The PRODUCTIVE HARDWARE
The world is debating Solow Paradox. Named after Nobel laureate in economics, it was stated by him thus: "You can see computer age everywhere these days, except in productivity statistics". The venerable economic magazine, "The Economist" in its issue dated July 24th, quotes no less venerable Professor Robert Gordon ("one of America's leading authorities on productivity") - p.20: "...the productivity performance of manufacturing sector of United States economy since 1995 has been abysmal rather than admirable. Not only has productivity growth in non-durable manufacturing decelerated in 1995-9 compared to 1972-95, but productivity growth in durable manufacturing stripped of computers has decelerated even more."
What should be held true - hype or dismal statistics? The answer to this question is of crucial importance to economies in transition. If investment in IT (information technology) actually RETARDS growth - then it should be avoided, at least until a functioning marketplace is there to counter its growth suppressing effects.
The notion that IT retards growth is counter-intuitive. It would seem that, at least, computers allow us to do more of same things faster. Typing, order processing, inventory management, production processes, number crunching are all managed more efficiently by computers. Added efficiency should translate into enhanced productivity. Put simply, same number of people can do more, faster, more cheaply with computers than they can without them. Yet reality begs to differ.
Two elements are often neglected in considering beneficial effects of IT.
The first is that concept of information technology comprises two very distinct economic activities: an all-purpose machine (the PC) and its enabling applications and a medium (the internet). Capital assets as distinct from media assets are governed by different economic principles, should be managed differently and be subject of different philosophical points of view.
Massive, double digit increases in productivity are feasible in manufacturing of computer hardware. The inevitable outcome is an exponential explosion in computing and networking power. The dual rules which govern IT - Moore's (a doubling of chip capacity and computing prowess every 18 months) and Metcalf's (the exponential increase in a network's processing ability as more computers connect to it) - also dictate a breathtaking pace of increased productivity in hardware cum software aspect of IT. This has been duly detected by Robert Gordon in his "Has 'New Economy' rendered productivity slowdown obsolete?".
But for this increased productivity to trickle down to rest of economy a few conditions have to be met.
The transition from old technologies to a new one (the computer renders many a technology obsolete) must not involve too much "creative destruction". The costs of getting rid of old hardware, software, of altering management techniques or adopting new ones, of shedding redundant manpower, of searching for new employees to replace unqualified or unqualifiable, of installing new hardware, software and of training new people in all levels of corporation are enormous. They must never exceed added benefits of newly introduced technology in long run. Hence crux of debate. Is IT more expensive to introduce, run and maintain than technologies that it so confidently aims to replace? Will new technologies be spun off core IT in a pace sufficient to compensate for disappearance of old ones? As technology mature, will it overcome its childhood maladies (lack of operational reliability, bad design, non-specificity, immaturity of first generation of computer users, absence of user friendliness and so on)?
Moreover, is IT an evolution or a veritable revolution? Does it merely allow us to do more of same only in a different way - or does it open up hitherto unheard of vistas for human imagination and creativity? The signals are mixed. IT did NOT succeed to do to human endeavour what electricity, internal combustion engine or even telegraph have done. It is also not clear at all that IT is a UNIVERSAL phenomenon suitable to all climes and mentalities. The penetration of both IT and medium it gave rise to (the internet) is not uniform throughout world even where purchasing power is similar and even among corporate class. Countries post communism should take all this into consideration. Their economies may be too obsolete and hidebound, poor and badly managed to absorb yet another critical change in form of IT. The introduction of IT into an ill-prepared market or corporation can be and often is counter-productive and growth-retarding.
The CYCLE OF THE INTERNET
Then, of course, there is Internet.
The internet runs on computers but it is related to them in same way that a TV show is related to a TV set. To bundle to two, as is often done today, obscures true picture and can often be very misleading. For instance: it is close to impossible to measure productivity in services sector, let alone is something as wildly informal and dynamic as internet. It is clear by now that internet is a medium and, as such, is subject to evolutionary cycle of its predecessors. Central and Eastern Europe has just entered this cycle while USA is most advanced.
The internet is simply latest in a series of networks which revolutionized our lives. A century before internet, telegraph and telephone have been similarly heralded as "global" and transforming.
So, what should CEE countries expect to happen to internet globally and, later, within their own territories? The issue here cannot be cast in terms of productivity. It is better to apply to it imagery of business cycle.
As we said, every medium of communications goes through same evolutionary cycle:
It starts with Anarchy - or The Public Phase.
At this stage, medium and resources attached to it are very cheap, accessible, under no regulatory constraints. The public sector steps in : higher education institutions, religious institutions, government, not for profit organizations, non governmental organizations (NGOs), trade unions, etc. Bedevilled by limited financial resources, they regard new medium as a cost effective way of disseminating their messages.
The Internet was not exempt from this phase which is at its death throes. It started with a complete computer anarchy manifested in ad hoc networks, local networks, networks of organizations (mainly universities and organs of government such as DARPA, a part of defence establishment, in USA). Non commercial entities jumped on bandwagon and started sewing these networks together (an activity fully subsidized by government funds). The result was a globe encompassing network of academic institutions. The American Pentagon established network of all networks, ARPANET. Other government departments joined fray, headed by National Science Foundation (NSF) which withdrew only lately from Internet.