Perspectives on a Global Economy: Making the Most of the Information Age--Productivity and...

Robert H. McGuckin and Bart van Ark; The Conference Board, New York, NY; 2001; Order from Conference Board Customer Service, Tel. (212)339-0345; www.conference-board.org

Information and communications technologies (ICT) are now driving a broad wave of productivity gains in the United

States, leaving Europe and many other countries behind, according to this report. "At the aggregate level, most OECD countries showed no productivity acceleration in the second half of the `90s," says Robert H. McGuckin, director of economic research at The Conference Board and author of the report along with Bart van Ark, a consulting director for The Conference Board's International Economic Research. "In fact, the European Union as a whole experienced a substantial deceleration in productivity growth. But the gap in productivity growth between the U.S. and Europe is only partly due to the U.S. head start in developing computer technology. U.S. productivity acceleration in the second half of the `90s owes more to information and communications technology use than to its production."

The United States was a clear exception to the deceleration trend, within the OECD as a whole, with labor productivity growth now tripling compared to the first half of the `90s, the report finds. While the U.S. leads in the production of computers and semiconductors, other countries (including Finland and Japan) have developed competitive advantages in the production of wireless communication equipment and robotics.

Trailing the United States in the production of information and communications technologies does not explain the relatively poor performance of industries that use such technologies intensively. The substantially lower acceleration in productivity growth in ICT-using industries outside the U.S. suggests that their investments in these critical sectors are much lower than in the U.S. Using new international comparative evidence on industries that produce and use information and communications technology, the report finds that the European ICT-using industries offer a tremendous potential market for growth.

In many European countries, the report continues, limited productivity growth in information and communications technology-using industries suggests underinvestment. Restricted investment opportunities in these industries can be traced to insufficient liberalization and impediments to market evolution. Aided by recent structural reforms and the introduction of the euro, Europe now appears to be in a process of transformation. Barriers to change and market evolution are widespread, however, and opportunities are still restricted in many information and communications technology-using industries, such as transportation, communication, and banking.

"It is the use of ICT, not its production, that is the likely key to future growth acceleration," says van Ark. "Even though computer and communications equipment have been readily available in a worldwide market for quite some time, it appears that we are at the beginning, not the end, of the diffusion process, even in the U.S. This suggests that the longer-run productivity gains and market advantages are likely to be found in the creative use of information and communications technologies. While the relative size of the information and communications technology-using sectors is similar across countries, there are substantial differences in the productivity growth resulting from investments in information and communications technologies."

In the U.S., 1.1 percent of the acceleration in labor productivity growth from 1995 to 1999 arose from intensive information and communications technology users, on top of the 0.35 percent from information and communications technology producers. In the second half of the `90s, the U.S. benefited greatly from information and communications technology production and use in speeding up its productivity growth.

"To realize the potential efficiency gains from ICT in Europe and Japan, businesses must make the most of expanded investment opportunities, but they must also support reforms that enable the restructuring of firms and transfers of resources," the report says. "Regulatory rigidities inhibit reallocations of labor and capital to their most productive uses, reducing the benefits to be obtained from investment in new technologies."

"While the opportunities for information and communications technology investment still appear less in countries where reforms in these intensive ICT-using industries have lagged, many countries now appear to be in a process of transformaton. Structural reforms, for example, new competition rules in communications, banking reforms, and even the adoption of the single currency have made larger, more efficient product and capital markets possible. But recent compilations of economic and administrative regulations suggest that Europe and Japan still have some way to go before they will be able to fully exploit the new technologies made possible by computer and information technologies. Failure to move forward on regulatory liberalization and the reduction of impediments to market evolution would perpetuate the present underinvestment in information and communications technology. Realizing the potential growth effects from information and communications technology is not automatic," the report cautions.