Dr. Catherine L. Mann Barbara ’54 and Richard M. Rosenberg Professor of Global Finance

1. Dr. Catherine L. Mann Barbara ’54 and Richard M. Rosenberg Professor of Global Finance International Business School, Brandeis University Ascent After Decline: Re-Growing Economic Growth Workshop, November 19, 2010 World Bank Information Technology, Globalization, and Growth: Production Economies of Scale or Trade in Variety Benefits

2. Three Factors Relate ICT and Growth • Production of ICT: • Gains from TFP and Economies of Scale • Consumption/Use of ICT: • Gains from Use of Variety • International Trade in ICT • Gains from Import via Terms of Trade • What is the Relative Importance for Growth?

3. Production, Use, Trade in ICT Domestic Focus Trade Focus ICT sector must keep growing as a share of the economy to continue the gains Capital-intensive production; job gains slow Export ICT to keep gains from EOS and TFP? Falling ICT prices means terms of trade (TOT)* move againstthe ICT exporter [Mann (2006, Fig 2.4] *Terms of Trade: Prices of exports/prices of imports

4. Evidence: Gains from Production and EOS • Total Factor Productivity (TFP) in ICT • TFP in ICT industries is higher than rest of economy • ~ 8 % in ICT-producing vs. ~ 3% in ICT-using(1979-02) [ Van Ark (2005)] • Economies of Scale (EOS) in ICT production • ICT EOS accounts for 30% of US ICT TFP (1978-99) [Chun and Nadiri (2008)]

5. Evidence: Gains from Import and Use • Terms of trade favor the ICT importer • Falling ICT prices => 0.3pp increase in US TFP (92-99)[Mann (2003)] • TFP increases more for ICT-using industries • TFP in ICT-using industries increases 250% vs. only 30% in ICT-producing (79-95 vs. 95-02).[Van Ark (2005)]

6. Evidence: Gains from Trade and Variety • Export variety increases TFP • Accounts for 40% of the difference in TFP across countries • Mostly due to variety in electronics[Feenstra and Kee (2007)] • Import variety increases TFP • Accounts for 25% of TFP growth of developing countries[Broda, Greenfield, Weinstein (2006)]

7. ICT, Trade, and Growth: No variety Economic Growth (measured using social surplus) Net Imports Gain ~ TOT effect Net Exports Loss ~ TOT effect Net Imports of IT ------------------ Net Exports of IT

8. ICT, Trade, and Growth: Add variety Net Export Low Variety: Economies of Scale In export production Offset TOT loss Net Import High Variety; Domestic use Accentuates TOT Gain Net Export High Variety Offset TOT loss Economic Growth (measured using social surplus) Net Import Low Variety: Supply Chain In imported intermediates to export supply chain Net Imports of IT ------------------ Net Exports of IT

9. Take to the Data: Social Savings Social Surplus (A+B+C) is larger with • Higher income elasticity of demand for IT (b) • Higher price elasticity of demand for IT (g) • Bigger fall in PriceIT • Larger Real GDP • More IT intermediates and IT externalities PriceIT P0 C A B P1 Total DemandIT Direct DemandIT E1/P1 E0/P0

10. Take to the Data: Social Savings • Social Savings by Country • Elasticities from Bayoumi and Haacker •  (time and country effects) • β (price elasticity) = -1.31 •  (income elasticity) = 1.58 • Real IT prices, Country-specific (current data 1999-2006) • IT prices from BLS => assumes global market IT prices • Country GDP deflator => country-specific relative price IT

11. Trade in IT by country (2003–2006) Production less expenditure Real IT expenditure, Country-Specific Reed Electronics Real Production, country-specific WITSA Take to the Data: Trade in IT

12. Take to the Data: Variety in Trade of IT Herfindahl indexes of variety in trade H* k j = ((S (i=1 to N) s2 i k) - (1/N k))/(1- 1/N k) Country j; , Sik is the share of product (i) in total imports/exports of the ‘product group’ (k) and Nk is the total number of products in the ‘product group’ (k). Market segments (k) correspond to the OECD semi-aggregates of telecommunications, computer and related equipment, electronic components, audio and visual equipment, other ICT goods (medical devices, GPS, instruments…) Product (i) = 178 product classes, 6-digit HS from COMTRADE Country (j) = 45 countries Segment (k) = 5

13. Take to the Data data hypothesis Economic Well-being Social Saving (%GDP) Net IT Trade: (IT Production-expenditure) %GDP Source: Mann (2010)

14. Take to the Data: Net Importers On average net IT imports strongly related to Economic Well-being BUT Dispersion of countries around trend Can Variety help explain?

15. Take to the Data: Net Exporters On average net IT exports NOT related to Economic Well-being AND Huge Dispersion of country experience Can Variety help explain?

16. Variety and Country Experience Concentrated net importer, medium Well-being Variety net Importer and net exporter, Highest Well-being Concentrated net exporter, lower well-being Tallest Export Bars: EOS Gains but negative TOT Shortest Import and Export Bars: Variety Gains, TOT Gains

17. Conclusions Net Importers gain more than net exporters of IT On average, terms of trade dominate But, many net exporters do gain Imported intermediates in an IT supply chain Variety of imports and exports explain country deviation from average Lower growth  more concentrated exports, imports Higher GDP/per capita  higher variety imports

18. ICT Strategies To Maximize Growth • Start as part of a supply chain: • Countries without global engagement in IT have worst growth • But, exporting only, gives up potential gains from ICT • Loss on Terms of Trade and lack of variety imports • Maximize TFP and growth with • Domestic production for export • High variety imports for highest