Thursday, February 2, 2017

Information Technology: Installation Phase to Deployment Phase

We seem to be surrounded by wave upon wave of new information and communications technology. However, measured rates of productivity growth rates have been slow for more than a decade, with the slowdown starting well before the Great Recession and continuing after its end, both in the US and around the world, Bart van Ark seeks to explain this situation in "The Productivity Paradox of the New Digital Economy," which appears in the Fall 2016 issue of International Productivity Monitor (pp. 3-18). In  a nutshell, his answer is that "the New Digital Economy is still in its `installation phase' and productivity effects may occur only once the technology enters the `deployment phase'."

At present, it's not just that productivity growth has slowed down, but counterintuitively, the sectors of the economy that make the biggest use of information and communications technology have been leading the way in this slowdown. Van Ark writes:
"What's more, we find that when looking at the top half of industries which represent the most intensive users of digital technology (measured by their purchases of ICT [information and communications technology] assets and services relative to GDP) have collectively accounted for the largest part of the slowdown in productivity growth in all three economies since 2007, namely for 60 per cent of the productivity slowdown in the United States, 66 per cent of the slowdown in Germany, and 54 per cent of the slowdown in the United Kingdom. In the United States the contribution of the most intensive ICT-using industries declined from 46 per cent to 26 per cent of aggregate productivity growth between both periods. ... The fact that ICT intensive users account for a larger part of the slowdown than less-intensive ICT users is another indication that the difficulty of absorbing the technology effectively is part of the explanation for the productivity slowdown."

Van Ark does believe that the growth of real output in information and communications technology is understated in the official statistics. But his broader theme is that information and communications technology is still in its "installation stage," not its "deployment stage." Here's how he sees the difference.

"This article has argued that there are good reasons to believe that the New Digital Economy is still in the installation phase producing only random and localized gains in productivity in certain industries and geographies. ... [W]we do not expect large aggregate growth effects from the New Digital Economy any time soon ..." 
As an example of where the installation phase is still taking place, van Ark points to digital services and "big data" projects:
"[T]he shift toward full usage of digital services is incomplete as yet. A recent survey of more than 550 companies in Europe and the United States suggests only a modest uptake on one major usage of digital services, which is "big data" analytics. Only 28 per cent of companies in North America and 16 per cent in Europe had undertaken big data initiatives as part of their business processes in 2015. Another 25 per cent of companies in North America and 23 per cent in Europe had implemented a big data initiative as a pilot project. Hence about half of companies surveyed had not yet undertaken any big data initiative. Strikingly, the study also found that manufacturing companies were lagging in applying big data analytics projects in regular business processes by 14 percentage points relative to the retail sector (27 per cent versus 13 per cent of companies in each sector)." 
An earlier post on "When Technology Spreads Slowly" (April 18, 2014) offered some discussion of transformative technologies that took decades to spread, with a focus on tractors and electrification.

I would be remiss not to mention that several other articles in this issue are worth particular attention, too, For example, Daniel Sichel reviews Robert J. Gordon's book, The Rise and Fall of American Growth,, and Gordon offers a response. Later in the same issue, Nicholas Oulton writes about "The Mystery of TFP," which stands for total factor productivity: "In all countries resources have been shifting away from industries with high TFP growth towards industries with low TFP growth. Nevertheless structural change has favoured TFP growth in most countries. Errors in measuring capital or in measuring the elasticity of output with respect to capital are unlikely to substantially reduce the role of TFP in explaining growth. The article concludes that the mystery of TFP is likely to remain as long as measurement error persists."