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pc_2012_10__2_

pc_2012_10__2_

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Published by: Bruegel on Jun 20, 2012
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ISSUE 2012/10JUNE 2012
ICT FOR GROWTH: ATARGETED APPROACH
MICHAŁ GRAJEK
Highlights
This Policy Contribution assesses the broad obstacles hampering ICT-led growth inEurope and identifies the main areas in which policy could unlock the greatestvalue. We review estimates of the value that could be generated through take-upof various technologies and carry out a broad matching with policy areas.According to the literature survey and the collected estimates, the areas in whichthe right policies could unlock the greatest ICT-led growth are product and labourmarket regulations and the European Single Market. These areas should bereformed to make European markets more flexible and competitive. This wouldpromote wider adoption of modern data-driven organisational and managementpractices thereby helping to close the productivity gap between the United Statesand the European Union.Gains could also be made in the areas of privacy, data security, intellectualproperty and liability pertaining to the digital economy, especially cloudcomputing, and next generation network infrastructure investment.Standardisation and spectrum allocation issues are found to be important, thoughto a lesser degree. Strong complementarities between the analysed technologiessuggest, however, that policymakers need to deal with all of the identifiedobstacles in order to fully realise the potential of ICT to spur long-term growthbeyond the partial gains that we report.
Michał Grajek
(michal.grajek@bruegel.org) is Visiting Fellow at Bruegel and anAssociate Professor at ESMT European School of Management and Technology.
Telephone
+32 2 227 4210info@bruegel.org
www.bruegel.org
BRUEGEL
POLICY
CONTRIBUTION
 
ICT FOR GROWTH:A TARGETED APPROACH
MICHAŁ GRAJEK, JUNE 2012
02
BRUEGEL
POLICY
CONTRIBUTION
THE DIGITAL AGENDA FOR EUROPE
is a primeexample of an initiative to promote EU growth, andas such is more relevant now than ever (EuropeanCommission, 2010). One of the Europe 2020strategy’s seven flagship initiatives, it focuses oninformation and communication technologies(ICTs) as a spur for sustainable and inclusivegrowth. The Digital Agenda also identifies severalobstacles that keep European businesses andorganisations from making greater use of ICT,holding them back from potential productivityimprovements and growth. These obstaclesinclude low investment in network roll-out, afragmented European digital market, ill-adaptedcopyright legislation and the lack of interoperability and digital skills. This PolicyContribution critically assesses these and otherobstacles in the way of ICT-led growth in Europe,and identifies in broad terms the policies that canunlock the highest value.We first identify four broad technology categorieswithin ICT and collect from academic literature andpractitioners’ reports estimates of their potentialeconomic impact in Europe. The categories are: i)social networks/Web 2.0, ii) cloud computing, iii)machine-to-machine (M2M) communication(including smart grids), and iv) data-drivenorganisational technology (including e-government). The choice of these technologycategories was motivated by the desire for themto be broad enough to be classified as
generalpurpose technologies
(GPTs), which have a non-trivial economic impact, and narrow enough sothat the mechanisms leading to productivityimprovements within each category can beunderstood. Once these mechanisms have beenunderstood we can identify the obstacles that
ICT FOR GROWTH: A TARGETED APPROACH
Michał Grajek
‘The Digital Agenda for Europe is more relevant now than ever. But obstacles to potential productivity improvements and growth include low investment in network roll-out, a fragmentedEuropean digital market, ill-adapted copyright legislation and lack of interoperability and skills.’ 
hamper the deployment of each ICT category. Bylinking these obstacles to the economic impact of the technologies that they obstruct, we can alsoidentify the areas in which policies could have thebiggest impact in terms of promoting ICT-ledgrowth in Europe.
ICT-ENABLED GENERAL PURPOSE TECHNOLOGIES
The GPT framework is helpful to distinguishbetween radical innovations that have a profoundimpact on GDP and organisation of the entireeconomy, and marginal innovations, which do not.According to Bresnahan and Trajtengerg (1995),who coined the term, GPTs are enablingtechnologies that provide a platform forsubsequent applications, rather than being inthemselves complete solutions. Thecomplementary natures of the platform and theapplications, and of the applications, are drivingforces behind the impact of GPTs. This leads to avirtuous circle, in which the platform benefits froman increasing number of applications, whichtriggers more investment in the platform followedby more applications and so on. The total impact of a GPT in any given point in time is much greaterthan the direct productivity impact of its individualapplications. The impact tends to growsubstantially over time, eventually reshapinglarge parts of the whole economy.Semiconductors are a good recent example of aGPT. Lipsey
et al
(1998) give other examplesincluding printing, steel processing, electricity, theinternal combustion engine and mass production.They define a GPT as a technology that exhibitsthe following features: i) scope for improvement,ii) a range of uses in different sectors, iii) a
 
significant range of uses in most of these sectors,and iv) complementarities with existing andpotential new technologies. The technologycategories that we assess in this PolicyContribution share these four features andtherefore can be expected to have a profoundimpact on the European and world economies.Table 1 shows the most relevant estimates fromacademic literature and practitioners’ reports of the economic impact of the four technologycategories. In choosing the estimates we focusedon the impact measured by macroeconomicindicators or efficiencies that benefit the users of those technologies rather than suppliers’revenues, as reported in the ‘measurement’column of Table 1. In this way we aim to come asclose as possible to the added value eachtechnology can generate for the economy. Clearly,
03
BRUEGEL
POLICY
CONTRIBUTION
from the perspective of the whole economy, newtechnologies displace some existing economicactivity, making their revenues a poor estimate of the added value. In contrast, the macroeconomicmeasures that we report, such as theunemployment rate or GDP growth, take thedisplacement effect into account. Also, theefficiencies that users derive from the deploymentof ICTs in terms of net cost savings are a goodmeasure of the value to the economy. They may,however, under- or over-estimate the valuedepending on the price elasticity of the ICT usageand general equilibrium effects. Infrastructureinvestment in technologies such as cloudcomputing, smart buildings, or smart grids, whichmay cause the reported cost savings in Table 1 todeviate substantially from the net cost savings, isdiscussed separately as an obstacle hamperingdeployment of the technologies. In the following
Michał Grajek
ICTFOR GROWTH: A TARGETED APPROACH
Table 1: Estimates of the economic impact of the chosen four technology categories
TechnologycategoryApplicationEstimateUnit/measurementRegionTimespanSource
Social networks
General
1.5% of GDP
Reduction in unemployment rate throughbetter job matching caused by more effi-cient information transmission
USMayer (2011)
Facebook
€15.3bn
Value added (net of displacement of existing economic activity)
EU-272011Deloitte (2012)Cloud computing
General
0.1 - 0.3%of GDP
Contribution to GDP growth rate due tolower entry barriers for SMEs
EU-25after 5 yearsEtro (2009)
General
€23-€32bn
Estimated annual productivity gains (ieadded value) resulting from cost savingsthrough adoption of cloud computing byall SMEs
EU-27Hatonen (2011)M2M
Smart buildings
€187bn
Energy saved by improved buildingdesign
Globalby 2020The Climate Group(2008)
Smart Grids
€61bn
Electricity saved by reduction in trans-mission and distribution losses
Globalby 2020The Climate Group(2008)
Smart motorsystem
€54bn
Electricity saved due to optimisedmotors and industrial automatisation
Globalby 2020The Climate Group(2008)
Smart logistics
€33bn
Fuel, electricity and heating energysaved due to optimisation of logisticsnetworks
EU-27by 2020The Climate Group(2008)
Personal locationdata
US$700bn
Cumulative value to consumers and busi-ness end users due to, for instance, fueland time saved
Global2011-2020Mckinsey GlobalInstitute (2011)Data-drivenorganisationaltechnology
General
US$452.5bn(4.3% of GDP)
Cumulative cost savings due to deploy-ment of Internet business solutions
US2001-2011Varian
et al
(2002)
General
US$81.9bn(1.1% of GDP)
Cumulative cost savings due to deploy-ment of Internet business solutions
UK, France andGermany2001-2011Varian
et al
(2002)
E-government
0.5% of GDP
Annual public sector productivity growth
EU OECDeconomiesMckinsey GlobalInstitute (2011)Source: Bruegel.

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