PRODUCTIVITY GROWTH AND ICT

Five Puzzles in the Behavior of Productivity, Investment, and Innovation
ABSTRACT: "Productivity growth in the United States was considerably faster during 2000-2003 than in the boom years of 1995-2000. This ebullient productivity performance raises numerous questions about its interpretation and its implications for the future, and these are stated here in the form of five puzzles. (1) Whatever happened to the cyclical effect? Skeptics were justified on the basis of data through the end of 1999 in their claim that part of the post-1995 productivity growth revival reflected the normal cyclical correlation between productivity and output growth. In contrast data through mid-2003 reveal only a negligible cyclical effect for 1995-99 but rather a temporary "bubble" in 2002 that repeats similar temporary blips in three previous business cycles. (2) Why did productivity growth accelerate after 2000 when the ICT investment boom was collapsing? The most persuasive argument points to "hidden" intangible investments in the late 1990s that required labor input but were not counted in measured output; after 2000 the delayed benefits of intangible investments boosted output, while much of the labor input that created them was laid off. In short, productivity growth was understated in the late 1990s but overstated since then. (3) What aspects of innovation caused productivity growth to take off? We draw an analogy to electricity, where miniaturization was the key step in making small electric motors practicable, and the internal combustion engine, where complementary investments, especially roads, were necessary to reap benefits. For computers the key steps were miniaturization in the form of the PC, followed in the 1990s by the "marriage" of computer hardware with software and communication technology. (4) How can ICT investment revive if innovations are second-rate? First-rate inventions in the 1990s, notably the web and user-friendly business productivity software, are being followed by second-rate inventions in the current decade, e.g., web-enabled mobile phones, wi-fi enabled laptops, and a host of innovations providing incremental improvements in consumer entertainment but not fundamental changes in business productivity. (5) Finally, why has Europe failed to experience a productivity growth revival? A consensus is emerging that U. S. institutions foster creative destruction and financial markets that welcome innovation, while Europe remains under the control of corporatist institutions that dampen competition and inhibit new entry. Further, Europe lacks a youth culture like that of the U. S. which fosters independence: U. S. teenagers work after school and college students must work to pay for much of their educational expense. There is a chasm of values across the Atlantic, as Americans facilitate the development of high-productivity "big box" retail formats while Europeans are disdainful of overly dispersed American metropolitan areas with their traffic congestion, waste of energy, and starvation of public transit." By Robert Gordon, draft of chapter for World Economic Forum, September 10, 2003. (PDF, 61 pages)

"The new 'new economy'”
The Economist holds that while the term "new economy" is going out of fashion, U.S. productivity gains due to ICT are increasing in the last three years as compared with even the high performance of the late 1990's. European productivity gains, however, appear to be fallling. The Economist, September 13-19, 2003.

There is a nice sidebar on the way ICT contributes to productivity gains in business:

Information Technology and Productivity: Where Are We Now and Where Are We Going?
Abstract: “Productivity growth in the U.S. economy jumped during the second half of the 1990s, a resurgence that many analysts linked to information technology (IT). However, shortly after this consensus emerged, demand for IT products fell sharply, leading to a lively debate about the connection between IT and productivity and about the sustainability of the faster growth. We contribute to this debate in two ways. First, to assess the robustness of the earlier evidence, we extend the growth-accounting results in Oliner and Sichel (2000a) through 2001. The new results confirm the basic story in our earlier work -- that the acceleration in labor productivity after 1995 was driven largely by the greater use of IT capital goods and by the more rapid efficiency gains in the production of IT goods. Second, to assess whether the pickup in productivity growth is sustainable, we analyze the steady-state properties of a multi-sector growth model. This exercise generates a range for labor productivity growth of 2 percent to 2-3/4 percent per year, which suggests that much -- and possibly all -- of the resurgence is sustainable.” By Stephen D. Oliner and Daniel E. Sichel, Federal Reserve Board, 2002. (621 KB, PDF)

ICT and productivity in Europe and the United States: Where do the differences come from?
Abstract: “The surge in labor productivity growth in the United States in the late 1990s has prompted much speculation about the capacity of Information and Communication Technologies (ICT) to structurally increase growth. The simultaneous slowdown in productivity growth in the EU suggests the European countries are falling behind. In this paper we will analyze labor productivity growth in 51 industries in Europe and the United States. Using shift-share techniques we identify the industries in which the U.S. has gained a lead and the underlying reasons for this. The results show that the U.S. has grown faster than the EU because of a larger ICT producing sector and faster growth in services industries that make intensive use of ICT. Lagging growth in Europe is concentrated in wholesale and retail trade and the securities industry. By Bart van Ark, Robert Inklaar, and Robert H. McGuckin, The Conference Board, January 2003. (PDF, 20 pages)

“Changing Gear”: Productivity, ICT and Services: Europe and the United States
Abstract: “This paper examines cross-country and cross-industry differences in labor productivity performance and their association with ICT. It broadens earlier work with coverage of 52 industries in 16 OECD countries. The analysis suggests that ICT diffusion in Europe is following similar industry patterns to those observed in the U.S., but at a considerably slower pace. The key differences between Europe and the U.S. are in the intensive ICT-using services, with U.S. productivity growth showing a strong acceleration during the second half of the decade, whereas growth stalled in the EU. More specifically, the U.S. showed rapid productivity expansion in retail and wholesale trade and securities, which account for much of the overall U.S.-EU gap in productivity growth since 1995. In the ICT producing sector, computers and communication equipment showed strong productivity growth and acceleration in virtually all countries, but differences are much bigger across countries for ICT producing services, such as telecom services.” By Bart van Ark, Robert Inklaar, and Robert H. McGuckin, Groningen Growth and Development Centre, December 2002. (PDF, 85 pages)