IT and Economic Growth

World Institute for Development Economics Research August 2000 No. 1/2000 IT and Economic Growth WIDER lessons on IT by Matti Pohjola Visual Communications Group he popular view is that information technology will Tchange the world by boosting productivity and income. But while IT has many visible effects on the modern economythe growth in electronic commerce for exampleits impact on productivity and economic growth has been surprisingly difficult to detect. Although there is increasing evidence that IT investment is associated with an improvement in company perform- ance in industrial countries, studies that look at the bigger macroeconomic picture find little correlation between IT investment and overall productivityand some studies even find a negative correlation. Explaining the Productivity Paradox How can we explain this discrepancy between the micro and macro pictures? The table on page 2 sheds new light on this paradox by displaying results from a UNU/WIDER study for three countriesFinland, Singapore and South rofessor Hans van Ginkel, Rector of the Koreaand comparing them with findings for the United PUnited Nations University, Professor Matti States economy by Daniel Sichel (see the references at the Pohjola, Principal Academic Officer and Acting end of this article). All these countries have invested large Director of UNU/WIDER, Professor Danny amounts in IT over the past two decades; computer capital Quah, London School of Economics, Mr Jason (hardware etc.) has grown at annual rates ranging from 25 Dedrick, Center for Research on Information per cent in Finland to 40 per cent in South Korea. Technology and Organizations (CRITO) Economists measure the contribution of computers to GDP University of California Irvine, and Mr growth by first multiplying the growth rate of computer Veli-Pekka Niitamo, Director Global Resourcing capital by the share in national income of the return on Nokia made presentations at a UNU panel on computer investment. In doing so we find that computers Information Technology, Economic Growth and have accounted for the greatest share of GDP growth (32 Development on 5 May 2000 at the UN per cent) in South Korea, and the smallest share (8 per Headquarters in New York. This was one of the cent) in the United States. These estimates measure the panels organized as part of the preparatory impact of computers and peripherals as a factor of process for the high-level segment of ECOSOC production, and do not measure the effect on GDP of their 2000 on the theme Development and manufacture. International Cooperation in the XXI Century: The Role of Information Technology in the The last two rows in the table show that the growth Context of a Knowledge-based Economy. contribution of computers in the United States has doubled in recent years. At the same time the growth rate of GNP in Over 100 people attended the meeting, the United States has also doubled, so the relative share of including delegates, UN officials and NGO IT in growth has been virtually unchanged. It does seem, representatives. The articles in this issue of however, that IT investment has become more profitable. WIDER Angle are based on the presentations made at this policy panel session. The increased productivity of IT investment may be a (continued on page 2) The United Nations University (continued from page 1) result of networkingthe fact that all of the worlds computers can be linked to each other via the Internet. In this way enterprises and house- holds that use IT benefit from the investments made by others. Moreover, enterprises may have learnt to modify their organizations and practices so that the return on these investments has risen. The table (below) also suggests that the productivity paradox has been largely an American phenomenon. ITs growth contribution has been much greater in other countries for which data is available. In Finland Source: International Data Corporation and World Bank the stock of computers has grown at practically the same rate as in the Countries: Australia (AUS), China (CHN), Denmark (DNK), Finland (FIN), United States. Computers have had India (IDN), South Korea (KOR), Malaysia (MYS), Singapore (SGP), a bigger impact on GDP growth in South Africa (ZAF), Sweden (SWE), Thailand (THA), Turkey (TUR), Finland (16 per cent) because they United Kingdom (UK), United States (USA). account for a larger share of national income in Finland than in the United IT investment has been almost as investment share in GDP is very States. This does not, however, great as the effects of all other fixed high in such fast growing economies imply that IT investment is more investment combined. On the other as China, South Korea, and productive in Finland. Rather, hand there has been no corresp- Thailand. But the IT content of Finland has a more capital-intensive onding growth effect in our sample investment is low. However, in economy than the United States of developing countries. It would develped countries such as Finland partly because of greater intervention therefore seem that developing and the United States, the in the labour marketso that countries have not yet invested investment ratio is low but the share capital produces a greater proportion sufficiently in physical infrastructure of IT investment in total investment of Finlands national income. and human capital to make is high. IT investment worthwhile. Conse- IT in Developing Countries quently, from a historical perspec- Policy Priorities According to UNU/WIDERs cross- tive, IT does not yet seem to offer the Investment in infrastructure, country comparison of a larger developing countries a shortcut to physical capital, and education sample of 23 OECD countries in prosperity. is still the key to economic 1980-95, investment in computers The figure above illustrates the development. This is, of course, a and software is strongly correlated basic difference between developed long-standing recommendation. with economic growth. The effect of and developing countries. The But it needs to be updated for a world economy in which the use of IT is spreading fast, so that no countryrich or poorcan ignore the need to invest in IT. Thus, the UNU/WIDER study concludes that the IT content of investments in infrastructure, physical capital, and education must be raised. The old policy recommendation is therefore given a new twist. Besides providing IT education and training for their citizens, govern- ments can themselves become sophisticated users of information technology. By developing advanced applications of ITand by Source: Matti Pohjola becoming a model for the private 2 sectorgovernments can change the attitudes of workers, firms and The Weightless Developing Economy consumers and lower their costs of adopting IT. It is the use of by Danny T. Quah information technology, not necessarily its production, which or the last fifty years, economists of a paper blueprint, or even an idea matters for economic development Fand development practitioners in someones mind. The form that in this new century. have viewed the accumulation of they take is largely immaterial to References: physical capitalmachines, their value. Hence, intellectual buildings, and highwaysas central property is more difficult to protect Pohjola, M. (ed.) Information to economic growth. However, the in the new weightless economy. Technology, Productivity and evidence shows that technological Moreover, these information strings Economic Growth: International advance, reflecting the accumula- do not simply plug into a Evidence and Implications tion of knowledge, is more production process as before. for Economic Development, important. Today, there are new Instead, consumers deal with them Forthcoming Oxford University opportunities to use knowledge for directly; from your PC you can Press publication. faster development; outsourcing download computer software, software construction and data Sichel, D.E. Computers and Aggre- digital entertainment, or use the entry to workers in emerging gate Economic Growth: An Web to purchase health consulta- economies (such as India) is just one Update. Business Economics 34, tions, financial instruments, and example. April 1999. other valuable items. And the The author is the Principal Economic progress has been knowl- enjoyment of these products by one Academic Officer and Acting edge-driven since the Industrial consumer does not preclude their Director of UNU/WIDER and Revolution of the late 18th century, consumption or use by anyone else. director of research on and you could argue that the ancient This is qualitatively different from the economics of IT. Further Sumerians started the process when the way consumers interacted with information at www.wider.unu.edu. they first carved financial records the old manufacturing economy. onto clay tablets, some 5,000 years Policies for a Weightless IT and Growth ago. Indeed, many of todays worriesjob destruction and rising Economy Although IT has many inequalitywere evident when Obviously, encouraging ongoing visible effects on the spinning jennies and steam engines technological development is modern economy, its first came into use. critical to the growth of a weight- impact on productivity The Weightless Economy less economy. Less obviously, systems for managing intellectual and economic growth However, the present revolution in assets must be changedsometimes has been surprisingly information and communications radically. Protecting intellectual difficult to detect technology (ICT) does raise fresh property

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