Estimating the impact of ICT on productivity growth

Of the DCITA research publications on productivity, three publications are devoted specifically to estimating the impact of ICT on productivity growth. Two reports, Productivity growth in Australian manufacturing and Productivity growth in service industries examined productivity growth in manufacturing and some service industries over 17 years, from 1984–85 to 2001–02. They jointly cover around 53 per cent of gross domestic population (GDP).

The reports used a different approach from earlier studies by the Productivity Commission and others to examine the contribution of ICT to Australian productivity growth. In particular, they investigated the role of technology and ICT in the unexplained residual or ‘multi-factor productivity’ (MFP), which is a major component of labour productivity.

The DCITA reports show that ICT influences labour productivity growth through its effect on MFP growth through technological changes, capital investment in ICT and the effect of falling ICT prices on the constant price valuation of ICT capital. In service industries, between 35 and 65 per cent of MFP growth is estimated to have been driven by technological factors—mainly ICT related. In manufacturing, the range was between 45 and 75 per cent. There are significant measurement difficulties—the upper estimates represent the plausible upper bound of the contribution of technological factors to MFP growth and vice versa for the lower estimates.

Table 2 shows the estimates for the various contributions to total labour productivity growth in service industries and manufacturing. The main non-technological factors driving MFP growth are micro-economic reform and the rising education level of the workforce—both are included under institutional factors.

The analysis was carried out at the industry level and indicates that productivity growth (both total labour productivity and MFP) was particularly strong in industries that are heavy users of ICT equipment and software. In services, these sectors include telecommunications, finance, wholesale trade and electricity. In manufacturing, ICT intensive industries include electronics, medical and scientific instruments, petrochemicals, basic metals and motor vehicles. The many new applications of ICT introduced as a result of rapidly falling ICT hardware prices has been the main reason for the strong impact of ICT on productivity growth.

The strong correlation between sectoral ICT and R&D intensities and productivity growth has led to the estimated contribution of technological change to MFP growth, shown in Table 2. These estimates, plus the effect of falling ICT prices on capital deepening, suggest that over the last 20 years ICT has emerged as the main technological driver of productivity growth in Australia. Apart from capital deepening and ICT, other important contributors to productivity growth were micro-economic reform, a more educated workforce and non-ICT related technological innovations.

The two reports also review, in some detail, the composition of manufacturing and service industries and structural changes that occurred in these sectors since 1984–85. Some descriptive material is presented on new ICT and non-ICT technologies introduced over the last 20 years.

The finding about the large contribution of ICT to productivity growth is supported by the third report on the theme, titled ICT networks and productivity: Australia in perspective. It is an econometric (regression based) study conducted by Barker, Fuss, Tooth and Waverman from the Centre for Law and Economics at the ANU. Using cross-country data at the national, rather than sectoral level, they found that in recent years ICT investment and spillovers were major drivers of productivity growth in Australia and other Organisation for Economic Co-operation and Development (OECD) countries. The study used a national productivity database for OECD countries compiled by the Groningen Centre in the Netherlands.

Their results show that more intensive use of ICT capital in the United States and its diffusion explained around 44 per cent of the Australian–United States productivity gap in 2000, and about 28 per cent in 2003. The results of this study are in line with a growing body of overseas econometric research, which suggests that ICT has been a major driver of productivity growth in developed countries in recent years.

The report on the services sector is restricted to market oriented service industries such as construction, transport, electricity, trade and finance. The service industries excluded cover education, health, government services, defence, property, business and personal services and imputed rent on housing. Mining and agriculture are also excluded from the ‘market sectors’ examined.

Both reports rely on Australian Bureau of Statistics (ABS) productivity estimates.

These earlier studies used growth accounting methods to estimate the contribution of ICT to economic growth through ICT investment and the effect of falling ICT prices on ABS (constant price) volume estimates of ICT investment.

• Document ID: 68015 |
• Last modified: 5 February 2008, 9:02am