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The ‘New Economy’ and Economic Growth in
Transition Economies
Marcin Piatkowski
TIGER
Transformation, Integration, and Globalization Economic Research,
Warsaw, Poland
e-mail: [email protected]
WIDER Seminar
21 August 2002
Agenda:
 Definitions
 Motivation
for research
 The potential of the ‘new economy’
 The determinants of productive use of ICT
 The contribution of ICT use to economic growth in
transition economies
 Conclusions and suggestions for future research
Definitions:
‘New Economy’ - an economy displaying faster
productivity and economic growth resulting from the two
concurrent processes: globalization, that is on-going
deregulation, integration of the global markets for capital,
goods, labor, and increased competition, and
technological revolution based mostly on general-purpose
ICT, which impacts all sectors of the economy
 Transition Economies - countries of Central and Eastern
Europe and the former Soviet Union transforming from a
planned to a market economy.
 The
The motivation for research:
 The
three main research questions:
 1. What is the potential of the ICT technological
revolution for accelerated economic growth and
faster catching-up of transition economies?
 2. What are the determinants of the productive use
of ICT in these countries?
 3. Has there been already any contribution of ICT to
growth and productivity in these countries?
Results of research on the impact of ICT in
developed countries...
 USA
- positive contribution of ICT production and use to
economic growth and productivity in late 1990s (Oliner and
Sichel 2000, Jorgenson and Stiroh 2001, OECD 2001)
 EU countries - much less conclusive evidence (Daveri
2002, Jalava and Pohjola 2002). Ireland, Finland, and
Sweden benefited the most, while the rest of Western
Europe seems to have benefited much less or not at all.
 Other developed countries: positive contribution of ICT use
to growth in Australia (OECD 2001)
And in developing countries...
 South-Asian
countries - positive contribution of ICT
production to growth (IMF 2001).
 Developing countries - return on investments in IT in
developing countries is statistically insignificant (Kreamer
and Dedrick 2000); Relative share of IT in economic
growth of developing countries did not exceed 2% in late
1990s compared to 10% in developed countries (Pohjola
2001)
 Lack of evidence for macroeconomic benefits, although
micro- and mezzoeconomic anecdotal evidence for positive
effects of IT is on the rise.
1. The ‘New Economy’ represents a significant
potential for transition economies...
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Opportunity for faster growth through technological
leapfrogging thanks to imitation, absorption, and productive
utilization of technological innovations, ideas, new
organizational structures and ways of doing business.
Conditional convergence hypothesis - poor countries should
grow faster
‘Public goods’ - search engines, e-mail accounts, and info
portals
Evidence of the potential...
 Accelerated
economic growth in a number of developed
and developing countries in the 1990’s
 Brdulak (2002) - IT-intensive logistics
companies in
Poland increased their market share between 1999 and
2001. Piatkowski (2002) found strong correlation (0.92 at
the 0.05 significance level) between ICT spending and
increase in efficiency of the Polish banking sector 19972001.
 Rapid growth of e-banking, e-commerce, and mobile
telephones - increase in productivity, but also rapid
growth in ‘consumer surplus’
2. Determinants of productive use of ICT...
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Costs of access to telephone and Internet networks, level of
education, and GDP per capita (Kiiski, Pohjola 2001 for
developed countries).
Economic and institutional factors (The New Economy
Indicator - Piatkowski 2002)
More research needed in this area, particularly in transition
economies (enterprise and household surveys).
The New Economy Indicator:

Objective - to assess, based on comparison of the
development of institutional and economic
infrastructure, the degree of preparedness of postcommunist economies for realizing the potential of
the ‘new economy’ for faster economic growth and
accelerated catching-up.
The ten most important variables for the diffusion of
the ‘new economy’...
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1. Quality of regulations and law enforcement
2. Infrastructure
3. Trade openness
4. Financial sector development
5. R&D spending
6. Quality of human capital
7. Flexibility of the labor market
8. Flexibility of the product market
9. Entrepreneurship
10. Macroeconomic stability
Proxied by...
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1. Legal system effectiveness & extensiveness (EBRD)
2. Total number of telephone lines (main and cellular) plus
Internet hosts per 100 people (ITU 2002)
3. Exports plus imports to GDP (EBRD)
4. Broad money (M3) to GDP (EBRD)
5. Annual R&D spending to GDP (Eurostat)
6. Education Index 1999 (UNDP 2001)
7. Unemployment rate (EBRD)
8. Competition policy index (EBRD)
9. Private sector share in GDP (EBRD)
10. Inflation (EBRD)
Methodology...

The NEI is a weighted sum of values of all ten variables for each
country. It has been assumed that the first six variables will be
given twice as large relative weight compared to other variables.
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Variables are selected, ensuring that each of them is either
entirely positively or negatively related to the main concept;
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If variables are negatively correlated (like inflation), they are
multiplied by –1 to insure that always ‘more is better’;
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Variables are standardized. The sample mean is subtracted from
each observation and then the result is divided by a sample
standard deviation. This implies a mean of zero and a standard
deviation of one across countries in the sample. Hence, all
results are comparable and can be aggregated.
Ranking:
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Country
Slovenia
Czech Republic
Hungary
Estonia
Slovak Republic
Poland
Bulgaria
Latvia
Lithuania
Croatia
Russia
Kazakhstan
Ukraine
NEI rank
1
2
3
4
5
6
7
8
9
10
11
12
13
NEI score
10,1785
9,4404
7,3497
7,2152
6,6799
3,7016
2,9908
2,3387
1,6368
1,3759
1,0092
0,2158
-0,2864
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Moldova
Krygyzstan
Romania
Armenia
FYR Macedonia
Turkmenistan
Belarus
Tajikistan
Georgia
Azerbaijan
Uzbekistan
Albania
Bosnia
14
15
16
17
18
19
20
21
22
23
24
25
26
-0,8892
-1,4902
-1,7719
-2,6630
-2,7710
-3,3181
-3,6276
-3,7250
-4,0096
-4,5110
-4,5665
-5,1069
-7,2454
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FR Yugoslavia
27
-8,1505
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Conclusions...
 The
most advanced countries in the transition process are
also the most likely to take advantage of the ‘new
economy’.
 Countries lagging in the ranking risk finding themselves in
a “technological trap”
 ICT revolution may thus contribute to further polarization
of growth rates among the transition countries
 The potential of the ‘new economy’ will remain
unharnessed without sufficient progress made in the
development of the economic and institutional
infrastructure of the transition economies (i.e. Jorgenson
2001 evidences importance of human capital and
organizational changes for productive use of ICT in USA)
3. The impact of ICT on growth in transition
countries...
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The ICT can impact economic growth in three ways (Pohjola
2002):
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1. The production of ICT goods and services, which directly
contributes to the aggregate value added generated in an
economy;
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2. The use of ICT as an input in the production of other goods and
services;
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3. The increase in productivity of production in ICT sector, which
contributes to overall productivity in an economy (TFP)
Impossible to measure (1) and (3) in transition
economies...
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Due to lack of sufficient data on the size of the ICT sectors in
transition countries and the input-output price information at the
industry level, it is not possible to estimate the contribution of
ICT to economic growth through production (1) and increase in
TFP (3).
Yet, it seems possible to measure (2) - the impact of ICT
investment on economic growth in a number of transition
economies in the period 1993-2001.
Sources of data...
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ICT spending for eight transition countries - Bulgaria, Czech
Republic, Hungary, Poland, Romania, Slovakia, Slovenia,
Russia - from WITSA (2002)
Fixed capital stocks, GDP growth, employment, share of
wages in total income - national statistical agencies
Chain-index constant-quality price indices for ICT equipment
- US Bureau of Economic Analysis (2002)
Exchange rates - ITU (2002)
Methodology...
To measure impact of ICT investment, it is best to
express the aggregate production function in the
following form:
Yt  Y (Yt ICT , Yt 0 )  At F (Ct , K t , Lt )
Assuming that constant returns to scale prevail
in production and that all production factors are
paid their marginal products, equation (1) can be
expressed in the following form:
Yˆ  wICT Yˆ
ICT

 w0Yˆ  vICT C t  v0 Kˆ 0  vL Lˆ  Aˆ
0
Methodology...
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The three most important steps in measurement:
ICT capital stock= Beginning ICT capital stock+ICT investment
(Deflated+Depreciated)
Income share of ICT = (gross rate of return * nominal ICT
stock)/nominal total income
Gross rate of return = nominal interest rate on long-term bonds
+ risk premium + ICT depreciation rate
Preliminary results for Russia 1994-2000
 GDP growth
 1994
 1995
 1996
 1997
 1998
 1999
 2000
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AVG 96-00
(-13,58)
(-4,19)
(-3,46)
0,91
(-5,02)
5,25
8,62
1,26
Contribution of ICT Invest.
0,08
0,48
0,24
0,30
0,36
0,54
0,66
0,42
Conclusions...
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ICT spending had a positive and growing contribution to
economic growth of Russia in the 1994-2000 period.
Nonetheless, its impact was small and did not exceed 0.66
percentage points in any year.
Explanation:
ICT investments are too small to have a significant impact on
growth. It takes time to build ICT capital stock.
Conclusions based on growth accouting measurements have
their limits. It is because growth accounting decomposes growth,
but it does not explain the underlying forces behind it.
Problems with data...
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Inadequate information on:
a) aggregate fixed capital stocks
b) return on capital investments
c) hedonic prices (constant quality price indices)
d) data from before 1990 and in early 1990’s tends to be not
consistent with data from later years.
E) and of course, data on ICT investment.
Suggestions for future research...
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Measurements of ICT contribution to growth in other transition
countries for which ICT data is available
More precise estimates of ROI on ICT in post-communist
countries (the question of supernormal returns)
Estimates of the contribution of ICT production to growth
Spillover effects - increase in economy-wide TFP resulting from
increases in productivity in ICT-using industries.
Determinants of absorption and diffusion of ICT