On Information Technology and Competitiveness Background paper for IPES 2001 Alberto Chong and Alejandro Micco

This presentation: What is so different about information technology? Ways in which Latin America may benefit How can the region become more innovative? What are the pending issues?

Why all the buzz? Some Examples: Information technology allows quick transmission of information inexpensively and conveniently. Firms can reduce costs of production, procurement and inventory savings thus, higher integration with suppliers. Marketing, distribution, and transportation costs may be greatly reduced. Savings in retail transactions as the market increases; proximity to wealthier potential clients is eliminated.

What is different with Information Technology? High fixed cost but low marginal cost. The cost of producing the first copy of an information good may be substantial but the cost of producing additional copies may be negligible. Network Externalities. Technologies subject to strong network effects tend to exhibit long lead times followed by explosive growth. Lock-In Issues. once chosen, the cost of switching information goods become difficult.

The holy grain of economic growth: productivity Impact can be divided in two: Physical capital –Computers… hardware… The use of information technology-related technology –Improved organization and efficiency of all factors... network externalities, economies of scale…

Is it too late for Latin America? A latecomer does not have to reinvent the wheel. By emulating best practices may be able to realize benefits with shorter gestation period.

How to become more innovative? Internet is indicative of potential as a tool to achieve increased competitiveness and productivity. The new information technology points to something more subtle: innovativeness and ability to adapt.

Economic Creativity Index

Internet and Innovation (controlling for telephone lines)

Other key determinants of innovation: Education: enables workers to become more innovative Credit and Finance: start-up costs high, potential firms relatively small Institutions: lack of rule of law and property rights; bureaucratic delays hinder innovation Openness: access to latest technologies

Pending issues: Additional Government role “Pirates”, property rights enforcement, and digital divide Laissez-faire attitude or settle for lower tech version of product? Public goods and free riding issues and distribution consequences Taxation issues: jurisdiction and enforcement Subsidies