

13.6%

Australia

3.37

4.62

0.48

0.68

14.2%

14.7%

Finland

-0.70

5.62

0.24

0.62

-34.3%

11.0%

Source: OECD

ICT Capital and 'Network Effects'

ICT affects productivity and growth in two ways. The first is through the production and use of ICT capital. The second channel is through the spillover or "network" effects of ICT equipment in the economy. For example, the economic benefits of improved business-to-business communication via the Internet are not all "embodied" in the quality improvements of the stock of individual computers, but also arise from different ways of organizing production and sales ("disembodied" effects). Estimates for OECD countries show that these network effects and other disembodied aspects of technological change can be substantial (OECD, 2003) and point to the importance of accompanying investments such as those related to education, training, and organizational change.

An alternative way of approaching the issue of the impact of ICT relates to the distinction between ICT-producing and ICT-using sectors. There has been continuing debate regarding the relative importance of the diffusion and use of ICTs versus their production in contributing to improved economic performance, alongside a more general discussion on the impact of R&D and technology diffusion (Papaconstantinou, Sakurai, & Wyckoff, 1996; Sakurai, Ioannidis, & Papaconstantinou, 1996). Increasing firm-level evidence suggests that effective diffusion and use of these technologies (especially in the services sector) are key factors in broad-based growth.

Several recent studies (Pilat & Lee, 2001; OECD, 2003) have attempted to separately quantify the contribution of ICT-producing and ICT-using sectors to aggregate GDP and productivity growth during the 1990s. Investment in technology adds to the capital stock that is available for workers throughout the economy and thus helps raise labor productivity. Investment and use of ICT can help firms increase their overall efficiency in combining labor and capital, or multifactor productivity. ICT use can also contribute to network effects, such as lower transaction costs and more rapid innovation, which also improve multifactor productivity. In some countries, notably the United States and Australia, there is evidence that sectors that have invested most in ICT, such as wholesale and retail trades, have experienced more rapid multifactor productivity growth (OECD, 2003).

The 'Productivity Paradox'

Recent evidence both from aggregate and sectoral international data, as well as from firm-level data, has established a clear positive link between ICT investment and productivity growth, and has thereby gone a long way in resolving what has for a long time been referred to as the 'Solow Paradox'. Coined after Robert Solow's famous phrase that "you can see the computer age everywhere these days except in the productivity statistics" (Solow, 1987), this apparent paradox between an increasing presence of ICT in the economy and the difficulty in tracing growth or productivity improvements to it has long pitted IT enthusiasts against more skeptical economists.

There were three possible resolutions to the paradox brought forward. The first was that despite an overwhelming impression of the ubiquity of computers, in fact there was no widespread diffusion, at least not yet, IT still accounting for a small part of the overall capital stock (Oliner & Sichel, 2000). The second was that ICT did not have the productivity impact expected, because as with other technological revolutions, time and complementary investments were needed before the productivity impact was reaped (David, 1991). Finally the third claimed that the impact was there, but measurement problems made it impossible to accurately assess its impact.

All three explanations held part of the true picture. Until recently, ICT capital stock remained a small part of the overall capital stock, though its share has been rapidly rising. The impact on productivity and growth has been small because IT investments have often turned out to be more difficult and costly that envisaged, and their impact hinges on complementary efforts in, for example, employee training or the adoption of new work methods. Other factors, such as the regulatory environment, the climate for trust and security in a digital economy, and the availability of appropriate skills, also affect the ability of firms to seize the benefits from ICT. Measurement problems have been and continue to be severe. They range from the difficulty in correctly measuring price deflators in products whose quality characteristics are rapidly changing (the PC is a classic example), to the near impossibility in calculating productivity improvements in large parts of the services sectors, the largest—and growing—part of the economy and one which has seen most IT investment.




Social and Economic Transformation in the Digital Era
Social and Economic Transformation in the Digital Era
ISBN: 1591402670
EAN: 2147483647
Year: 2003
Pages: 198

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