Investment in ICT and international

competitiveness

Marcin Gomułka

World Economy Research Institute

The economic approach

vs

The business approach

What is competitiveness?

Paul Krugman (1994):

the most popular definition of competitiveness
nowadays runs along the lines of the one given in
Council of Economic Advisors Chairman Laura
D'Andrea Tyson ... :

competitiveness is "our ability to produce
goods and services that meet the test of
international competition while our citizens
enjoy a standard of living that is both rising
and sustainable."

Krugman says, it's simpler:

So in an economy with very little international trade,

the growth in living standards -- and thus

"competitiveness"... -- would be determined almost

entirely by domestic factors, primarily the rate of

productivity growth.

That's domestic productivity growth, period -- not

productivity growth relative to other countries.

In other words, for an economy with very little

international trade, "competitiveness" would turn out

to be a funny way of saying "productivity" and would

have nothing to do with international competition.

Business reasons to invest in ICT

Nr

Type of investment

Comment

Profitability

1

Infrastructural

LAN network. Base for further
investment.

Low

2

Required/forced

Regulations or business partner

None. Cost of doing
business

3

Only way to do the
job

Flight ticket reservation

Has potential

4

Direct profitability

Can be calculated upfont

Low

5

Intermediate
profitability

Reservation systems for travel
agencies

High potential

6

Necessary to compete Automatic teller machines. EDI, e-

commerce.

Low for followers

7

Strategic

Company strategy relies on it

High potential

8

Transformative

Virtual corporations. Necessary
change in philosophy and
organisation.

High potential

Source: Lucas (1999)

Reason 3: Only way to do the job

Consider that ca. 50% of US economy

is now information processing

ICT are the machines for that job

1800

1820

1840

1860

1880

1900

1920

1940

1960

1980

0

10

20

30

40

50

60

70

80

90

100

Agriculture

Industrial

Service

Information

Information processing is the dominant part

of the US economy.

(% of employment)

Source: http://www.cscs.umich.edu/~crshalizi/reviews/beniger/beniger-table.html

Enabler: falling prices of ICT

equipment

Source: Brynjolfsson, Yang (1996)

Moore's Law – the progress in the

production of capital goods

Source: Brynjolfsson, Yang (1996)

The consequence is that it is possible to

get more information processing power

for the same money

We do spend more on ICT. We also get

more.

Nominal and real share of

investment

Investment jump
ca.1978-1984

Source: Brynjolfsson, Yang (1996)

Acceleration of growth in the

late1990s – caused by IT?

Source: Triplett, Bosworth 2003

This is a big economic issue

There were 3 phases in the growth of

the US economy

1. After WW2 growth 1945-1973

2. Productivity growth slowdown 1973-

1995

3. Faster growth since 1995

Investment surge in the late 1990s

Source: McKinsey (2001)

Is ICT as a „General Purpose

Technology”?

Lipsey et al. (1998) :
"a technology that initially has much scope for
improvement and eventually comes to be
widely used, to have many uses, and to have
many Hicksian and technological
complementarities" -
Examples:
- steam
- electricity

Some industries benefit from IT

investment, many do not.

Source: McKinsey (2001)

Finance in the EU enabled by ICT in 1984

LP_I

E

M

P

/E

M

P

_T

O

T

0.

02

0

0.

02

5

0.

03

0

70

80

90

100

110

120

130

J

EU15ex

EUROex

LABOUR PRODUCTIVITY

S

H

A

R

E

O

F

T

O

TA

L

E

M

P

L

O

Y

M

E

N

T

st

ag

na

tin

g

pr

od

uc

tiv

ity

Enabled productivity growth

1984

ICT capital goods productivity has

grown

Software goods production has not

Consequences for international

competitiveness

Productivity of software coding

(programming tasks per month)

Source: IMF 2001

Change
in prices
of IT
goods

These

activities can

get offshored

Conclusions

It's better to look at productivity than

competitiveness

ICT investment enabled growth after 1995

Software is now a real competitiveness issue

(who is producing what)

Some simple productivity

issues

Q= A⋅L  A=

Q

L

1. quantities

p⋅Q=w⋅L

value identity

pQ

Q

=

w L

A



A=

w

p

2. prices

Two approaches to productivity

Two sectors and purchasing power

farmers buying apples

w

1

p

1

farmers buying houses

w

1

p

2

builders buying apples

w

2

p

1

builders buying houses

w

2

p

2

Competitiveness =

Productivity plus pricing power

nominal wage=w

1

=

p

1

Q

L

=

p

1

A

real wage=

w

1

p

*

=

p

1

p

*

⋅

A

QUICK INTRODUCTION INTO

GROWTH ACCOUNTING

HOW CAN WE EXPLAIN GROWTH?

How to get higher output?

OUTPUT

OUTPUT

LABOUR

CAPITAL

TECHNOLOGY
PROGRESS

Some multipliers

OUTPUT

OUTPUT

LABOUR

CAPITAL

TECHNOLOGY
PROGRESS

m

L

m

K

1

Put this all in an equation.

Consider growth rates.

OUTPUT
GROWTH

=CAPITAL

GROWTH

⋅

m

K

LABOUR

GROWTH

⋅

m

L

TECH

GROWTH



5 % =2 %⋅0.30



capital impact



2 %⋅0.70



labour impact



3 %



residual

Example: