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Digital Prosperity: Understanding the Economic Benefits of the Information Technology Revolution

March 13, 2007
| Reports

Executive Summary

In the new global economy information and communications technology (IT) is the major driver, not just of improved quality of life, but also of economic growth. Moreover, there are strong indications that IT has the potential to continue driving growth for the foreseeable future. Yet, most policymakers do not adequately appreciate this fundamental reality. In fact, after the post-2000 economic dip many concluded incorrectly that the IT economy was smoke and mirrors.

The reality is that while the benefits of new technologies are often exaggerated at first, they often turn out to exceed initial expectations in the moderate-to-long term. This is exactly what has happened with the digital revolution. The digital economy is more than fulfilling its original promise, with digital adoption rates exceeding even the most optimistic forecasts of the late 1990s. The integration of IT into virtually all aspects of the economy and society is creating a digitally-enabled economy that is responsible for generating the lion’s share of economic growth and prosperity.

Notwithstanding the centrality of IT to economic growth, there have been surprisingly few attempts to catalogue what is known about IT’s impacts on the economy. This report attempts to do just that by collecting, organizing, and surveying studies and examples of IT’s impact in five key areas: 1) productivity; 2) employment; 3) more efficient markets; 4) higher quality goods and services; and 5) innovation and new products and services.

In order to better understand IT’s role in economic growth it is important to realize that the digital economy is more than an economy conducted on the Internet. Rather, it represents the pervasive use of IT (hardware, software and telecommunications) in all aspects of the economy, including internal operations of organizations (business, government and non-profit); transactions between organizations; and transactions between individuals, acting both as consumers and citizens, and organizations. IT has enabled the creation of a host of tools to create, manipulate, organize, transmit, store and act on information in digital form in new ways and through new organizational forms. And its impact is pervasive as it is being used in virtually every sector from farming to manufacturing to services to government.

Importantly, the “IT engine” does not appear likely to run out of gas anytime soon. The core technologies (memory, processors, storage, sensors, displays, and communication) continue to get better, faster, cheaper, and easier to use, enabling new applications to be introduced on a regular basis. Moreover, the adoption of digital technologies by organizations and individuals continues to grow.

There is no doubt that the IT revolution has enhanced quality of life, from improving health care, to making it easier for children to get better information and learn more, to giving consumers more convenience in their interactions with business and government and making it easier to measure environmental quality. But while these and other benefits are important, perhaps the most important benefit of the IT revolution is its impact on economic growth. The diffusion of information technology and telecommunications hardware, software, and services turns out to be a powerful driver of growth, having an impact on worker productivity three to five times that of non-IT capital (e.g., buildings and machines). In fact, in the United States IT was responsible for two-thirds of total factor growth in productivity between 1995 and 2002 and virtually all of the growth in labor productivity.

While these productivity impacts from IT are among the highest in the United States, most other nations have benefited from the IT revolution as well. Economists have found significant impacts of IT on the productivity of firms in many other nations, including Australia, Canada, Finland, France, Germany, Korea, Japan, the Netherlands, and Switzerland. Moreover, while its impact is not as large in most developing nations, IT is making a difference there as well, in part because IT expenditures rose twice as fast in developing nations from 1993 to 2001 compared to the OECD average. For example, IT usage in China was responsible for 38 percent of the increase in total factor productivity growth and 21 percent of GDP growth.

IT boosts productivity in a variety of ways. It lets companies automate tasks, freeing workers up to create value in other tasks. IT also has widespread complementary effects, including allowing companies to fundamentally re-engineer processes and lets companies more efficiently use capital and natural resources. IT also has a number of indirect effects, which in turn spur higher productivity, including enabling larger markets and better organizational decision-making.

In addition, IT boosts economic output by enabling more people to work. The IT industry itself creates jobs, on average paying 84 percent more than average jobs. Moreover, IT appears to be playing a key role in reducing the severity of the business cycle, allowing the economy to run at full capacity more of the time. Additionally, IT makes it easier for more people to join the workforce, including disabled people and people who cannot work full-time, but who can work part-time or from home.

Our standard of living is not just a function of higher levels of efficiency, but of the quality of products and services. IT is helping organizations boost quality. IT enables more information about quality to be collected, giving organizations greater opportunity and incentive to boost quality. Second, IT makes it easier for organizations to design more customized products and services, which by definition are of higher quality because they more closely fit the wishes of consumers.

Finally, IT is making it easier to create new products and services. IT gives researchers powerful new tools that make discovery easier. Moreover, IT boosts innovation by giving users more of a role in shaping innovation, in part by making research more collaborative.

In short, IT is the major driver of today’s global economy. But just because IT has been the leading engine of growth does not mean that policymakers can afford to be complacent. Ensuring that societies fully benefit from the IT revolution means that policymakers must devote the same, if not higher, level of attention to it than they currently give to more conventional economic policy areas, such as managing the business cycle. While this report does not lay out a detailed IT policy blueprint, it offers five key principles policymakers around the globe should follow if their nations are to fully benefit from the digital revolution.

1) Give the Digital Economy Its Due: Economic policymakers need to see IT issues not just as narrow IT policy, but as the centerpiece of economic policy. This means putting issues of digital transformation at the front and center of economic policy.

2) Actively Encourage Digital Innovation and Transformation of Economic Sectors: The private sector will drive much of digital transformation, but government can play a supportive role. Government should support research in emerging IT areas. Government should also use a wide array of policy levers, including tax, regulatory, and procurement policies, to spur greater IT innovation and transformation, particularly in key sectors like health care, education, transportation, and others influenced by public policy. Moreover, government should lead by example by leveraging their own IT efforts to achieve more effective and productive public sector management and administration.

3) Use the Tax Code to Spur IT Investment: Investment is how IT innovations are diffused throughout the economy. Because IT seems have a much larger impact on productivity, public policies should focus on spurring additional investment in newer generations of IT.

4) Encourage Universal Digital Literacy and Digital Technology Adoption: Ensuring that societies take full advantage of the IT revolution will require that the large majority of citizens participate in the digital economy. National governments need to work in partnership with the for-profit, non-profit, and state and local government sectors to help citizens use and access technology.

5) Do No Harm: Making digital transformation the center of economic policy means not just supporting IT, just as importantly it means avoiding harming the digital engine of growth. All too often well-intentioned policymakers consider laws and regulations that could slow digital transformation.

While the emerging digital economy has produced enormous benefits, the best is yet to come. The job of policymakers in developed and developing nations alike is to ensure that the policies and programs they put in place spur digital transformation so that all their citizens can fully benefit.