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The New Economy in Development

by Anthony P. D’Costa

The last three decades have witnessed a sea change in the character and functioning of the world economy. With the speeding up of the relative decline of the industrial sector, the rise of the services economy, and the growing ubiquitousness of information and communications technologies (ICT) a ‘new economy’ has been created. There is increasing recognition that knowledge-based economic activities are key to international competitiveness and productivity growth, and that industrialization, particularly manufacturing, is no longer viewed as the principal driver of economic growth. This poses a fundamental question: what are the implications of the new economy for developing countries?

WIDER undertook a major initiative to better understand the relationship between development and the new economy. This initiative, under the direction of Matti Pohjola (University of Helsinki) involved three interrelated research projects undertaken between 1998 and 2003: ‘Information Technology and Growth’, ‘Production, Employment, and Income Distribution in the Global Digital Economy’, and ‘Information Technology and Global Economic Development’. A book is now published based on selected papers from a related WIDER conference in 2002. It takes a broad look at the new economy, both theoretically and empirically, to understand the development possibilities and attendant challenges associated with ICT in selected non-OECD countries and regions. Theoretically it addresses some conceptual issues pertaining to the new economy and development implications of the new carrier technologies such as ICT. Empirically the book covers Argentina, India, the Philippines, South Africa, the Arab region, and the transition economies of Eastern Europe. The adoption and impact of ICT in both rural and industrial sectors are also analyzed.

Though the emergence and the impact of ICT, which includes computers, software, satellite communications, e-mail, and the internet have been investigated by scholars and policymakers in recent years, the strength of this collection lies in its systematic academic and policy-oriented investigation of the nature of the new economy and its role in the development process. The contributors represent a good mix of academics and policymakers from universities and policy institutions from both OECD and developing country regions. They present a wealth of data that will be useful for both scholars and practitioners.

As services comprise a significant sector in the new economy, this volume addresses some of the vexing conceptual issues pertaining to the measurement and performance of services. Services are intertwined with new technologies such as telecommunications and the internet, making them difficult to measure. Their network characteristics require new global rules of engagement. Consequently, whether developing countries can work effectively with the changing global regime, how they might utilize the open access to knowledge and information, and how they can adopt best practices (such as telemedicine, distance learning, and e-government), are significant questions for development.

The empirical studies show that the impact and potential of ICT for development are at best mixed and there is considerable variation within and among countries. Small domestic markets, as in Argentina, limit the adoption of ICT and thus productivity growth. This can be seen also in the case of several transition economies of central and Eastern Europe. In the Arab region income differences and low levels of human capital development seem to hinder the widespread diffusion of ICT.

Developing countries are structurally disadvantaged in seeking the best from the global regime of ICT infrastructure, which, inter alia, is related to their lack of key ingredients such as human capital, physical infrastructure, and venture capital to exploit ICT. But that does not mean the doors are closed. Poor countries (such as the Philippines and India) that have unwittingly created human capital are better placed to interact with the global economy, adapt imported ideas and know-how, and localize them. The wide variation in ICT diffusion is mainly due to weak economic and institutional environments. This suggests that ‘old’ economy needs such as infrastructure development and domestic market stimulation are still relevant.

Several lessons emerge from these individual studies. First, ICT, in the form of automation, suggests not only increasing competitiveness of small and medium enterprises due to productivity growth it also results in labour displacement, especially of the unskilled. At the same time, productivity-led opportunities thrown open by economic integration suggest that the vast rural poor and illiterate populations may miss out on the benefits of ICT if appropriate social policies are not aimed at improving the quality of their lives. Second, developing countries must still contend with traditional development concerns such as poverty and inequality as well as structural transformation from agriculture to industry. Yet, they must be alert to the possibility that increasing export competition in labour-intensive manufactures means declining terms of trade when not offset by continuous learning and technological upgrading. The new economy also imposes a reduction in social protections due to endemic fiscal crisis and business demands for flexibility and deregulation, open unemployment due to privatization of the state sector, and, paradoxically, by productivity-enhancing ICT. The continued emphasis on investment in traditional development spheres such as education, literacy, basic health, and physical infrastructure is considered necessary to make participation in the new economy more effective.

Third, while the evidence of productivity growth based on ICT diffusion is not robust for developing countries, partly due to productivity lags, it would be foolhardy to ignore the benefits of ICT in poor societies. If anything, ICT is an enabling carrier technology, applicable in both new and old economies. While ICT is not a panacea for poverty, developing countries, if they fail to actively engage in the use and production of ICT goods and services, are likely to be impoverished further and experience deepening problems associated with the global digital divide.

Fourth, to avoid global polarization the consumption of both ICT goods and services must be increased. ICT services can be employed in a wide variety of social and economic sectors such as education, health, rural development, business, banking, and manufacturing activities. Thus, fostering knowledge workers and establishing communications infrastructure is consistent, though in conflict resource allocationwise, with basic education and human capital development and with infrastructure spending on rural roads and irrigation. The fundamental development challenges of literacy, basic education, alleviation of poverty and inequality, health, and the rural–urban gap could be addressed by wider ICT adoption, complemented by a variety of critical services to under-served rural and low-income constituencies. Poor countries must foster e-development to complement a wider development strategy to meet basic needs. Based on the extensive and intensive use of ICT, public sector services can be efficiently provided to citizens, business, and to various government departments. The expected benefits are lower transactions costs, greater efficiency in service delivery, more transparent governance, and productivity growth.

Fifth, the challenges to the implementation of such projects should not be underestimated as they require financial and human resources, long-term commitment, intra-government coordination, and public acceptance. ICT cannot be seen as a technological fix to what are essentially social and political problems. At the same time, the economics of ICT suggest that developing countries cannot increase their long-term economy-wide productivity if they remain outside the new economy. The role of the government and other institutions cannot be overemphasized, especially in areas of regulatory reform.

Finally, the continued emphasis on knowledge workers, information literacy, and communications infrastructure vital to participating effectively in the new economy also suggests that developing countries must find a political voice at the global level so that they are not excluded from the multilateral negotiations on the emerging global information society. In the end global participation must be complemented by the ensuing ‘good’ governance that is expected to emerge from the widespread adoption of ICT. 

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Anthony P. D’Costa is Professor of Comparative International Development, University of Washington, Tacoma. He has written on the global and Asian steel, auto, and IT industries. Recently he was an Abe Fellow and author of ‘Long March to Capitalism: Embourgeoisment, Internationalization, and Industrial Transformation in India.’ He edits the ‘Technology, Globalization and Development’ series for Palgrave Macmillan.