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Economy & Business Environment Blog

May
17
2016

The New Digital Economy is not paying off in terms of higher productivity—yet

Despite rapid digital innovation, booming spending on digital services, and spectacular tech-price declines, the New Digital Economy of mobile, broadband, and cloud has had little visible impact thus far on hard measures of growth, productivity, or profits. Optimists argue we just need to be a little more patient. Pessimists suspect that, behind the techno-utopian buzz and bluster, there’s no “there” there. Who will turn out to have had it most right?

In a new report on the digital economy, The Conference Board introduces a suite of metrics that maps out where technological adaptation stands today, and where it is headed over the next decade. Let’s start with what the existing statistics are telling us. Productivity growth has been on a declining path in most mature economies since a decade. Annual U.S. labor productivity growth slowed to 1 percent on average between 2007 and 2014 (down from 2.4 percent in 1999–2006), and stands at just half of that today. This isn’t an American problem: Productivity growth also fell in Germany, from 1.6 to 0.8 percent, and in the UK, from 1.9 to 0.1 percent. What’s more, we find that the top half of industries which represent the most intensive users of digital technology account for 60 percent of the productivity slowdown in the U.S., 66 percent of the slowdown in Germany, and 54 percent of the slowdown in the United Kingdom.

“Most intensive ICT-using industries” refers to the top half of the industries with the highest share of value of ICT investment plus purchases of ICT services as a percentage of “synthetic output” (which is value added at industry level plus the intermediate use of ICT services ). Least intensive ICT-using sectors refer to the bottom half of industries in terms of ICT intensity. Source: The Conference Board, Navigating the Digital Economy, May 2016

We need to be careful in interpreting those numbers because common macroeconomic statistics may not pick up all the effects from the New Digital Economy. For example, we estimate that relative prices for communication equipment and software are still dropping by almost 10 percent per year. That alone is enough to understate productivity growth by about 0.3 percentage point a year. But it’s not enough to account for the entire productivity slowdown, as has also been confirmed by other research.

Of course, one can be more outspoken about the measurement problems and argue that all the consumer benefits from new digital products and services and sharing platforms should be included in GDP. But then we need to agree what to include and what not to include. The consumer benefits from streaming TV? Probably, yes. And the costs to protect and secure our private information, and risks involved if we don’t get it right? Probably also. How to go about measuring will be a Hercules task.

The drop in ICT investment intensity is substituted by a rise in ICT services intensity Computer services and ICT investment as a % of GDP in the United States, 1997–2014

Which leaves the question: why are we not seeing the productivity effects of all this activity? As we describe in our report, it turns out that more spending on digital innovation doesn’t give us the productivity growth yet. That also requires business innovations, for example the ability to turn data analytics into insights that help to generate new product and service offerings. Companies need to do a lot more than buying cloud services to go through this digital transformation process. For example, we find that higher investment in knowledge based assets, such as product and service design, workforce training and organizational improvement, are highly complementary with increasing spending on ICT services. But it will be a while before we will see the effects on productivity.

In another blog post we discuss what it is companies can do to speed up the transformation process in the New Digital Economy.



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