ICT-Driven Economic and Financial Development: Analyses of European Countries

By Ewa Lechman and Adam Marszk

ICT-Driven Economic and Financial Development: Analyses of European Countries demonstrates the effects of ICT diffusion on economic, social and financial development by examining their impact on the structure and dynamics of national economies. It provides the insight into shifts observed in labour markets, international trade activities productivity factors, education and use of innovative financial products. It combines empirical analyses and data sources stretching back to 1990 make it an important contribution to understanding the effects of ICT diffusion on economic and financial development. The book answers questions such as how will national and regional economies react to upcoming ICT developments and growing usage, and what is the magnitude of impact of new information and communication technologies on various aspects of social and economic life.

• Demonstrates the process fo ICT spread across European countries
• Analyzes the value of ICTs from both economic and social perspective
• Examines structural changes in financial markets caused by ICTs implementation

• Language: English
• Publisher: Academic Press
• Release date: Sep 4, 2019
• ISBN: 9780128137994

Ewa Lechman

Ewa Lechman, Ph.D. Habil, is an Assistant Professor at the Faculty of Management and Economics, Gdansk University of Technology (Fahrenheit Universities), Poland. Her extensive research interests concentrate on economic development, ICT, and its role in reshaping social and economic systems and various aspects of poverty and economics in developing countries. She was the 2013 winner of an Emerald Literati Network Award for Excellence and is a member of the editorial boards of international journals on technology diffusion, the digital economy and economic development. She coordinates and participates in international research and educational projects and also works as an independent expert assisting with innovation assignments, including the evaluation of small and medium enterprise proposals, EU-financed programmes, and policy design regarding innovativeness, digitalization, education and social exclusion.

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Poland.

Chapter One

Introduction

Abstract

This introductory chapter briefly explains the context and conceptual background of this book. It defines major research goals and discusses the book structure and consecutive chapter contents.

Keywords

ICT; Digital revolution; Socio-economic development; Financial development

Contents

1.1Cutting-edge technologies—Setting the context

1.2The goals

1.3Structure and contents

References

Technology is widely considered the main source of economic progress (…). The myth of Prometheus is nothing if not a cautionary tale of those uncontrollable effects of technology.

—Mokyr, Vickers, and Ziebarth (2015)

1.1 Cutting-edge technologies—Setting the context

Technological change has a unique ability to induce short-term disruptions, which usually unveil long-term benefits (Mokyr et al., 2015). ‘Technology is a vitally important aspect of the human condition. Technologies feed, clothe, and provide shelter for us; they transport, entertain, and heal us; they provide the bases of wealth and of leisure; they also pollute and kill. For good or ill, they are woven inextricably into the fabric of our lives, from birth to death, at home, in school, in paid work. Rich or poor, employed or nonemployed, woman or man, black or white, north or south—all of our lives are intertwined with technologies, from simple tools to large technical systems’ (Donald & Wajcman, 1986, p. 2). Despite the fact that the relationship between technology diffusion and socio-economic development is usually hard to quantify and trace empirically, clearly, society, economy, and technology are fundamentally inseparable. In that sense, profound contextualisation of social and technological change becomes a prerequisite to understand the dynamics of society’s shaping by technology. Technological change often brings disruptive changes, which has far-reaching consequences usually unveiled in a long-run perspective. ‘The Great Escape’ of Deaton (2013) may never come if societies do not get assimilated and put into work technological progress embodying humans’ knowledge and ideas. The first industrial revolution, a path-breaking event, enforced the global economic takeoff, and since the beginning of the 18th century, the world’s gross output started to grow at an unprecedented fast pace. Examining, even very superficially, the historical economic statistics provided in Maddison (2007), it is quite evident that, in terms of per capita income, the world has grown enormously after the 17th century. In 1500, the average per capita income of the developed world was at about 704 U$a; in 1700, it was 907; in 1820, 1132; and in 1998, it reached 21,470, which shows that within barely 180 years the average per capita income increased about 19 times. Whatever the case may be, technology has been central to the dynamics of the economy in the past two centuries (Mokyr, 2005, p. 1113).

Since early seventies of the 20th century, the world has witnessed a process of rapid diffusion of new information and communication technologies (ICTs)—and undeniably, this process has enforced remarkable changes and structural shifts going far beyond the economic sphere of life. ICTs become fast available worldwide and, as already stated, the rate of diffusion was extremely high (Comin, Hobijn, & Rovito, 2006). The adoption of ICTs allows for a rapid growth of social networks (Castells, Fernandez-Ardevol, Qiu, & Sey, 2009), which generates economic advantages, such as, for instance, economies of scale (Economides, 1996; Katz & Shapiro, 1985), providing solid foundations for long-term economic growth and development. A dynamic growth of socio-economic networks is predominantly facilitated by the type of technological solution offered by ICTs. These are, for instance, wireless networks, which enable direct connections among society members, allowing for information and knowledge flows, regardless of the physical location of the agents, diminishing their economic and technological marginalisation. Cairncross (2001) writes about the death of distance showing that the geographic distance is no longer a barrier for various types of economic activities, as ICTs become widely adopted and used. A broad adoption of ICTs enables a fast and low-cost flow of knowledge and information (Quah, 2001; Venables, 2001). ICTs are claimed to be general-purpose technologies (GPTs) (Bresnahan & Trajtenberg, 1995), which means that they are technologies that enforce significant structural changes and pervasively impact society and economy. Bresnahan and Trajtenberg (1995) underline that a broad adoption of GPTs fosters radical changes of social norms and structures, which leads to the transformation of social systems and ways of doing business, heavily impacting the growth of productivity (Helpman, 1998) while providing a solid background for long-term economic growth and development. Moreover, ICTs have been profoundly reshaping global economic landscape, providing, inter alia, solid foundations for a rapid expansion of financial innovations worldwide. Undeniably, a fast spread of such instruments has been facilitated by the growing penetration of ICTs, which enables unrestricted and unbounded flows of information and knowledge among geographically separated actors.

Many claim that differences among countries today in their economic growth dynamics and long-term trajectories are, to a large extent, determined by differences in their technological advancements and state of assimilation of new technological solutions. Society- and economy-wide adoption of new ICTs paves road ahead for changes in production, development of new cheaper goods and services, enhancement of international trade flows, and mobilisation of financial and human capital resources, which in the long-time perspective constitutes an important factor of international competitiveness of nations. Still, the potential benefits of ICT development are various, but hard to quantify. ICTs drive management efficiency and increase productivity, show the emergence of new export opportunities, and empower distance education. Some countries consider ICTs to be a major incentive to promote their social and economic development. By means of ICTs, they can quickly bridge the economic gap with world leaders and get huge returns on creating more wealth and jobs for highly skilled workers.

But, does technological progress bringing critical changes into social and economic structures and life also allows for closing the gaps? Or, reversely, is uneven speed of technology diffusion about to enforce cross-country divergence and aggravate inequalities in terms of wealth? This work intends to challenge these questions, although the answers are partial and imperfect.

1.2 The goals

This book is designed to extensively portray issues associated with the process of diffusion of ICTs in Europe, identifying potential channels of ICTs that impact on socio-economic and financial market development; and above all, it demonstrates changes in development patterns across European economies that have been subjected and determined by the emergence and country-wide application of ICTs. Put differently, we aim to identify how ICTs shape social, economic, and financial market development patterns and the dynamics of change and structural shifts across European economies.

To ensure a logic flow of this research, we set three major questions to be answered, as follows:

•What is the dynamics of ICT diffusion across European countries and how ICT diffusion patterns are shaped?

•How ICT deployment impacts the process of social and economic development and convergence?

•How growing access to ICTs contributes to the state development of financial markets?

The analysis is restricted to the period between 1990 and 2017. This is the first book presenting Europe-wide empirical evidence on the relationships between ICT diffusion and its socio-economic consequences, which may be traced within the last 37-year period. It is broad in scope and well contextualises the process of structural changes in Europe, trying to identify the major breakthrough changes.

1.3 Structure and contents

This book contains seven logically structured chapters.

This Chapter is the introduction itself. Chapter 2 offers a discussion on technology, technological progress, and the successive technological revolutions of modern history. It briefly demonstrates how technology and technological progress are defined; it defines the role of technological change in creating the wealth of nations and presents it as a driving force of global shifts observed during ages of economic development of the world. In addition, this chapter explains the main ideas behind the concept of techno-economic paradigms and identifies the major channels through which technology, society, and economy are impacting one another. Next, it introduces the term ‘Fifth Technological Revolution’, also labelled the ‘Digital Revolution’, and explains why new ICTs are treated as GPTs. It underscores the major points underlying the advantages of ICTs over ‘old’ technological solutions.

Next Chapter 3 continues the discussion on the role new ICTs play in the process of enhancing the process of social, economic, and financial developments. This chapter examines various aspects of the relationship of ICTs with social and economic development: why ICTs are treated as opportunity windows; why they are a prerequisite for socio-economic development; and how they can affect the performance of financial markets. It briefly discusses the channels through which ICTs can affect social, financial, and economic development.

Chapters 4, 5, and 6 are entirely empirical. First Chapter 4 unveils the pattern of ICT diffusion in 32 European countries between 1990 and 2017. It provides a detailed analysis of country-specific curves, using four core indicators of ICT diffusion: mobile-cellular telephony, fixed broadband networks, active mobile broadband networks, and Internet users. In this chapter, we highlight the unique features of the process in each of the sample economies, illustrating the dynamics, country-specific patterns, and future development scenarios. It also examines changing cross-country inequalities in access to and use of new ICTs. To enrich the picture, this chapter also briefly examines the emerging process of technological substitution that demonstrates a gradual switch from ‘old’ to ‘new’ technology. All the data used to study the process of ICT diffusion are entirely derived from the World Telecommunication/ICT Indicators database 2017 and 2018.

Chapter 5, using data on 32 European countries between 1990 and 2017, shows the process of social and economic development. With this aim we have selected a bundle of 15 different economic variables (out of which 6 are ICT trade-related), and 9 different social variables. Such an approach allows capturing changes and shifts observable across economies in the overall social and economic welfare. It additionally sheds light on various aspects of social and economic spheres of life that, as we claim, may be both directly and indirectly impacted by the technological change generated by a wider adoption and usage of new ICTs. This chapter unveils development trends and shows structural shifts across European economies. It aims to examine whether ICT deployment may be treated as an important factor driving the overall social and economic welfare. It additionally tests the process of social and economic convergence, aiming to uncover if increasing access to and use of ICTs diminishes cross-country disparities.

Chapter 6 continues the empirical study and presents results of the analysis of links between the diffusion of ICTs and financial development in European countries in 1990–2016; the sample is identical as in Chapter 5. The analysis is divided into three parts. Its first part covers financial development at large—the development of banking sector and insurance industry (as well as some additional elements, i.e. savings and electronic payments). The second part demonstrates the results for financial markets, with a particular focus on stock markets and a brief examination of bond markets. In the final, third part, the main area of interest is financial innovations, in particular, exchange-traded funds (ETFs); additionally, the significance of ICTs for mutual funds is also studied. The structure of the analysis is similar in all three parts. First, in each case we provide an introductory analysis of changes in the levels of various aspects of financial development based on timelines, and then a cursory analysis of the distribution of variables based on density functions. Second, we examine the results of the nonparametric analysis (local polynomial regressions) for pairs of variables—in each case we juxtapose one of the ICT indicators to a select non-ICT variable; in some cases, the analysis is supplemented by correlation coefficients. Finally, we interpret the estimates of panel models with a single explanatory variable (one of the ICT indicators) in which the respective indicators of financial development are used as dependent variables. The utilised data sources are World Telecommunication/ICT Indicators, the IMF Financial Development Index, and the Global Financial Development Database; additional databases are used for the analysis of certain aspects of financial development (e.g. development of ETFs). In order to be able to formulate general conclusions, we concentrate mostly on the results based on panel data rather than country-specific evidence.

Finally, Chapter 7 briefly discusses conclusions derived from empirical parts of this work.

References

Bresnahan T.F., Trajtenberg M. General purpose technologies ‘Engines of growth’?. Journal of Econometrics. 1995;65(1):83–108.

Cairncross, F. (2001). The death of distance: 2.0: How the communications revolution will change our lives Texere.

Castells M., Fernandez-Ardevol M., Qiu J.L., Sey A. Mobile communication and society: A global perspective. MIT Press; 2009.

Comin D., Hobijn B., Rovito E. Five facts you need to know about technology diffusion. National Bureau of Economic Research; 2006 (No. w11928).

Deaton A. The great escape: Health, wealth, and the origins of inequality. Princeton University Press; 2013.

Donald M., Wajcman J. Introductory essay: The social shaping of technology. New York: McGraw Hill; 1986.2–25 idem (Eds.).

Economides N. The economics of networks. International Journal of Industrial Organization. 1996;14(6):673–699.

Helpman E., ed. General purpose technologies and economic growth. MIT press; 1998.

Katz M.L., Shapiro C. Network externalities, competition, and compatibility. The American Economic Review. 1985;75(3):424–440.

Maddison A. Contours of the world economy 1-2030 AD: Essays in macro-economic history. Oxford University Press; 2007.

Mokyr J. Long-term economic growth and the history of technology. In: Handbook of economic growth. Elsevier; 1113–1180. 2005;vol. 1.

Mokyr J., Vickers C., Ziebarth N.L. The history of technological anxiety and the future of economic growth: Is this time different?. The Journal of Economic Perspectives. 2015;29(3):31–50.

Quah D. ICT clusters in development: Theory and evidence. EIB Papers. 2001;6(1):85–100.

Venables A.J. Geography and international inequalities: The impact of new technologies. Journal of Industry, Competition and Trade. 2001;1(2):135–159.

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a 1990 International dollars.

Chapter Two

The fifth technological revolution: context and background

Abstract

This chapter offers a discussion on technology, technological progress, and the successive technological revolutions of modern history. In addition, it explains the main ideas behind the concept of techno-economic paradigms. It introduces the term ‘Fifth Technological Revolution’ and explains why new information and communication technologies can be treated as general purpose technologies. This chapter also shows the Digital Revolution in the context of past technological waves, delineating why this Fifth Technological wave is different. It underscores the major points underlying the advantages of information and communication technologies over ‘old’ technological solutions. It also explains the several unique features of new information and communication technologies.

Keywords

Technology; Industrial revolution; ICT; Economy

Contents

2.1Technology and technological change in the historical perspective

2.2Technology, economy, society: A few words on techno-economic paradigms

2.3ICT as GPT

2.3.1Final note

References

Further reading

2.1 Technology and technological change in the historical perspective

The Industrial Revolution created a critical juncture that affected almost every country. nations (…) not only allowed but (…) encouraged commerce, industrialization and entrepreneurship grew rapidly. Many, such as the Ottoman Empire (…), lagged behind as they blocked or (…) did nothing to encourage the spread of industry.

Landes (2003)

Technological change and human progress are historically inseparable. Throughout the ages, we observe a continuous interplay between technology, technological change, and socio-economic development (Galor & Tsiddon, 1997). Undeniably, the dynamics of technological change and economic growth are mutually conditioned, as technology and all the knowledge embedded in it profoundly affects the way societies and economies work (Inglehart & Welzel, 2005; Nelson & Phelps, 1966). The argument set forth by Saviotti (1997) makes it clear that technological progress contributes to economic change not only qualitatively but also quantitatively, stimulating the emergence of new products and services and boosting the demand for them. Mokyr, Vickers, and Ziebarth (2015) noted that ‘technology is widely considered as main the source of economic progress’ (p. 31), while Franko (2018) emphasised that economic growth pulls societies out of material poverty, the low-productivity trap, and enables them to climb up the development ladder. In Platteau (2000), we learn that institutions and societies as such, with their norms and attitudes, culture, and value systems, also heavily condition the acquisition of economically efficient technologies; put differently, technological change translates into social development and economic wealth only when it is accepted by individuals in the society (Drucker, 2017). Castells and Cardoso (2006) contend that technology often becomes the main driving force in societal transformation, even though technology alone is not a sufficient condition for it.

These works have established a number of generalisations concerning technological change and socio-economic development; they direct our attention to more extensive research on how and why technology determines shifts in economies, redefines the way in which people communicate, and ushers in different types of network that in the long run become driving forces of both economies and societies (Hakansson, 2015; Metcalfe, 2018; Rosenberg, 1969). And while a precise definition or quantification is difficult, it is widely acknowledged among scholars that technology and technological knowledge are fundamental elements in economic, social, institutional progress (Rosenberg, 1994), although it must be borne in mind that the impact of technology is usually neither direct nor easy to measure (David, 1999; Triplett, 1999).

Before we start putting the puzzle together, let us attempt, at least in part, to capture the generic meaning of technology and technological change. Technology and technological change are inherently characterised by complexity, interdependency, and multidimensionality (Lechman, 2017). In fact, the literature offers a solid if varied body of definitions of technology, which, although differing, do interestingly share one common element, namely, knowledge, even though direct connotations are not always easily recognised. For instance, in Singer and Williams (1954), we read that technology may be defined as ‘how things are made or done’ (I:vii). This short and simple, albeit indirect, definition directs our attention to knowledge; the word ‘how’ implies that human action, skills, and knowledge are all involved in the creation of technology. Campbell, Wang, Hsu, Duffy, and Wolf (2010) perceive technology in a similar vein, through the lens of developed tools, crafts, and techniques that, if adopted by the society, serve to control the production process and possibly the environment. Comin, Hobijn, and Rovito (2006), in their definition of technology, stress the importance of knowledge in developing new technologies, which allow people to use new methods and technical processes. This straightforward conception of technology can also be found in Olsen and Engen (2007), who stress that technology is frequently perceived exclusively in terms of tools, machines, or devices for use in the production of goods. And in Gomulka (2006) we read that technology may be simply defined as a bundle of techniques that are used to produce goods. The view of Olsen and Engen (2007) is to some extent consistent with the proposition of Pinch and Bijker (1984) and Bijker, Hughes, and Pinch (1987) that technology may be understood as both artefact and knowledge. Clearly, even when technology is narrowly defined and viewed only from the standpoint of new techniques and tools for material production, it always embodies human knowledge. Dosi (1982) emphasises that tacit knowledge demonstrated through technological change can help to solve both practical and theoretical problems that arise in the production process, and in this sense, technological progress is the demonstration of human knowhow and skills. Qualitatively similar arguments for the thesis that technology embodies human knowledge are also found in Wilson and Heeks (2000) or Collins (1990), all arguing that technology is a specific kind of activity designed for people’s application of their entire stock of knowledge. In J. Mokyr’s influential Gifts of Athena: Historical Origins of the Knowledge Economy (Mokyr, 2002) we read that ‘technology is knowledge, even if not all knowledge is technology’ (p. 2). An analogous understanding of technology is to be found in the conceptual works of Law (1991) and Bijker and Law (1992), while Arrow (1962), Dosi (1988), and Pavitt (1999) claim that in addition to human knowledge, technology as such and technological progress encompass another important component, namely, information. In their view, technological change is an outcome, the end result of accumulated knowledge and information, but at the same time technology also facilitates flows of knowledge and information among social and economic actors. This dual role of technology and technological change, in society and the economy, is essential. That is, technology is not only a desired result of knowledge but also itself a force for change in the socio-economic environment, inducing further propagation of both technology and knowledge.

The concept of technology as knowledge (Mokyr, 2002, 2013) carries far-reaching implications. First, it defines technology as a ‘product’ of the human brain, thought, and intelligence, embodying the knowledge accumulated through the ages. Second, it means that technology can serve as a tool to propagate and transmit this knowledge across societies.

Needless to say, technology and technological change have always been at the centre of human interests. The modern era can be termed the era of technology-led economic growth. In the past two centuries, per capita output has increased dramatically, and the increase has happened in a sustained manner, as never before in history. The universal consensus associates the beginning of these phenomenally rapid economic advances with the Industrial Revolution. Angus Deaton, in his book The Great Escape: health, wealth, and the origins of inequality (Deaton, 2013), writes: ‘The desire to escape is always there. (…) New knowledge, new inventions, and new ways of doing things are the key to progress’, and ‘Economists think of eras of innovation as powering up waves of creative destruction. New methods sweep away old methods, destroying the lives and livelihoods of those who were dependent on the old order’ (p. 9, 10). This passage suggests just how powerfully technology and technological change can impact society and the economy; how disruptive and profound they can be in destroying the status quo and driving the emergence of a new social, institutional, and economic order. Therefore, it is easy to conclude that technology is useful for social and economic development, but if it is to truly transform economies and societies, it must be widely accepted, adopted, and used by individuals and firms. The unbounded diffusion of technology is critical. If technologies and knowledge do not come into widespread use, their impact on society and economy remains negligible.

In pre-industrial times the rate of economic growth was regularly negligible or even nil (Cipolla, 2004; De Vries, 1994). Deane (1979) and Hartwell (2017) argue that in pre-industrial society the increase in material wealth was painfully slow and easily reversible; there was no fundamental upward trend in economic activity. For centuries, living standards and average material well-being rose little if at all, while the population was growing dramatically (Jones, 2001). This is not to say that pre-industrial economies were completely without technological advance. In fact, even medieval European societies made path-breaking inventions (Mokyr, 2005a, 2005b) and produced a wide variety of goods and services. The Middle Ages saw the invention of paper, mechanical clocks, and gunpowder, to cite just a few examples. Inventions such as navigational instruments and innovations such as Arabic numerals were relatively broadly adopted among these societies (Aiyar, Dalgaard, & Moav, 2008; Crone, 2015). All of these constituted a kind of technological progress that societies could benefit from, but before about 1750, most people were too poorly educated and knew too little to convert this technological progress into long-term growth in wealth (Bell, 1976). In a way, technological advances in pre-modern societies remained uncodified and informal; they were rarely diffused throughout the society. Knowledge was mainly tacit and hard to transmit. As noted by Mokyr (2005b), individuals in pre-industrial societies were not in a position to lay the intellectual groundwork for technological progress; indeed, the impact of what inventions there were on material well-being remained barely detectable. ‘The quality of life failed to improve in any (…) observable dimension. (…) nor the variety of material consumption improved. (…) For the majority of the English as late as 1813 conditions were no better than for their naked ancestors of the African savannah’ (Clark, 2008, p. 1). In order to work effectively, knowledge and technology must be shared among individuals. Those pre-industrial societies were locked in the Malthusian trap (Nelson, 1956; Steinmann, Prskawetz, & Feichtinger, 1998), and any gains in income, thanks to technical advances, were immediately swallowed up by population growth (Galor & Weil, 1999; Wood, 1998).

Still, the pre-1750 period did produce several episodes of economic growth, which, according to economic historians, was enhanced by institutional change. The period of so-called ‘Smithian growth’ (Barkai, 1969; Kelly, 1997) consisted of some economic growth that enhanced the increase in economic output that was generated by commercial progress but not by technological change. Improvements in the quality of institutions (North, 1990; Shleifer & Vishny, 1991; Baumol, 2002; Greif, 2003) made it possible to take advantage of the economies of scale that were emerging in trade, which sparked competition among market agents, in turn stimulating efficiency gains and better resource allocation. Apparently, sound institutions, trust, the introduction of money, and credit institutions were solid foundations for economic growth even in the absence of rapid, deep-going technological advance. Evidently, economic growth before 1750 was primarily based on Smithian and Northian effects, namely, the benefits of trade and efficient allocation of resources. ‘The wealth of Imperial Rome and the flourishing of the medieval Italian and Flemish cities (…) were based (…) on commercial progress, (…) woolen cloth production in Flanders or the production of glass in Venice’ (Mokyr, 2005a, p. 1119). Those pre-industrial times have been called a ‘consumer revolution’ (Breen, 1988), which unquestionably produced a significant rise in income prior to 1750 (Weatherill, 2002). Some economic historians suggest that the peak of the ‘consumer revolution’ can be dated to between 1680 and 1720, and contend that without this significant boost in consumer demand the historical success of the First Technological (Industrial) Revolution would remain inexplicable. Mokyr (2005a, 2015b) writes, ‘On the eve of the Industrial Revolution, large parts of Europe and some parts of Asia were enjoying a standard of living that had not been experienced ever before, in terms of the quantity, quality, and variety of consumption’ (p. 1118). This created the groundwork for the Technological Revolution of 18th-century