Economic Development, Growthand the ICT Connection

By

Paul A. DavidStanford University and the University of Oxford Internet Institute

A Keynote Presentation to the WSIS Thematic Meeting

Economic and Social Implications of ICTAntigua, Guatemala, 17th -19th January 2005

A Keynote Presentation to the WSIS Thematic Meeting Economic and Social Implications of ICT

Antigua, Guatemala, 17th -19th January 2005 ___________________________________________________________________

Economic Development, Growth and the ICT Connection

By

Paul A. David

Stanford University and the University of Oxford

AN OVERVIEW I have a three-fold aim in this brief presentation. Firstly, I wish to underscore the evidence that points to the existence of strong complementarities and mutual interactions among elements of economic development, particularly during several historical episodes when a radically new technology emerged as a key driver of long-run economic growth. The general bearing of that theme upon the way we should be thinking about the contemporary role of information and communication technologies (ICTS) -- in the developing and the economically advanced economies alike -- will be quite transparent to everyone present. To try to delineate some among of the multiple of pathways of influence, through which information technology and the information infrastructure shapes and is shaped by economic processes, will be a more formidable challenge. Secondly, I want to emphasize the “dis-connects” between the realities of the complex and dynamic phenomena of economic development, and the faint and distorted shadows of that reality that are projected on to the statistical surfaces we examine when we analyze the sources of “measured economic growth.” Economic growth is not the same thing as economic development, and “measured economic growth” sets us the task of understanding inevitably flawed, and now increasingly obsolete indicators of the phenomena in which we should really interest ourselves. The effects of the growing importance of information and information technologies during the past quarter-century have only contributed to the severity of the problem. This point carries some obvious implications for the degree of caution that is appropriate when considering much of the macroeconomic evidence that today is confidently produced in the otherwise laudable quest for “evidence based” growth policies. Lastly, the third of my goals is to elaborate a darker theme, by focusing on some problematic implications of the existence of those same complementary relationships that appear to lie at the heart of technology–driven surges of economic growth. Modern information and computer-mediated telecommunication technologies themselves are evolving through the convergence and clustering of complementary innovations, a process that is characteristic of the emergent properties of a “general purpose technology”. GPTs exert a pervasive transformative influence throughout the economy and many of their effect are conducive to enhanced economic performance. But onll\y rarely are their impacts “neutral”. Instead, they disturb the relative values of productive assets thereby inducing changes in the composition of investment. They disrupt established industries, displace workers, alter the social status as well as the remuneration of occupations, and reconfigure both the comparative and the absolute economic advantages associated with different geographical locations. GPTs that impinge directly upon the media of communications also have the capacity to undermine some well-established social and political power-relations, but also to further entrench others. In short, the central role played by GPTs throughout the history of modern economies is among the main causes of the observed association between sustained growth and structural change. To appreciate this is to add one more good reason in the current context for greater attention to building better institutional mechanisms for the care and compensation of members of society whose economic welfare and well-being otherwise is likely to suffer serious “collateral damage” in the course of the growth and development based on exploiting the potential of the new information and communications technologies.

Economic Development, Growth and the ICT Connection

The presentation will proceed rapidly through the following topical list.

OUTLINE Introduction: On the Purposes of Keynotes and the Value of “Dis-cords” Tuning the chorus, getting on the same page Reassuring common prayers and historical benedictions Awakening to discordant notes On Growth, Development and “Measured Economic Growth” “Growth” -- sustained economic transformation, beneficial to human welfare “Development” -- endogenous capability to sustain growth “Measured growth” --a low-dimensional biased indicator of economic change On Knowledge and Economic Development Knowledge as a human capability and the “KIDs-triangles” Knowledge & information as socio-cultural constructs and societal resources Reliable knowledge from experimentation, learning and communication On ICTs, Information and Data – Assets and Products Tangibles and intangibles: hardware, middleware, software – and skills Digital “working capital”—dynamic databases, classifications Organizations, information and data: the power of “blinkers”... and vice versa On ICTs, Networks and Markets – Metaphors and Structures Real markets and the substrate of social communication networks Connectivity and coordination for enterprise Network architecture matters: strategic position and payoff distributions On General Purpose Technologies (GPTs), ICTs and the Growth Process The concept and characteristics of GPTS GPTs and historical transformations: General purpose engines Complementarities, externalities and the unstable dynamics of development On ICTs and Measured Economic Growth –Paradoxes and Potentialities ICTs, the “productivity paradox” and the return of “our ignorance” ICTs as sources of measurement error -- “uncreative destruction” of NIAs “New economy”?— Toward the “re-newed” economy, and “informed society”

Introduction: On the Purposes of Keynotes . . . and the Value of “Dis-cords”

Tuning the chorus, getting on the same page

Reassuring common prayers and historical benedictions

Awakening to discordant notes

Introduction: Three “off key” themes

In economics everything depends on everything else, in at least two ways –complexity is unavoidable, embrace it.

Competitive markets work wonders, but not everywhere -- and especially not in the production and distribution of information.

In order for economic growth to improve general well-being and material welfare, it is necessary also to design processes that yield equitable outcomes.

On Growth, Development and “Measured Economic Growth”

Growth -- sustained economic transformation, beneficial to human welfare

Development -- the endogenous capability to sustain growth

“Measured growth,” e.g., real GDP per capita -- a low-dimensional, biased indicator of economic change

On Knowledge andEconomic Development

Knowledge as a human capability, and the “KID-triangles”

Information and societal knowledge -- socio-cultural constructs and resources for development (and growth)

Reliable knowledge from experimentation, learning and communication

Knowledge as a human capability --relationships to information and data

knowledge is the capability formed from information

information is the signal(s) extracted from data -- using knowledge

information is translated into actions(based on knowledge), including the generation and capture of data

Knowledge as a human capability --the “K I D - triangles”

I D

K

D K

I

K I

D

building knowledge (capabilities for action)

extracting information (“signals”)from data

Generating and capturing data

Information and societal knowledge --socio-cultural constructs and resources for development (and growth)

societal knowledge

isolated knowledge pools

C & C

Codification and Communication forms societal (common) knowledge, augmenting individual capabilities with shared “tools”

ITCs and Information as a commodity—some basic economics

Information is not a normal (private) commodity, it has several of the properties of “pure public goods”…

“infinite expansibilty,” i.e., negligible marginal transfer costsSignificant costs of exclusion from access and ‘possession’High initial (fixed) costs of production

Which has serious implications for market transactions:Competitive markets fail to allocate ‘public goods’ efficiently

‘mc pricing’ leaves most costs uncovered, even at large scales

external use benefits are not properly valued by private parties“willingness to pay”

Societal knowledge -- socio-cultural construction and intellectual property rights

IPRs are one solution to the “appropriability problem”, but while these incentives for knowledge codification and disclosure, they also impose obstacles to its diffusion.

Intellectual Property Rights

Private or PublicPatronage

Public Provision

“The Three P’s” and the Mix of Solutions to the Knowledge-Appropriation Problem

On ICTs, Information and Data –Assets and Products

Tangibles & intangibles: hardware, middleware, software – and skills

Digital “working capital”—dynamic databases, classifications

Organizations, information and data: the power of “blinkers”... and vice versa

On ICTs, Networks and Markets –Metaphors and Structures

Real markets and the substrate of social communication networks

Connectivity and coordination for enterprise

Network architecture matters: strategic position and payoff distributions

How network architectures matters: the instructive case of ICT applied in “supply-chain management” Networked ICT permits purchaser reduce unit costs of search for supply sources & unit costs of inventory holdings;

“Lean inventories” are least risky when a purchaser has market power, so use of ICT network and “loss-leader” pricing of final goods to gain market share are mutually reinforcing;

Enlarged market share brings greater monopsony power, which ICT network position enables purchasing agents to exploit by making “take-it-or-leave-it” price offers to suppliers;

Outcome: ICTs provide some efficiency gain, but also helps increase the (big) “buyer’s surplus” by reducing the (many small) “suppliers’ surpluses”.

On General Purpose Technologies (GPTs), ICTs and the Growth Process

The concept and characteristics of GPTs

GPTs and historical transformations: general purpose engines

Complementarities, externalities and the self-reinforcing (unstable) dynamics of development

Concept and characteristics of GPTs

GPTs are technologies that share four characteristics (Lipsey, Bekar, and Carlaw ,1998):

Wide scope for improvement and elaborationApplicability across a broad range of usesPotential integration in wide variety of processes and productsComplementarities with existing or potential new technologies

GPTs and historical transformations: general purpose engines

vertical water-wheel --leading to 18th c. (Smeaton) breast-wheel designsteam-engine --leading to Watt’s separate condensing low-pressure, and Corliss’s high-pressure engineselectric dynamo (Faraday) --leading to Edison’s efficient DC generator and Tesla’s polyphase AC generatordigital computer – leading to transistor-based microprocessor, and VLSI chips

GPTs and historical transformations: general purpose engines (2)

Historical analogies can help inform economic analysis, and identify aspects of significant novelty in the modern (digital) GPT“Although the analogy between information technology and electrical power technology would have many limitations if taken very literally, it proves illuminating nonetheless…. In both instances we can recognize the emergence of an extended trajectory of incremental technical improvements, the gradual and protracted process of diffusion into widespread use, and the confluence of other streams of technological innovation, all of which are interdependent features of the dynamic process through which a general-purpose engine acquires a broad domain of specific application.

– P. A. David, 1991

Complementarities, externalities andself-reinforcing (unstable) dynamics

supply-side complementaries and industrial “development blocs,” and potential coordination failuredemand-side complementaries and capital formation boomstechnical complementarities and “chicken-and-egg” innovation quandriescritical mass, “tipping” and winner-takes-all in market competition (e.g., where network externalities are strong and interoperability standards matter)

On ICTs and Measured Economic Growth –Paradoxes and Potentialities

ICTs, the “productivity paradox” --and the return of “our ignorance”

ICTs as sources of measurement error: the “uncreative destruction” of Nation Income Accounting systems

Forget “the New Economy”--exploiting ICT potential for a “renewed economy”, and an “informed society”

ICTs, the “productivity paradox” -- and the return of “our ignorance”

Measured total factor productivity (TFP) growth rate: a weighted index of the growth rates of labor productivity and capital productivity

TFP growth is the residual growth (not accounted for by growth of the factor inputs) is “a measure of our ignorance”

The post-1997 US TFP growth revival reflected a long period of heavy public and private investments in ITC networks and business reorganization—with little immediate payoff

ICTs as sources of measurement error in the National Income Accounts

ICTs have enabled bundling of service provision with tangible goods, but unit prices of services are hard to measure;

ICTs enabled “mass customization” and increased the share of new goods, tending to increase the importance of un-measured quality improvements;

Efforts to adjust official prices of ICT equipment (and some software) to reflect quality improvements have distorted inter-industry and international comparisions of output, productivity growth.

Exploiting ICTs potential for a “renewed” economy, and an “informed society”:

Three concluding policy preceptsAny economic policy based on a simple argument (about information and knowledge) probably is wrong.

“Pure market” and “pure non-market” solutions for ICT infrastructures and services are likely to fail; try mixing, but don’t blend.

No real and sustained improvements in economic welfare will be achieved at the expense of the many.

Paul A. David -- Biographical Sketch : December 2004 Paul Allan David is Professor of Economics and Senior Fellow of the Institute for Economic Policy Research at Stanford University. He is Professor Emeritus of Economics and Economic History in the University of Oxford, Emeritus Fellow of All Souls College, Oxford and currently Senior Fellow of the Oxford Internet Institute. David is the author of more than 150 journal articles and contributions to edited volumes, as well as of the author and editor of several books including Technical Choice, Innovation and Economic Growth (1975) and The Economic Future in Historical Perspective (2003). He was among the pioneering practitioners of the "new economic history," and is known internationally for wide-ranging contributions in the fields of American economic history, economic and historical demography, and the economics of science and technology. Investigation of the conditions that give rise to ‘path dependence’ -- the persisting influence of historical events in micro- and macro-economic phenomena – is a recurring theme in his research. Two main areas of contemporary economic policy research have emerged in his work the past two decades: the evolution of information technology standards and network industries, and the influence of legal institutions and social norms upon the funding and conduct of scientific research in the public sector, and the interactions between that latter and private sector R&D. David currently leads an international research project on the organization, performance and viability of free and open source software. David’s service as a consultant to international organizations has included work for the World Bank, the United Nations Commission on Trade and Development, the United Nations University Institute, the OECD, several directorates of the European Commission of the EU, the European Committee for Future Accelerators, the Economic and Social Research Council (U.K.), the Treasury and the Ministry of Science and Technology of New Zealand, and the German Monopolies Commission. He also has had extensive service-experience as a consultant to U. S. government agencies and foundations, including the National Academy of Science (National Research Council), the National Science Foundation, and the Departments of Commerce, and of Energy; the Rockefeller Foundation, the Sloan Foundation and other public and non-profit organizations. He is at present a non-executive member of the board of directors of La Compagnie de Saint-Gobain. Many professional honors have been bestowed upon David in the course of his career, including election as Fellow of the International Econometrics Society (1975), Pitt Professor of American History and Institutions in the University of Cambridge, as Fellow of the American Academy of Arts and Sciences (1979), Vice-President, and President of the Economic History Association (1988-89), as Marshall Lecturer in the University of Cambridge (1992), Ordinary Fellow of the British Academy (1995), Member of Council of the Royal Economics Society (1996-2002), Member of the American Philosophical Society (2003); and the award of a Doctorate Honoris Causa by the University of Torino (2003). Contact Address: From 1 October 2004 to 15 March 2005 :Department of Economics, Stanford University, Stanford CA, 94es305-6072.Fax:01+(650)+725-5702 ; Email:<pad@stanford.edu>. After 16 March 2005: Oxford Internet Institute, 1 St.Giles, Oxford, OX1 3JS. Tel. (+44) 01865 287210. Email:<pdavid@herald.ox.ac.uk.