1. Infrastructures and ICT. Measurement Issues and Impact on Economic Growth Matilde Mas Universitat de València & Ivie OECD Workshop on Productivity Analysis and Measurement Bern, 16-18 October 2006

2. 2 OECD Workshop on Productivity Analysis and Measurement The measurement of the impact of ICT and Infrastructures on Economic Growth Using a growth accounting framework Previous step: address the measurement problem posed by the presence of publicly owned assets (such as infrastructures) Illustration: Spain as an example OBJECTIVE OF THE PAPER

3. 3 OECD Workshop on Productivity Analysis and Measurement TWO POINTS OF DEPARTURE: 1.The Infrastructure´s debate of the late eighties and early nineties. A growth and convergence debate 2.The ICT revolution of the late nineties and the beginning of the new century

4. 4 OECD Workshop on Productivity Analysis and Measurement Infrastructures:  Responsible of the US productivity slowdown of the ´70s and ´80s  Engine of growth in the European countries  Factor lying behind the lack of convergence of per capita income (as in the case of the Spanish regions and provinces) ICT capital (production and use) as source of:  US productivity upsurge  EU (including Spain) poor productivity performance TWO POINTS OF DEPARTURE:

5. 5 OECD Workshop on Productivity Analysis and Measurement INFRASTRUCTURES: MEASUREMENT ISSUES

6. 6 OECD Workshop on Productivity Analysis and Measurement INFRASTRUCTURES: MEASUREMENT ISSUES Infrastructures are mainly provided by the public sector. National Accounts do not assign a net return to the flow of services provided by public capital. The only recognized flow is public fixed capital consumption

7. 7 OECD Workshop on Productivity Analysis and Measurement INFRASTRUCTURES: MEASUREMENT ISSUES Implications: 1.NA Gross Operating Surplus figures are underestimated because the value of the capital services provided by public capital is not fully considered. 2.Consequently, the value of output is also underestimated in NA figures, afecting both its level and rate of growth

8. 8 OECD Workshop on Productivity Analysis and Measurement INFRASTRUCTURES: MEASUREMENT ISSUES 3.If the standard (endogenous) approach is used when computing the rate of return, 1 & 2 will have consequences on: a)the user cost; b)the input shares; c)the growth accounting results

9. 9 OECD Workshop on Productivity Analysis and Measurement INFRASTRUCTURES: MEASUREMENT ISSUES According to NA practices: GOS = GOS (private)+Public Capital Consumption From an analytical perspective: GOS (private) = Value of private capital services

10. 10 OECD Workshop on Productivity Analysis and Measurement Standard computation of the internal rate of return: An Alternative: Revised computation (referring only to the private sector) INFRASTRUCTURES: MEASUREMENT ISSUES

11. 11 OECD Workshop on Productivity Analysis and Measurement INFRASTRUCTURES: MEASUREMENT ISSUES Applying Nordhaus (2004) basic principle for measuring non-market activities: “Non-market goods and services should be treated as if they were produced and consumed as market activities…the prices of non-market goods and services should be imputed on the basis of the comparable market goods and services”

12. 12 OECD Workshop on Productivity Analysis and Measurement INFRASTRUCTURES: MEASUREMENT ISSUES Revised Gross Operating Surplus (including the value of public capital services): Revised Nominal Value Added (including the value of public capital services):

13. 13 OECD Workshop on Productivity Analysis and Measurement INFRASTRUCTURES: MEASUREMENT ISSUES Capital shares Standard Approach Capital shares Revised Approach:

14. 14 OECD Workshop on Productivity Analysis and Measurement THE DATA

15. 15 OECD Workshop on Productivity Analysis and Measurement THE SPANISH DATA GFCF available for 18 assets, of which:  3 ICT assets (hardware, software, communication)  6 types of infrastructures (roads, railways, airports, ports, water & urban infrastructures) And 43 branches of activity, of which:  15 manufactures  23 services

16. 16 OECD Workshop on Productivity Analysis and Measurement Treatment of Infrastructures in Spanish Capital Stock estimates. An illustration Recording of year t investment in infrastructures

17. 17 OECD Workshop on Productivity Analysis and Measurement IMPLICATIONS OF THE TWO APPROACHES Spain as an example

18. 18 OECD Workshop on Productivity Analysis and Measurement IMPLICATIONS OF THE TWO APPROACHES On GVA and GOS levels

19. 19 OECD Workshop on Productivity Analysis and Measurement IMPLICATIONS OF THE TWO APPROACHES On GVA rate of growth

20. 20 OECD Workshop on Productivity Analysis and Measurement IMPLICATIONS OF THE TWO APPROACHES On capital rate of growth

21. 21 OECD Workshop on Productivity Analysis and Measurement IMPLICATIONS OF THE TWO APPROACHES On capital output shares

22. 22 OECD Workshop on Productivity Analysis and Measurement ICT AND INFRASTRUCTURES Results from a growth accounting perspective

23. 23 OECD Workshop on Productivity Analysis and Measurement ICT and Infrastructures. Results

24. 24 OECD Workshop on Productivity Analysis and Measurement ICT and Infrastructures. Results

25. 25 OECD Workshop on Productivity Analysis and Measurement ICT and Infrastructures. Results

26. 26 OECD Workshop on Productivity Analysis and Measurement SUMMARY AND CONCLUDING REMARKS

27. 27 OECD Workshop on Productivity Analysis and Measurement SUMMARY AND CONCLUDING REMARKS 1. ON MEASUREMENT PROBLEMS The paper identifies a methodological problem in the growth accounting framework arising from the way public assets are treated by National Accounts. It proposes an alternative approach to computation of the internal rate of return. The standard (endogenous) approach, does not take into account the full value of the capital services provided by publicly owned goods. In contrast, the revised approach proposed here computes the internal rate of return for the private sector of the economy. And, following Nordhaus principle, it is used to estimate the value of the capital services provided by public capital.

28. 28 OECD Workshop on Productivity Analysis and Measurement SUMMARY AND CONCLUDING REMARKS 1. ON MEASUREMENT PROBLEMS Implications (taking Spanish data as reference) GVA figures provided by NA are underestimated by 5%-6% and Gross Operating Surplus by aprox. 15%. The share of capital services on total output is around 3.5 percentage points higher when the value of public capital services is fully included (as proposed by the revised approach) However, the growth rates of both, GVA and the Volume Index of Capital Services are not significantly affected.

29. 29 OECD Workshop on Productivity Analysis and Measurement SUMMARY AND CONCLUDING REMARKS 1. ON MEASUREMENT PROBLEMS Implications (taking Spanish data as reference) Neither ICT capital services share on total output nor the aggregate rate of growth of these types of assets are practically affected by the use of any of the two approaches. As a consequence, the contribution of ICT assets to the growth rate of labor productivity does not seem to depend on the chosen methodology. However, the contribution of total capital and TFP is (though modestly) affected.

30. 30 OECD Workshop on Productivity Analysis and Measurement SUMMARY AND CONCLUDING REMARKS 2. ICT and Infrastructures impact on growth The impact of an asset on the rate of economic growth depends on two factors: its share on total output and its own rate of growth. On the shares The share of ICT capital services on total output has been slightly lower (around 0.04) than that of infrastructures (around 0.05-0.06). Under certain assumptions (CRS, perfect competition, optimizing behavior) these shares measure the output elasticities of the assets. Concerning ICT assets, the highest elasticity corresponds to communication and the lowest to hardware, while software is the ICT asset showing the strongest elasticity increase.

31. 31 OECD Workshop on Productivity Analysis and Measurement SUMMARY AND CONCLUDING REMARKS 2. ICT and Infrastructures impact on growth On the shares The figures for infrastructures elasticities are close to the ones previously obtained for Spain from an econometric estimation of a production function. Thus, the figures for infrastructures reconcile the results obtained from two alternative strategies, econometric estimation and growth accounting. However, it also contradicts a previous result for Spain: here the infrastructures elasticity was rather stable along the period while previous (econometric) results indicated a continuous reduction.

32. 32 OECD Workshop on Productivity Analysis and Measurement SUMMARY AND CONCLUDING REMARKS 2. ICT and Infrastructures impact on growth On the growth rates The rate of growth of total (non residential) capital has been rather strong in Spain (4.5% on average) ICT accumulation was even stronger (11%) in 1995-2004 although it decelerated to 7.5% in 2000-2004 Infrastructures rate of growth was less than a third of ICT´s between 1995-2000, but more than a half in 2000-2004.

33. 33 OECD Workshop on Productivity Analysis and Measurement SUMMARY AND CONCLUDING REMARKS 2. ICT and Infrastructures impact on growth As a combination of the two effects: The contribution of ICT capital has been notable higher than that of Infrastructures. Office machinery showed the highest contribution, and software the lowest one Infrastructures contribution was negative in 1995-2000 but it accelerated in 2000-2004. ICT showed the opposite behavior, decelerating in the second subperiod.