Government economists are optimistic that the UK can experience an
"Internet effect" on productivity, and inflation. Matthew Cobb
explains why measuring the impact of e-commerce is a central to UK
Online
The UK Online report claimed that the performance of the UK ICT
sector is well ahead of the rest of Europe and pointed out that
high-tech industries account for one third of economic growth,
despite contributing just 8% of GDP. However, what is missing is
proof that there is an economy-wide "Internet effect" that can
boost growth and prolong economic recovery as it has in the US.
The US Department of Commerce is already into its third year of
measuring the impact of the Internet on the economy, but the UK
equivalent of the US Digital Economy reports will not be available
until 2002.
Meanwhile, government economists are cautiously optimistic.
DeAnne Julius, of the Monetary Policy Committee (MPC) at the Bank
of England, said recently, "A convincing case can be made that
developments in the US are a leading indicator of events here. The
UK, like the US, has seen a sharp increase in investment spending
on ICT in the latter part of the 1990s, and productivity growth has
recently begun to rise.
"High-tech industrial sectors, such as computers and mobile
phone production, have achieved double-digit growth in three of the
past four years, in contrast to declining or static output in the
manufacturing sector as a whole."
Another MPC member, Sushil Wadhwani, told LSE economists, "One
might reasonably expect the UK to mirror recent US experience, with
a two to three-year lag because of slower IT diffusion in the
UK."
The Government's attempt to measure the economic impact of the
Internet comes after years of academic scepticism towards the
effects of technology on growth. In 1987, US Nobel prize-winner
Robert Solow outlined what became known as Solow's Paradox - "The
computer age is everywhere, except in the productivity
statistics".
Until the mid-1990s, the absence of an IT-effect on productivity
was taken as gospel by economists. But a series of recent studies
from the US Federal Reserve Board (FRB), and up-beat reports from
the US Department of Commerce suggest that ICT is playing a key
role in driving growth rates in all sectors.
Using the latest US figures, FRB statistician Karl Whelan found
that expenditure on ICT equipment in the US grew at 4.4% per year
between 1992 and 1998, and that the impact of computing and growth
in the ICT industry directly accounted for a 20-year high in growth
rates. Whelan found that 74% of the US' growth acceleration was due
to IT.
The Digital Economy 2000 report from the US Department of
Commerce said, "Two remarkable developments occurred in the second
half of the 1990s. After quietly improving in speed, power and
convenience since 1969, the Internet burst onto the economic scene
and began to change business strategy and investment. At the same
time, the US economy has enjoyed a remarkable resurgence.
"Productivity growth doubled its pace from a sluggish 1.4%
average between 1973 and 1995 to a 2.8% rate from 1995 to 1999.
Evidence is increasing that these two phenomena are not
coincidental but derive substantially from the same
phenomenon."
Price declines in IT hardware and software, the "network effect"
from online trade and the increased productivity of the ICT sector
itself were the key factors, the report said.
However, Robert Gordon, professor of economics at Northwestern
University in the US disagrees. He 0found that, in comparison with
the "second industrial revolution" 100 years ago, which brought us
telecommunications, chemicals and the oil industry, the computer is
having very little impact on productivity.
Gordon argued that ICT is having an effect on productivity only
in the computer industry itself and in the durable manufacturing
sector, which makes up only 12% of the US economy. In the remaining
88%, he said the explosion in computing power had a "minimal"
impact on productivity.
"The greatest benefits of computers lie a decade or more in the
past, not in the future," said Gordon.
Of course, part of the problem lies in the statistics. The US
Department of Commerce figures show that, in services, IT
investment produced a statistical decline in productivity - a
phenomenon it attributes to measurement problems.
Jonathan Coppel, senior economist at the OECD, told Computer
Weekly, "ICT is heavily used in services, such as hospitals and
administrations, where it is extremely difficult to measure
output."
Furthermore, measuring the "Internet effect" in Europe is being
hampered by the time lag in gathering statistics. Reliable figures
for this period are only available from the US. A recent OECD
report on the impact of ICT on the G7 countries bemoaned the fact
that comparable international statistics were simply not available
for 1997 onwards.
This is why UK Online contains a raft of measures to standardise
and speed up the measurement of e-commerce effect in the UK and the
European Union.
There are currently no agreed international criteria for
measuring e-commerce. EStatMap, the UK framework, is compatible
with the emerging OECD indicators for e-commerce, but is more
comprehensive, as it includes ISP costs.
As part of a drive to improve statistics in this field, the
Government is to launch a pilot survey of business Internet use
this autumn, and the e-commerce research centre at De Montfort
University plans a project to measure the value of UK
e-commerce.
Despite statistical problems, Coppel believes the Solow Paradox
is being overcome. "Is there a new economy based on ICT and
biotechnology? Our answer is probably yes - at least in the US," he
said.
In the UK, the jury is still out, but for Tony Blair,
transforming the UK economy using the Internet is central to
economic policy. As he said at the UK Online launch, "I truly
believe that if we modernise our economy, if we take the tough
choices needed for the future and live up to the challenge of the
knowledge economy, we can reverse the decades of decline that we
suffered in the 20th century and become one of the world's most
successful economies in the 21st century."
Read the full report on www.e-envoy.gov.uk
News special reporting team
Paul Mason, Mike Simons, Robert Dunt, Hazel Ward, Matthew Cobb.
Edited by Paul Mason. Graphics by Al Grant
Comment
Why business leaders should back Blair's plans