THE NEW HOLY GRAIL - ICT AND THE NEW ECONOMY

by Chakravarthi Raghavan

Geneva, 5 July 2000 -- Is Information and Communication Technology (ICT), and its benefits being spread more widely among developed and developing countries, the new holy grail for development and the war on poverty?

The information technology revolution will be the main focus of the UN Economic and Social Council, during its 5-7 July meeting—with heads of main multilateral institutions, ministers of information and development, IT pioneers and corporate chiefs meeting to and confer on ways for overcoming the late start of Third World countries, according to an UN Press release.

In an upbeat view of the world economy, the United Nations issued Monday the first chapter of its World Economic and Social Survey 2000, and said that the world economy, which had faced widespread recession during 1997-1998, was now recovering and gathering momentum and the recovery is expected to broaden and deepen in the near future.

It projected growth in gross world output to accelerate from 1.9 percent in 1998 and 2.7% in 1999 to 3.5% in 2000, the highest since 1996.

“In the United States alone, we estimate that the so-called ‘new economy’ is adding about $100 billion a year to total output,” says Ian Kinniburgh, Director of Policy Analysis, at the UN Department of Economic and Social Affairs (DESA) which released the report.

The report flags several downside risks—the large fiscal and current account imbalances, accompanying recovery in the crisis-hit countries, the growing trade deficit of the US (4% of GDP) and large surpluses of Europe and Japan, the strong US dollar and large capital inflows that could be reversed by a shock, including some supply side shocks, and the systemic threat due to the incomplete reform of the world financial system.

The report then presents an optimistic assessment of the New Economy and the ICT revolution, and suggests that rapid advances in information technology (IT) will open up opportunities to stepped-up economic growth in countries that are able to take advantage.

“If the wave of benefits from ICT were to spread itself more widely among developed and emerging market economies, the benefits that the US economy has recently reported would cumulate and help to sustain a faster pace of economic expansion in the short- to medium-run,” it argues.

Adds the UN report: “National governments and the international community should focus on the potential of the ‘new economy’ to raise productivity levels in developing countries and economies in transition. The virtuous circle in the USA has involved a growth-oriented process of adjustment from the ‘old economy’ to the ‘new economy’, whereby the population at last has benefited, albeit not equally. The objective should be to emulate this virtuous circle elsewhere. For this, sound pro-growth domestic policies that encourage the private sector to seize the opportunities offered by the ICT are indispensable.”

The UN’s view of the New Economy and productivity increases in the US, based on US labour department data of productivity increases (1960-1999) on an economy wide level, is more exuberant than a recent report from the UN’s Economic Commission for Europe.

The ECE report (Economic Survey of Europe 2000:1), after looking at the same data, but across various sectors, was more sceptical about the ‘New Economy’.

The UN report cites the most recent revision in the official statistics for the USA and says that the data show that productivity growth since the mid-1990s accelerated to about 2.5 percent. It also says that total factor productivity (gains in growth that cannot be explained by changes in factor inputs) has risen since 1995 to 1.2 percent a year, triple the 0.4 percent rate of the previous two decades.

The UN ECE report has given changes in productivity and unit labour costs—as average growth rates in percentage points—in a detailed table as well as in graph/chart format. The data in the tables are given for total non-farm business, total manufacturing with further sub-divisions in durables and non-durables.

This shows for e.g., that over 1990-1995, changes in productivity for the total non-farm business sector was 1.6, for manufacturing sector as a whole was 3.3 -- durables, 4.5 and non-durables, 2.3.

Over 1995-1999, the ECE data show productivity increase for the non-farm business sector as 2.6, for total manufacturing sector at 5.1 -- 7.6 in durables and 2.3 in non-durables.

The ECE has also provided data on the contribution to growth in real gross output in the US for the entire non-farm business sector in terms of computer hardware, other capital, labour input and multifactor productivity.

There is also another table decomposing the data of productivity growth in the US in terms of cyclical effects, the trend from second quarter of 1972 to fourth quarter of 1995, the improved price measurement and the true structural acceleration—for the non-farm business, durable manufacturing and non-farm non-durables.

From this data, the ECE report suggests that only 0.3 percentage points of the actual growth in output per hour in the non-farm private business sector by 2.2 percent between fourth quarter of 1995 and the first quarter of 1999 reflects a true structural alteration (that the introduction and wide use of computers and ICT may imply).

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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