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Mainstream, VOL LVII No 27 New Delhi June 22, 2019

ICT Revolution, Digitisation and Growth

Monday 24 June 2019

by Sanchita Bhattacharya and Arup Mitra

Resource-intensive growth is not desirable for most of the developing countries as serious trade-offs are involved between the present and future growth outcomes. Non-resource driven growth is the key to economic prosperity and rise in competitiveness and exports. But then the substantial question arises as to what is the driver of non-resource driven growth. One class of literature argues that the only determinant of long-run rate of growth is technological development or technical progress since the rate of return on capital follows a diminishing pattern. The notion of total factor productivity growth (TFPG) is interpreted as an improvement in output levels not accounted by the growth in factor inputs. Arrow (1962) considered technical change as the result of learning-by-doing, where “doing” refers to the process of investment. He used the link between growth of knowledge and cumulative level of investment to model the rate of technical change which may contribute to non-resource driven growth. In his postulation investment is seen as causing changes in the environment which would stimulate learning. On the other hand, the other “knowledge-based” endogenous growth models refer to the imitation model. (Barro and Sala-i-Martin, 1995) The imitation model involves costs in transferring knowledge which then contributes to positive long-run growth.

Romer (1990), another “knowledge-based” endogenous growth theorist, argued that the growth of technological progress of a firm can be a function of the level of resources devoted to research as well as the existing level of knowledge the firm has access to. Nadiri (1993) found a positive and strong relationship between R&D and the growth of output or total factor productivity. Further, in terms of techno-logy diffusion and growth Sena (2004) noted that a firm with low Research and Development (R&D) expenditure can draw from the high-tech technology firm without incurring any substantial cost and therefore, the high-tech firms’ innovative efforts may explain other firm’s productivity growth. The channels of diffusion of spillovers which vary considerably may take the following form: intra- and inter-industry relationships, interdependence between public and private sector investment, supplier and purchaser connections, and geographical location, as well as domestic firms and firms in other countries through international technology market trade and multinational entry. R&D activity is a channel for the diffusion of knowledge on innovative ideas from one firm to another and the increase in productivity growth can be translated to the market value of the firm. That widespread technology diffusion creates the possibility for increasing returns to investment is argued by Arthur (1996). Mitra, Varodakis and Veganzones-Varodakis (2002) presented evidence to suggest infrastructure— physical, financial and social—as a major determinant of total factor productivity growth. Among the three components social infra-structure is the most important one with an emphasis on human capital (education and health). Human capital investment plays a pivotal role in driving TFP growth. Recent studies by members of Asian Productivity Organisation (APO, 2004) reported positive effects of quality change in labour on TFPG due to higher educational level for most countries.

Many have argued in favour of ICT-led development based on the notion that investments in ICT can accelerate economic growth by enhancing worker productivity and increasing the returns to investment in other capital goods (APO, 1990; Mody and Dahlman, 1992; OECD, 1988). In addition, the ICT industry itself can be a source of economic growth and jobs. Ahmed (2006) noted that ICT in the activities of Malaysia’s manufacturing sector contributed significantly to its productivity growth in general and total factor productivity (TFP) growth of the sector in particular. Labour input was subdivided into skilled, semi-skilled and unskilled, to measure the achievement of the knowledge-based economy (K-economy) through human capital involved in the sector and evidence shows that contribution of the ICT used in the sector was the highest among all the inputs.

On the whole, in this entire body of literature on determinants of non-input driven growth ICT emerges as the common frame. For example, even when we believe that TFPG is technology- driven we must recognise the fact that both technology and skill bear a highly compli-mentary relationship. Without requisite improve-ment in skill the advanced technology cannot be operated optimally. On the other hand, both technology upgradation and skill acquisition have become increasingly ICT-driven. New methods or experiments for technical progress cannot be operationalised without ICT. R&D cannot be undertaken without ICT. Technological progress is attained with the help of ICT as an input and also as a device through which it is manifested or executed. On the other hand, the new technology requires the knowledge of ICT for the one who operates it. On the whole, ICT is required as an input and also ICT is used extensively at the level of yielding output. The stock of human capital, the level of domestic innovation and technological adaptation, and the level of ICT infrastructure all exert positive effects on long-term economic growth.

Singh (2002) discusses the possibilities for broad-based IT-led economic growth in India, using ‘better telecom’ links to capture more benefits domestically through offshore development, having greater spillovers to the local economy, improving the functioning of the economy through a more extensive and denser communi-cations network and improving governance. Further, Singh (2006) noted the role of ICT, playing a crucial role in the context of infrastructure, which is indeed an important determinant of non-resource driven growth. Focusing on the rural economy, where the developmental needs are the greatest, and the use of ICT presents serious challenges, the study examines the nature of benefits in areas such as education, health, market efficiency and democratic participation. channels through which impacts can be realised, and the practical means for realising potential benefits, including organisational innovations and government policy as well as structural changes (Singh, 2006).

The ability of IT-based communications (combined with storage and processing) to bring together buyers and sellers more effectively represents major potential gains. These gains can come about through lower search costs, better matching of buyers and sellers, and even the creation of new markets. Improving TFPG by moving from low value product (LVP) to high value product (HVP) is important. As a firm moves from LVP to HVP there will be greater scope and need to utilise ICT. Also for the marketing of HVP greater amenities are required which are more ICT intensive. Application of ICT in units and sectors where it has not been used so far, for example, informal manufacturing enterprises, can contribute hugely to improving the performance. ICT use can enhance information accessibility which can reduce risk and raise the prediction capability of the entrepreneurs. This results in reduction in wastages and, losses. Further, through ICT requisite training and education can be introduced in a cost-effective manner.

Singh (2015) reviews a number of success stories. Computer-aided registration of land deeds and stamp duties in Andhra Pradesh reduced dependence on brokers and possibilities for corruption. Delays were cut down substantially through computerisation of rural local government offices for delivery of statutory certificates of identity and landholdings. Computerised checkpoints for local entry taxes in Gujarat for example, with data automatically being sent to a central database, curtailed possibilities for local corruption. Consolidated bill payment sites in Kerala are noteworthy which allowed citizens to pay bills under seventeen different categories in one place, from electricity to university fees. Similarly requests through e-mails for repairs to basic rural infrastructure such as hand pumps, led to a decline in the dependence on erratic visits of government functionaries.

In this era of ICT-led development, the impact of ICT capabilities can be enormous on growth and productivity if the business environment can be made digital. The transformation of design and delivery of public services through greater use of digital technologies requires a developed ICT platform, increasingly shared infrastructure and administrative machinery. A bonding of ICT capabilities and digital technologies is essential prerequisite for reaping optimum return from investment in digital technology.

The business strategy can be transformed and revamped through digital techniques. This transformation is possible in different aspects and stages of planning and implementation through adoption of digital techniques in goal, models, production orientation, operational approaches and marketing of enterprises. In this context, it is worth-mentioning that marketing through digital/ video advertising can be used more efficiently to increase service productivity than traditional marketing. Several studies have exhibited that digital transfor-mation can go a long way in enhancing growth of output, productivity, generation and expansion of revenue.

In one of the studies of OECD (2016), it has been reported that digital technology can create an open, participatory and trustworthy public sector and emphasises its crucial role in improving social inclusiveness, accountability of the government and making a platform to bring together government and non-government actors. The report recommends digital technology as a strategic driver for developing innovative approaches to contribute to long-term and sustainable growth of an economy. The report mentions about the lessons drawn from Digital Welfare services of Nordic countries. The focus on digitisation of education, health-care, social care and protection services and smarter use of related technologies have been referred as digital welfare in the paper. Certain guiding principles have been documented for setting and implementing the government strategies for engaging citizens, maintaining public trust, improving governance for better outcome, strengthening capabilities and thereby increasing returns on investments in digital technologies.

There are some studies showing that investment in digital technology can have a multiplier effect on economy in future. The report by Accenture urges that better returns in high-performing economies can be achieved from an optimal combination of investments in digital skills, digital technologies and digital accelerators. The modelling of Accenture provides an example of the US economy where the combination of digital skills, technologies and other assets could enhance productivity and generate additional economic output. Their model makes an assessment and reports that value addition is possible in the economy through use of digital skill in combination of use of intermediate goods and services. The study shows that an inter-action of three levers—digital skills, digital technologies and digital accelerators—acts as a growth multiplier. The indicators related to these three levers are broad and specific. Digital skills are related to information, communication and technological skill of employees to facilitate remote working. Digital technologies include mobile connectivity so that the economy can make use of the industrial internet. Digital accelerators are related to parameters such as access to finance etc. The report states that a 10-point improvement in digital opportunity in terms of three levers can enhance 2.1 per cent Gross Domestic Product to the economy.

A study by Shanks and Barnes (2008) examines the impact of communications infrastructure and digitisation on productivity in Australia. They found a positive impact of communications infrastructure on productivity.They also found a coefficient of interaction between digitisation and IT capital of 0.01, suggesting that each of these is reinforced by the other with an elasticity of 0.01. Waverman et al (2005) explores the impact of mobile communications on growth and productivity. The authors observe that mobile communication has a positive and significant impact on growth, and interestingly enough the impact in developing countries is double compared to that in developed countries. From the evidence of 192 countries during 1990-2007, Gruber and Kouproumtis (2010) have found that the impact of mobile telecommunications have significant impact on growth and productivity. Their study suggests that the growth impact increases with the level of diffusion i.e, adoption of mobile telecommunications results in increasing returns. The evidences mentioned in several reports across countries point towards the fact digital technology sets a direction, brings optimality in resource allocation and makes best use of ICT to raise the performance level of individual and maximise return on invest-ment, resulting efficacy in overall business environment.

References

Ahmed (2006), The impact of ICT and human capital on achieving knowledge-based economy: applications in Malaysia’s economy, World Review of Science Technology and Sustainable Development, 3(3), January. 

Asian Productivity Orgaisation (1990), Information technology and development, Tokyo, APO.

Arrow, K. (1962), The rate and direction of inventive activity: Economic and social factors, Princeton University Press. 

Barro, R. J. and X. Sala-i-Martin, (1995), Technological diffusion, convergence, and growth, NBER Working Paper No. 5151, June. 

Frontier Economics Contribution of the digital communications sector to economic growth and productivity in the UK—economic analysis paper FINAL REPORT PREPARED FOR THE DEPARTMENT FOR CULTURE, MEDIA AND SPORT (DCMS) September 2011, Frontier Economics Ltd, London.

Gruber, H. and P. Koutroumpis (2010): “Mobile telecommunications and the impact on economic development”, First Draft for Economic Policy.

Mark Knickrehm, Bruno Berthon and Paul Daugherty (2016), Digital Disruption: The Growth Multiplier Optimising Digital Investments to realise higher Productivity and Growth, Accenture Strategy.

Mitra, A., A. Varodakis and M. A. Veganzones-Varodakis (2002), Productivity and technical efficiency in Indian States’ manufacturing: the role of infrastructure. Economic Development and Cultural Change, Vol. 50, pp. 395-426.

Mody, A. and C. Dahlman, (1992), Performance and potential of information technology: An international perspective, World Development, Vol. 20(12). pp.1703-1719.

OECD (1988), New technologies in the 1990s: A socio-economic strategy, Paris.

OECD (2016), OECD comparative study digital government strategies for transforming public services in the welfare areas.

Nadiri, M. I. (1993), Innovations and technological spillovers, NBER Working Paper No. 4423, August.

Romer, P. (1990), Endogenous technological change, Journal of Political Economy, Vol. 98(5).

Sena, V. (2004) The return of the Prince of Denmark: A survey on recent developments in the economics of innovation. Economic Journal 114: F312-332.

Shanks, S. and P. Barnes (2008): “Econometric Modelling of Infrastructure and Australia’s Productivity”, Internal Research Memorandum, Cat No: 08-01.

Singh, Nirvikar (2002), Information technology as an engine of broad-based growth in India, in The future of India and Indian business, ed. P. Banerjee and F.-J. Richter, London: Palgrave/Macmillan, pp. 34-57.

Singh, N. (2006), ICTs and rural development in India, https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=950322

Singh, N. (2015), Information technology and its role in India’s economic development: A review. http://www.ncaer.org/uploads/photo-gallery/files/1438927028Singh_Paper_IGIDR25th_2015%20(1).pdf

Waverman, L., M. Meschi and M. Fuss (2005): “The Impact of Telecoms on Economic Growth in Developing Countries”, The Vodafone Policy Paper Series, No.2, March 2005.

The authors belong to the National Institute of Labour Economics Research and Development, Delhi.

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