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Societies in Transition to the Network Society
The Knowledge Economy,
The New Productive Economy
Information Technology and the
Dale W. Jorgenson and Khuong Vu
The purpose of this paper is to analyze the impact of investment in
information technology (IT) equipment and software on the world
economy. The resurgence of the U.S. economy during the 1990’s and
the crucial role of IT investment have been thoroughly documented
and widely discussed.
Jorgenson (2001) has shown that the remark-
able behavior of IT prices is the key to understanding the resurgence
of American economic growth. This behavior can be traced to devel-
opments in semiconductor technology that are widely understood by
technologists and economists.
Jorgenson (2003) has shown that the growth of IT investment
jumped to double-digit levels after 1995 in all the G7 economies—
Canada, France, Germany, Italy, Japan, and the United Kingdom, as
well as the United States.
In 1995-2001 these economies accounted
for nearly fifty percent of world output and a much larger share of
world IT investment. The surge of IT investment after 1995 is a
response to the sharp acceleration in the rate of decline of prices of IT
*Department of Economics, Harvard University, 122 Littauer Center, Cambridge, MA
02138-3001. The Economic and Social Research Institute provided financial support for
work on the G7 economies from its program on international collaboration through the
Nomura Research Institute. We are grateful to Jon Samuels for excellent research assis-
tance and helpful comments. Alessandra Colecchia, Mun S. Ho, Kazuyuki Motohashi,
Koji Nomura, Kevin J. Stiroh, Marcel Timmer, and Bart van Ark provided valuable data.
The Bureau of Economic Analysis and the Bureau of Labor Statistics assisted with data for
the U.S and Statistics Canada contributed the data for Canada. We are grateful to all of
them but retain sole responsibility for any remaining deficiencies.
1 See Jorgenson and Kevin Stiroh (2000) and Stephen Oliner and Daniel Sichel (2000).
2 Nadim Ahmad, Paul Schreyer, and Anita W
olfl (2004) have analyzed the impact of IT
investment in OECD countries. Bart van Ark, et al. (2003) and Francesco Daveri (2002)
have presented comparisons among European economies.
equipment and software. Jorgenson (2001) has traced this acceleration
to a shift in the semiconductor product cycle from three years to two
years in 1995.
In Section 2 we describe economic growth during the period 1989-
2001 for the world economy as a whole and 116 economies listed in
Table 3.1 below.
We have allocated the 116 economies among seven
regions of the world listed in the table. We have divided the period in
1995 in order to focus on the response of these economies to the
acceleration in the IT price decline. The major developments during
the first half of the 1990’s were the dramatic rise of Developing Asia
and the stunning collapse of Eastern Europe and the former Soviet
Union. As shown in Table 3.1, world economic growth has undergone
a powerful revival since 1995. The world growth rate jumped nearly a
full percentage point from 2.53 percent during 1989-1995 to 3.51 per-
cent in 1995-2001.
In Section 3 we present levels of output per capita, input per capita
and productivity for the world economy, seven regions of the world
and 116 economies. Our most remarkable finding is that output dif-
ferences are primarily explained by differences in input, rather than
variations in productivity. Taking U.S. output per capita in 2000 as
100.0, world output per capita was a relatively modest 22.6 in 2001.
Using similar scales for input per capita and productivity, world input
per capita in 2001 was a substantial 34.6 and world productivity a
In Section 4 we allocate the growth of output between input
growth and productivity. World input greatly predominates in the
growth of world output. Of the world growth rate of 2.53 percent
during 1989-1995, productivity accounts for 0.37 percent or less than
fifteen percent, while input growth accounts for 2.16 percent or more
than eighty-five percent. Similarly, the higher world growth rate of
3.51 percent from 1995-2001 can be divided between productivity
growth of 0.77 percent, less than twenty-two percent of total growth,
and input growth of 2.74 percent, more than seventy-eight percent of
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e have included countries with more than one million in population and a complete set of
national accounting data for the period 1989-2001 from World Bank Development Indi-
cators Online (WBDI). These economies account for more that 96 percent of world output.
In Section 4 we allocate the growth of input between investments
in tangible assets, especially IT equipment and software, and invest-
ments in human capital. We show that the world economy, all seven
regions, and almost every one of the 116 economies experienced a
surge in investment in IT after 1995. This was most striking in the G7
economies, led by a rush of IT investment in the U.S. However, the
soaring level of IT investment in the U.S. after 1995 was paralleled by
increases throughout the G7, the Non-G7 industrialized economies,
and Developing Asia. Doubling of IT investment also occurred in
Latin America, Eastern Europe, and North Africa and the Middle
East with near doubling in Sub-Saharan Africa.
World Economic Growth, 1989-2001
Table 3.1 presents shares of world product and regional product for
each of the seven regions and 116 economies included in our study.
The G7 economies accounted for slightly under half of world product
from 1989-2001. The growth rates of these economies—2.15 percent
before 1995 and 2.78 percent afterward—were considerably below
world growth rates. The growth acceleration of 0.60 percent between
the two periods also lagged behind the acceleration of world economic
growth. The G7 shares in world growth were 41.3 percent during
1989-1995 and 37.2 percent in 1995-2001, well below the G7 shares
in world product.
During 1995-2001 the U.S. accounted for more than 22 percent of
world product and somewhat less than half of G7 output. Japan fell to
a third the size of the U.S., but remained the second largest of the G7
economies and the third largest economy in the world after China.
Germany ranked behind the U.S., China, Japan, and India, but
remained the leading European economy. France, Italy and the U.K.
were similar in size, but less than half the size of Japan. Canada was
the smallest of the G7 economies.
The U.S. growth rate jumped sharply from 2.36 percent during
1989-1995 to 3.58 percent in 1995-2001. We note that the period
1995-2001 includes the U.S. recession of 2001 as well as the boom of
the last half of the 1990’s. The U.S. accounted for more than half of
G7 growth before 1995 and over 60 percent afterward. The U.S.
share in world growth was less than its share in world product before
Information Technology and the World Economy
1995, but greater after 1995. By contrast Japan’s share in world eco-
nomic growth before 1995 exceeded its share in world product, but
fell short of its world product share after 1995. The shares of the G7
economies in world growth during 1989-2001, except for the U.S. and
Japan, fell below the G7 shares in world product.
The 16 economies of Developing Asia generated more than 20 per-
cent of world output before 1995 and almost 25 percent afterward.
The burgeoning economies of China and India accounted for more
than 60 percent of Asian output.
China has surpassed Japan to rank as
the world’s second largest economy and India has outstripped
Germany to rank fourth. Indonesia and Korea are similar in size, but
together they are only half the size of India. Taiwan and Thailand are
also similar in size, jointly about one-tenth the size of China.
The economies of Developing Asia grew at 7.53 percent before
1995, but only 5.66 percent afterward. These economies accounted
for an astonishing 60 percent of world growth during 1989-1995.
Slightly less than half of this took place in China, while a little more
than a third occurred in India. In 1995-2001 the share of Developing
Asia in world growth declined to just over 40 percent, still well above
the region’s share in world product. China accounted for more than
half of this and India about a quarter.
The 15 Non-G7 industrialized economies generated more than
eight percent of world output during 1989-2001, slightly above Japan.
Australia, The Netherlands, and Spain accounted for almost half of
this. However, none of these approached Canada, the smallest among
the G7 economies, in size. The Non-G7 economies were responsible
for lower shares in world economic growth than world product before
and after 1995. However, Israel and Norway had larger shares in
growth than product before 1995 and Finland and Spain had larger
shares in growth after 1995. Australian and Irish shares in world
growth exceeded the shares of these countries in world product in
both periods. Irish growth rates—5.15 percent during 1989-1995 and
8.85 percent in 1995-2001—compared with the stratospheric growth
rates of Developing Asia.
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4 Our data for China are taken from W
orld Bank (2004) indicators and are based on official
Chinese estimates. Alwyn Young (2003) presents persuasive evidence that these estimates
may exaggerate the growth of output and productivity in China.
The 19 Latin American economies generated more than eight per-
cent of world output with Brazil responsible for a third of the total.
During 1995-2001 Brazil’s economy ranked ninth in the world, only
slightly smaller than France, Italy, and the U.K., but larger than the
rapidly fading Russian economy. Mexico was a little over half the size
of Brazil and comparable in size to Spain. Argentina was a bit more
than half the size of Mexico and ranked with Australia. Argentina and
Mexico, taken together, were slightly less than Brazil in size. The
remaining sixteen Latin American economies, collectively, also ranked
During 1989-1995 the share of the Latin American economies in
world growth of almost ten percent exceeded their eight-and-a-half
percent share in world product. In 1995-2001 these economies had a
substantially smaller share in world growth of only six percent, while
retaining close to an eight-and-a-half share in world product. Brazil’s
share in world growth was substantially below its three percent share
in world product before and after 1995, while Chile, one of the
smaller Latin American economies, had a larger share in world growth
than product in both periods.
Before the fall of the Berlin Wall and the collapse of the Soviet
Union, the 18 economies of Eastern Europe and the former Soviet
Union were comparable in size to Latin America, generating more
than eight percent of world product. Collectively, these economies
subtracted 24.7 percent from world growth during 1989-1995, drag-
ging their share of world product below six percent. Before 1995 the
Russian economy was comparable in size to France, Italy, or the
U.K., but fell to tenth in the world after Brazil during 1995-2001.
The 11 economies of North Africa and the Middle East, taken
together, were also comparable in size to France, Italy, or the U.K.,
while the 30 economies of Sub-Saharan Africa, collectively, ranked
Poland was the only economy in Eastern Europe with a positive
growth rate during 1989-1995. In 1995-2001 Poland’s share in world
growth exceeded its share in world product, while Russia’s share in
growth fell below its share in world product. Growth in the sizeable
economy of Ukraine continued to languish during 1995-2001. The
economies of North Africa and the Middle East had shares in growth
well above their shares in world product during 1989-1995, but this
Information Technology and the World Economy
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