How can you get more economic
growth out of your ICT?
Take care of your digital divide
Alain BOURDEAU de FONTENAY
Columbia Institute for Tele-Information (CITI)
Fernando BELTRAN
University of Auckland
ACORN/REDECOM Conference2009, Mexico City, 4-5 September 2009
Objective
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To formulate a general analytical framework that:
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Contributes to a better understanding of the links with economic growth and
economic efficiency
Facilitates the evaluation of competing proposals in the digital divide debate
Makes it possible to focus on the key differences between the competing
proposals
Highlights those assumptions that need to be evaluated theoretically and/or
empirically to buttress a policy proposal
The objective is to develop an analytical framework, not to test it
empirically nor to prove formally any parts of it.
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Fernando BELTRAN ([email protected])
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Outline
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Background to the digital divide debate
ICT and economic growth
Poverty and inequality: is it efficient?
Chronic poverty and inequality: what might
make it sustainable?
What to look for when formulating a progrowth digital divide policy?
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Fernando BELTRAN ([email protected])
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Why a digital divide policy?
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The primary rational for a digital divide
policy might be:
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Social equity
A vision of society (Gore 1996)
More efficient delivery of government services
Economic efficiency (Mueller 2001)
Here, we are concerned with economic
growth, hence economic efficiency
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Fernando BELTRAN ([email protected])
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How to look at the digital divide?
A wide spectrum of concerns, e.g.,
 Technology (Goolsbee and Guryan 2006)
 What’s the fuss? It’s just another new good the
market needs to take care of (Mueller 2001)
 Internet usage (DiMaggio et al. 2004; Noh and Yoo
2008)
 Economic growth (Liu & San 2006)
 Social exclusion (NTIA 1995; Jung 2008)
 Social capital (Selwyn 2002)
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Fernando BELTRAN ([email protected])
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Origin: a vision of society
Vice President Gore (1996)
President Clinton and I… challenged the
nation to ensure that all of our teachers
and students have access to modern
computers and engaging educational
software… We challenged the nation to
make sure that our children will never
be separated by a digital divide.
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Fernando BELTRAN ([email protected])
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Definitions
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Fink and Kenny (2003): “Four possible interpretations… [that]
appear in the literature:
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1.A gap in access to use of ICTs—crudely measured by the number and
spread of telephones or web-enabled computers, for instance.
2. A gap in the ability to use ICTs—measured by the skills base and the
presence of numerous complimentary assets.
3. A gap in actual use—the minutes of telecommunications for various
purposes, the number and time online of users, the number of Internet
hosts, and the level of electronic commerce.
4. A gap in the impact of use—measured by financial and economic
returns”
#4 corresponds to a market failure, implying the potential merit
for a policy intervention
ACORN/REDECOM, Mexico City
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([email protected]) Fernando BELTRAN
([email protected])
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Definitions
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A digital divide policy has to be evaluated in terms of its specificity in time
and space, e.g., Keniston and Kumar’s (2003) four divides:
 1.
“The first divide is… between
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those who are rich, educated, and powerful, and
those who are not…
2.
A second digital divide… is linguistic and cultural…
It separates those who speak English…
3.
The third digital divide… is the gap between the rich
and the poor nations…
4. … in countries like India and America, yet a fourth: the emergence
of a new elite group,… the beneficiaries of the enormous successful
information technology industry and the other knowledge-based
sectors of the economy such as biotechnology and pharmacology….”
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Fernando BELTRAN ([email protected])
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Definitions
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DiMaggio et al. (2004)
“inequalities in
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access to the Internet,
extent of use,
knowledge of search strategies,
quality of technical connections and social support,
ability to evaluate the quality of information, and
diversity of uses”
Identify useful parameters to assess ICT’s
effectiveness
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Fernando BELTRAN ([email protected])
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What are their relevance?
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Mueller (2001) – Is broadband access a consumption
good or an infrastructure?
What is the scope of the digital divide, e.g.,
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A technology?
Are dimensions such as “social exclusion” relevant to
economic efficiency?
Is DiMaggio et al.’s (2004) definition too broad/narrow to look
at economic efficiency?
What is the relevant time dimension from a policy
perspective?
To what extent might dimensions such as political power,
culture, institutions, and local specificity be relevant?
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Fernando BELTRAN ([email protected])
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Objective for a digital divide
policy
2 different kinds of objectives:
 Economic efficiency
 Social equity
Implications of economic efficiency
 Proper allocation of resources
 Economic growth
 International competitiveness
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Fernando BELTRAN ([email protected])
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Lesson for the digital divide
Would we have reasons to expect the digital divide
to have a significant impact on economic growth
if so many questions are raised about ICT’s own
impact on the economy, especially post-2000?
 Different:
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Productivity studies
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Structural changes are ignored
Growth from technical change or factor substitution
(Jorgenson & Vu 2005)
Digital divide: is it long run, e.g.,
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Is it an infrastructure?
Is it associated with institutional changes?
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Fernando BELTRAN ([email protected])
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Productivity analysis
Generic formulation:
Q = AFF{L, K}
where L and K are constant quality
but the index methodology used to estimate L and K implies
that:
L = ALN
K = AKC
N and C are the observed labor and capital inputs and AL
and AK are the measured of technical change for those
inputs.
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Productivity studies ignore factor-specific technical change
AL and AK
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Fernando BELTRAN ([email protected])
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The digital divide & growth: the
impact of poverty
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AF is Solow’s technical change
AL is the labor-specific technical change
Unskilled labor is primarily associated with
poverty, hence, potentially with the digital
divide. The digital divide, if it exists would
correspond to frictions in the labor market
associated with poverty.
Growth might be achieved through
improvements in:
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Low skilled labor participation, NUSkilled
Ability to benefit from technical change, AUSkilled
Alain BOURDEAU de FONTENAY ([email protected])
Fernando BELTRAN ([email protected])
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Poverty/inequality
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Question – What determines what?
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Direct – what direction?
 Poverty/inequality
=>
Growth
 Poverty/inequality
<=
Growth
 Poverty/inequality

Growth
Indirect:
 Poverty = F(other factors = X)
 Growth = G(other factors = Y)
 How are X and Y related and how does it affect the
relationship between poverty/inequality and growth?
(Davis 2006)
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Fernando BELTRAN ([email protected])
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Poverty
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Question: poverty/inequality?
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Absolute poverty
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Absolute poverty: trickle down effect
Relative poverty
Subjective poverty
Inequality
Long run: growth is good
Short run: ambiguous
Ambiguous:
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Mostly absolute only in the short run (periodically revised)
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But subcategories such as food insecurity (Gundersen 2008)
Inequality
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More flexible than relative poverty
Reflects better the behavioral impact of the evenness and fairness of
the income/wealth distribution
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Fernando BELTRAN ([email protected])
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Multidimensionality of poverty
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Poverty is multidimensional, e.g.,
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Food insecurity (Gundersen 2008)
Violence and security (Fay 2005; Aizer 2008)
Socio-economic polarization (Mogues & Carter
2005)
Racism (Becker 1957)
Political power (Chin & Wagner 2007)
Business cycles
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Fernando BELTRAN ([email protected])
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Relative poverty, inequality,
and growth?
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Observation: inequality
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Decreased in the middle of XXth century
Generally increased since the ‘70s
Increased inequality:
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Generally attributed to technological change, but why long
run?
Some suggest ICT is a GPT
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Very long time impact on labor force
Skilled labor force is a complement
Unskilled labor force a substitute
Limited wage flexibility of low wage worker
Potentially: low skilled workers might become permanently
unemployable
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Fernando BELTRAN ([email protected])
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No inequality in a pure
neoclassical environment
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Neoclassical labor allocation:
Individuals differ in terms of their innate abilities
 Abilities are randomly distributed among individuals
 The demand for abilities is exogenous and may
change at random
 The economy is characterized by perfect competition
Then, marginal product-based wages are efficient
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Neoclassical credit market:
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People can “insure” themselves against low-wage
abilities
(Aghion and Howitt 1998)
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Fernando BELTRAN ([email protected])
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Corrective factors
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Competition optimizes efficiency given the
transfer requirements (Becker 1957)
Knightian uncertainty (Knight 1921)
Innovation (Schumpeter 1912)
The response by the poor/minority:
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Threat (Margo 1991)
Assimilation (Bloch & Rao 2001)
Pressure toward power sharing (Alesina &
LaFerrara 2005)
…
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Fernando BELTRAN ([email protected])
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The impossibility of an efficient
market-based allocation system
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Perfect credit market are inconsistent with free riding
Cost of credit is inversely related to wages
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It is expensive to be poor
The very poor cannot be accountable, i.e., the cost of
credit is infinite for them
The very poor need a welfare transfer to compensate for
very low marginal product (safety net)
Excluding lumps sum transfer, the need for transfer
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distorts the allocation of labor, hence
introduces economic inefficiency
(Duflo 2003)
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Fernando BELTRAN ([email protected])
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Why inequality is inefficient?
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Poverty is undesirable, hence the haves have
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The incentives to restrict upward mobility-based
competition by the higher abilities have-nots.
More resources to block competition due to their higher
wages, e.g., through being in a better position to:
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Manage information
Manage the political process (Buchanan)
Control the allocation of public resources (e.g., education,
security)
Hence, a greater ability to achieve mobility foreclosure
(Chin & Wagner 2007; Cuellar 2007)
Mobility limitations means tendencies toward
increases in chronic poverty
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Fernando BELTRAN ([email protected])
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Population segmentation and mobility
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Mobility foreclosure (hence inequality)
strengthened where:
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Individuals are easily identifiable (Alesina et al. 1999)
Easy identification facilitates discrimination (Phelps
1972)
Discrimination controls mobility
Disproportionate representation among the poor
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Many racial and ethnic minorities (Kijima 2006)
Women
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Fernando BELTRAN ([email protected])
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Population segmentation and mobility
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Hence, easy identification facilitates mobility
foreclosure through discrimination
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For instance, Eliza in Shaw’s 1913 Pygmalion (My
Fair Lady)
Easier identification facilitates mobility foreclosure
(Quillian 2003)
Discrimination is self-enforcing
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Statistical discrimination (Phelps 1972; Altonji and
Pierret 2001)
Implicit discrimination (Bertrand et al. 2005)
Network effects (Lee 2004)
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Fernando BELTRAN ([email protected])
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Population segmentation and
the allocation of political power
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Geographic segmentation and
discrimination (Squires and Kubrin
2005)
Enforcement of laws and regulation
(Cuellar 2007)
Information about minorities (Galbraith
et al. 2006)
U.S. welfare reform (Jennings 2001)
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Fernando BELTRAN ([email protected])
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Summary
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The concern with the digital divide is about poverty
and inequality
Poverty and inequality
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Time dimension:
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Chronic (segmentation, lack of mobility)
Response to short run fluctuations
Information/discrimination key to mobility
What might make it sustainable?
Information/discrimination
Reducing chronic poverty and inequality
contributes to economic growth
Hence ICT needs to reduce discrimination
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Fernando BELTRAN ([email protected])
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Potential
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Using ICT as:
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Affirmative action (Franke 2007)
A way to better implement legislations and regulations, e.g.,
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Gender-based (Gayathri 2005)
…
Challenge - How to formulate a pro-long run growth
strategy to go from the digital divide to the promotion of
digital opportunity?
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Inequality is largely sustained through social discrimination
buttressed by institutions, what digital divide strategy can
best address those problems?
The window of opportunity is limited in time (McSorley 2003)
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Fernando BELTRAN ([email protected])
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THANK YOU
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Fernando BELTRAN ([email protected])
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