The economic impact of ICTs: Myths and realities

1. The economic impact of ICTs:Myths and realities Professor Howard Williams February 2011

2. Perspectives • Trade theory • Business process review • What does BB offer • Devices • What do people do

3. Nothing as practical as good theory! • Second mover regions – is the impact of BB the same along the diffusion curve? • Is ‘new and different the same as sustainable? • How do we think about firms? • Can perspectives from trade theory help understand BB impacts? • We do we think people do with BB?! • How do we deliver relevance and credibility?

4. Regional Income inequalities • Manifestation of multifarious factors • Multifaceted issues • Accelerating or decelerating • In front or behind a moving curve • Dynamic and relative not a static and absolute issue • Looking for policy interventions that apply at the regional level • Actions capable of differentiate but deliver positive effects against identifiable and addressable policy goals

5. Debt: a new context for regions • We are in debt • Municipal and regional debt is the emerging issue in the euro zone • Issues are • The rate of interest • Sustainability • Security – related to risk of a ‘haircut’; who pays in the case of a default • Economic development prospects and income inequalities are central concerns – willingness and ability to repay debt!

6. How does BB fit into this context ? • Seems to be an easy win • Short term ‘shovel’ ready developments • Longer term sustainability • 10% additional BB penetration equivalent to 1.2% economic growth • Increase the diffusion process and, for EU regions, emerging economy growth rates are in reach

7. Typical BB policy objectives • Economic regeneration • Competitiveness • Job creation • Job protection • Social inclusion • Sustainable development • But what are the issues, myths and realities?

8. A view from Analysys Mason Study • The packages were less obviously successful in achieving goals related to attracting investment and driving growth • This is partly due to the number of factors influencing business location decisions, and economic growth the downturn has meant many businesses lack funds to move without a strong incentive –an FTTH stimulus package alone may not be sufficient • Clear economic growth resulting from FTTH stimulus packages was rare, but evidence of impact on the digital divide was more compelling two very different projects –e-Japan and Red ASTURCÓN –successfully addressed digital divide issues through direct network investment

9. OECD Study – BB as economic stimulus • A balancing act • Connectivity; competition; innovation and growth; social benefit • What are the immediate aggregate demand effects • Employment, materials • Readiness of the projects • Composition of spending – geographical circulation of money • What are the longer term aggregate supply-side effects • Increases in productive capacity • New businesses formation • Empirical evidence • ‘gravity models’ are real; bypassed areas –ve impact directly in proportion to distance from roads • Total regional earnings fall – retail sectors experience the most precipitous declines

10. Trade Theory • Mercantilist, absolute advantage, comparative advantage, international product life cycle, new trade theory • New trade theory • Specialisation - economies of scale and scope • Tradable business functions - outsourcing • First mover advantages give market power (barriers to entry) • Govt plays a pivotal role in aiding domestic firms - procurement

11. Trade and income inequalities • Trade can have a (large) income distribution effect – groups can be worse off (Stolper & Samuleson 1941) • Income effect self regulating and offset by changes in prices, deflationary pressures, stimulation of innovation BUT • China (BRICs) • Fragmentation of production

12. The ‘buts’ • China (BRICs) • Cheap and plentiful and highly skilled labour • By 1990 NIEs (Korea, Singapore, Hong Kong, Taiwan) had wage rates 25% of US wages; China 2009 had wages rates of juts 3% of US wages • Up-skilling by China is taking place (labour to skill intensive industries) but slowly • Chinese investment in OECD firms • Fragmentation of production • Firms now organise around processes • Amplifies the income effects of trade; reduces moderating effects of up-skiling • Intel; fabrication in USA with assembly and testing in China • Lenovo: HQ functions in the US • Who looses? • Education seems to be the big determining factor • US new jobs; 38% for those with degrees, only 8% high school (the unemployment profile is the opposite, approx unemployment rate for those with school education is 17%) • Major group of non users in UK is those with 5 years of secondary education

13. Kenya • 9% of users have access to BB • Average weekly expenditure • Among male participants US$10.06 – 500/year (per capita GDP 1100 USD) • among female participants US$7.55 • among 25-34 year olds US$12.59 • Main drivers of use are recreational • entertainment • communications rather than information • Access to and the nature of devices critical – smart phones transforming BB use • Local content and website of little value Impacts • Consumption abroad and cross border trade • Export of the benefits to China

14. Policy actions • Limited focus on infrastructure • Who is using what; where are the gains – eg mobile masts not agencies (70% use one base station) • What are our strengths (at the process level) – who does what well given a tradable processes perspective • What can be imported to strengthen the region – education? Continuing education and re-education • Regional innovation processes • Relevance and credibility of BB applications • Devices