The ICT revolution and New Zealand

ICT is an increasingly important element of the New Zealand economy.  In this article, we outline some of the ways that ICT can influence the broad economy, and what these influences may mean for New Zealand going forward.

Information communication technology is a popular buzzword in New Zealand at the moment, and there are some good reasons why.  ICT is transforming the way that firms do business, both in terms of the way create goods and services and the way that they add value for customers.  Furthermore, as a small open economy far away from the rest of the world, ICT offers special opportunities for our country.

What is ICT?

Information technology (IT) is the analysis of information.  It involves a huge array of ways of looking at data such as its collection, storage, access, analysis, and transmission.

On the face of it, Information communication technology is a subset of IT, focused primarily on the transmission of information.  However, the term is actually even broader than IT – encompassing not only the areas we have mentioned above, but articulating the way those issues fit into how the business communicates both internally and externally, and including broader forms of communication technology as well (eg, between households).

This broader conception of ICT is more useful to consider than IT alone when thinking about the effect of technological change on the New Zealand economy, as the utilisation of communications technology by businesses and households is intrinsically linked to the way valuable output is created.

Before touching on how ICT fits into the productive process, we need to quickly discuss how New Zealand stacks up in the use of ICT services.

How does New Zealand stack up on the utilization of ICT?

New Zealand firms, specifically service firms, are believed to be laggards in the utilisation of ICT according to Productivity Commission research[1].  In the Productivity Commission’s report, it found that

New Zealand firms are, on average, relatively slow adopters of ICT.  This can be inferred from comparative data on ICT investments per capita (Figure 8.3) and industry-by-industry comparisons between Australia and New Zealand in machinery and equipment (including computers) for each hour worked.

The Commission gave the following reasons for this lack of utilisation.

  • Because of business and market-scale effects, New Zealand businesses may prefer to wait to adopt new ICT technologies
  • Lack of geographic scale and agglomeration in New Zealand reduces opportunities for productivity gains through the use of ICT in some industries (in particular wholesaling) compared to other countries.
  • Relatively low labour costs make it profitable for New Zealand firms to use less capital-intensive business models, including those with less ICT capital.

On the face of it, the decision to not invest in ICT given these shortcomings could be eminently sensible.  However, if there are “spill-over” effects to other firms, or in terms of the quality of infrastructure that is put in place once a sufficient mass of firms are interested, then there could be a case for trying to push firms to invest in more ICT services.

ICT and the economy: productivity

ICT is an input to the productive process.  As a result, how ICT affects measures of productivity depends both upon what type of input productivity we are looking at, and the relationship ICT has to that input.

Generally, inputs to production can be viewed as complements and substitutes.  They are complements in the way that having more of one input (eg, having more computers) increases how much can be done with one additional unit of another input (eg, an employee using the computer to do the accounts).

However, inputs can also be substitutes in the way that, if you have more of one input, you may need less of other inputs to make a given level of goods and services.

When considering ICT, we need to think of the ways that ICT either complements or acts as a substitute for other inputs to understand what it does for productivity and production in the economy.

In this context, ICT functions along several dimensions.

  • It can improve the way employees coordinate their actions when creating goods and services
  • It can improve the delivery of goods and services to consumers.
  • It can increase the value of goods and services to consumers.

Each of these three roles constitute ways that ICT can influence the value of types of employees in three ways:

  • By adding value to the good or service, ICT investment makes employees more valuable (the complement side).
  • By meaning that fewer workers are required to sell a number of goods and services, it reduces the incentive to hire workers (the substitute side).
  • By acting as a form of investment that can directly replace certain labour types (eg, accountants, typists, secretaries), it reduces the incentive to hire these types of workers – while increasing the value of other types of workers (skill-biased technological change).

In each of these instances, ICT investment makes the staff the firm has on hand relatively more productive.  In other words, the firm can make as much output with less labour.  As a result, firms will also have the incentive to make more at a lower price.

This outcome is part of the reason why the Productivity Commission is so focused on ICT and on its utilisation in the service sector of the New Zealand economy.  As we mention in What is going on with the labour market recovery?, the service sector is a huge employer in New Zealand.  And the low level of utilisation of ICT within the service sector is part of the reason why overall productivity is low.  Furthermore, as services (and ICT itself) are an important input into the creation of export goods and services, the low productivity in this sector is part of the reason why some of our exporters are so uncompetitive.

In this way, encouraging the take up of ICT in New Zealand, especially among service sector firms, appears to be a no-brainer.  However, we haven’t covered off all the consequences of such a change.

ICT and the economy: inequality

The discussion of productivity helps us to understand how ICT fits into a business, at least from an economist’s point of view.  Understanding how ICT fits into a business can help tell us how ICT usage influences the level of income in an economy.  However, the special properties of ICT as an input to production can also be considered when thinking about other questions around the broader economy, such as how dispersed (or unequal) incomes would become due to the use of ICT.

ICT is something a firm decides to invest in, like other types of plant and machinery.  However, as we described earlier, ICT tends to require specific skills – rewarding those that are highly skilled in the appropriate areas. 

As a result, ICT innovations can be seen as a form of “skill-biased technological change”.  There are three matters to consider when looking at this type of change.

  • The shift from “lower” skilled work to “high” skilled work
  • The replacement of “human capital” with ICT as capital
  • The shift away from primary and secondary production, and towards the provision of services for capital owners

In the first type of shift, those who have not invested heavily in education or work experience would be replaced by technology, while the return to workers who know how to use the technology would rise.  This type of change in the return to labour is what was observed during the early stages of the agricultural revolution and partway through the industrial revolution.

The second type of shift leads to people who have invested in specific skills being replaced by some form of automation – in this case ICT.  This is similar to what happened in the early stages of the industrial revolution – where large industrial plants were able to outperform artisans.  We are seeing similar shifts in modern times with automation in accounting and word processing software.

The last type of shift also leans on our experience of the agricultural revolution.  The agricultural revolution allowed food to be made with significantly less labour, creating a significant surplus of food.  However, this outcome left a lot of people without work – people who either had to head into towns to work for the owners of new factories, or to try to offer some type of service to wealthy landowners.

Each of these shifts bears some similarity to the trends we would expect to see from ICT, and all of these shifts imply that income inequality will rise as investment in ICT climbs.

Furthermore, it points to a potential world where those that own ICT and capital infrastructure are able to create most of the output demanded by those in society, but many individuals will be forced to find a way to provide services to capital owners in order to share in this newfound wealth.  In this case, stratification and social inequalities would be likely to worsen – especially given that many service industries (acting, music, sport) are effectively winner-takes-all markets.

As a result, although an ICT “revolution” offers a lot, there are social issues that need to be kept in mind.

How does this relate to New Zealand?  New Zealand has not only experienced a smaller uptake in ICT over the past decade, but it has also experienced a less rapid increase in measures of income inequality and social stratification.  It appears likely that many of the same underlying drivers that have kept ICT use and productivity relatively low in New Zealand are the same factors that have kept these other potential measures of economic health in check.

ICT and the economy: as an industry and exporter

While we’ve talked a lot about the utilisation of ICT within current business models, we haven’t touched on a very important issue for the broad New Zealand economy – is there some way that firms and entrepreneurs can become involved in the ICT industry as goods and service providers?

As described in What is going on with the labour market recovery?, New Zealand is experiencing a winding down of much of its manufacturing sector.  Although it is common to hear that this decline is due to a “lack of competitiveness”, this view ignores the drastic technological changes that are taking place in the industry.  These changes are rewarding manufacturers that are close to market and have sufficient population demand to benefit from economies of scale.

Now ICT is helping to create this situation, by making it possible for a firm to become truly global – by integrating supply chains, improving communication, removing the “tyranny of distance” from management decisions, and by opening up markets through websites.  In this way, a US firm in New Zealand does not face the barriers it used to for running such a distant outlet.

As a result, it is not the manufacturing element of the increasing global supply chain that New Zealand needs to be involved in.  We have too small a scale, and the global competition to manufacture means that countries are taxing and bidding against each other for the pleasure.  In truth, New Zealand’s best interests are served by looking for other opportunities.

Agriculture is New Zealand’s traditional area of comparative advantage.  But there are limits to how far we can push our environmental capacity, and as the recent drop in dairy prices shows, it is an industry that is at risk of significant entry at short notice.  Furthermore, the shipping of value-added agricultural products from New Zealand suffers from the “tyranny of distance”.

But ICT offers a unique opportunity for New Zealand, and where firms like Xero are taking advantage of the special attributes New Zealand has – an educated workforce, strong legal system, positive trade relationships with major economies, relatively low costs, and strong non-monetary benefits for potential employees (stemming from the environment and living standards).

As a result, there is a real chance that ICT exports will become a burgeoning part of the New Zealand economy over the coming decades.

 


[1] www.productivity.govt.nz/sites/default/files/services-inquiry-final-report.pdf

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