Long term implications of the ICT revolution: Applying the lessons of growth theory and growth accounting

How big a boost to long run growth can countries expect from the ICT revolution? I use the results of growth accounting and the insights from a two-sector growth model to answer this question. A two-sector rather than a one-sector model is required because of the very rapid rate at which the prices of ICT products have fallen in the past and are expected to fall in the future. According to the two-sector model, the main boost to growth comes from ICT use, not ICT production. Even a country with zero ICT production can benefit via improving terms of trade. I quantify this effect for 15 European and 4 non-European countries, using the EU KLEMS database. The ICT intensity of production (the ICT income share) is much lower in many European countries than it is in the United States or Sweden. Nevertheless the contribution to long run growth stemming from even the current levels of ICT intensity is substantial: about half a per cent per annum on average in these 19 countries. If ICT intensity reached the same level as currently in the U.S. or Sweden, this would add a further 0.2 percentage points per annum to long run growth.     

DEPRECIATION, OBSOLESCENCE AND THE ROLE OF CAPITAL IN GROWTH ACCOUNTING

Maurice Scott has argued that the neoclassical production function and growth accounting are fundamentally flawed as tools for understanding the growth process. If the role of capital were correctly evaluated, then (he argues) the famous 'residual' of growth accounting would disappear. Contrary to these claims, this paper seeks to show that growth accounting gives correct answers to interesting questions, even when all technical progress is embodied in new capital goods and even when depreciation is entirely due to obsolescence.     

EX POST VERSUS EX ANTE MEASURES OF THE USER COST OF CAPITAL

Should we use ex post or ex ante measures of user costs to calculate the contribution of capital in a growth accounting exercise? The answer, based on a simple model of temporary equilibrium, is that ex post is better in theory. In practice researchers usually calculate ex post user costs by assuming that the rate of return is equalized across assets. But this is only true if expectations are correct. In general, the ex post rate of return differs between assets, even though ex ante it is the same. I propose a hybrid method. The index of capital services is estimated using ex ante weights; the contribution of capital is the growth of this index multiplied by the ex post income share of capital. I show that this method is theoretically correct if the production function is CES. I compare the ex post, ex ante and hybrid methods using data for 31 U.K. industries from 1970 to 2000.     

ICT and Productivity Growth in the United Kingdom

This paper develops new estimates of investment in and outputof information and communication technology (ICT). These newestimates imply that GDP growth has been significantly understated,particularly since 1994. A growth-accounting approach is employedto measure the contribution of ICT to the growth of both aggregateoutput and aggregate input. On both counts, the contributionof ICT has been rising over time. From 1989 to 1998, ICT outputcontributed a fifth of overall GDP growth. Since 1989, 55 percent of capital deepening (the growth of capital per hour worked)has been contributed by ICT capital; since 1994 this proportionhas risen to 90 per cent. ICT capital deepening accounts for25 per cent of the growth of labour productivity over 1989–98and 48 per cent over 1994–8. But even when output growthis adjusted for the new ICT estimates, both labour productivityand TFP growth are still found to slow down after 1994.     

Gibrat,Galton and Job Generation

The proportionate growth of a company decreases with increases in its initial size, in accordance with the Galton model of regression towards the mean. Gibrat's Law of proportionate effect does not hold within size classes or within industries. In job generation accounting, actual increases in employment are even more important than proportionate ones. In the UK small and medium sized companies had larger absolute and proportionate increases in employment than did large companies and were responsible for most of the increase in jobs 1989-93. In fact large companies tended to reduce the numbers they employed.     

Must the growth rate decline? Baumol's unbalanced growth revisited

According to Baumol's model of unbalanced growth, if resourcesare shifting towards industries where productivity is growingrelatively slowly, the aggregate productivity growth rate willslow down. This conclusion is often applied to the advancedeconomies, where resources are indeed shifting towards the relativelystagnant service industries. But Baumol's conclusion only followslogically if the stagnant industries produce final products.If instead they produce intermediate products, the aggregateproductivity growth rate may rise rather than fall. This isempirically relevant since the most rapidly expanding serviceindustries, e.g. business services, are producing mainly forintermediate use.