Does it grow the economy?

Trying to understand patterns of economic growth has always been a headache for economists, especially if one is seeking to understand the source of that growth. This is because the traditional models linking growth to labour and capital are starting to be no longer valid. The main reason for this is IT. IT can generate growth through investment in the sector and it also contributes to making other capital investment generate a higher rate of return. The same can be said about labour. Labour becomes more effective and more efficient through IT. Thus IT contributes to growth in the economy both directly and indirectly.

On the other hand we need to take account of the fact that the prices of IT goods have fallen rapidly in the last 15 years.

This has reduced the benefits from fast productivity growth in the IT sector. Thus real income growth in countries that have relied on IT sector exports, has been slower than it would have been without adverse price developments. Malta has had to suffer such a situation, even if one has not been able as yet to quantify what the impact of a drop in IT prices has meant in terms of gdp growth.

Going back to the question posed by the title of this week's contribution, one can take the US economy as an example. During the five-year period 1995 - 2004 the US economy grew by 4.2 per cent. Growth of IT capital contributed to 0.9 per cent of this amount while growth of non-IT capital contributed two-thirds of that. Labour input contributed 1.3 per cent; general technological progress contributed 1.5 per cent. Investment in IT contributed to the growth generated by both the labour component and the technological progress. In the following five years the US economy grew by 2.4 per cent, but the contribution by the labour input was negative. Growth from IT capital was again somewhat more important than growth from non-IT capital.

Within the EU, there have been varied economic growth trends for the various countries. Of the large economies, the three that registered the slowest growth rates were Germany, Italy and France. In these so-called "laggard" economies, the contribution to economic growth from IT capital has been at best equal to that of non-IT capital, as in the case of Germany, and even lower in the case of Italy and France. On the other hand, in the case of the UK and Sweden, economic growth was higher and contribution of IT capital has been higher than that of non-IT capital.

The example of Ireland may be an anomaly as it is recognised that the Irish economy has grown at a very fast rate and IT activity has been judged to be a major contributor to this growth. Data shows that technological progress has contributed more than IT capital.

However, this is understandable as Ireland is more of a follower than a leader in technological development, and they have been very capable in absorbing new technology developed in other countries at a much lower cost. They have borne the benefits of IT capital developed elsewhere.

How does this apply to Malta? It just proves the point that we cannot hold back any investment in IT, be it in capital, be it in manufacturing, be it in services. We have to appreciate that we have had a late start compared to other EU member states as IT development has been taken seriously only in the last 19 years. The SmartCity development is a continuation, or even a culmination, of these efforts. There are still segments of the economy where we still require significant investment in IT. One such segment is the tourism industry.

The answer to the question posed by the title of this contribution is a definite yes. However, we can only reap the full economic benefits of IT if public sector initiatives are supported by private sector investment and a willingness by trade unions to have more labour flexibility. Maybe more hard economic data about IT's contribution to our economy is required to drive this point home.