INFORMATION AND DIGITAL ECONOMICS(5ECON007W) The ‘New’ Economy: Reality or illusion?

The OECD ‘Growth Project’ (1999-2001) The OECD ‘confirmed’ that there was a ‘New Economy’ in the 1990s; however, only about 20% of OECD experienced an increase in growth rates. Innovation and technological change, particularly ICT = the main drivers of economic growth.

The OECD ‘Growth Project’ (1999-2001) “in the structure of the OECD economies…crucially, ICT seems to have facilitated productivity-enhancing changes in the firm, in both new and traditional industries” (OECD, 2001)

What is the ‘New’ Economy? A process of transformation or structural change in the world economy from the late 1990s, based around: The globalisation of business The revolution in information and communication technology (ICT)

‘Globalisation’ of business Dominance of capitalism and the market Deregulation of trade and capital flows Greater openness of countries to international trade and investment Increased global ‘reach’ of companies, with changes in organisational structure

The revolution in ICT A technological breakthrough in the mid-1990s the semi-conductor manufacturing industry shifted from a 3-year to 2-year product cycle. An increase in network computing based on the widespread diffusion of the Internet. The improvement in productivity in the US economy from the mid-1990s

Measuring the ‘New’ Economy ICT as both an output from the ICT-producing industries an input into the ICT-using industries.

Measuring the ‘New’ Economy Share of ICT industries in total output, trade, employment and R&D. In 1997, ICT industries accounted for 3-4% of employment, 6-9% of value-added, 10-25% of exports and 25-40% of R&D expenditures in USA, Japan and EU Use of ICT measured as ratio of ICT spending to GDP or total output/expenditure). Closely correlated to level of income. Size of the Internet numbers on-line Measuring the ‘New’ Economy

IT Industries as share of GDP (%) in US and EU, 2000 IT Producers Manufacturing 1.6 2.6 Services 4.3 4.7 IT Users 5.9 21.1 26.3 Non-IT Industries 67.1 62.1

Technical progress and productivity Technological improvements Computers improved transport methods improved communications has caused capital productivity to rise over time.

Technical progress and productivity Increase in human capital improved education, training, skills better health has caused labour productivity to increase.

US Computer Price Index, 1959-1999 (Source: Jorgenson, 2001) Between 1959 & 1964 prices dropped by 66%. 1959 Between 1984 & 1999 prices dropped by 92%. 1964 1969 1974 1979 1984 1989 1994 1999

ICT and productivity growth in the US Economy Has IT provided a temporary boost or a permanent improvement in US growth prospects? Rapid decline in IT prices strong incentive for substitution for (other) capital and labour inputs.

ICT and productivity growth in the US Economy Faster economic growth rates after mid- 1990s. productivity growth in IT-producing industries and IT-using industries. At firm level, investment in IT goods led to rising productivity, IF accompanied by organisational change and business strategy.

Productivity growth (% pa) in the EU and US 1990-95 1995-00 Total Economy 1.9 1.4 1.1 2.5 ICT Producers 6.7 8.7 8.1 10.1 ICT Using 1.7 1.6 1.5 4.7 Non-ICT 0.7 0.2 0.5 Productivity defined as value added per person employed

86% with Broadband access National Statistics (www.statistics.gov.uk)

The ‘Digital Divide’ (2000): indicators by region (%) Pop GDP Phone Lines Cell phones PCs Inter-net hosts TVs Africa 10 1 <1 2 Asia/ Pacific 56 25 31 33 23 8 43 Europe 15 32 35 37 30 14 26 Middle East 5 3 America 38 28 44 78 WORLD 100

Share of ICT-producing activities in the business sector (2000) (Source: OECD)

International Salary Differences for Software Professionals, 2003 (indices) Switzerland UK Greece India Project Leader 100 52 32 31 Systems Analyst 51 20 19 Database Analyst 39 25 Test Engineer 40 22 14

The‘digital divide’: an alternative view ‘(Yet) the debate over the ‘digital divide’ is founded on a myth – that plugging poor countries into the Internet will help them become rich rapidly’ (The Economist, 12th March 2005) The ‘digital divide’ as a symptom of deeper, more important divides: of income, development & literacy. Treat causes, not symptoms. How best to use technology to promote ‘bottom-up’ development? – promote spread of mobile phones, not PCs and Internet (UN has target of 50% mobile

World Internet and Mobile Phone usage, 2006 Region Population Internet penetration (mobile penetration) Usage growth 2000-2006 Africa 14.1% 3.6% (18%) +625.8% Asia 56,4% 10.8% (24%) +245.5% Europe 12.4% 38.2% (85%) +193.7% Middle East 2.9% 10.0% (38%) +479.3% N. America 5.1% 69.1% (74%) +112.0% LA/Caribbean 8.5% 15.1% (46%) +361.4% Oceania/Aus 0.5% 54.1% +141.0% WORLD 100% 16.7% (40%) +220.9% Sources: Internet usage from Neilsen/Net Ratings & ITU; Mobile penetration from GSMA

Mobile phones and development Waverman et al (2005) found that in a ‘typical’ developing country an increase of 10 mobile phones per hundred people, boosts GDP growth by 0.6% (twice as big an impact as in rich countries). Mobiles cut transaction costs, broaden trade networks and reduce need for costly physical transport. Policy priorities? Education, healthcare and regulatory policies favouring competition, plus lower taxes on network access & cheaper handsets