Magoosh GRE

What is the Impact of ICT on Economic Growth?

| December 7, 2012

Background:

A nation’s standard of living is the most significant indicator of national economic performance. Economic growth is considered the most powerful engine for generating long term increases in standards of living.

In today’s world economy, technology is a key factor that has a strong impact on economic growth both in short and long term. Thus, economists have become accustomed to associate long term economic growth with technological progress (Mokyr, 2005).

Economists identify technology as ideas or knowledge that helps to produce output from inputs. Having more technology means being capable of producing more output with a given amount of inputs.

People tend to focus on computers and the Internet as the icons of economic development, but it is the process that generates new ideas and innovations not the technologies themselves, that is the energy that sustains economic growth (Cortright, 2001). Accordingly, firms have invested in new technologies when they have seen an opportunity to earn profits.

Investment in technology contributes to overall capital deepening. The greater use of technology may help firms reduce their costs, enhance their productivity and increase their overall efficiency, and thus raise economic growth. Moreover, greater use of information and communication technology may contribute to network effects, such as lower transaction costs, higher productivity of knowledge workers, and more rapid innovation, which will improve the overall efficiency of the economy (Moradi and Kebryaee, 2005).

Research aim:

This paper discusses the impact of Information and Communication technology on economic growth.

Research hypothesis:

 The use of information and communication technology (ICT) is directly related to economic growth.

Literature review:

 Although economic growth and technological progress are conceptually distinct, both theory and evidence suggest they often come together. Earlier economists had been interested in linking them together.

Paul Romer’s New Growth theory, often called endogenous growth theory, is a view of the economy that incorporates two points. First, it views technological progress as a product of economic activity. Second, it holds that, unlike physical objects, knowledge and technology are characterized by increasing returns, and these increasing returns drive the process of growth (Cortright, 2001).The central idea of the New Growth theory is that the increase in returns is associated with new knowledge or technology.

According to Romer, economic growth does not result from adding more labor to more capital, but from new and enhanced ideas articulated as technological development.

In the 1950s, Robert Solow developed a model that added technical knowledge as a third factor -beside capital and labor- that continued to push economic productivity and growth (Cotright, 2001). In this model, Solow assumed that changes in technological progress have permanent effects on economic growth, while other changes have only level effects.  Solow’s model pictured technology as a continuous, ever expanding set of knowledge.

Chen and Kee in 2005 developed a theoretical model which states that knowledge is the main engine of economic growth, and that R&D and human capital are tools to “endogenize” the accumulation of knowledge via technical progress (Detschew, 2008). Their main idea was that the increase in human capital in R&D sector produces more innovations and at the same time the higher stock of human capital is considered as a factor of production, and using the innovations raises the rate of output growth. The rate of human capital growth biases the growth rate of productivity and output per worker, consequently, the growth rate per capita GDP (Detschew, 2008).

Discussion:

Taking into account the effects of technology on economic growth, we shift to emphasize on the Information and communication technology (ICT). ICT definition varies, causing intensive confusion. Many economists and agencies could not find a typical definition of ICT within the framework of economics. Patrick Bongo (2005) defined ICT as a set of activities that facilitate by electronic means the processing, transmission and display of information.

 According to the World Bank, ICT consist of the whole range of technologies designed to access, process and transmit information: hardware, software, networks and media for collection, storage, processing transmission, and presentation of information in the form of voice, sound, data, text and images. They range from the telephone, mobile phone, hardware, software to the internet (Detschew, 2008).

Since economic growth is the ability of a nation to produce more goods and services (Bongo, 2005), therefore, the use of ICT enables the production of more goods in a shorter time as well as provides more efficient services. Miles (2001) explained that economic growth could happen in two ways; “the increased use of land, labor, capital and entrepreneurial resources by using improved technology or management techniques and increased productivity of existing resource use through rising labor and capital productivity”, which further explains the impact of ICT on economic growth.

OECD (2003) mentioned three main impacts of ICT on economic growth.

  1. Capital deepening: investment in ICT contributes in overall capital deepening and consequently helps raise labor productivity. While the qualities and capabilities of ICTs have been improved all over the years, nominal prices of most ICTs have decreased (Hempell and Writschaftsforschung, 2006). Together, these developments had large declines in prices in real terms, which encouraged downstream sectors to increase their capital spending in real terms and consequently result in capital deepening. In addition, the decrease in ICTs prices and the resulting capital deepening contribute to overall labor productivity growth.

Contribution of declining prices of ICT equipment to growth:

 

Contribution of declining prices of ICT equipment to growth:

http://www.imf.org/external/pubs/ft/wp/2010/wp1066.pdf

(Haacker, 2010).

2. Technical progress in the ICT sector: for several years, there have been outstanding progress in the production of ICT goods and services; the qualities of these goods and services have improved.

The production of ICT goods and services as a result of rapid technological progress may contribute to more rapid multifactor productivity (MFP) growth in the ICT producing sector (OECD, 2003).

Increasing the amount and type of capital and labor used in production, plus reaching higher overall efficiency in how these factors of production can be used, would directly lead to economic growth, specifically higher multifactor productivity.

http://coevolving.com/blogs/index.php/archive/ict-capital-and-the-services-sector-in-oecd-reports/

3. Spillover effects: the greater use of ICT possibly will help out companies enhance their overall efficiency and thus raise MFP; also it may contribute to network effects, such as lower transaction costs and more innovations, which will improve the economy’s overall efficiency.

 

Figure 1. The contribution of ICTs to economic growth (Source: ITU, World

Telecommunication/ICT Development Report 2006: Measuring ICT for Social and

Economic Development (Geneva: ITU, 2006), 44,

http://www.unapcict.org/academy/academy-modules/english/Academy-Module8-Update-Section1.pdf

Conclusion:

 The three impacts mentioned above all feed through economic growth, which prove that ICT has a positive impact on economic growth. But having this technology only is not enough to derive economic benefits. Many other factors are needed such as stable environment, the availability of the right skills, the organizational ability to make ICT effective in the workplace.

It is important to mention that countries with equal flow of ICT will not always have equal impacts of ICT on their economic performances.

Bibliography:

Tags: , , , , , , ,

Category: Economics, Free Essays