This study examines certain long-run relationships hypothesised to be present among per capita real GDP, information and communication technology (ICT) infrastructure, consumer price index, labour force participation rate, and gross fixed capital formation manifest in G-20 countries recorded for the 2001–2012 period. Using panel cointegration, the study finds that the variables are cointegrated and do not drift apart in the long run. Methodology using vector error correction models (VECM) further confirms that embellishment of ICT infrastructure an apparent imperative in an economy’s information technology (IT) policy formulation for both fixed broadband and internet users causes a boost in the per capita GDP.
Information and communication technology (ICT) infrastructure plays a substantial role in catalysing economic growth, especially in today’s era of internet and mobile telecommunication (Lee, Brahmasrene, 2014, Ishida, 2015, Rohman, Bohlin, 2014, Shahiduzzaman, Alam, 2014, Pradhan et al, 2014, World Trade Organization, 2008, Jorgenson, Stiroh, 1999). Information and communication technology infrastructure is a leading growth enabler in countries which have realised its importance. Not surprisingly, therefore, many developing nations are working hard to internalise ICT, balancing the limited allocation of their revenues, to catch up rapidly with the developed economies (Bankole et al, 2013, ASEAN, 2011, Kooshki, Ismail, 2011, Bollou, 2010, Shirazi et al, 2009, Kuppusamy et al, 2009, Thompson, Garbacz, 2008, Jorgenson, Vu, 2005, Kuppusamy, Santhapparaj, 2005, Chakraborty, Nandi, 2003). In fact, adoption of ICT-enhanced policies is one of the top agendas for governments today in most developing countries.
Information and communication technology infrastructure now encompasses digital telephone network, mobile phones, internet capability, internet servers and fixed broadband, and other technologies. In this paper we particularly probe the extent of the use of broadband and internet in the hands of their users. These two innovations have remarkably impacted communication and interaction among decision makers in the conduct of business and administration – the two key drivers of economic prosperity.
Broadband, defined as always-on internet access with transmission speeds equalling or exceeding 256 Kbps for downstream connections and 64 Kbps for upstream connections (Organization of Economic Cooperation and Development (OECD), 2001), is, at present, the most common mode of internet access (Lin & Wu, 2013). Both kinds of broadband adoption (256 Kbps for downstream connections and 64 Kbps for upstream connections) by internet users have emerged as a vital component of the new marketplace infrastructure. This has even led to economic restructuring (Rajabiun, Middleton, 2013, Prieger, 2013, Grimes et al, 2012, OECD, 2003, Dabinett, 2002, Gillen, Lall, 2002). Broadband adoption has influenced the economy widely, particularly impacting economic growth, employment and national competitiveness (Ng et al, 2013, Lin, Wu, 2013, Bojnec, Ferto, 2012, Czernich et al, 2011, Bauer, 2010, Qiang et al, 2009, International Telecommunication Union (ITU), 2011, Cambini, Jiang, 2009, Holt, Jamison, 2009, Majumdar, 2008, Van Gaasbeck, 2008, Dwivedi, Lal, 2007, Arbore, Ordanini, 2006, Horrigan et al, 2006, Firth, Mellor, 2005, Group, 2004, Roller, Waverman, 2001, Krueger, 1993).
Recent literature addressing the interaction of broadband (and internet) and economic growth has noted a reinforcing relationship between broadband (and internet) availability, and economic growth and local employment (Bertschek et al, 2013, Kolko, 2012, Gillett et al, 2006, Stenberg et al, 2009, Katz, 2009, Koutroumpis, 2009, Crandall et al, 2007). Countries with wide broadband availability have seen higher economic growth and lower unemployment rates, even at the height of the recent recession (Jayakar & Park, 2013). However, these studies only investigate the magnitude of the impact of broadband infrastructure on economic growth and employment, without looking at the direction of causality. The primary objective of this paper is to overcome this deficiency and to examine more broadly the causes and consequences of broadband use. In particular, the paper uses a macroeconomic growth framework to investigate the long-run relationship between broadband infrastructure and economic growth experienced in G-20 countries, using a panel data approach. The ceteris paribus assumption for the present, therefore, is whether broadband infrastructure (and internet users) has contributed to economic growth, or whether the expansion of the broadband infrastructure (and those who use internet) itself is a consequence of economic growth.
This paper is organised as follows: Section 2 provides the theoretical background for the possible interaction between ICT infrastructure and economic growth; the third section presents a review of the related literature; the data and empirical models are presented in Section 4; an econometric analysis of the scenario and the empirical results thus obtained are discussed in the fifth section. Section 6 concludes the paper with suitable policy implications.
The rationale that links ICT infrastructure and economic growth
In the conduct of modern day business, the importance of ICT infrastructure, otherwise called information highways, is undeniable supply chain management, B2C and B2B transactions, and instantaneous transfer of funds are some examples. One important feature of broadband infrastructure, which is not present in other types of infrastructure, is the presence of network externalities: the greater the number of users, the more value is derived by other users. For instance, such characteristics do not exist in other types of public infrastructure such as transport, drainage and sewage systems. Thus, investment returns (in terms of higher economic growth) are likely to be higher in broadband infrastructure than in other types of infrastructure. Furthermore, the returns may not accrue as a linear function of the value of infrastructure investment. One can thus expect a positive link between broadband infrastructure and economic development in all countries (Jorgenson, 1991). While there are many ways broadband infrastructure can contribute to economic development (Van Gaasbeck, 2008), perhaps the greatest impact of broadband infrastructure is on information diffusion and organisational efficiency (Hardy, 1980).
Many economists have asserted that broadband infrastructure affects economic growth directly and also indirectly. Others state that the development of broadband infrastructure is a prerequisite to exploit other infrastructure developments (such as transportation, education, and remote sensing) which are necessary for economic growth (Koutroumpis, 2009). These instances imply that a positive relationship between broadband infrastructure and economic growth (often measured by total number of business establishments) would be but “natural.” On the contrary, there are three reasons why one might not always observe a positive relationship between the two. First, a total count of business establishments does not capture the number of firms entering and exiting the market. If increased broadband use does lead to a total sectoral shift, it is possible that no change would show in the number of total business establishments. Second, a related issue is that increased broadband use leads to an increase in self-employment, telecommunication, and/or easier importation of goods and services from outside of a given country. Third, a business may draw the advantage of economies of scale through the adoption of physical capital, such as broadband. These factors would tend to reduce the real number of business establishments though causing an increase in productivity (Barua et al, 2000, Thompson, Garbacz, 2008, Van Gaasbeck, 2008).
Currently, broadband infrastructure arises and grows on a global scale. This trend has heightened the debate about the benefits of broadband internet (Ng et al., 2013). This has caused broadband infrastructure to be of much interest and also of concern to governments and industry (Sommers, Carlson, 2000, Wieman, 1998). However, there has been increasing consensus among experts that broadband infrastructure should be contrasted with other types of infrastructure. Infrastructure, irrespective of type, cannot be all things to all communities – it is not the silver bullet. Hence, cities that are vying to be the next Silicon Valley need to understand this varied role of broadband infrastructure and know its limits. It is expected that the relationship between broadband and economic growth is likely to be complex and also mutually reinforcing. Broadband infrastructure can potentially contribute to economic development through the lowering of transactions costs (such as through faster provision of financial services), creating new opportunities for innovation, providing access to new markets (for instance through e-commerce and better exchange of information), lowering the cost of capital (through increased efficiency in the functioning of financial markets), closing regional discrepancies in incomes and productivity, providing access to human capital (through tele-networking), and generating positive externalities. Hence, as noted in advanced economies, a solid broadband infrastructure is a key pre-condition to enhancing economic development through supporting industry and manufacturing, marketing and sales, improving agriculture, education, health, social services, and transportation, as well as contributing to macroeconomic stability (Gasmi, Recuero Virto, 2010, Gasmi, Recuero Virto, 2010, Hackler, 2003, Narayana, 2011). Fig. 1 hypothesises the possible links between broadband infrastructure and economic growth.
Figure 1. Impact of ICT infrastructure on economic growth. Source: Thompson and Garbacz, 2008.
Explaining the causes and consequences of ICT infrastructure in general, and broadband deployment and internet use in particular has been a central focus of recent empirical literature, particularly since Jipp’s seminal work in 1963 (Jipp, 1963). Numerous studies confirm a positive relationship between broadband infrastructure (and internet users) and economic growth (Bacache et al, 2013, Bertschek et al, 2013, Bojnec, Ferto, 2012, Bouras et al, 2009, Brewer et al, 2005, Crandall et al, 2007, Czernich et al, 2011, Dwivedi et al, 2009, Gillett et al, 2006, Holt, Jamison, 2009, Koutroumpis, 2009). Some studies use a structural model to isolate the effect of ICT infrastructure on economic growth by controlling for a number of macroeconomic variables such as employment, trade openness, inflation, government expenditure, education, urbanisation, and regulation (Bojnec, Ferto, 2012, Caroli, Van Reenen, 2002, Czernich et al, 2011). Although these studies investigate the correlation between ICT infrastructure and economic growth, a causal connection has been harder to prove due to the presence of simultaneous bias and spurious correlation (Koutroumpis, 2009).
More recent studies have utilised advanced econometric tools to eliminate many of these problems (Czernich et al., 2011). For instance, a study by Cronin, Parker, Colleran, and Gold (1991) showed that appropriately lagged telecommunications penetration variables are causally linked to economic growth, and vice versa. The presence of a correlation between telecommunications deployment and economic growth is now, virtually, taken for granted. However, while some studies assert significant positive effects, others find non-significant or even negative effects (Cronin et al, 1993, Fornefeld et al, 2008, Jayakar, Park, 2013). However, all such studies completely miss establishing the direction of causality between ICT infrastructure and economic growth – a key requirement for policy makers. The present study, therefore, particularly investigates the direction of causality between the two. It is expected that this will answer the question whether development of broadband infrastructure (and growth of internet users) drives economic growth or if it is a consequence of growth. As we state below, hypothetically, one may have four possible causality nexus existing between ICT infrastructure and economic growth.
The supply-leading hypothesis (SLH) contends that ICT infrastructure is a necessary pre-condition to economic growth. Thus, the causality runs from ICT infrastructure to economic growth. This hypothesis maintains that ICT infrastructure induces economic growth by directly supporting other infrastructures and factors of production, thereby improving economic growth.
A second proposition is the demand-following hypothesis (DFH), which suggests that causality runs instead from economic growth to ICT infrastructure. Supporters of the demand-following hypothesis suggest that ICT infrastructure plays only a minor role in economic growth and that it is a by-product or an outcome of economic growth. The idea is that as an economy grows, additional ICT infrastructure emerges in the economy.
Third, the feedback hypothesis (FBH) suggests that economic growth and ICT infrastructure can complement and reinforce each other, making economic growth and ICT infrastructure mutually causal. The argument in favour of such bidirectional causality is that ICT infrastructure is indispensable to economic growth and economic growth inevitably requires ICT infrastructure to be integrated into the economy.
Fourth is the neutrality hypothesis (NEH), which supports the view that economic growth and ICT infrastructure are independent of each other. The neutrality hypothesis avers that the two are independent of each other in the process of economic development.
Data and empirical model
Annual data ranging from 2001 to 2012 for the selected G-20 countries were obtained from World Development Indicators of The World Bank. Appendix 1 lists the selected G-20 countries included in the analysis. The multivariate framework encompasses per capita economic growth in percentage (variable: PCGDP), broadband users in percentage of total population in numbers (variable: BBAND), internet users in percentage of total population in numbers (variable: INNET), gross domestic fixed capital formation in percentage of GDP (variable: GDFCF), labour force participation rate in percentage of the adult population (variable: LAFPR), and Consumer Price Index (variable: CONPI). These variables are converted into their natural logarithms for use.
The study used two specifications of analysis, first, determining the impact on growth of ICT infrastructure (broadband adoption/internet users), consumer price index and labour force participation rate; second, the impact of ICT infrastructure (broadband adoption/internet users), consumer price index, labour force participation rate, and gross domestic fixed capital formation. Empirical results indicate that all four variables (ICT infrastructure – both broadband and internet users, consumer price index, labour force participation rate, and gross domestic fixed capital formation and economic growth are integrated at I (1) confirmed by panel unit root tests. Being cointegrated, these variables do not drift apart in the long run. The same inference is drawn about cointegration among economic growth, ICT infrastructure (both broadband and internet users), consumer price index, labour force participation rate, and gross domestic fixed capital formation.
The DOLS and FMOLS estimation analyses reveal a positive association among ICT infrastructure (both broadband and internet), consumer price index and economic growth. The effect of labour force participation in this nexus is positive in model specification 1 and negative in model specification 2. The effect of gross domestic capital formation, particularly in specification 2, is positive and significant in both the broadband and internet users’ cases. Further, the results provide evidence of Granger causality relationship among per capita economic growth, ICT infrastructure (broadband adoption/ internet users), consumer price index, labour force participation and gross domestic fixed capital formation.
An important policy implication based on the general result of the study is that to enhance economic growth, ICT infrastructure must be upgraded and expanded, and particular attention should be paid to broadband adoption and internet users. This is not surprising, considering how ICT catalyses the execution of business communication and decision making today. Another policy implication is that gross domestic capital formation (GDCF) can be considered as the control variable, particularly for labour force participation, in bringing high impact on the ICT infrastructure-economic growth nexus in the G-20 countries. Therefore, the respective governments should stabilise the economic environment by adjusting GDCF in order to facilitate high economic growth. Besides, governments should prioritise the allocation of resources to the development of ICT infrastructure and ensure the requisite upgradation of fixed broadband adoption and internet users.
A key shortcoming of this study is that it has focussed only on G-20 countries and four macroeconomic variables. Therefore, it is important to note that further studies are required with expanded country data and other factors that are likely to affect economic growth.
Appendix 1: Selected G-20 countries
The G-20 economic group consists of 19 member countries plus the European Union (EU), which is represented by the President of the European Council and by the European Central Bank. Thus, although we look at the G-20 within this group of developed and developing economies, we observe only 19 member countries, as used here in this study. To include the EU, the twentieth member, would have meant double-counting France, Germany, Italy, and the UK. The countries used are Australia, Canada, France, Germany, Italy, Japan, Korean Republic, United Kingdom, United States of America, Argentina, Brazil, China, India, Indonesia, Mexico, Russian Federation, Saudi Arabia, South Africa, and Turkey. We have also included Spain in the list because Spain is participating as a “permanent guest”.
IIMB Management Review
Vinod Gupta School of Management, Indian Institute of Technology Kharagpur, West Bengal, India
School of Business (Parramatta Campus), University of Western Sydney, NSW 1797, Australia