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Economic Forum reviews information technology’s impact on productivity and economic prospects

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2001
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On December 12, an IMF Economic Forum examined “The Information Economy: New Paradigm or Old Fashion?” A group of experts representing different viewpoints discussed the impact of information technology (IT) on productivity growth and the prospects of other industrial countries for achieving a U.S.-style economic expansion.

Thomas J. Duesterberg, President of the Manufacturers Alliance/MAPI, suggested that the “new economic paradigm” could be characterized as one in which rapid innovation in IT—combined with globalization, deregulation, and a number of other competitive factors—substantially improved business processes and permanently raised the long-run rate of productivity growth relative to the past quarter century.

Duesterberg provided evidence of how new technologies are altering U.S. business practices. Web-enabled real-time information exchanges between businesses, he said, are yielding significant dollar savings and productivity benefits. The automotive industry, as well as other industries that produce highly engineered products, is on the cutting edge of exploiting the Internet’s advantages. In all of these industries, there has been a marked decrease in inventory-to-sales ratios and an enhanced ability to customize products and services to customer demands. IT investment has also increased the efficiency and reliability with which industrial parts are machined and lowered the cost of global communications, making it easier for companies to produce in a variety of locations to serve local markets and use global means of production.

Many of the signs of the new economic paradigm, Duesterberg added, are not obvious to the public but are evident in redesigned business practices, streamlined supply chains, flatter management structures, and other fundamental shifts in how goods and services are designed and produced. The impact of these microlevel changes has been an acceleration in labor productivity growth. U.S. corporations are far from having fully exploited the benefits from IT, so future productivity growth, he observed, is likely to remain strong.

Mark Wynne, Senior Economist and Research Officer of the U.S. Federal Reserve Bank of Dallas, considered why, relative to the United States, European economies have adopted technology less rapidly, have grown at a slower rate with higher rates of unemployment, and have not seen an acceleration in labor productivity growth. He cited three key differences in their business environments to explain why this is so. First, the burden of government is greater in Europe than in the United States, and therefore requires higher tax rates to finance greater levels of government spending. Second, European firms tend to operate in a less competitive environment than U.S. firms owing to the smaller size of their domestic markets, greater regulation and nationalization of industries, and higher tariff and nontariff barriers to trade. Third, social and cultural attitudes toward entrepreneurship in Europe tend to hinder new business development.

Although Europe has lagged behind the United States in terms of adopting technology and economic performance, Wynne observed that prospects are bright for improved European performance in the future. The continued process of European economic integration will create a single domestic market for European firms that will allow them to reap the efficiencies that have typically been available only to U.S. firms. Moreover, Europe’s common currency, by eliminating exchange rate risk, will deepen and strengthen the single market. Already, a pan-European capital market has emerged, he said, that has facilitated a pickup in merger and acquisition activity. A more favorable business environment is emerging—the result of the integration process, the single market, the more market-friendly policies of governments, deregulation, and privatization. Over time, these will facilitate technological innovation and adoption, potentially creating a “new economy” experience in Europe.

Lawrence Mishel, Vice President, Economic Policy Institute, suggested that although Europe had not experienced a recent pickup in productivity growth, economic conditions in Europe, as measured by a number of indicators, may be better there than in the United States. During the 1990s, growth of real annual compensation was stronger in four other Group of Seven countries than in the United States, and while hourly compensation in the manufacturing sector fell in the United States, it rose in many European countries. He noted that international comparisons of output per hour worked reveal that, as of 1997, Belgium, the Netherlands, France, and Germany had productivity levels equal to that in the United States. Moreover, productivity growth in Europe over the last three decades has increased twice as fast as in the United States. One explanation for the weaker long-term performance of U.S. productivity growth, Mishel said, is that other economies are catching up—assimilating technological improvements pioneered in the United States. The data on productivity levels suggest that by the mid-1990s several European countries had caught up to U.S. levels, and many others had significantly narrowed the gap.

Mishel challenged the ideas that a large welfare state, labor protection, strong unions, extensive social insurance, and extensive market intervention pose obstacles to European growth and that the U.S. “model” should be emulated in Europe. Europe has been able to catch up to U.S. productivity levels despite the presence of what some consider impediments. Mishel cited the far greater wage and income inequality in the United States and concluded that, as the European experience illustrated, productivity growth does not necessarily entail a widening in income inequality.

The transcript of the IMF Economic Forum “The Information Economy: New Paradigm or Old Fashion?” is available on the IMF’s website (www.imf.org).

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