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Why broadband does not always have an impact on economic growth?

Victor Mulas's picture

A growing number of studies have linked broadband diffusion to economic growth. The World Bank’s and infoDev’s Broadband Strategies Handbook includes a reference of some of these studies, which show a positive correlation between broadband diffusion and economic (GDP) growth. On the micro level, numerous anecdotic evidence suggest that broadband has an economic impact at the firm and local level when it is absorbed in the firm’s and the labor force’s productive process. Overall, this anecdotic evidence coupled with the macro studies suggests that broadband has a positive effect on economic growth and productivity, both of which are critical for economic development.  

So, why we do not see broadband producing major economic impact and productivity growth at the same rate in all the economies where this technology is deployed? Why broadband does not turn into a silver bullet that increases economic growth where it is deployed?

My hypothesis is that broadband, as it is the case with any other disruptive technology, requires a fertile ground to unleash its potential. In simple terms, there are economies that provide a better soil for broadband than others do. This fertile ground is the “absorptive capacity” of each economy for broadband. Not all economies are the same and not all economies are equally prepared to absorb broadband and embrace it to reap its potential benefits. 

Broadband absorptive capacity is the degree of which an economy (and within in its main actors: business, citizens and government) can increase productivity and innovation in its processes to increase efficiency and result in economic growth. This translates in the ability of business, citizens and government to: (a) recognize the value and possibilities of broadband, (b) assimilate this technology in existing processes, and (c) apply it to modify existing processes to be more productive or to create new processes or businesses (innovation) that also results in higher productivity. 

Difference among economies’ absorptive capacity makes broadband to have different impact. Countries which population is more ICT literate and technology savvy, where companies are more innovative, entrepreneurship is enabled and fostered, and there is a vision that encourages the use of technology, among others, tend to benefit more and faster from broadband diffusion. Cases such as the European Nordic countries, Canada or Korea are examples of this.

The degree of absorptive capacity in a given economy is critical to develop broadband-enabled economic growth. An economy with no absorptive capacity cannot reap the benefits (in terms of productivity and innovation) from broadband no matter how much broadband infrastructure is deployed (penetration) and used (adoption). In fact, the effect of broadband in these cases can even be counter-productive and result in negative productivity (e.g., use of broadband as a distraction in education or work).  On the contrary, an economy with high absorptive capacity will reap the benefits of broadband resulting in economic growth to the extent that broadband is diffused. Indeed, a country with limited broadband infrastructure deployment but high absorptive capacity can have a targeted impact of its economy, optimizing the limited penetration and adoption of broadband in the country. 

The dimension of absorptive capacity adds a new perspective to broadband policy.  Following the extended rationale that broadband has the potential of resulting in economic gains many countries (both developed and developing countries) have considered investing in broadband by building fiber networks and other broadband-related infrastructure. However, this does not guarantee these economies to enjoy broadband-enabled economic growth.  If broadband infrastructure is added to an economy with little or no absorptive capacity, these investments will not be maximized. Moreover, they can even be counter-productive, resulting in decrease of productivity as described above.

Developing absorptive capacity is thus critical for achieving broadband-enabled economic growth. Fostering investment in broadband infrastructure should be carefully considered taking into account the level of absorptive capacity and the accompanying policies that increase such absorptive capacity.  Indeed, it can be the case that the level of broadband infrastructure in a given economy (even if lower in regional or international comparative terms) is much larger than the economy’s absorptive capacity. In these instances, broadband policy would achieve better results if it focuses its resources in developing more absorptive capacity. 

Comments

Thanks for the thoughtful post Victor. I agree that "Countries which population is more ICT literate and technology savvy, where companies are more innovative, entrepreneurship is enabled and fostered, and there is a vision that encourages the use of technology, among others, tend to benefit more and faster from broadband diffusion." The question is: how best to develop absorptive capacity? I believe that broadband itself is an important, if not critical, tool in developing precisely those characteristics which make for positive benefits. And while I agree that in specific instances the Internet can also foster "negative productivity" (Facebook's rapid rise in Africa comes to mind), to say that the poorest and most marginalized communities aren't yet "ready" for broadband has a serious whiff of modernization-theory complacency about it. These are precisely the communities that need broadband MOST! I've seen far too many positive outcomes to believe that negative effects could ever outweigh the positive impacts when access is widespread. What's needed are lower-cost models for extending sustainable broadband access to underserved areas. By decreasing costs we can lower the threshold for investing in areas that are, as you suggest, likely to see a delayed return in terms of increased growth. for one approach, see http://inveneo.org/download/Rural_Broadband_Whitepaper_v2.pdf cheers, Eric

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