The ‘New Economy’ and Economic Growth in Transition Economies

Marcin Piatkowski

TIGERTransformation, Integration, and Globalization Economic Research,

Warsaw, Poland

e-mail: mpiatek@tiger.edu.pl

WIDER Seminar 21 August 2002

Agenda:

Definitions Motivation for research The potential of the ‘new economy’ The determinants of productive use of ICT The contribution of ICT use to economic growth in

transition economies Conclusions and suggestions for future research

Definitions:

The ‘New Economy’ - an economy displaying faster productivity and economic growth resulting from the two concurrent processes: globalization, that is on-going deregulation, integration of the global markets for capital, goods, labor, and increased competition, and technological revolution based mostly on general-purpose ICT, which impacts all sectors of the economy

Transition Economies - countries of Central and Eastern Europe and the former Soviet Union transforming from a planned to a market economy.

The motivation for research:The three main research questions: 1. What is the potential of the ICT technological

revolution for accelerated economic growth and faster catching-up of transition economies?

2. What are the determinants of the productive use of ICT in these countries?

3. Has there been already any contribution of ICT to growth and productivity in these countries?

Results of research on the impact of ICT in developed countries...

USA - positive contribution of ICT production and use to economic growth and productivity in late 1990s (Oliner and Sichel 2000, Jorgenson and Stiroh 2001, OECD 2001)

EU countries - much less conclusive evidence (Daveri 2002, Jalava and Pohjola 2002). Ireland, Finland, and Sweden benefited the most, while the rest of Western Europe seems to have benefited much less or not at all.

Other developed countries: positive contribution of ICT use to growth in Australia (OECD 2001)

And in developing countries...

South-Asian countries - positive contribution of ICT production to growth (IMF 2001).

Developing countries - return on investments in IT in developing countries is statistically insignificant (Kreamer and Dedrick 2000); Relative share of IT in economic growth of developing countries did not exceed 2% in late 1990s compared to 10% in developed countries (Pohjola 2001)

Lack of evidence for macroeconomic benefits, although micro- and mezzoeconomic anecdotal evidence for positive effects of IT is on the rise.

1. The ‘New Economy’ represents a significant potential for transition economies...

Opportunity for faster growth through technological leapfrogging thanks to imitation, absorption, and productive utilization of technological innovations, ideas, new organizational structures and ways of doing business.

Conditional convergence hypothesis - poor countries should grow faster

‘Public goods’ - search engines, e-mail accounts, and info portals

Evidence of the potential...

Accelerated economic growth in a number of developed and developing countries in the 1990’s

Brdulak (2002) - IT-intensive logistics companies in Poland increased their market share between 1999 and 2001. Piatkowski (2002) found strong correlation (0.92 at the 0.05 significance level) between ICT spending and increase in efficiency of the Polish banking sector 1997-2001.

Rapid growth of e-banking, e-commerce, and mobile telephones - increase in productivity, but also rapid growth in ‘consumer surplus’

2. Determinants of productive use of ICT...

Costs of access to telephone and Internet networks, level of education, and GDP per capita (Kiiski, Pohjola 2001 for developed countries).

Economic and institutional factors (The New Economy Indicator - Piatkowski 2002)

More research needed in this area, particularly in transition economies (enterprise and household surveys).

The New Economy Indicator:

Objective - to assess, based on comparison of the development of institutional and economic infrastructure, the degree of preparedness of post-communist economies for realizing the potential of the ‘new economy’ for faster economic growth and accelerated catching-up.

The ten most important variables for the diffusion of the ‘new economy’...

1. Quality of regulations and law enforcement 2. Infrastructure 3. Trade openness 4. Financial sector development 5. R&D spending 6. Quality of human capital 7. Flexibility of the labor market 8. Flexibility of the product market 9. Entrepreneurship 10. Macroeconomic stability

Proxied by...

1. Legal system effectiveness & extensiveness (EBRD) 2. Total number of telephone lines (main and cellular) plus

Internet hosts per 100 people (ITU 2002) 3. Exports plus imports to GDP (EBRD) 4. Broad money (M3) to GDP (EBRD) 5. Annual R&D spending to GDP (Eurostat) 6. Education Index 1999 (UNDP 2001) 7. Unemployment rate (EBRD) 8. Competition policy index (EBRD) 9. Private sector share in GDP (EBRD) 10. Inflation (EBRD)

Methodology...

The NEI is a weighted sum of values of all ten variables for each country. It has been assumed that the first six variables will be given twice as large relative weight compared to other variables.

Variables are selected, ensuring that each of them is either entirely positively or negatively related to the main concept;

If variables are negatively correlated (like inflation), they are multiplied by –1 to insure that always ‘more is better’;

Variables are standardized. The sample mean is subtracted from each observation and then the result is divided by a sample standard deviation. This implies a mean of zero and a standard deviation of one across countries in the sample. Hence, all results are comparable and can be aggregated.

Ranking:

Country NEI rank NEI score Slovenia 1 10,1785 Czech Republic 2 9,4404 Hungary 3 7,3497 Estonia 4 7,2152 Slovak Republic 5 6,6799 Poland 6 3,7016 Bulgaria 7 2,9908 Latvia 8 2,3387 Lithuania 9 1,6368 Croatia 10 1,3759 Russia 11 1,0092 Kazakhstan 12 0,2158 Ukraine 13 -0,2864

Moldova 14 -0,8892

Krygyzstan 15 -1,4902 Romania 16 -1,7719

Armenia 17 -2,6630

FYR Macedonia 18 -2,7710

Turkmenistan 19 -3,3181 Belarus 20 -3,6276

Tajikistan 21 -3,7250 Georgia 22 -4,0096

Azerbaijan 23 -4,5110 Uzbekistan 24 -4,5665 Albania 25 -5,1069

Bosnia 26 -7,2454

FR Yugoslavia 27 -8,1505

Conclusions...

The most advanced countries in the transition process are also the most likely to take advantage of the ‘new economy’.

Countries lagging in the ranking risk finding themselves in a “technological trap”

ICT revolution may thus contribute to further polarization of growth rates among the transition countries

The potential of the ‘new economy’ will remain unharnessed without sufficient progress made in the development of the economic and institutional infrastructure of the transition economies (i.e. Jorgenson 2001 evidences importance of human capital and organizational changes for productive use of ICT in USA)

3. The impact of ICT on growth in transition countries...

The ICT can impact economic growth in three ways (Pohjola 2002):

1. The production of ICT goods and services, which directly contributes to the aggregate value added generated in an economy;

2. The use of ICT as an input in the production of other goods and services;

3. The increase in productivity of production in ICT sector, which contributes to overall productivity in an economy (TFP)

Impossible to measure (1) and (3) in transition economies...

Due to lack of sufficient data on the size of the ICT sectors in transition countries and the input-output price information at the industry level, it is not possible to estimate the contribution of ICT to economic growth through production (1) and increase in TFP (3).

Yet, it seems possible to measure (2) - the impact of ICT investment on economic growth in a number of transition economies in the period 1993-2001.

Sources of data...

ICT spending for eight transition countries - Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovakia, Slovenia, Russia - from WITSA (2002)

Fixed capital stocks, GDP growth, employment, share of wages in total income - national statistical agencies

Chain-index constant-quality price indices for ICT equipment - US Bureau of Economic Analysis (2002)

Exchange rates - ITU (2002)

Methodology...

ALvKvCvYwYwY LtICTICT

ICTˆˆˆˆˆˆ

000

0

),,(),( 0ttttt

ICTtt LKCFAYYYY

Assuming that constant returns to scale prevail

in production and that all production factors are

paid their marginal products, equation (1) can be

expressed in the following form:

To measure impact of ICT investment, it is best toexpress the aggregate production function in thefollowing form:

Methodology...

The three most important steps in measurement: ICT capital stock= Beginning ICT capital stock+ICT investment

(Deflated+Depreciated) Income share of ICT = (gross rate of return * nominal ICT

stock)/nominal total income Gross rate of return = nominal interest rate on long-term bonds

+ risk premium + ICT depreciation rate

Preliminary results for Russia 1994-2000

GDP growth Contribution of ICT Invest. 1994 (-13,58) 0,08 1995 (-4,19) 0,48 1996 (-3,46) 0,24 1997 0,91 0,30 1998 (-5,02) 0,36 1999 5,25 0,54 2000 8,62 0,66

AVG 96-00 1,26 0,42

Conclusions...

ICT spending had a positive and growing contribution to economic growth of Russia in the 1994-2000 period. Nonetheless, its impact was small and did not exceed 0.66 percentage points in any year.

Explanation: ICT investments are too small to have a significant impact on

growth. It takes time to build ICT capital stock. Conclusions based on growth accouting measurements have

their limits. It is because growth accounting decomposes growth, but it does not explain the underlying forces behind it.

Problems with data...

Inadequate information on: a) aggregate fixed capital stocks b) return on capital investments c) hedonic prices (constant quality price indices) d) data from before 1990 and in early 1990’s tends to be not

consistent with data from later years. E) and of course, data on ICT investment.

Suggestions for future research...

Measurements of ICT contribution to growth in other transition countries for which ICT data is available

More precise estimates of ROI on ICT in post-communist countries (the question of supernormal returns)

Estimates of the contribution of ICT production to growth Spillover effects - increase in economy-wide TFP resulting from

increases in productivity in ICT-using industries. Determinants of absorption and diffusion of ICT