Diane Coyle: Let's be positive after all the shock treatment

'The UK economy doesn't compare impressively with other economies'

It's hardly surprising that many people find it hard to be optimistic about the economic outlook, with the impact of the terrorist attacks, the existing sharp slowdown and a deflating stock market. How long ago does the turn-of-the-millennium buzz about the promise of the new economy seem now? Yet serious concerns about prospects for growth and jobs should not obscure how economies' growth over the long term has been transformed by all those new technologies we used to get so excited about.

A special edition of the Organisation for Economic Cooperation and Development's annual Science, Technology and Industry Outlook (http://www.oecd.org), shows the way information and communication technologies have turned ideas and innovations into the main sources of growth. Economies no longer grow the way they used to; the process has changed.

Although understanding growth would seem to be central to economics, it is a process that has never been well understood. Economists have repeatedly found that up to two-thirds of measured output growth over long periods cannot be explained by increases in inputs like labour and capital, but by gains in productivity – either of the workers and capital directly, or "multi-factor productivity". This is the label given to the mysterious left-over improvement in the economy's generation of output per unit of input. However, explaining what increases productivity has proved difficult.

The new OECD report finds clear evidence that indicators of a country's capacity to innovate, and push forward the scientific boundaries, were strongly linked during the 1990s to its productivity performance. In the past decade or so, the productivity performance of OECD's member countries has diverged, with the best pulling further ahead, reversing the previous pattern of convergence. Not only the US but such countries as Australia, Canada, Denmark, Finland and Ireland that displayed a strong rise in the number of patents registered or a rising share of hi-tech goods in trade, enjoyed greater economy-wide productivity gains. Similarly, across 16 member countries, increases in research and development (R&D) spending from 1980-1998 made a big difference to average growth.

Interestingly, the biggest impact came from the huge improvement foreign investor-financed R&D made to productivity, thanks to the technologies and ideas brought in from abroad. The smaller the country, the bigger the impact.

The report says: "Countries that experience the highest levels of growth are likely to be those that can most rapidly develop new products, processes and services based on new technologies and apply them most efficiently to other sectors of the economy." Although it adds that information and communications technologies (ICTs) are not the only new ones around, with others like biotech and nanotechnology also clearly going to be very important, the high-profile computer and internet developments are crucial. They have underpinned the development of other technologies thanks to cheap data-processing, and also create the rapid diffusion of new ideas. So the OECD has assembled considerable information on how its member-countries are progressing in the diffusion of the ICTs.

The UK does not compare impressively with other leading economies, on the whole. On some indicators, such as competition in telecommunications and the cost of leased lines, it is in the top handful of countries. On many others it lags. Internet access costs remain high in the UK, limiting the increase in the diffusion of internet use, and keeping the spread of e-commerce below average. The UK's broadband penetration rate lags behind almost all the rest of the OECD, save for some smaller countries like Greece, Turkey, and the Slovak Republic. UK companies lag behind many international competitors in their internet use, especially the bigger businesses. Britain fares badly, too, in growth in number of patents granted and increases in business expenditure on R&D. There is no room for complacency by British businesses and policymakers, these figures reveal. Of course, if there is going to be a serious economic downturn, investing in new technologies or rethinking their production processes could well be the last thing on the minds of corporate executives. There seems likely, too, to be at least a pause in the dramatic global restructuring of industry that characterised the 1990s – at least until it becomes a bit clearer whether there is going to be a full-scale international war.

Yet the Gulf War and early 1990s recession turned out to make no difference to the upward trend in cross-border investment, or to the technology-intensity of exports, or to investment in telecommunications infrastructure or business investment in ICTs. So the wise corporate executive will resist the conclusion there is no need to fret about the transformation of the economy for a while yet.

As the OECD's authors put it: "It appears clear that technological and organisational processes are under way, the limits and ultimate consequences of which are unlikely to be reached for some time to come. The basic results remain unaffected by the present downturn." This is not a pious hope, for the report provides detailed documentation of structural change and the new patterns of growth. It backs up a similar claim made in the recently-published World Economic Outlook from the International Monetary Fund. The IMF concluded that: "The longer-term benefits [of the new technologies] for the global economy are likely to continue or even accelerate in the years ahead."

It doesn't mean the short-term gloom will be misplaced, for it would take a brave forecaster to be confident the US and world economy will ride out the terrible shock inflicted on it. But that doesn't relieve us from continuing to think about the long-term future, and how to get from here to there.

Diane Coyle's new book, 'Paradoxes of Prosperity', has just been published by Texere (£17.99, $27.95)

Diane@enlightenmenteconomics.com