Professor Leonard Waverman: Getting out of recession

The US Bureau of Labor statistics reported on December 5, 2008 that “Non-farm payroll employment fell sharply (-533,000) in November.” And this “followed declines of 403,000 in September and 320,000 in October. Job losses were large and widespread across the major industry sectors in November."

The Financial Times reported on November 21 that 80,000 jobs had been cut across the world in the previous five days and that the UK had shed 30,000 jobs in the previous two weeks.

As a response to these unprecedented falls in employment, governments and leaders have announced large stimulus packages. U.S. President Barack Obama has led the way proposing a $136 billion infrastructure economic stimulus program, expected to generate up to 2.5 million U.S. jobs by 2011. Obama wants to make public buildings more energy-efficient; repair roads and bridges; modernize schools; increase broadband access; and ensure healthcare uses the latest technology.

European leaders revealed their recovery plan on November 26, 2008: an injection of €200 billion (1.5% of GDP) to boost demand and action “to reinforce Europe’s competitiveness in the long term.” The plan sets out a comprehensive program to direct action to “smart” investment: “investing in the right skills for tomorrow’s needs; investing in energy efficiency to create jobs and save energy; investing in clean technologies to boost sectors like construction and automobiles in the low-carbon markets of the future; and investing in infrastructure and inter-connection to promote efficiency and innovation.”

As of December 12, Canada had not come up with any stimulus package.

President Obama is correct in stressing broadband as a major infrastructure need, and Europe, Canada and other nations should listen and act. A large amount of economics research demonstrates that the U.S. leads in labor productivity growth post-1995 is largely due to the U.S. businesses' advanced use of Information Communications Technology (ICT). The rest of the world has lagged the U.S. in labor productivity growth and in adoption of advanced ICT hardware, software and skills.

In recent research funded by Nokia Siemens Networks, a team of researchers at economic consulting firm LECG and I have developed a new way of measuring what the EU would call “smart” communications – the extent to which a nation uses ICT as a means of advancing productivity and economic growth (see www.connectivityscorecard.org).

Table 1 summarizes the 2009 ranking of 25 innovation-driven and 25 resource and efficiency-driven economies. The Connectivity Scorecard 2009, which has doubled the number of countries covered in the 2008 study, ranks the United States first in the group of innovation-driven economies, while Malaysia leads the resource and efficiency-driven economies.

The Scorecard is relative. That is, a country could earn a score of 10 if it leads in each of the 32 metrics. What is most important here is the low average score, 5.0. In other words, countries are not using advanced hardware, software and skills as drivers of productivity and economic growth. The U.S. leads the world in our scorecard but note the 23 percent gap relative to best-in-class performance as the score of the U.S. is 7.71.

The study shows that even the world’s best-connected countries, such as the United States and Sweden, are not exploiting communications technologies to their fullest potential. With room for improvement on multiple measures of connectivity, we believe the worldwide gain from improving connectivity could be significantly higher.

You will note also that Korea scores relatively poorly in our measure as its businesses do not make extensive use of advanced “smart” connectivity.

The Information Superhighway is thus the most critical infrastructure need all advanced economies have

Certainly, highway systems need work in many countries. However, the key to future productivity enhancement and economic growth is the infrastructure of tomorrow – bandwidth everywhere. Broadband penetration is about equal across the U.S., Europe and Asia (Korea and Japan). But Asia leads in two critical areas going forward - speed or bandwidth - and the major means of achieving bandwidth - fiber, in the core - and access telecoms networks. While Japan and Korea have been investing heavily in fiber, upgrading the century-old copper communications infrastructure, we in the west have been lagging.

Why have we been lagging? Fiber investment is expensive and communications companies may not see the future demand. Fib-ing up the USA, Europe or Canada is so costly because of construction costs, not the cost of electronics or the fiber itself.

Verizon in the U.S. has an ambitious fiber investment program. But the costs of fiber to a home are in the order of $1000 - 2000 per household or $100 - 200 billion for 100 million households.

Getting the most advanced broadband network is not a matter of rocket science - it is a matter of construction – moving dirt

Getting the modern broadband world that President Obama appears to want is exactly the make-work, employment-rich program to help us get out of the current recession.

I therefore urge governments everywhere in their haste to stimulate economies and in their desire to advance infrastructure, to build an infrastructure for the 21st century, not one for the 20th century. If governments decide to use taxes to build their way out of recessions, let us build hugely productive assets that will advance productivity and economic growth for decades to come

- let us build the Information Superhighway.

About the Author: Professor Leonard Waverman

Leonard is Professor of Economics at the London Business School. He is also the incoming dean at the Haskayne School of Business at the University of Calgary.

Professor Waverman’s current research is on the growth and productivity impacts of the rollout of telecommunications and computers.

His most influential publication is Telecommunications Infrastructure and Economic Development authored jointly with Lars Hendrik Roeller, for the American Economic Review, September 2001. He is currently finishing a book (jointly with Melvyn Fuss), entitled The Networked Computer, to be published in 2008 by Cambridge University Press.