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The Contribution of Information Technology to Productivity Growth

International Comparison

March 2001
Yoshihito SAITO

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Summary

  1. (1) In the US, the acceleration of labor productivity growth that started from 1996 had entered a fifth year by mid-2000, leading to a growing consensus that the progress of IT innovation has contributed to a structural improvement in labor productivity. According to some analyses, the contribution of IT is estimated to have accounted for more than half of the acceleration in US productivity growth during the late 1990s. Furthermore, in a number of other countries such as Australia, Canada, and Norway, robust economic growth in the late 1990s led by IT was also observed. This paper examines the following: (1) the contribution of IT to labor productivity growth in the US; (2) international comparison of the size of the IT industry and IT capital deepening in developed countries and the contribution to labor productivity; and (3) reasons for the international difference in labor productivity growth in the late 1990s, and the extent to which IT contributed to the formation of this gap.
  2. (2) The progress of IT has pushed up labor productivity in the following ways: (1) through an increase in Total Factor Productivity (TFP) in IT industries. (2) IT capital deepening; and (3) positive synergistic effects between the IT capital stock and other capital stock or labor. As for the US in the late 1990s, the growth rate of labor productivity increased by one percentage point compared to the long-term trend. Previous studies show that factor (1), improved efficiency in IT industries and factor (2), IT capital deepening accounted for 50-70% of the increase in the growth rate of labor productivity. Furthermore, as there is a strong correlation between TFP and IT stock ratio i.e. IT stock/total capital stock by industries, the contribution of factor (3), positive synergitic effect is also considered to be significant. Thus, the contribution of IT to the increase in labor productivity is quite substantial.
  3. (3) In order to examine the extent to which IT pushed up labor productivity growth in countries other than the US, I compared the economic performance of the developed countries in the 1990s. In OECD countries as a whole, average GDP growth was slowing down in the 1990s compared to the 1980s. The labor productivity growth rate did not show any remarkable increase, either. Yet, in Scandinavian countries such as Sweden, Norway, and Finland as well as English speaking-countries such as the US, Canada, and Australia, GDP growth and the growth rate of labor productivity accelerated.
  4. (4) I examined the effect of IT on the labor productivity growth by decomposing labor productivity growth into the previous mentioned three factors. As for factor (1), improved efficiency in IT industries, in Scandinavian countries such as Sweden and Finland, where IT industries are growing rapidly, the contribution of IT is large. In these countries it is probable that the expansion of IT industries has contributed to labor productivity growth to a substantial extent, even more so than in the US. As for factor, (2) capital deepening, as a result of the active IT investment in English-speaking countries such as the UK and Australia, IT stock has contributed considerably to labor productivity growth. With respect to factor (3), substantial synergistic effects are observed in English-speaking countries, where goods and labor markets are less regulated and the progress of capital deepening is rapid. There is a possibility that the accumulation of IT stock has achieved synergistic effects simultaneously in these countries.
  5. (5) Because not enough data regarding IT innovation has been accumulated, we should be careful how we treat the above findings. However, in many countries that achieved strong growth in the 1990s, rapid progress in IT innovation in the form of growth in IT industries or IT capital deepening is observed. On the other hand, IT innovation tended to be slow in countries with poor economic performance. This shows that IT has a considerable effect on economic growth through the supply side. Also, the difference in the progress of IT actually exerted an influence upon the differences in economic performance during the 1990s in industrial economies.
  6. (6) By looking at the background to the gaps in IT capital deepening and TFP growth by country, we can observe that there is a high correlation between IT innovation and the strictness of regulations in goods and labor markets. In countries with high TFP growth, regulations are generally lenient. On the other hand, in highly regulated countries, there is less competition between companies since corporate governance structures are not functioning effectively. Such an environment can curb the incentive to invest in IT, thus, in such an uncompetitive environment, it is hard to encourage TFP growth.
  7. (7) When we turn to Japan, the size of IT industries is relatively large. However, IT capital deepening is much lower compared to English-speaking countries such as the US, Australia, and the UK. It means that there is a need to activate IT investment on the user side and, in order to realize this, it is important to provide a competitive environment for corporate activity.