SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 1 ”With hindsight” retrospective policy...

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 1

”With hindsight” retrospective policy assessment

Governor Erkki Liikanen

ENCIP Business MeetingSeville, 25 March, 2007

2SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

ICT-policy framework in Europe

REGULATION

(Telecoms package2006)

PROMOTION

eEurope 2002eEurope 2005

i2010

RESEARCH

IST-programs


On the economic impact of the ICT and the use of ICT

When we started in autumn 1999, there was a little knowledge on the accelerated productivity growth in the US since 1995 and the declining development in Europe

The first research results were coming on the US development, but only later on Europe

The strong economic argument was not presented in Lisbon in March 2000; the declining productivity development was not mentioned in the conclusions

(China, India and the rest of the emerging economies were also missing)


Three channels through which ICT impacts on growth

1st channel: Effect of ICT investment which raises output and labour productivity

2nd channel: Rapid technological change in ICT producing industries leading to Total Factor Productivity (TFP) growth

3rd channel: TFP growth in industries that make intensive use of ICT:– In process of transition, structural changes can drive a lot of the TFP growth

differential

– For ICT adjustment costs related to intangibles investment

– ICT-induced innovation may create real knowledge spillovers


Intangible capital that may affect ICT-TFP relationship

ICT is general purpose technology so that productivity effects come with time lag– Need to raise investments in human capital, education, training,

knowledge, etc.)

– Organizational innovations critical, in particular in services

– ICT is an enabler, productivity benefits can be achieved only when complemented by changes organisation and investments in human capital


a) Physical Capitala1) ICT capital (IT hardware, communications equipment)a2) Other capital (plant, machinery, buildings)

b) Human Capitalb1) Formal Educationb2) Company training

c) Knowledge Capitalc1) Research and Developmentc2) Patentsc3) Licenses, brands, copyrightsc3) Other technological innovations, not related to b1) to b3)[c4) Software]*c5) Mineral Explorationc6) Experience

d) Process Capitald1) Engineering designd2) Organisation designd3) Construction and use of data basesd4) Remuneration of innovative ideas

e) Customer Capitale1) Brandse2) Marketing of new products

Firm Specific Resources (intangible

capital)

FactorInputs

(tangible capital)


The TFP residual is key to understand impact of innovation and intangibles on productivity

output Total Output or GDPmeasure

input Total Hours Worked Capital Goodsmeasure (Machinery, Structures, ICT)

productivity Labour Productivity Total Factor Productivity Capital Productivitymeasure (= efficiency)

sources Motivation and Markets, Institutions and Innovation andthat competencies Regulations Technological Change

impactproductivity

growthIntangible Investment

- education & skills- R&D, patents, licencies

- organisational innovations- marketing of new products

Measures of Productivity, Input Varables and Sources of Growth

Source: van Ark, Bart


Direct effect from higher ICT capital intensity accounts for part of U.S. productivity advantage over EU

Sources of labour productivity growth, EU-15 and U.S., 1987-2004

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1987-1995 1995-2000 2000-2004 1987-1995 1995-2000 2000-2004

EU-15 U.S.

ICT capital deepening Non-ICT capital deepening ICT-production TFP Other TFP

ICT investment

effect

ICT production

effect

Other TFP incl. ICT use

effect



Industry contributions to market sector labour productivity growth EU-15, Finland and U.S., 1987-2003

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1987-1995 1995-2000 2000-2003 1987-1995 1995-2000 2000-2003 1987-1995 1995-2000 2000-2003

EU-15 Finland U.S.

ICT production* Production industries**

Market services** Reallocation

* Includes ICT manufacturing, telecom and software services** Excludes ICT producing industries*** Contribution to aggregate economy

Industry Decomposition Highlights Importance of Market Services



Major market service industries account for US-EU growth differential

Source of US-EU Productivity Growth Differential, 1987-20031987-1995 1995-2000 2000-2003

ICT production, excl. telecom 0.17 0.24 0.31Telecommunications -0.04 -0.13 0.03

Wholesale trade 0.06 0.34 0.10Retail trade 0.06 0.11 0.09Banking 0.01 -0.17 0.20Business services -0.04 0.29 0.15

Other industries & reallocation -1.35 -0.32 0.16

Total US-EU productivity differental -1.13 0.35 1.03



ICT-policy framework in Europe

REGULATION

(Telecoms package2006)

PROMOTION

eEurope 2002eEurope 2005

i2010

RESEARCH

IST-programs


Reform of telecoms regulation

Unbundling of the local loop, to promote cheaper and faster access to Internet; the last sector specific legal act

Telecom package, presented in 2000, was based• on convergence; we were convinced that boundaries

between telecommunications, IT and media sectors were blurred; so we had to apply technological neutrality

• on competition; more emphasis on competition policy principles instead of sector specific rules

• simplicifation; a reduction of legal acts from 20 to 6• flexibility; allow for adaptation for future market changes• coherence; try to guarantee a coherent application in all

member states


eEurope 2002the Action Plan adopted in Feira June 2000

focus on internet penetration and connectivity;

18.3 % March 2000, 42.6 % November 2002

more competition to reduce prices; support for ULL and telecom package

Action Plan included 64 (!) targets in 11 action areas.

A huge benchmarking exercise in the early Lisbon spirit


A new Action Plan, eEurope 2005Seville European Coucil June 2002

We had in 2002 more research and analysis on the impact of the ICT and the use of ICT on productivity; (Jorgensen, van Ark etc.)

Focus on the demand side areas, where public sector has the leading role and where digitalisation can increase productivity due to data sharing

Demanding applications require high speed access and at the same time high security

A conclusion from the earlier plan; if you want to make a difference by an action on the European level, you must concentrate


eEurope2005; by 2005, Europe should have:

modern online public services– e-government– e-learning services– e-health services

a dynamic e-business environment

and, as an enabler for these widespread availability of broadband access at

competitive prices a secure information infrastructure


Take-off of broadband Number of broadband lines in percentage of population

2002 2003 2004 2005 2006

Belgium 6,7 10,1 14,0 17,4 20,7

Denmark 7,4 10,4 15,6 22,0 29,6

Germany 3,2 4,8 6,7 10,2 15,3

Estonia 7,6 11,1 16,6

Ireland 0,0 0,2 1,7 4,4 8,8

Greece 0,0 0,0 0,2 0,8 2,7

Spain 2,0 4,3 6,7 10,0 13,2

France 1,2 4,0 8,2 13,9 18,0

Italy 1,0 2,8 6,1 9,5 13,1

Luxembourg 0,0 2,3 5,7 11,7 17,4

Netherlands 6,3 9,8 14,7 22,4 29,0

Austria 4,7 6,6 8,7 11,6 15,8

Portugal 1,5 3,6 6,4 10,1 12.9

Finland 3,0 6,6 11,0 18,7 24,9

Sweden 4,6 8,6 12,1 17,1 22,9

United Kingdom 1,6 3,7 7,4 13,5 19,2

United States

Japan


How to measure success in public services?

to measure productivity in public services is a continous challenge; but however difficult; we must advance

when there is not pressure from the markets; the role of management even more important

changes in organisation and processes cannot be led by IT-departments, if there is not commitment from the top, the bureaucracy fights back and prevents a change

the exchange of best practices useful, when also political leaders participate in the process


IST-programs

IST program in 6th Framework program had the biggest resources;

The relations of the ”lead” research DG and DG Information Society often tense;

The technology platforms were the major new inititives; Integration of technology and content still slow; IST program has the greatest significance when it

creates platforms for European-wide participations from research, industry and other stakeholders

”without a risk there is no innovation”


Parameter estimates for quadratic trend and R&D intensities by countries

0.0

0.5

1.0

1.5

2.0

2.5

3.0

SE FI US GE DK BE FR UK NL IE IT SP AU

-0.0005

-0.0004

-0.0003

-0.0002

-0.0001

0

0.0001

0.0002

0.0003

0.0004

0.0005

R&D, % of GDP (left scale) Parameter value (right scale)

Correlation coefficient = 0,63

Source: Pyyhtiä, Ilmo


R&D expenditure, total business enterprise,% of GDP

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Finland Sweden Denmark Ireland United States

Source: OECD STAN


R&D expenditure, total business enterprise, % of GDP


Technical progress

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

1970 1975 1980 1985 1990 1995 2000

Finland Denmark Sweden Ireland US



Technical progress

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

1970 1975 1980 1985 1990 1995 2000

Austria Belgium France Germany Italy Netherlands Spain UK



Improve Operational Efficiency by Bringing Firms Closer to Local Best Practice

Capital

Output

X

X

X

X

X

X

X

Local best practice

X

X

ACTIONS TO IMPROVE BEST PRACTICES

• Remove local restrictions in labor and product markets

• Invest in hard infrastructure (transport, etc.)

• Invest in education (in particular primary & secondary education for low skilled)

• Programs for small enterprise to raise employment and productivity jointly

• Raise productivity of supply of government services



Move out Technology Frontier by Becoming Part of International Best Practices

Capital

Output

X

X

X

Local best practice

Technologicalor innovation frontier

X

ACTIONS TO PROMOTE INNOVATIONS

• Higher education and scientific research (R&D)

• Attract foreign physical and human capital

• A larger market for goods and services

• Venture capital facilities

• ICT infrastructure

• Government as partner or client in innovation projects



Successes?Failures?

the telecom package was a modern, leading-edge solution; convergence and technological neutrality forward-looking choices

eEurope 2002; too fragmented to make a difference eEurope 2005; more focussed, mobilised political and

business leaders; made a difference at least in broadband

IST programs; technology platforms can become an effective tool; the program still too fragmented;

A weakness; the commission was to slow to make a strong economic case from the productivity angle


i2010

a positive continuation to eEurope2002 and eEurope2005 action plans

a qualitative step, when it merges the fragmented efforts in digital content field in an integrated framework

a major challenge: maintain the attention of the European Council

the digital Europe is vital for the inclusion and quality of life, but also for the productivity growth in an aging Europe

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