Information and communications technology: New Economy and the Productivity Paradox
The extraordinary performance of the U.S. economy in the late 1990s and the associated economic growth were referred to as the ‘‘new economy.’’ The computing power of microchips, which underlies the rapid progress in productivity of ICT, has doubled every 18 24 months since 1965, as Moore’s Law predicted. Contrary to mainstream economists’ theoretical models, inflation and unemployment were low at the same time, particularly following 1992, and the economy experienced sustained growth and the stockmarket boomed throughout the 1990s.
The new economy phenomenon happened because of a number of factors. First, increased efficiency in firms’ management though ICT adoption affected productivity growth at the firm level and connected productivity growth in each industry through spillover effects. As a consequence, productivity in the total economy increased. In other words, since the middle of the 1980s,more intensive competition between companies contributed to high investment in IT and the introduction of innovative management, which in turn affected productivity gains.
Second, productivity gains led to a low inflation rate. When productivity continues to grow, the inflation rate becomes lower because inflation is offset by productivity increases. Furthermore, lowinflation coexists with low interest rates, and it increases the investment rate. Finally, it can link productivity growth and sustained economic growth in an interconnected cycle of investment, productivity, and economic growth.
Third, the wide-ranging diffusion of IT and Internet use made it possible for the new economy to evolve. The spread of IT and the Internet due to price reductions stimulated the network effect, and it induced sustained economic growth by creating increasing returns to scale in the whole economy. Furthermore, continuous strong productivity growth since the 2001 recession made it likely that some of the gains of the late 1990s may endure.
In disagreement with the widespread view about productivity gains through ICT adoption, Robert Solow commented in 1987 on the IT productivity paradox that the productivity of the workforce had not risen as IT had extended through Western industry. It was widely believed that office automation was boosting labor or total factor productivity, but the growth accounts did not seem to confirm this, because the ‘‘computer era’’ from the early 1970s to the time that Solow spoke about the paradox included a massive slow-down in growth as the machines were becoming ubiquitous.
The causes of the productivity paradox are the following. First, a portion of the benefit fromICT is not included in productivity statistics. Productivity statistics of service sectors with a high rate of investment in ICT correspond to this case. For example, the increased benefit of financial services such as ATMs (automated tellermachines) is not included in productivity statistics. Insurance, business services, and health services show the same phenomenon of the benefits of ICT not being fully reflected in productivity statistics.
Second, there may be a lag in productivity improvements. The lag is because computers did not enhance productivity until things such as software, the Internet, and handhelds became prevalent. It takes a long time for a new technology to become popular and companies to adopt it. Given that ICT increasesmultifactor productivity through networks, and building a network requires a long time, productivity growth will lag behind the initial introduction of new technology. Productivity growth originating from IT may already be occurring, but a flaw in the measurement tools available may be hiding it.
Third, previously much research aimed at identifying the effect of ICT at the company level was based on small samples. If the early impact of ICT is trivial, research in the early stage will not capture the contribution of ICT. In addition, some research shows that the ICT impact differs by industrial sector. These days, there are more detailed data on ICT investment available to measure the impacts of ICT.
In the search for explanations of the productivity paradox, Oliner and Sichel (2000) deny the significance of the IT sector by arguing that IT accounted for nomore than 2 percent of the capital stock in any country in the world. Other economists have made more controversial statements about the utility of computers: that they pale into insignificance as a source of productivity advantage when compared to the first industrial revolution or the adoption of motorcars.