ICT as a Driver of Productivity: The Role of Structural Policies

1. ICT as a Driver of Productivity. The Role of Structural Policies “Workshop on Productivity”, October 31, 2005, World Bank Marcin Piatkowski International Monetary Fund

2. Summary • ICT producing sector accelerated productivity growth in CEE countries. Yet, it is too small to drive convergence. It will have to rely on the use of ICT • ICT use contributed to faster productivity growth in CEE countries • There is, however, divergence in productivity growth between manufacturing and services • Productivity growth in ICT producing and ICT using manufacturing in CEE countries is mostly dependent on basic fundamental reforms • Whereas faster productivity growth in services and in traditional manufacturing requires deeper structural reforms.

3. ICT producing sector can accelerate productivity growth... Figure 1. ICT-producing sector contribution to labour productivity growth, 1995-2003 average Source: Van Ark and Piatkowski (2006)

4. ... but it is too small to be a driver of growth. It will have to rely on ICT use... Figure 2. Share of ICT-producing, ICT-using, and non-ICT-using industries in GDP in 2002 Source: Van Ark and Piatkowski (2006)

5. ... Particularly as there is no conclusive evidence for ICT-production spillover effects. • Trajtenberg (2005) - since 1990 the ICT sector in Israel grew at a double-digit rate per year, while at the same time the rest of the economy stagnated. Productivity in some non-ICT producing sectors even declined.

6. ICT use increases productivity growth on the industry-level... Figure 3. Labour productivity growth in ICT-using and non-ICT-using industries, 1995-2003 average Source: based on Van Ark and Piatkowski (2006)

7. ... Particularly in manufacturing in CEE countries... Figure 4. Labour productivity growth in ICT-using and non-ICT using manufacturing industries, 1995-2003 average Source: Van Ark and Piatkowski (2006)

8. ... but productivity growth in ICT using services in CEE countries is much lower than in the US and in manufacturing... Figure 5. Labour productivity growth in ICT-using manufacturing and services, 1995-2003 average Source: Van Ark and Piatkowski (2006)

9. This may suggest that ICT-led growth and convergence is a “two-phase” process... • In the first “restructuring” phase, convergence is driven by productivity growth in ICT-using manufacturing and a rise in ICT production (mainly through FDI); • Later, however, productivity growth slows down as the restructuring process in ICT-using manufacturing nears completion and simple post-transition growth reserves become exhausted (largely completed institution-building and privatization, macroeconomic stability, elimination of loss-making SOEs etc.).

10. Hence, in the second “expansionary” phase... • Faster productivity growth must be dependent on productivity increase in services and non-ICT using industries… • … which, however, requires that ICT investment, especially in services, is complemented with more flexible product and labor markets, human capital, business re-organization around ICT and more sophisticated managerial skills. These are much harder to achieve (socially sensitive).

11. The “two-phase” convergence can be shown as the following... “Second phase” of convergence “First phase” of convergence Source: Piatkowski and Van Ark (2005)

12. Policy recommendations • Implement deeper structural reforms - lower administrative barriers, more flexible labor markets, business-friendly regulations; • Competition, competition, competition! • Develop public e-services and e-procurement (spillover and network effects); • Increase public funding on ICT education; • Promote ICT use through grants and co-financing, productivity rankings, educational programs.