WP-2003-08

Solow's paradox has disappeared in the United States but remains alive and well in the United Kingdom. In particular, the U.K. experienced an information and communications technology (ICT) investment boom in the 1990s in parallel with the U.S., but measured total factor productivity has decelerated rather than accelerated in recent years. We ask whether ICT can explain the divergent TFP performance in the two countries. Stories of ICT as a 'general purpose technology' suggest that measured TFP should rise in ICT-using sectors (reflecting either unobserved accumulation of intangible organizational capital; spillovers; or both), but perhaps with long lags. Contemporaneously, investments in ICT may in fact be associated with lower TFP as resources are diverted to reorganization and learning. In both the U.S. and U.K., we find a strong correlation between ICT use and industry TFP growth. The U.S. results are consistent with GPT stories: the acceleration after the mid- 1990s was broadbased-located primarily in ICT-using industries rather than ICT- producing industries. Furthermore, industry TFP growth is positively correlated with industry ICT capital growth in the 1980s and early 1990s. Indeed, as GPT stories would suggest, controlling for past ICT growth, industry TFP growth appears negatively correlated with increases in ICT usage in the late 1990s. A somewhat different picture emerges for the U.K. TFP growth does not appear correlated with lagged ICT investment. But TFP growth in the 1990s is strongly and positively associated with the growth of ICT capital services, while being strongly and negatively associated with the growth of ICT investment. If, as we argue, unmeasured investment in complementary capital is correlated with ICT investment, then this finding too is consistent with the GPT story. However, comparing the first and second halves of the 1990s, the net effect of ICT is positive, suggesting that ICT cannot explain the observed TFP slowdown. On the other hand, our results do suggest, albeit tentatively, that the U.K. could see an acceleration in TFP growth over the next decade.

Working Paper (PDF,422KB)