ICT as a GPT: an Historical Perspective Nicholas Crafts

The Solow Productivity Paradox “You can see the computer age everywhere except in the productivity statistics” Robert Solow, 1987

Solow Paradox Revisited Even before the mid-1990s ICT had a much bigger impact than steam or electricity The Solow paradox was based on unrealistic expectations…initially new technologies have a small weight in the economy The growth potential of GPTs has been realised more quickly over time

Steam as a GPT Steam Engines, Railways, Steamships James Watt’s invention: 1769 Liverpool & Manchester Railway: 1830 Steamship crosses the Atlantic: 1838

Steam Engine Technology Took a long time to become cost effective in most sectors Coal consumption per hp per hour fell from 30 lb pre- Watt to 12.5 lb for Watt engine to 2 lb by 1900 when psi reached 200 compared with 6 in1770 The big breakthrough was not James Watt but the move to the high pressure steam engine after 1850 Cumulative effect on British labour productivity over 150 years similar to that of ICT on American labour productivity over 35 years

Source: Kanefsky (1979a, p338); not including internal combustion engines Sources of Power, (Thousand Horsepower) Steam Water Wind Total

Source: Crafts (2004); includes railway, steamships, steam engines Total Steam Contribution to Growth of Labour Productivity (% per year)

Implications Small contribution of steam pre-1830 helps explain Crafts-Harley view of industrial revolution Strong contribution of steam power in second half of 19 th century says climacteric not explained by hiatus between GPTs Puts Solow Paradox into perspective

The Computer and the Dynamo (David, 1991) The big impact of commercial electricity on American productivity was in the 1920s, 40 years after Edison TFP spillovers a key aspect of the 1920s’ productivity surge; factory design improved through learning externalities in transition from drive-shafts to wires Across manufacturing sectors, change in TFP growth strongly correlated with change in electric motors Impact of TFP spillovers is to raise Y/L growth in manufacturing by 2.4, whole economy by 0.7pp/year

Contributions to US Labor Productivity Growth (Crafts, 2002; Oliner et al., 2007) ElectricityICT (0.28)

Real Hedonic Price Index for Electric Motors in Sweden (Edquist, 2010)

Source: Nordhaus (2007)

Note: the estimates are for a benchmark textile mill in a low coal cost region like Manchester Capital Cost and Annual Cost per Steam Horsepower per year (£ current) Capital CostAnnual Cost

Impacts of GPTs on Growth ICT much bigger impact on American growth in recent past than steam ever had on UK growth Costs of computing have fallen much faster than did costs of electrical power or steam power ICT is historically remarkable Society seems to be getting better at exploiting GPTs more rapidly

Does Innovation Generate Supernormal Profits? (Nordhaus, 2004) Innovators capture about 2% of the total social gain from technological progress The US stock market valuation of ‘new economy’ firms grew between 1995 and 2000 at a rate that implied owners could capture 90% of the social gain Yet the appropriability of gains from ICT unlikely to match that of earlier technologies including railways

Social Savings vs. Growth Accounting Alternative methodologies to estimate contribution of new technology to economic growth Social savings pioneered by Fogel (1964) for US railroads; measures reduction in cost Social savings amounts to a subset of growth accounting; net vs. gross effects Social saving focuses attention on the benefits; generally speaking, in the long run users get the benefits of a new technology (Nordhaus, 2004)

Social Savings of Railways Transport benefits = total economic benefits Fogel’s upper bound measure: A + B + C + D + E Under perfect competition real cost of rail transport falls at rate of TFP growth (price-dual measure) Compared with growth accounting includes own TFP contribution but no spillovers and no capital deepening Capital deepening not ‘unique’; in absence of railway other normal-returns investments

Figure 2 Transportation T0T0 T1T1 D2D2 E D A PTPT B P T0 P TI D1D1 C D

Social Gains from Railways, 1912 (%GDP)

Welfare Benefits Growth accounting focuses on increase in productive potential but social savings highlights user benefits Not necessarily the same in an open economy British railway-users got nearly all the benefits Cotton textiles in the industrial revolution: foreign consumers took 60% of the benefits of British technological progress (Harley,1999)

Transport Benefits May Not Capture All the Economic Benefits Wider economic benefits may be relevant; cf. recent developments in transport CBA Understanding the characteristics of the transport-using sector matters Imperfect competition (freight) New goods (passengers) Agglomeration benefits from industrial re-location, bigger cities etc = TFP spillovers (both)

City Size and Labour Productivity Elasticity of labour productivity with respect to city size in range 0.04 to 0.11 Robust result but could be one or more of several reasons Effective city size is the key concept; population with 80 minutes of UK NUTS1 region has positive effect on productivity (Rice & Venables, 2004) If railways increased effective city size, there would be a TFP spillover

Better Transport: with Productivity Externality

TFP Spillovers In danger of being unduly neglected; clearly the really hard part of evaluating impact of GPT GPTs often have geographic implications and that may be key source of spillovers Intra-sectoral correlation of capital in use and TFP growth does not necessarily capture these

Growth in No-ICT-Production Country (Oulton, 2010) y c = Bh 1-α –β (k c ) α (k ICT ) β Δp/p = μ c – μ ICT < 0 Δy c /y c = μ c + (1-α-β)Δh/h + αΔk c /k c + βΔk ICT /k ICT User cost = marginal product, so Δy c * /y c * = μ c + (1-α-β)Δh/h + αΔy c * /y c * + β(Δy c * /y c – Δp/p) Δy c * /y c * = Δc * /c * = (μ c – βΔp/p)/(1-α-β) + Δh/h

Implications So in open economy consumers get higher growth from technological progress in foreign ICT even though no domestic ICT production Projected ICT-use effects on long-run growth generally much bigger than ICT-output effects Economies like Ireland which export ICT production have a negative terms of trade effect on real income

ICT-Use Effects vs. ICT-Output Effects (% per year) (Oulton, 2010) ICT-UseICT-Output Finland France Germany Ireland Uk USA

Special Features of Celtic Tiger Growth Pivotal role for export-platform FDI and supply- side policy designed to attract it Exceptionally large share of ICT production (Domar weight = 22.6%) GDP much bigger than GNP and terms of trade adjustment to real income growth unusually large Employment growth made a large contribution to real GDP growth

Source: Timmer and van Ark (2005) Contributions to Labour Productivity Growth, (% per year) IrelandEU Total ICT TFP in ICT Production Other TFP Other Capital Deepening Labour Productivity Growth

Growth of Real GNP (% per year) GNPGNP/HeadGNP/HW TT-Adjusted GNP/Head

Europe and ICT European countries have generally not matched USA in ICT contribution to growth; UK does relatively well “American diagnosis” is too much regulation too much taxation, too little competition (the ‘corporatist legacy’) Less ICT production but also smaller ICT capital- deepening contribution; the latter is the worrying diagnostic ICT-using services (e.g., distribution) have been Europe’s Achilles Heel and may be where regulation has slowed diffusion most

Regulation and the contribution of ICT-using services to aggregate productivity growth ICT using services, Product market regulation (inward-oriented), 1998 Correlation coefficient: t-statistic: Source: Nicoletti & Scarpetta (2005)

UK in the ICT Era Compared with big continental economies, UK fares much better with ICT than with Fordist manufacturing Thatcherite reforms have lagged pay off Competitive product markets and flexible labour markets are favourable to relatively rapid diffusion of ICT NB: downside is exposure to large and badly- regulated financial services sector

Social Capability and ICT Standard American criticisms of Europe at least equally valid for 20 years before 1995 Social capability depends on requirements of the technological epoch It is not that there is more regulation but rather that existing regulation is more costly in the ICT world

Policy Lesson Social capability that facilitates diffusion is the key to good productivity performance Technology transfer matters much more than domestic R & D; 5/6 new technology comes from R & D in ROW (Eaton & Kornum, 1999) Intangible capital rather than just R & D is key to exploiting new technology (Haskel et al., 2009)