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
3SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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)
4SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
5SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
6SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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)
7SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
8SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
Source: van Ark, Bart
9SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
Source: van Ark, Bart
10SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
Source: van Ark, Bart
11SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
ICT-policy framework in Europe
REGULATION
(Telecoms package2006)
PROMOTION
eEurope 2002eEurope 2005
i2010
RESEARCH
IST-programs
12SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
13SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
14SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
15SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
16SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
17SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
18SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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”
19SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
20SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
21SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
R&D expenditure, total business enterprise, % of GDP
22SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
Source: Pyyhtiä, Ilmo
23SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
Source: Pyyhtiä, Ilmo
24SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
Source: van Ark, Bart
25SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
Source: van Ark, Bart
26SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
27SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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