The Political Economy of (Icts) and Economic Development

The Political Economy of Information and Communication Technologies and Economic Development

Thomas D. Lairson

Gelbman Professor of International Business

Professor of Political Science

RollinsCollege

Abstract: Determining the impact of information and communication technologies (ICTs) on economic growth is part of a process of understanding the relationship of technological change and economic growth more generally. Like the several technological revolutions before it, the ICT revolution generates economic growth through increasing investment and productivity generated by large changes in relative prices and the resulting positive feedback, autocatalytic effects, and increasing returns on products, processes, and institutions throughout the economy. The ICT revolution is distinctive because of the knowledge intensity of the technology, which generates exceptionally high levels of externalities, spillovers and positive feedback on a global scale. Economic growth is a result of the ability of national and local institutions repeatedly to generate and/or capture the resources from the processes of positive feedback produced by technological change. Technology and institutions co-evolve as new resources are captured and used strategically in economic and political relationships. The most successful institutional form (to this point) for developing nations is a partnership of states and firms, able repeatedly to capture and use knowledge resources to amplify the productive and competitive capabilities of nation and firms. These ideas are demonstrated through a brief review of the processes of increasing returns in previous technological revolutions, a detailed examination of the successes of Singapore, Taiwan, Korea, and Malaysia in the electronics industries, and a discussion of new opportunities in business process outsourcing, especially in India. The conclusion is that ICTs offer significant opportunities for states ready to create institutions able to utilize the resources now flowing from global production and outsourcing networks.

NB: This version contains case studies only of Korea and Malaysia. The remaining cases of Singapore, Taiwan, and India are forthcoming.

Paper prepared for presentation at the annual conference of the International Studies Association, Honolulu, March 2-6, 2005

The rise of information and communication technologies (ICTs) is the most recent in a series of radical and rapid technological changes extending back more than 200 years. Thesenew technologies have generated considerable hopes and fears: expectations that ICTs will spur economic growth are as common as predictions that these will produce even greater income gaps.[1] One of the most optimistic scenarios forecasts the ability of developing states to leapfrog the outmoded technology of developed states and establish themselves at the technological forefront.[2] There is also the possibility that information and communication technologies are more easily transferred to poor nations than previous technologies, thereby promising greater potential benefits. At the same time, there is good reason to fear that revolutionary improvements in ICT and related transformations in biotechnology and nanotechnology will primarily benefit already wealthy, knowledge-intensive societies, thereby creating an even larger and potentially unbridgeable gap between rich and poor.[3]

However, there are more elemental issues yet to be resolved before we can begin to estimate the impact of ICTs. Three questions will frame the discussion in this paper:

(1) How does the process of technological change affect the process of economic growth? In order to answer this question, we need a historical perspective about the way technology, knowledge and technological change has affected economies in the past.[4] How, for example, did the advent of railroads and steam engines affect economic growth in the 19th century? ICTs draw our attention to the special role of knowledge, especially as to how the knowledge intensity of products and processes affect the prospects for economic growth.[5] This means our understanding of the past must incorporate the effect of knowledge on economic growth.

(2) What kinds of institutional arrangements are necessary for developing nations to gain from ICTs? Some nations have recently made the leap to rapid economic growth through ICTs and we need to understand how this happened and the implications for other nations. Using theoretical insights from our study of the past, we can identify some of the key relationships that propelled these nations forward.

(3) What specific opportunities for developing states are presented by ICTs?

Given the shifting forms of globalization, we need to apply these ideas to future prospects for development. How can the experience of the past and recent history of technology and economic growth shed light on the future of ICTs and economic growth?[6]

Unfortunately, most discussions of the relationship of ICTs to the prospects for economic growth in developing states have not addressed these questions sufficiently. There is a veritable laundry list of problems with existing thinking. In particular, writing on this topic does not always have an adequate appreciation of past experiences with technological change and economic growth, misses the central implications of the special knowledge-intensive character of ICTs, ineffectively incorporates the impact of firms and firm-state relations in their analysis, and thereby misunderstands the main opportunities for developing states.[7] This paper argues the answers to these three questions come from bringing together research on the history of technology and economic and social change, the special features of knowledge-intensity in ICT, characteristics of global industry structures and the operation of firms, and the relationship of states and firms. These ideas can be constructed from the burgeoning literatures on technology, technological change, economic growth, and the operations of firms. Further, there are specific examples of previously poor nations that have successfully used ICTs as a basis for economic growth, and this experience must be mined to understand both the opportunities and barriers to economic development.

This paper makes three main arguments. First, determining the impact of information and communication technologies (ICTs) on economic growth is but one part of a process of understanding the historical relationship between technological change and economic growth. Like those technological revolutions before it, the ICT revolution generates economic growth through large changes in relative prices and the resulting positive feedback and autocatalytic effects on products, processes, and institutions throughout the economy. The ICT revolution is distinctive, however, because of the high knowledge intensity of this technology, which generates exceptionally high levels of externalities and spillovers on a global scale.[8] Economic growth, especially in an era of knowledge intensive production, is a result of institutional development. Specifically, economic growth is a result of the ability of institutions – such as firms and states – repeatedly to generate and/or capture the resources from the processes of positive feedback produced by technological change.[9] The continuation of this process requires that institutions evolve as new resources are captured and used strategically in economic and political relationships. Second, the most successful institutional form (to this point) for developing nations is a partnership of states and firms able to capture and use resources repeatedly to amplify the productive and competitive capabilities of nation and firms. Third, the relationship of technology, institutions and economic growth can be seen through a detailed examination of the successes of Singapore, Taiwan, Korea, and Malaysia in several ICT industries. More recent examples of ICT-based opportunities for developing states are demonstrated through an examination of business process offshore outsourcing and the management of supply chain integration.

Technological Change and Economic Growth

Technology and technological improvements, for our purposes, refer not simply to the artifacts of technology, but more importantly to the knowledge and innovations embedded in or associated with these “things.” The process of technological improvement has to do with the removal or alteration of constraints on human activity through a combination of reducing the costs of production and the new ability to produce goods and services previously impossible.[10] New technologies include not only the great general purpose technologies but also the complementary co-inventions of much more specific and limited application.[11]

The effect of ICTs on economic growth comes into focus when we have a better sense of the sources of economic growth, especially the role of technological progress.[12] Joel Mokyr has succinctly summarized the main sources of economic growth: (1) increases in investment or increases in the capital stock – made possible by savings; (2) commercial expansion or expansion of market relations – which generates the gains from trade produced by increased specialization (Smithian growth); (3) Population growth leading to scale effects – making certain activities more cost effective –having much the same consequences as agglomeration effects; and (4) Increases in the stock of knowledge – the application of information to production so as to increase efficiency and/or new and better products.[13] As we shall see, each of these processes is important for growth. Yet scholars have increasingly focused on improvements in knowledge and technology as the most important source of economic growth.[14] This is because of the special characteristic of technology and knowledge: thesubstantial capacity for generating increasing returns. Significant and sustained economic growth comes with large increases in knowledge and technology and has been confined to the past 250 years.

What are increasing returns and how is this important for economic growth? Increasing returns refers to processes in a system in which increases in the value of a particular property invoke relationships that generate additional cumulating increases in the value of that property.[15] This self-reinforcing situation is a systemic process with many forms and applications. Economists refer to increasing returns and network effects to understand the processes of economic growth and the development of technology.[16] Political scientists refer to bandwagon effects to describe spirals of hostility that can lead to conflict.[17] Business analysts are interested in the operation of supply chains, such that a small fluctuation in orders leads to increasing amplification of orders and inventory along the supply chain.[18] Sociologists refer to tipping points to understand how contagions move from a limited to a system-wide impact.[19] And considerable thinking in understanding the characteristics of networks implicitly focuses on increasing returns.[20]

For our purposes, increasing returns as it relates to economic growth is best stated by Joel Mokyr: the costs of inputs are continually exceeded by the benefits of production. More specifically: technological change is able to generate “an increase in output that is not commensurate with the increase in effort and cost necessary to bring it about.”[21] In part, this is because technological improvements result in sometimes dramatic reductions in the cost of inputs, sometimes equally dramatic improvements in the nature of inputs, and sometimes in the combination of dramatic improvements in the quality and dramatic declines in the cost of inputs. Technological change alters the relative prices of goods, in particular those related to or complementary with the falling costs of inputs. In the most basic sense, technological change shifts outward the production possibilities frontier by reducing or removing physical or cost constraints that previously controlled production choices. The decline in relative prices permits the creation of entirely new products, improved products that replace old ones, and/or reductions in the cost of making and/or delivering new or existing products.[22] Technological change can make possible increases in output without corresponding increases in inputs.

The changes in relative prices and resulting advances in productivity is one form of increasing returns. Other equally and potentially more potent positive feedbacks come from two sources: (1) Changes in relative prices ripple across the economy, affecting a vast array of complementary products with essentially the same forms of productivity increases. Further, this process can engage other forms of positive feedback through the expansion of markets and the resulting gains from trade and through new scale economies that result in declining prices for other inputs.(2) The changes in prices and the new knowledge embedded in technology spawn new forms of innovation that leads to the creation of new institutions (and new knowledge), to new products and processes, and to additional cycles of changes in relative prices. Knowledge not only can be reused repeatedly to expand output; it also has potential impacts from its recombination to generate additional forms of innovation. Put another way, as knowledge-intensive assets accumulate the return on them begins to rise. The main point is that technological change and innovation set off recursive rounds of price and knowledge changes that feed on each other in autocatalytic ways to generate increasing returns.[23] It is this process that is at the heart of understanding the potential of ICTs for economic growth.[24] But we can see this process better after considering an example from the past.

Technology and Economic Growth in the 19th Century

Most scholars believe the Industrial Revolution did not begin to make dramatic transformations in British economy and society until about 1825. This is partly due to the tiny role of manufacturing in an otherwise agricultural society. It was also caused by the still limited applications of the new technologies of steam power and cotton spinning. The initial industrial developments after 1760 did result in important changes – for example, between 1780 and 1825 the time required to process 100 lbs of cotton yarn fell from 2000 hours in Britain to 135 hours. This compared to 50,000 hours in India in the late 18th century. The actual price of cotton yarn fell by 95% between 1760 and 1837.[25]

However, the greatest acceleration of economic growth came when technological improvements began to interact, generating not only sharp changes in relative prices but massively cumulative increasing returns as well. From the 1830s to the 1890s, a growth complex emerged consisting of two important inputs: iron – later replaced by steel - and steam power.The pervasiveness and widespread impact of these inputs allowed them to interact with many other industries and generate rapid economic growth and large scale economic and institutional changes. The costs for these inputs plummeted, which contributed to the emergence of the railroad industry and the machine tools industry and to an enormous number of other factor combinations. Between 1806 and 1845, the price of iron fell by two-thirds, and between 1870 and 1898, the price of steel rails fell by more than four-fifths.[26]

The declining price of these important inputs affected a vast array of other products and processes. The cost of other important inputs - water wheels and steam engines – declined as well, making it feasible to develop many new applications. Iron was also a direct input for many items such as munitions, rails, tools, pumps, bridges, and textile machines, leading to declining costs across an expanding range of products.[27] It is surely in railroads where this cumulative process of growth can be seen most easily. An interconnected system of positive feedbacks based on changes in relative prices and the creation of new market structures, coupled and derivative demand, economies of scale, new products and industries, and new knowledge and institutions propelled the economy forward. Railroads tapped into a vast demand for quickly transporting goods and people over long distances. Building this infrastructure itself raised economic growth, but also increased demand for steam engines, iron, machine tools, and an engineering industry. Development of a machine tools and engineering industry facilitated the mechanization and manufacturing of many other products. Moreover, the improvements in transportation expanded markets which helped to diffuse technology and thereby expand markets even more.

Railroad construction was an enormous activity and in itself was a big contributor to economic growth. However, the investment in railroads would quickly have encountered diminishing returns but for the positive feedbacks across much of the economy. The decline in transportation costs, in conjunction with the new capabilities for speed of transport over large distances, were the main forces leading to new market structures. The reduction in costs, expansion of geographic scope, and reduction of delivery time led to the integration of markets on a much larger scale.[28] Expanding markets, as usual, led to greater economies of scale in production and to gains from trade resulting from greater specialization. This was especially noticeable in the production and distribution of grain, where new markets for grain supported new investment in machinery, a huge increase in production, and a rapid fall in price.[29] Expanding markets and economies of scale meant that costs for railroads (and other industries) fell with declines in the price of steam engines and in coal.

Of perhaps even greater consequence were the knowledge effects of the railroads and telegraph companies. The management and financing of the railroads could not be accomplished with existing institutional forms for operating and financing corporations. In the process of solving the complex problems of coordination and organization of these far-flung enterprises, the modern business enterprise was invented. And, because the size of the capital requirements for railroads dwarfed that of existing firms, new systems of financial institutions and products were developed. Over the thirty years from 1850-1880, the owners and managers of railroad corporations created new and innovative systems consisting of professional management separated from owners, accounting, planning and administration, communication, and control. The result was the large, vertically integrated firm.[30] The capital needs required to build and operate railroads were so much larger than before that new financial systems for the aggregation of capital across the nation and even the world were needed. This led to the concentration of financial firms and resources in New York City and to the development of new financial instruments. Railroads created large concentrations of finance as well as industry.[31] Further, the knowledge embedded in the new managerial and financial systems diffused to other parts of the economy, leading to new capabilities for creating large, vertically integrated firms in many product areas. This opportunity for great gains if continental scale systems of production and distribution could be formed served as the incentives for the rise of the large firms of the late 19th and 20th centuries.