September 12, 2002
Who Benefits Most from the High-Tech Revolution?

David Wessel writes about one of the secrets of the new economy: the principal productivity gains and cost reductions are found not in IT-making but IT-using industries. Indeed, given the fierceness of competition in (most) IT-making industries, not just the productivity gains but the profits are likely to be found in IT-using industries, both here and abroad.


WSJ.com - Capital: ...Ireland is proudly turning itself into the Silicon Isle. The Philippines and Thailand boast of their electronics exports. But one of the biggest beneficiaries from information technology is Australia, which hasn't any high-tech industry at all. Yet it is one of the few economies to have enjoyed a 1990s surge in productivity (or output for each hour of work) as impressive as the one the U.S. has seen. Its secret: import high-tech gear that others make. As in the U.S., the spread of bar-coding, scanning and inventory-management systems is making Australian wholesalers much more efficient, and that is paying economywide dividends. Compared to its population, Australia has more secure servers, the sort used in e-commerce, than anyone else besides the U.S. and Iceland (that is another story).

"Australia is far better off being an importer of information- and communications-technology equipment than a producer," says Dean Parnham, an economist at the government's Productivity Commission. "We take advantage of the productivity gains that are generated by the producing countries through lower prices." Each pound of Australian beef exports buys ever-more powerful computers. Because of falling prices for high-tech gear, Southeast Asian chip-making countries have to make ever-more powerful computers to buy a pound of that Australian beef.

High-tech producers get pretty plants, some high-wage jobs and lots of glory, but as the prices of their exports fall, more of the benefits accrue to consumers elsewhere, International Monetary Fund economists Tamim Bayoumi and Markus Haacker observe...

Technology Users Cash In,
While Its Makers Founder

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RESOURCES
For more on the IMF research, see Chapter III of the Oct. 2001 World Economic Outlook4

 

 
See the OECD view, "The New Economy: Beyond the Hype6" (Free Adobe Acrobat7 Reader software required)

 

 
ABOUT DAVID WESSEL
David Wessel, 48, The Wall Street Journal's Washington bureau chief, writes Capital, a weekly look at the economy and the forces shaping living standards around the world. He also appears frequently on CNBC.

 
David has been with The Wall Street Journal since 1984, first in the Boston bureau and then the Washington bureau, where he was chief economics correspondent. During 1999 and 2000, he was the newspaper's Berlin bureau chief. He also has worked for the Boston Globe, where he shared a Pulitzer Prize for a series of stories on the persistence of racism in Boston, and at the Hartford (Conn.) Courant and Middletown (Conn.) Press.

 
He is the co-author, with fellow Wall Street Journal reporter Bob Davis, of "Prosperity: The Coming 20-Year Boom and What It Means to You" (Random House/Times Books, 1998), which argued that the next 20 years will be better for the American middle class than the previous 20 years.

 
Write to him at capital@wsj.com8.

 

One notion is surely dead now: that the people and places who produce information technology will get ever richer, while the rest of us languish on hold waiting for "technical support." Auto dealers are making money; companies that make fiber optics aren't. Shares of ace computer-user Wal-Mart Stores Inc. are down about 6% so far this year; shares of Internet-gear supplier Cisco Systems Inc. are down about 30%.

CAPITAL EXCHANGE
Reader comments1 -- and David Wessel's answers -- about the Capital column. Published Sunday mornings.

Submit comments to Mr. Wessel at capital@wsj.com2

Resources

See Web resources2 on this column.

The biggest benefits from information technology, it is increasingly apparent, often go to those who use it cleverly rather than to those who make it. The computer hardware and software businesses are sexy, but some parts of it are very competitive. That is squeezing profits for producers and cutting prices for consumers.

Look at the personal computer that $1,500 buys today.

Therein lies a lesson for countries and communities who lust after sparkling high-tech factories. The surest path to prosperity isn't exporting computer chips or software.

It is deploying them.

BETTER USER THAN MAKER
Countries that produce information technology aren't always heavy users. Estimated spending and production as a percentage of GDP. Data for 1999.

SPENDING PRODUCTION
Singapore 7.3% 32.8%
Hong Kong 7.2 1.9
Australia 6.7 0.3
Israel 5.8 3.3
Switzerland 5.6 0.6
Japan 5.6 3.0
Malaysia 5.5 29.1
Canada 5.3 0.9
U.S. 5.2 1.9
Sweden 5.2 3.8
Netherlands 5.1 1.0
Korea 4.9 10.5
U.K. 4.7 2.0
Taiwan 4.7 9.4
Denmark 4.5 0.5
Portugal 4.4 0.7
Belgium 4.4 1.2
Finland 4.4 4.6
Ireland 4.4 12.6
Norway 4.2 0.5
Germany 4.1 1.1
Greece 4.1 0.3
France 3.8 1.4
Austria 3.6 0.8
Italy 3.4 0.9
Spain 3.3 0.7
Philippines 2.7 9.3
Thailand 2.7 7.6

Source: International Monetary Fund

Ireland is proudly turning itself into the Silicon Isle. The Philippines and Thailand boast of their electronics exports. But one of the biggest beneficiaries from information technology is Australia, which hasn't any high-tech industry at all. Yet it is one of the few economies to have enjoyed a 1990s surge in productivity (or output for each hour of work) as impressive as the one the U.S. has seen. Its secret: import high-tech gear that others make. As in the U.S., the spread of bar-coding, scanning and inventory-management systems is making Australian wholesalers much more efficient, and that is paying economywide dividends. Compared to its population, Australia has more secure servers, the sort used in e-commerce, than anyone else besides the U.S. and Iceland (that is another story).

"Australia is far better off being an importer of information- and communications-technology equipment than a producer," says Dean Parnham, an economist at the government's Productivity Commission. "We take advantage of the productivity gains that are generated by the producing countries through lower prices." Each pound of Australian beef exports buys ever-more powerful computers. Because of falling prices for high-tech gear, Southeast Asian chip-making countries have to make ever-more powerful computers to buy a pound of that Australian beef.

High-tech producers get pretty plants, some high-wage jobs and lots of glory, but as the prices of their exports fall, more of the benefits accrue to consumers elsewhere, International Monetary Fund economists Tamim Bayoumi and Markus Haacker observe.

The technological revolution of our time has lots in common with earlier revolutions. Parallels are most often drawn to electricity and railroads.

"They also had stock-market mania where people expected to make huge amounts forever," Mr. Bayoumi says. "And they didn't. So you had a big rise in stock prices and then a big fall."

But electricity and railroad gear was largely produced inside the countries that used it. Information technology is more like cotton textiles in the 19th century. "Production was concentrated in Britain," Mr. Haacker says, "but about half the goods were exported." Prices fell, and about half the benefits of British breakthroughs in making cotton textiles went to those in other countries that bought cheap cloth. "We find the same result for the information-technology revolution," he says. "If you export information-technology goods, you lose most of the benefits."

Of course, places that produce high-tech gear and software are sometimes -- though not always -- more likely to see its potential and use it. Malaysia is a big high-tech producer but also invests heavily in high-tech for domestic use; its people are likely to benefit as a result, the IMF analysis suggests. And there's a lot more to economic success than buying computers. "Australia didn't have an explicit strategy to become a smart user of information and communications technology," Mr. Parnham says. Its experience suggests that policies that promote more competition, greater openness to trade and foreign investment and increased flexibility lead business to deploy technology smartly, he says.

[drawing]

But ranking countries by how much of their spending goes to buy technology, rather than how much of it they make, can be revealing. "The differences across industrialized, relatively rich countries are greater than you might think," Mr. Haacker says. The IMF analysis shows how northern European countries, Sweden, for instance, are spending more heavily and deploying information technology much more intensively than Germany or France -- and how far southern European countries such as Spain, Italy and Greece lag behind despite all their shared rhetoric. So the gap between the Swedes and the Spaniards grows ever wider.

Falling technology prices may have another unappreciated benefit: permitting poor countries to enjoy the payoff now largely claimed by rich ones. Once, railroads were an enormous boost to Mexico; it didn't have U.S.-style waterways to move goods, so trains replaced inefficient carts. Today, cellular phones are a convenience to Americans, but they bring phone service to remote places in Africa for the first time with benefits far greater than opening a cellular-phone factory would.

Write to David Wessel at capital@wsj.com3

URL for this article:
http://online.wsj.com/article/0,,SB103177926061455555.djm,00.html

Hyperlinks in this Article:
(1) http://online.wsj.com/articles/capital_exchange
(2) mailto:capital@wsj.com
(3) mailto:capital@wsj.com
(4) http://www.imf.org/external/pubs/ft/weo/2001/02/index.htm
(5) http://www.pc.gov.au/
(6) http://www.oecd.org/pdf/M00018000/M00018624.pdf
(7) http://www.adobe.com/
(8) mailto:capital@wsj.com

Updated September 12, 2002



Posted by DeLong at September 12, 2002 01:48 AM | Trackback

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Comments

It's heartening that David Wessel recognizes that the productivity benefits of IT accrue mainly to thos einvesting in it, and has some anecdotal international evidence for it. The fact is, the Economics & Statistics Administration (ESA) of the Department of Commerce published this finding in 1999 and again in 2000, in their "Digital Economy" reports. (Full disclosure: I was Under Scertary of Commerce for Economics at the time, overseeing ESA.) There were two striking findings: first, there was a positive relationship between the IT intensity of an industry (IT investment per worker) and its productivity gains; and, on a firm level, the critical variable in securing productivity gains was not the IT investment itself but the reorgaizaiton of the firm to make decent use of these investments. That's why Japan, which invests in IT more intesively than the US (hardware, anyway) has seen virtually no productivity benefits.

Posted by: Rob Shapiro on September 12, 2002 07:37 AM

Australia has strong unions and employers in general are fairly protective of labor. How then has Australia been able to take advantage of technology to reorganize businesses enough to realize a surge in productivity.

Posted by: on September 12, 2002 11:29 AM

Seems that the benefits of technology and competition more often go to consumers rather than producers. The airline industry has made the economy much more productive, even though the industry as a whole has reportedly lost money over its entire history. The internet has made shopping much easier, helping consumers and making retail even less profitable. Or consider telecommunications - would you rather own stock in a telecom company or would you rather own a cell phone? Etc., etc.

Posted by: richard on September 12, 2002 11:59 AM

I suppose the key is "competition."

Posted by: on September 12, 2002 12:17 PM

Boy, does this ever put a spin on the strategic trade arguments of the late 80s/early 90s.

Posted by: Jason McCullough on September 12, 2002 03:08 PM
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