China's accelerating 'Internet revolution'
- By John Ross
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E-mail China.org.cn, June 7, 2015
From a fundamental economic perspective, it is important to understand that the pure technology of the Internet and ICT does not increase productivity and economic growth by itself. Winner of the Nobel Prize in economics Robert Solow noted in 1987, six years after the beginning of the mass introduction of personal computers into the economy, that computer technology was not speeding up U.S. productivity growth."You see the computer age everywhere but in the productivity statistics," he explained.
This has not changed. As Figure 1 shows, in 1980, the year before the introduction of the modern personal computer, U.S. annual productivity growth was 1.2 percent over a five-year average that removes the effects of short-term business cycle fluctuations. By 2014 U.S. productivity growth was still only 1.2 percent. Therefore, 34 years of revolutionary technological developments in the Internet and ICT have led to no increase in U.S. productivity!
Indeed, the latest U.S. figures are even worse. In May Federal Reserve Chairwoman Janet Yellen admitted that the U.S. was experiencing "relatively weak productivity growth." In 2014 despite publicity about iPhones, Apple Watches, Google, e-tailing and other Internet-centric products and services, U.S. productivity increased by only a snail-like 0.5 percent.
The data therefore clearly shows that technological advances in the Internet and ICT sector alone do not lead to productivity increases.
As can be seen in Figure 1, however, there was one phase during the past 34 years of the Internet and ICT revolution when U.S. economic efficiency sharply increased. In the period leading up to 2003, U.S. annual productivity growth reached its highest level in half a century, 3.6 percent. This was explained by a huge surge in ICT focused on fixed investment. U.S. investment rose from 19.8 percent of GDP in 1991 to 23.1 percent of GDP in 2000, fell slightly after the dot-com bubble's collapse, and then reached 22.9 percent in 2005.The majority of this investment was in ICT. Afterward, this U.S. investment fell, leading to the sharp slowdown in productivity.
It was therefore not purely the ideas or technology of the Internet that led to rapid economic efficiency growth. Growth in efficiency could rather be attributed to the embodiment of these in a massive wave of investment focused on ICT. This is the unambiguous lesson of the U.S., and therefore a key one for China to study as it seeks to cut costs and boost speeds in order to accelerate its own "Internet revolution."
The writer is a columnist with China.org.cn. For more information please visit: http://www.china.org.cn/opinion/johnross.htm
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