Reaping the rewards of IT growth
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The digital revolution has created corporate and individual wealth
on an unprecedented scale and helped transform entire economies -
particularly in the most developed nations.
The pace of change has accelerated markedly since the mid-1990s
when the internet began to be exploited commercially, emerging as
the driving force for a new economic revolution.
"The internet economy is dramatically rearranging the commercial
landscape, well beyond the central and decentralised waves of
computerisation that marked the past two decades," noted a report
on the "New Economy" by Cambridge Technology Partners, the US
consultancy.
"Its influence is spreading brushfire-fast, on a global scale," it
argued.
Indeed, as William Daley, the US commerce secretary, noted in June
when he presented the latest US government report on the emerging
digital economy*: "This past year, electronic commerce has grown
beyond almost everyone's expectations. Every day, more people are
finding new ways to provide innovative products and services
electronically.
"The internet is changing the way businesses do business, from the
acquisition and servicing of customers, to the management of their
relations with suppliers.
"It is revolutionising our access to information and the way we
communicate, shop and entertain ourselves." While the numbers were
still small compared to the overall economy, they were growing more
rapidly and provided more evidence that e-commerce would be the
engine for future economic growth, he said.
In Europe and the US, the IT sector itself is a key generator of
new jobs and economic activity. Barry Grislake, chief executive of
French IT group Bull Information Systems in the UK and Ireland,
says "the development of a 'digital economy', based upon virtual
trading and electronic markets, and the application of computing
power to exchange and analyse information should be to the benefit
of all".
The importance of the IT sector itself to the health and
development of local and regional economies is well established.
According to the Frankfurt-based European Information, the western
European market for information technology and communications
products and services is equivalent to 5 per cent of gross domestic
product.
A study commissioned by the Business Software Alliance from
consultancy PricewaterhouseCoopers estimated that the packaged
software industry generated $37bn in sales, 334,200 jobs and $15bn
in tax revenues in western Europe in 1996.
Based on market growth projections of 10 per cent a year, the study
suggested this IT segment would produce 426,000 jobs, fiscal
revenues of $21.8bn and sales of $59.8bn by 2001.
Indeed, many technologists, policy makers and economists including
Alan Greenspan, chairman of the US Federal Reserve, believe this
new "information revolution" will have an impact as profound as
past agrarian and industrial revolutions.
"The newest innovations, which we label information technologies,
have begun to alter the manner in which we do business and create
value, often in ways not readily foreseeable even five years ago,"
he said.
Robert Shapiro, the US under-secretary of commerce for economic
affairs, echoed this sentiment in his introduction to the Commerce
Department report.
"Revolutions, by their nature, create new and unanticipated
opportunities, challenges and risks for those caught up in them,"
he said. "We all find ourselves in the midst of a technological
revolution propelled by digital processing. All around us, in ways
and forms we cannot fully appreciate, new digitally-based economic
arrangements are changing how people work together and alone,
communicate and relate, consume and relax.
"These changes have been rapid and widespread, and often do not fit
the established categories for understanding economic developments.
As a result, early efforts to take the measure of these changes
have often seemed to be inventories of what is not yet known."
Mr Shapiro said the "digital economy", electronic commerce and the
information technology industries that made e-commerce possible
were growing and changing at breathtaking speed.
"Not only were we unable to foresee five years ago how advances in
information technology would alter the manner in which we do
business and create value, but the rate of change is racing ahead
of estimates that only a year ago appeared optimistic." For
example, analysts forecast in 1997 that the value of internet
retailing could reach $7bn by 2000 - a level surpassed by nearly 50
per cent in 1998. In the past year, forecasters have tripled
previous estimates of near-term growth in business-to-business e-
commerce.
But despite the problems of forecasting the scale of the changes
under way, understanding and at least anticipating them has become
a key element in corporate strategic planning, as well as in more
ambitious national or regional initiatives.
The importance of this is underscored by the recent rapid growth of
e-commerce transactions over the web. Even though the value of e-
commerce transactions is still small relative to the size of the
economy, it continues to grow at a remarkable rate.
But as the US Commerce Department notes, even more significant than
the dollar amount of these transactions are the new business
processes e-commerce enables and the new business models it is
generating.
"Both the new internet-based companies and the traditional
producers of goods and services are transforming their business
processes into e-commerce processes in an effort to lower costs,
improve customer service, and increase productivity."
At the same time, the digital economy makes possible a truly global
marketplace with more transparency than before. This, coupled with
other developments such as the introduction of the euro, is
encouraging many vendors to adopt transnational pricing.
"Driven by customer demand and business imperatives, the digital
economy is becoming truly global," said the Commerce Department
report. "The United States continues to lead the world in many
measures of the utilisation of digital technology." But this lead
was diminishing.
IT-producing industries - the makers of computer and communications
hardware, software, and services that enable e-commerce - play a
strategic role in the growth process.
Between 1995 and 1998, the IT industry's share of GDP in the US
increased to about 8 per cent of GDP from 6 per cent in 1993.
Again, some economists argue that this increase understates the
importance of these industries because their prices are falling. A
better way to gauge the importance of IT-producing industries, they
argue, is to look at their contribution to real growth. Over the
last four years, IT industries' output has contributed on average
35 per cent of real economic growth in the US.
Moreover, in 1996 and 1997, the last years for which detailed data
are available, falling prices in IT-producing industries lowered
inflation in the US by an average 0.7 percentage points,
contributing to the remarkable ability of the US economy to control
inflation in a period of historically low unemployment.
Indeed, the IT industries have achieved extraordinary productivity
gains. Between 1990 and 1997, the value-added per worker in the IT-
producing industries grew by 10.4 per cent in the US; value-added
in the hardware subgroup of the sector grew by 23.9 per cent. From
the consuming end of the equation, IT equipment continues to be the
largest category of industry spending for all types of capital
equipment. US industry spending on IT equipment rose from $142bn in
1993 to $233bn in 1998 and has consistently accounted for about
one-third of all such spending.
By 2006, it is estimated that 49 per cent of the private sector US
workforce will be employed by industries producing IT equipment or
services or by heavy users of these, up from 44 per cent in 1989.
In particular, expanding internet usage and electronic commerce are
contributing to increased demand for "core" IT workers (computer
scientists, engineers, programmers and systems analysts) but are
also generating new IT occupations, changing skill requirements for
some non-IT occupations and raising the minimum skill requirements
for many lower skilled jobs.
As skill requirements have risen, so have wages paid to IT workers.
The wage gap between IT workers and all other workers continues to
widen. For example, in 1997, workers employed in IT-producing
industries in the US earned $53,000 compared with the economy-wide
average of $30,000.
Across the globe, government, business and educational
establishments have begun to respond with joint initiatives to help
increase the supply of IT workers. But employment growth in IT-
producing industries continues to outpace average employment
growth.
From 1989 to 1997, employment in IT-producing industries in the US
grew by 2.4 per cent annually against 1.7 per cent for all private
industries. Since 1996, IT-producing industries have added 350,000
jobs, an annual increase of 7.7 per cent compared with average
employment growth of about 3 per cent.
Among the four IT-producing industry groups, software and services
is the fastest growing group - at 8.3 per cent annually - and is
now the largest.
But while the US leads the way, the strong demand for additional
skilled IT workers is not unique to that country. Almost all
developed nations have expressed a need to increase their IT skills
base.
As the Commerce Department report noted: "While this labour
imbalance has the potential to limit the evolution of the digital
economies of developed nations, it has even more serious
implications for less developed countries. Information technology
itself should be an important development tool allowing LDCs to
move forward faster. However, the demand in the industrially
advanced countries makes it difficult for much of the developing
world to keep their limited pool of IT workers at home."
Neither is recognition of the benefits that can arise from full
participation in the information economy limited to the world's
developed nations.
"For much of the world," the report added, "e-commerce and the
movement to a digital economy in general are constrained by a lack
of critical infrastructure. Both on national and transnational
levels, developing countries are struggling to determine how they
too can benefit from the emerging digital economy, given other
needs and the condition of their electric and telephonic
infrastructure."
*The Emerging Digital Economy II, US Department of Commerce, July
1999. |
