Poverty and Development Division
last updated : 20 December 1999
INTERRELATIONSHIPS BETWEEN INFORMATION TECHNOLOGY, GLOBALIZATION AND THE DEVELOPMENT PROCESS
At least four dimensions of the positive impact of ICT on economic growth can be discerned.9 First, ICT allows process innovation (new ways of doing old things) which increases productivity and creates new value added. Second, innovative economic activities (new ways of doing new things) may be generated. Third, ICT represents a new factor of production, along with land, labour and capital, which can lead to economic restructuring. Finally, it represents a new means of organizing activities through its synergies with other technologies. All of these dimensions directly impact on growth or indirectly do so through multiplier effects ("ripple effects") that influence price, income and capacity.
Recent rapid advances in ICT have thus become a major force in promoting economic growth. With smaller, faster and cheaper ICT, the cost-to-performance ratio of its application has declined considerably, thereby raising productivity. The potential for growth has also been expanded by the use of ICT to promote more efficient utilization of inputs such as energy, raw materials and land. Some new applications of ICT have made it economical to customize products and have made production processes more flexible. With closer attention to customer tastes and preferences, producers have increased the value added (usefulness and appeal) of their products and improved their quality. The adoption and dissemination of ICT also contribute to the build-up of networks that, in turn, increase knowledge and lead to innovations.
Some new applications of ICT have made it possible to carry out production and service activities efficiently on a small scale. Advances in telecommunications enable enterprises which are geographically separated to communicate both within a country and across borders. The growing decentralization and globalization of many industries provide new opportunities for developing countries to participate in regional and global subcontracting. Participation, however, depends on the quality of the local telecommunications infrastructure and the ability to work in an electronic communications environment. Within developing countries, the organizational changes and decentralization options made possible by ICT can facilitate a better spatial distribution of economic activities, especially those industrial operations which have been centralized in large cities.
New and varied applications of ICT are also speeding up the integration of markets across countries through the transmission of market signals and consumer/producer responses. These effects are already being reflected in changes in the design of products and processes and in the nature of industrial competition. As a consequence, market horizons have become broader, with more information available on markets and worldwide competitor responses to changes in them. Timely and detailed information about markets, point-of-sale information and electronic linkages to clients and distributors have enhanced the capability to provide consumers with tailor-made products and services and to create market niches. Producers with computer-assisted design are also capable of responding to market signals with greater flexibility and speed. Built-in software and "intelligence" in products, automatic diagnosis of malfunctions and electronically assisted after-sales service increase the adaptibility and substitutability of products, which in turn increases competition. The resulting globalization of competition and the pressures of market integration have forced most large-scale manufacturers to consider their sources of inputs, markets and competitors on a worldwide scale.
ICT has revolutionized the marketing systems for commodities and other widely traded standardized goods through the diffusion of market-determined prices instantaneously around the world. Even small-scale producers are becoming an integral part of the marketing chain as they have access on a real-time basis through mobile phones, the Internet, and so on to the prices of their products on international markets such as commodity exchanges. This, in theory, should reduce the potential for exploitation of these producers and enhance their bargaining position with traders. Local traders have the means to become better equipped to compete with international trading firms and enhance their competitiveness in marketing new products as well.
In the more advanced countries, new applications of ICT are profoundly changing the services sector. In particular, the nature and structure of financial, insurance, marketing, distribution, and tourism/travel businesses have been transformed by improvements in the speed, reliability and cost of manipulating vast quantities of information related to financial, inventory and sales transactions. Advancements in ICT have raised the information equipment intensity of the services sector and increased the diversity of services provided by any one firm. American Airlines, through its reservation system (SABRE), for example, is now in the business of hotel reservations, car rentals and software development, and is rapidly expanding into supplying spare parts. At the same time, service providers, traditionally small and decentralized, are being linked nationally and globally through the use of communications technology.
In terms of investment patterns, the application of ICT can help to improve economic efficiency of investment by permitting the financial intermediaries to evaluate more correctly the portfolio preference of savers while managing more effectively the risks inherent in global portfolios. The increasingly wide coverage of economic and financial data available on a timely basis on both countries and individual firms, especially when there are reliability checks and auditing, should permit these intermediaries to identify and fund the most productive investments. This should provide investors with a broader range of investment opportunities and ensure that asset prices realistically reflect underlying risks and returns. More modern investment banking and hedging services can also help to overcome limitations generated by uncertainty and incomplete information.
Increasing globalization is likely to have a long-lasting influence on inflation rates in countries because of the discipline imposed on domestic financial policies by increased financial market integration, such integration having been spurred and facilitated by advances in the applications of ICT. Differentials in real interest rates between domestic and foreign markets have become a major factor influencing the decisions on short-term money flows, and even small changes in these differentials can cause large movements of funds. The destabilizing effects of these flows of funds on the balance of payments of a country can be very severe and any consequent movements in the exchange rates can have substantial effects on its exports and imports independent of any changes in real economic fundamentals. Nominal interest rate differentials among countries appear to be diminishing as they are integrated into the global system and, because of this, their inflation rates also have to conform. A country which is globalized will not be able to run hyper or even high inflation rates without being cut off from international financial flows.
In fact, the easier access to real-time information worldwide through the application of ICT means that fewer countries can isolate themselves from the effects of world economic events and trends, and that countries cannot formulate economic policies without being responsive to outside signals. The distinction between a country's international and domestic economic policies is becoming increasingly blurred; all macroeconomic policies are increasingly international ones. Recent studies have shown, for instance, that large and volatile capital flows demand that countries have a more conservative fiscal stance and maintain a sustainable fiscal structure.10
In the medium term, a trend has emerged in many countries towards a broader and more integrated use of ICT in socio-economic development. With new forms of applications becoming available at decreasing cost, and with a shift in emphasis from quantitative to qualitative growth, the impact on growth will often depend on the capacity to disperse ICT capabilities across a broad range of economic activities, not just in the manufacturing of ICT products (for example, microchips). This perhaps distinguishes ICT from other forms of technological development, which often tend to be location- or industry-specific, and difficult to transfer.
ICT and competitiveness11
In fact, the very definition of mobile and immobile factors of production, the quality and quantity of which determine a country's competitiveness, needs to be recast to include the influence of ICT. According to an OECD report,12 thanks to the convergence of computer and communication technologies, it has now become technically feasible for multinational enterprises, banks, and industrial and service firms to install intra-corporate worldwide information networks, through which headquarters management can link together production and marketing facilities around the world. The report also notes that an increasing fraction of total value and wealth produced in the world will be produced and distributed through the intra-firm and inter-firm networks covering the entire globe. In this regard, a country will be even more in the position of waiting to be selected as a site of operations by investment decisions rather than giving permission for investments to be undertaken. The deciding factor will therefore be whether or not a country is seen as attractive as an investment site by its own firms or by multinational ones.
Source: Based on information in Yoo Jungho, "The Korean economy in a borderless world", Korea Journal (Korean National Commission for UNESCO), vol. 37, No. 4 (1997), pp. 25-38.
In the past, the internationally mobile factors of production were mainly capital and technology, and immobile ones were labour, land and natural resources. Today, as illustrated in figure IV.6, the ability of countries to restrict the movement of goods, services and labour has become much weaker and the determining factors of competitiveness have clearly shifted towards the social and economic institutional and governance characteristics of a country. The physical infrastructure, the rules and regulations applied to business and individuals, the degree of transparency, perceptions of fairness or lack of corruption, the investment climate and the functioning of the legal system will be the most important elements inducing investment in the production of goods and services. Technologies and skilled labour can move easily and so the ability of a country to attract or keep an industry, whether it be textiles, automobiles, computer software development or financial services, will depend on these institutional factors. This implies that countries will be forced to pay more attention to meeting international norms of economic behaviour and the rules of the game if they wish to avoid marginalization.
Two rather rough illustrations of this influence of ICT can be seen in figure IV.7. The two parts of this figure report cross-country relationships between investments in telecommunications as a percentage of GDP averaged over the 1987-1996 period and indicators of transparency and degree of proper business practices, as reported by the world competitiveness survey data collected and collated by the International Institute for Management Development from executives of multinational corporations. If increased application of ICT has the above-described effect on competitiveness considerations, then some (weak) positive correlation would be expected, and is indeed found in these figures.
Figure IV. 7. ICT diffusion and indices of the investment climate
(a) ICT diffusion and transparency
(b) ICT diffusion and proper business practices
Source: Calculated from data in ITU, Statistical
Yearbook 1994 (Geneva, 1995) and Asia-Pacific Telecommunication Indicators
1997: New Telecommunication Operators (Geneva, 1997) and from the world
competitiveness survey organized by the International Institute for Management
Nevertheless, within the production sector, the effect of ICT on the competitiveness of developing countries is likely to vary between countries at different levels of industrialization. Flexible automation technologies and organizational innovations are coalescing into new best-practice manufacturing systems which are spreading throughout industry in the advanced economies. Diffusion in developing countries is still very limited, occurring primarily among the newly industrialized countries. Even in them, the diffusion is quite slow. For example, while some have enjoyed good export performance in those industries where products are simple and the effects of flexible automation are relatively minor, there are new obstacles in many other industries (such as machine tools) where new techniques are being rapidly adopted by the OECD countries, with substantial improvement in their competitiveness.
The role of ICT, particularly telecommunications, cannot be overemphasized in supporting growth in services and economic activities as a whole. Studies funded by the United Nations in Kenya and the Philippines have shown that the total benefits of telecommunication investments were, in some cases, 40 to 80 times greater than the usual measure of benefit, revenue or willingness to pay. These additional benefits include direct benefits from savings of personal time and reduced expenditure on more expensive communications media (such as messengers or telegrammes) or on alternative transportation services. Other benefits came from the use of a more effective communications medium for the acquisition of supplies, the operation of organizations, and the sale and marketing of goods or services. In business, expansion was achieved mainly through reaching a wider range of customers. Agriculture, health care delivery, wholesale/retail trade, services, transportation, construction, and light industry also benefit from telecommunications. Unless developing countries take these substantial indirect benefits and externalities arising from telecommunications into account, there will be serious underinvestment in communication systems. Consequently, their competitiveness will decline.
In essence, the ICT revolution has given rise to an ongoing change in the techno-economic paradigm which is likely to speed the transition of the world economy towards even more information-intensive technology-based products and processes. Countries lacking the necessary educational, research and design capabilities may become even more seriously disadvantaged in international competition.13 They will not be equipped to participate in the knowledge society.
The knowledge society
The shift from the agricultural age to the industrial age was driven by economic factors such as improvements in productivity resulting from better technology, including knowledge and skills, development of new sources of energy, and improvements in market mechanisms. It is ICT which has played a central role in enabling the further growth from the industrial age towards the knowledge society. In all areas of human intellectual creativity, this technology facilitates the development and analysis of ideas and concepts. During the past 30 years, the rapid expansion of knowledge in so many areas such as genetics, medicine, space science, medical science and the environment would have been impossible without the ability to handle and analyse large quantities of data.
Knowledge is becoming the key resource. Educational institutions and libraries are at the centre of the knowledge society. There is also a rise in knowledge industries based on workers who are skilled in a wide range of subjects and technologies. In the knowledge society, education is central to personal, organizational and national well-being. Educational attainments on a lifelong basis are becoming correlated with high monetary and social value. There are likely to be changes in organizational structures in the public and private sectors to enable them to deliver learning systems efficiently in an information society from pre-school to old age. Especially promising technologies are interactive video, networking and collaboration tools which stimulate curiosity and creative thinking, and promote innovation. Appropriately used, technology can reduce education-related costs, increase access and boost learning retention rates.
ICT will continue to play a central role in driving social change as the knowledge society develops its information infrastructure. Telecommunications will facilitate the creation and operation of global networks of people with specific interests (commercial, scientific, religious, artistic and so on). Although science and technology will bring about these developments, their interaction with social and political factors will determine their usefulness. This interplay is especially apparent in the current evolution of the information superhighway, where issues such as universal access, privacy and government jurisdiction are yet to be resolved. Governments now face the challenge of managing appropriate social change to accommodate the knowledge society that can maximize both international competitiveness and social equity. These dual objectives involve a delicate balancing act.
In the next three chapters, substantial empirical evidence is presented regarding the application of ICT in the areas of trade, investment and production patterns and financial flows, the constraints faced and opportunities foreseen, based on the experiences of ESCAP countries. This material is then used as the basis for the policy proposals made for the consideration of governments in the last chapter.
9 OECD, Information Technology and New Growth Opportunities (Paris, 1989), p. 12.
10 For example, see P.S. Heller, "Fiscal policy management in an open capital regime", IMF Working Paper, WP/97/20, 1997.
11 This section is based on Yoo Jungho, "The Korean economy in a borderless world", Korea Journal (Korean National Commission for UNESCO), vol. 37, No. 4 (1997), pp. 25-38.
12 OECD, Technology and the Economy: The
Key Relationships (Paris, 1992), chapter 10.
13 N.Y. Hanna, "The information technology revolution and economic development", World Bank Discussion Papers, No. 120 (Washington DC, 1991), p. 13.
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