Dr. Catherine L. MannBarbara ’54 and Richard M. Rosenberg Professor of Global Finance

International Business School, Brandeis University

Ascent After Decline: Re-Growing Economic GrowthWorkshop, November 19, 2010 World Bank

Information Technology, Globalization, and Growth:

Production Economies of Scale or Trade in Variety Benefits

Three Factors Relate ICT and Growth

Production of ICT: Gains from TFP and Economies of Scale

Consumption/Use of ICT: Gains from Use of Variety

International Trade in ICT Gains from Import via Terms of Trade

What is the Relative Importance for Growth?

Production, Use, Trade in ICT

*Terms of Trade: Prices of exports/prices of imports

Domestic Focus Trade Focus

ICT sector must keep growing as a share of

the economy to continue the gains

Capital-intensive production; job gains slow

Export ICT to keep gains from EOS and TFP?

Falling ICT prices means terms of trade (TOT)* move against the ICT exporter

[Mann (2006, Fig 2.4]

Evidence: Gains from Production and EOS

Total Factor Productivity (TFP) in ICT

TFP in ICT industries is higher than rest of economy

~ 8 % in ICT-producing vs. ~ 3% in ICT-using (1979-02) [ Van Ark (2005)]

Economies of Scale (EOS) in ICT production

ICT EOS accounts for 30% of US ICT TFP

(1978-99) [Chun and Nadiri (2008)]

Evidence: Gains from Import and Use

Terms of trade favor the ICT importer

Falling ICT prices => 0.3pp increase in US TFP (92-99) [Mann (2003)]

TFP increases more for ICT-using industriesTFP in ICT-using industries increases 250% vs. only 30% in ICT-producing (79-95 vs. 95-02). [Van Ark (2005)]

Evidence: Gains from Trade and Variety

Export variety increases TFP

Accounts for 40% of the difference in TFP across countries

Mostly due to variety in electronics [Feenstra and Kee (2007)]

Import variety increases TFPAccounts for 25% of TFP growth of developing countries [Broda, Greenfield, Weinstein (2006)]

Net Imports of IT ------------------ Net Exports of IT

Net Imports

Gain ~ TOT effect

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Net ExportsLoss ~ TOT effect

ICT, Trade, and Growth: No variety

Net Imports of IT ------------------ Net Exports of IT

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Net Import

High Variety; Domestic useAccentuates TOT Gain

Net Export

Low Variety: Economies of ScaleIn export productionOffset TOT loss

Net Export

High VarietyOffset TOT loss

Net Import

Low Variety: Supply Chain In imported intermediates to export supply chain

ICT, Trade, and Growth: Add variety

PriceIT

Direct DemandIT

E0/P0E1/P1

P0

P1

AB

Social Surplus (A+B+C) is larger with Higher income elasticity of demand for IT () Higher price elasticity of demand for IT () Bigger fall in PriceIT Larger Real GDP More IT intermediates and IT externalities

C

Total DemandIT

Take to the Data: Social Savings

Social Savings by CountryElasticities from Bayoumi and Haacker

(time and country effects)

β (price elasticity) = -1.31

(income elasticity) = 1.58

Real IT prices, Country-specific (current data 1999-2006)IT prices from BLS => assumes global market IT prices

Country GDP deflator => country-specific relative price IT

Take to the Data: Social Savings

Trade in IT by country (2003–2006)Production less expenditure

Real IT expenditure, Country-SpecificReed Electronics

Real Production, country-specific WITSA

Take to the Data: Trade in IT

Take to the Data: Variety in Trade of IT

Herfindahl indexes of variety in trade

H* k j = ((S (i=1 to N) s2 i k) - (1/N k))/(1- 1/N k)

Country j; , Sik is the share of product (i) in total imports/exports of the ‘product

group’ (k) and Nk is the total number of products in the ‘product group’ (k).

Market segments (k) correspond to the OECD semi-aggregates of

telecommunications, computer and related equipment, electronic components,

audio and visual equipment, other ICT goods (medical devices, GPS,

instruments…)

Product (i) = 178 product classes, 6-digit HS from COMTRADE Country (j) = 45 countriesSegment (k) = 5

Source: Mann (2010)Net IT Trade: (IT Production-expenditure) %GDP

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(%G

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hypothesis

data

Take to the Data

On averagenet IT imports

strongly related to Economic

Well-being

BUT

Dispersion of countries

around trend

Can Varietyhelp explain?

Take to the Data: Net Importers

On averagenet IT exportsNOT related to Economic

Well-being

AND

Huge Dispersion of country experience

Can Varietyhelp explain?

Take to the Data: Net Exporters

Tallest Export Bars: EOS Gains but negative TOTShortest Import and Export Bars: Variety Gains, TOT Gains

Concentrated net exporter, lower

well-being

Variety net Importer and net exporter,

Highest Well-being

Concentrated net importer, medium

Well-being

Variety and Country Experience

Conclusions

1) Net Importers gain more than net exporters of IT On average, terms of trade dominate

2) But, many net exporters do gain Imported intermediates in an IT supply chain

3) Variety of imports and exports explain country deviation from average Lower growth more concentrated exports, imports

Higher GDP/per capita higher variety imports

ICT Strategies To Maximize Growth

1) Start as part of a supply chain: Countries without global engagement in IT have worst growth

2) But, exporting only, gives up potential gains from ICT Loss on Terms of Trade and lack of variety imports

3) Maximize TFP and growth with Domestic production for export

High variety imports for highest