ICT uptake leads to GDP rise

By adopting ICT now, New Zealand will eventually get wealthier, says research

Information and communication technologies cause GDP to rise, according to a research project by Nancy Chu, Ken Carlaw and Les Oxley, at the University of Canterbury.

Economic growth in New Zealand during the period 1987-2001 appears to have been influenced by changes in ICT, not the other way around, according to Chu, Carlaw and Oxley. Their research shows that growing the economy will not necessarily lead to the adoption of ICT, but, by adopting ICT now, New Zealand will eventually get wealthier.

“There is a connection between ICT uptake and productivity,” says Chris Hector, researcher in economics at Waikato Management School.

“But it has a lag in it,” he says. “When something new, like new ICT and use of computers, comes along, it doesn’t diffuse instantly. There can be quite a few years [before it has beneficial effects].”

Quite often even inventors don’t know how their inventions will ultimately be used, he says.

“Things evolve over time and uses materialise over many years — long after the initial invention has been made. And, for that reason, you can have quite a lot of expenditure on new technology without, initially, much productivity growth. You may have a productivity decline.”

Adopting ICT generates structural adjustment costs in the beginning, according to the research. Productivity growth comes later, after the development of complementary technologies that help boost productivity. Research that has found a negative relationship between ICT uptake and productivity is based on the assumption that technological adoption is cheap and that it immediately leads to higher productivity, say Chu, Carlaw and Oxley.

Hector refers to two growth theories: the neo-classical model, which has been dominant since the late 20th century, and the more recent “endogenous growth theory”, which has been gaining more and more supporters for the last 20 years, according to Hector.

“The endogenous growth theory addresses the uptake of technology which the old model simply couldn’t handle,” he says.

Supporters of the endogenous growth model fully expect a lag, and can explain it, because they expect diffusions to take quite a long time, he says.

“Even when the technology itself is diffused, they expect an adaptation time.”

Hector is currently investigating ICT uptake in different industries and its connections to wage inequality. He has found that there is an increasing demand for education and skills in New Zealand, and that the supply of skilled workers does not meet the needs of the market.

“My guess is that we should have more public investment in education at every level, because every step affects the next one” says Hector. “The gaps have widened between the well-skilled and school-leavers. What we need in this changing world is a more highly skilled workforce, but too big a slice at the bottom is missing out and falling off the bottom.”

The lack of appropriate skills in the workforce is a constraint on the rate at which firms can pick up ICT, he says.

Hector thinks the future is going to be increasingly skill-dependent and that New Zealand needs to lift skill levels across the board in order to facilitate economic growth.

“The future depends a great deal on how much we manage to include all New Zealanders in the benefits, rather than only the minority who are well educated. It is a bad thing for a society to be polarised,” he says.