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Summary by: SEAN PANARAM Summary of: The Importance of Information Technology: A Canada - U.S. Comparison. By John R. Baldwin, Tarek M. Harchaoui and Faouzi Tarkhani During the late 1990s, the Canadian economy performed very well. However, unlike previous phases in the economy that also displayed persistent, strong growth, Canadians did not witness the usual increase in inflation. This caused people to believe that there was something new about the economy. One notable difference between the economy of previous years and now was that there was a huge increase in capital spending in new information and communications technology (ICT). The article, “The Importance of Information Technology: A Canada-U.S. Comparison” attempts to determine whether or not this investment in and application of new ICT technology has been the cause for these structural shifts in the Canadian economy. What is ICT and how is it calculated? ICT can be found both in the outputs of those firms and industries that produce ICT goods, as well as in the capital inputs into the production process of other firms and industries that use ICT. To obtain the data on ICT expenditures in Canada, we turn to the Canadian System of National Accounts (CSNA). The CSNA, aside from measuring GDP, also collects the data required to analyze the economic impact of ICT. The organization breaks down ICT into three main categories: Computer hardware Computer software and, Telecommunications equipment. For each of these ICT investment assets, the CSNA reports information on: The dollar value of expenditures (called nominal or current dollars), The price (called the price index or price deflator) and, The quantity of investment (called real, constant or chain-weighted dollars). One problem that ICT goods pose over other commodities is that it is difficult to construct a consistent time series of prices and real investments. This is because with each passing year, technologies improve at an incredible rate. For example, a dollar spent today on computer hardware provides more computing power than a dollar spent last year, so attempting to compare dollar expenditures on ICT alone would be quite misleading. Instead, the CSNA uses “constant-quality price indexes” in an attempt to deal with this difficulty. “Constantquality price indexes” measure the price of a common set of productive characteristics over time and translates observed nominal dollar expenditures into comparable estimates of real investment. This enables economists to capture the enormous quality improvements that have taken place across successive generations of ICT assets. The Behaviour of ICT Investment in Canada Investment in ICT assets begun to decline in price and rapid growth was seen in real investment between 1981 and 2000. There was also a considerable decline in the quality-adjusted price of computer hardware over the years. This drastic drop in the quality-price of computer hardware is made even more obvious when it is compared to the GDP deflator –the price of business sector GDP output – which actually did the exact opposite and rose instead of decreasing. This decline in the relative price of computers reflects the extent to which technological progress in the production of computers surpassed technological progress in the production of other commodities. The table below summarizes the exact figures as given in the article. Time Period 1981-2000 Price of Computer Hardware Decreased 15.4% GDP Deflator Reason for change (if stated) 1995-2000 Decreased 16.7% Increased 6.6% Increase in the production of computers over production of other commodities. Collectively, the three ICT assets (hardware, software, telecommunications) displayed a dramatic acceleration in real ICT investment during the 1990s. The precise figures are listed in the table below as well as the business sector GDP for comparison. Real Investment in Computer Hardware Real Investment in Software Real Investment in Telecommunications Business Sector GDP Time Period: 1995-2000 28.8% increase 18.3% increase 6.0% increase 3.0% increase There was also evidence that showed that the contribution of ICT equipment investment to total business sector investment has been rising steadily over time. This is important because it directly determines the growth of capital stock; basically, fast ICT equipment investment lead to an increase in the capital stock share of equipment. These trends in the growth of the capital stock are major determinations of the growth of capital services – the flow of services that are yielded by the investment in capital stock. One key observation was that the growth of capital services was higher than the growth of capital stock. This is due to ongoing substitution of short-lived equipment such as ICT equipment for long-lived structures such as buildings. The consequence is that fast growing short-lived assets receive higher weight in capital service aggregation compared to their weight for capital stock. To further gain a better perspective of the impact of the stock of ICT capital on the Canadian economy, a direct comparison can be made with the U.S. experience. The statistics collected by the U.S. Bureau of Labor Statistics are listed in the table below along with the equivalent Canadian figures. Ultimately, the table shows that Canada followed similar growth patterns to that of the U.S. if not at times, exceeding the U.S. growth. The U.S. attributed its growth pattern to ICT and thus Canada has reason to as well. Capital Services (includes all assets) (1981-1999) Capital Services from private sector business investment ICT Capital Investment Services Canada United States 3.3% growth 3.8% growth 1981-1988: 3.5% growth 1988-1995: 2.6% growth 1995-1999: 4.2% growth 1981-1988: 21.5% growth 1988-1995: 17.5% growth 1995-1999: 25.7% growth 1981-1988: 3.9% growth 1988-1995: 2.8% growth 1995-1999: 5.3% growth 1981-1988: 14.5% growth 1988-1995: 8.5% growth 1995-1999: 17.5% growth Reason / Notes Similar growth, but slight difference may be due to the structural difference between the two countries Notice the similar growth patterns (decline, then increase) Canada experienced much faster growth Impact of ICT on Productivity Growth Despite all the support of ICT’s impact on the Canadian economy, the ultimate question of whether the growth in ICT is also reflected in Canadian productivity still remains. There are three components of labour productivity (output per hour) to consider when looking at productivity growth: capital deepening – the increase in capital available per worker. This is further broken down into the following: the contribution of ICT equipment (accounts for largest percentage in both Canada and U.S.) the contribution of other machinery and equipment structures (includes inventories and land) changes in composition of the workforce – from increases in skills of workers “multifactor productivity” – everything that does not fit in the first two categories (ie. exploitation of economies of scale, general improvements in knowledge, specific spillovers that allow more efficient plant operations, etc.) The table below from the article summaries the breakdown of the growth of labour productivity into these components for Canada and the U.S. The table basically shows the consistent growth in productivity experienced by both countries over the past few years as verified by the table’s positive growth percentages for “Labour productivity growth.” One key observation is that the “Information and Communication Technology” (ICT) portion of “Capital deepening” experienced the highest growth when compared to the other two (“Other machinery and equipment” and “Structures”). This just further verifies the positive impact of ICT on the total labour productivity. One final note is that the acceleration in “Multifactor productivity” growth suggests: considerable improvements in the technology increases in the efficiency of production and, cyclical effects associated with the expansion phase. Conclusion It is clear from the evidence mentioned above that ICT investments have had a significant impact on the Canadian business sector at an aggregated level as it did in the U.S. The two most obvious and observable effects are: the increase in the rate of growth of ICT during the late 1990s and, its major contribution to the portion of capital deepening, which in turn, increased labour productivity. There is also however, a third indirect effect: The multifactor productivity estimates increased dramatically at the same time as ICT investments, which is consistent with the belief that ICT finally had its long-awaited impact on the type of externalities and technological change that the multifactor productivity measures capture. In the end, it is almost certain that as the price of computing power continues to decline, the rapid accumulation of ICT will likely remain an important contributor to the growth in the overall output and productivity of the Canadian business sector.