Oliner and Sichel (1994) and Jorgenson and Stiroh (1995) were the first to quantify the impact of information technology capital within a growth accounting framework. The common conclusion was that information technology had made a relatively small contribution to output growth up to the mid 1990s.After productivity growth improved dramatically in the last half of the 1990s, the Bureau of Labor Statistics (2000), Jorgenson and Stiroh (2000), and Oliner and Sichel (2000) all reported substantial contributions from information technology capital to economic growth.After 2000, however, the sources of U.S. productivity changed and the contribution of information technology to productivity growth fell significantly.A final critical question is what explains the strong performance of total factor productivity growth outside of information technology production during the early 2000s. … More broadly, some of the productivity success in the last decade likely reflects the overall competitive and flexible nature of the U.S. business environment. Much has been written about why productivity growth in Europe has decelerated since 1995 while accelerating in the United States (for examples, see van Ark, O’Mahony, and Timmer in this issue, as well as Baily, 2002; OECD, 2006; Gomez-Salvador,Musso, Stocker, and Turunen, 2006). More flexible labor markets, more competitiveand open product markets, and more innovative management in the United States have all played a role.Information technology emerged as the driving force behind the acceleration of labor productivity growth that began in the mid-1990s, while capital deepening and total factor productivity growth outside of information technology increased in relative importance after 2000.Information technology will continue to have a positive impact on the U.S. economy. Given flexible labor markets, competitive product markets with relatively low barriers to entry, and the deep, sophisticated, capital markets that characterize the U.S.economy, the country should be well-position to continue to innovate and benefitas improved technologies emerge. As a consequence, there is little reason to expect that the U.S. economy will revert all the way back to the slower pace of productivity growth of the 1970s and 1980s.
This paper shows that the European productivity slowdown is attributable to the slower emergence of the knowledge economy in Europe compared to theUnited States.Since the mid 1990s, the European Union has experienced a significant slowdown in productivity growth, at a time when productivity growth in the UnitedStates significantly accelerated. The resurgence of productivity growth in the United States appears to have been a combination of high levels of investment in rapidly progressing information and communications technology in the second half of the 1990s, followed by rapid productivity growth in the market services sector of the economy in the first half of the 2000s. Conversely, the productivity slowdown in European countries is largely the result of slower multifactor productivity growth in market services, particularly in trade, finance, and business services.While Europe needs to find mechanisms to exploit service innovations for greater multifactor productivity growth, the traditional catch-up and convergence model of the 1950s and 1960s may not help Europe get back on track. First, because Europe had reached the productivity frontier by the mid 1990s, it now may require a new model of innovation and technological change to make better use of acountry’s own innovative capabilities (Acemoglu, Aghion, and Zilibotti, 2006). Arguably innovations in services are more difficult to imitate than “hard” technologies based in manufacturing. The greater emphasis on human resources, organizational change, and other intangible investments are strongly specific to individual firms. Moreover, the firm receives most of the benefits of such changes, which reduces the legitimization for government support such as research and development and innovation subsidies to support “technology” transfer in services. Service activities also tend to be less standardized and more customized than manufacturing production; they depend strongly on the interaction with the consumer and are therefore more embedded in national and cultural institutions. In this situation, the spillover of technol
ogies across firms and nations becomes much more difficult. Recent work by Bloom and Van Reenen (2007) links corporate management practices to productivity. They find significant cross-country differences in corporate management practice, with U.S. firms being better managed than European firms on average, as well as significant within-country differences with a long tail ofbadly managed firms. In other words, a simple “copying” of practices from other countries–or even from other firms within the same country–is not the most likely way for European service companies to attain greater productivity growth.
In this paper, we investigate patterns of economic growth for China and India by constructing growth accounts that uncover the supply-side sources of output change for each economy.China stands out for the explosive growth in its industrial sector, which in turn was fueled by China’s willingness to act more quickly and aggressively to lower its trade barriers and to attract foreign direct investment inflows. In contrast, India’s growth has been fueled primarily by rapid expansion of service-producing industries, not the more traditional development path that begins with an emphasis on low-wage manufacturingtotal factor productivity is not only a measure of technical progress. It also captures the effects of myriad other determinants of the efficiency of factor usage: government policy, political unrest, even weather shocksIndia’s growth has been strongest in various service producing industries, while India’s manufacturing sector has remained surprisingly weak. China’s growth is remarkably broad across agriculture, industry, and services.Overall, the growth of services in China actually exceeds that of India.China is faced with a slowing of the increase inthe population of labor force age, but it should be able to sustain its economic growth in future years, in large part by continuing to shift workers out of agriculture to higher productivity jobs in industry and services. India has an even larger share of its workforce still in agriculture, which offers still greater opportunities for reallocation to more productive sectors.The growth prospects for both China and India depend upon continued integration with the global economy to deepen and sustain their growth, including both trade in goods and services and also investment flows.Just as with the sector composition of GDP, China’s exports are concentrated in goods exports,whereas India’s trade has a much larger services componentthe volume of India’s merchandise exports is similar to that of China a decade earlierOverall, we conclude that the supply-side prospects for continued rapid growth in China and India, in terms of labor, physical capital, and reallocation across sectors, are very good. Ultimately, India will need to redress its inadequate infrastructure and to broaden its trade beyond the current emphasis onservices. Only an expansion of goods production and trade can provide employment opportunities for its current pool of underemployed and undereducated workers. China has performed well in the international dimension but now needs to focus on development of domestic markets, reducing inefficiencies in its financial sector, and achieving a more balanced trade position