sou · GQB3118d4 · 2003-01-01 00:00:00 — Per , , , and from the Division of National Accounts made valuable contributions by gathering our data, commenting extensively on the text. We are also indebted to our foreign colleagues who helped us with Chap- ter 5 and to all those who have provided constructive criticism in seminars; in particular to , and . Special thanks to for valuable comments on our text and who helped us with programming. None of these persons carry any responsibility for mistakes and shortcomings in this report, for which only the authors are to be blamed. Australian , ABS (1997): Revisions to Quarterly Economic Growth Rates 1984 to 1993, website: . (1998): Balance of Payments, , Concepts, Sources (2000): Accounts: Concepts, Sources Chapter 29: Quality of the National Accounts. Barklem, A.J.E. (2000): Revision analysis of initial estimates of key economic indicators and GDP components, Economic Trends, No. 556, , 31–52. 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(1997) The reliability of quarterly Na- tional Accounts in seven major countries: A users perspective, OACD, Economics Department, Working Paper no. (1974): Reliability of the quarterly national income and product accounts of the 1947–71, (20), pp. 1–39. (1995): Reliability and accuracy of quarterly GDP estimates: A review, in Accounts, ed. Kendrick, Kluwer Academic Publishers, pp. 423–455. Zellner, A. (1958): A statistical analysis of provisional estimates of and its components, of selected Na- tional Income components, and of Personal Saving, , , pp. 54–65. The Role of High-Tech Capital Formation for Swedish Productivity Growth The Role of High-Tech Capital Formation for Swedish Productivity Growth While using new data and standard growth-accounting techniques, this paper takes a closer look at the Swedish productivity revival in the second half of the 1990s. In particular, I find very large total factor productivity growth in high-tech producing sectors and capital deepening associated with high-tech equipment elsewhere. In addition, for high-tech producers, high-tech capital deepening has as a rule contributed negatively to labor productivity growth – a result above all driven by large increases in hours worked in this sector. I also find that in the business sector, the contribution from high-tech capital deepening to labor productivity growth increased from about 1 percent 1994 to 6–10 percent in 1999. I thank , , , , , and seminar participants at the 2002 Conference on Swedish Economic Statistics for helpful comments. I am also grateful to for data assistance. This article is part of the Commission on the Review of Economic Statistics. The views expressed are those of the author. The usual disclaimer applies. Correspondence: , , SE-103 62 , . The well-being of the economy is a lot like the well-being of an individual. My happiness de- pends almost entirely on a few important things; like work, love, and health, and everything else is not really worth worrying about – except that I usually cant or wont do anything to change the basic structure of my life, and so I worry about small things, like the state of my basement. For the economy, the important things – the things that affect the standard of living of a large num- ber of people – are productivity, income distri- bution, and unemployment. If these things are satisfactory, not much else can go wrong, while if they are not, nothing can go right. [(1998)]1 Throughout the 1990s the Swedish economy experienced a fairly strong resurgence in average labor productivity (ALP) growth (c.f. Figures 1 and 2). After growing only about 1.2 percent per year from 1981 through 1990, labor productivity growth for the econ- omy as a whole jumped to close to 2 percent per year over the pe- riod 1991–2000. Annual labor productivity growth for the total business sector averaged slightly more than 2.5 percent over the period 1991–2000 – about a 50 percent higher growth rate than its average annual rate over the period 1981–1990.2 Annual labor pro- ductivity growth for the goods sector, in turn, averaged almost 4 percent over the period 1991–2000 compared to 2.8 percent in 1981–1990. Productivity accelerated in the service sector as well – from an annual growth rate close to 1 percent during the 1980s to 1Quoted from book The of Diminished Expectations. 2Note that the business sector is in some studies defined exclusive of the agriculture, hun- ting, forestry, and fishing sectors. In this article, the business sector refers to the total busi- ness sector in the sense of market producers and producers for own final use. Note also that one potential reason why the computed productivity growth rates can nonetheless diverge somewhat between studies, although they refer to identical sectors, is that labor input is sometimes measured by the number of employees rather than worked hours. Another rea- son is that growth rates are sometimes approximated by log-differences. In this article, labor input is always measured by hours worked and log-differences are used for all growth rates. about 1.7 percent during the 1990s.3 The manufacturing sector started to experience a particularly strong resurgence in labor pro- ductivity growth in the aftermath of the recession years 1990–1993 (the deepest recession since the 1930s). This revival in productivity during the 1990s – which is notable in comparison with the Swedish historical record dating back more than a decade – has been accompanied by a speeding up in the price decline of computer hardware and sizeable capital outlays on infor- mation and communication technology (ICT) equipment.4 By the end of 1999, for example, the current dollar stock of business sec- tor ICT equipment approached 16 billion – in this sector, the share of real ICT capital in total capital increased from 3.2 percent in 1993 to 5.2 percent in 1999 (see Table 3 below). In the goods sec- tor this share increased from 4.0 percent to 5.9 percent, while in the service sector it increased from 2.9 to 5.0 percent. Further- more, the ICT capital share increased from 7.4 in 1993 to 10.1 per- cent in 1999 in the manufacturing sector, and, interestingly, it de- creased somewhat from 32.9 to 31.3 percent in a collective ICT sector consisting of producers of high-tech goods and services.5 3This resurgence in Swedish productivity was parallel to the U.S. productivity revival in the 1990s – this period has now been identified as the longest-ever-recorded period of U.S. sus- tained growth together with low unemployment and low inflation rates. 4ICT investments are defined throughout this article to include capital outlays on computer hardware (product-ISIC code 30.02) and software (ISIC 72.2) as well as telecommunications equipment (ISIC 32.1, 32.2, 32.3). 5This sector is defined here (and in the following) to include the manufacturing of (i) office machinery and computers (ISIC 30), (ii) cables and wires (ISIC 313), (iii) radio, television and communication equipment (ISIC 32), (iv) , surgical and orthopedic instruments (ISIC 331), (v) telecommunications equipment (measured by radio transmit), plus the op- eration of cable-television and the use of electric power (ISIC 642), and (vi) data processing and computer consulting (ISIC 72). The reason why (iv) is included in this collective meas- ure is that substantial productivity improvements have in recent times been accomplished also in biology, pharmaceuticals, and technology in general – and hence it seems reasonable to take this into account when studying Swedish productivity growth in the 1990s. Average labor productivity growth 1981–2000. Note: Total refers to the whole economy. Source: Statistics and the authors calculations. Business sector growth in ALP and TFP. Note: Labors share is set to equal 0.7. Annual average growth of ALP (TFP) has increased from 1.85 (1.26) percent in 1980–1989 to 2.36 (1.58) percent in 1990–99. Source: Statistics and the authors calculations. Table 1 shows that the Swedish business sector has – as in most other developed countries – been shifting out of goods production into services over the last 30 years. For example, the goods share in output has declined from 40 percent in 1970 to 27 percent in 2000, and the hours worked share has at the same time declined from 47 to 29 percent. The flip side of this development is, of course, the parallel increase in the service sectors share in output (from 32 percent to 45 percent) and in hours worked (from 35 to 41 percent). Because the decline in the goods sectors share in total hours is larger than that of total output (18 percentage points as compared with 13 percentage points), the relative output per hours worked has increased in the goods sector (i.e. this shift in the busi- ness sector has resulted in comparatively stronger labor productiv- ity in the goods sector). While this reorganization of the business sector has continued in the last couple of years, it has, at least to some extent, been camouflaged by the fast-growing high-tech sec- tor in the 1990s and the recent collapse of the very same sector. Table 2 shows the shares in output and hours worked during the period 1993–1999 (thus, the impact of the ICT collapse cannot be observed in these data). According to the table, the decline (in- crease) of the goods (services) sector has, as expected, been less pronounced during the 1993–1999 period. Table 1 Restructuring in the Swedish business sector 1970–2000 Share of output (GDP) and hours worked (H) Business and Real . Note: The output shares are computed from current SEK values. The sub-sectors are defined as follows: Goods (ISIC 01–45), Manufacturing (ISIC 10–37), Construction (ISIC 45), Services (ISIC 50–95), Wholesale and Retail (ISIC 50–52), Transport and Communication (ISIC 60–64), Finance and Insurance (ISIC 65–67), Business and (ISIC 70–74). Source: Statistics and authors calculations. Table 2 Restructuring in the Swedish business sector 1993–1999 Share of output (GDP) and hours worked (H) Electrical and optical eq. Radio, TV, and . Note: The output shares are computed from current SEK values. The sub-sectors are defined as follows: Goods (ISIC 01-45), Manufacturing (ISIC 10-37), Electrical and optics equipment (ISIC 30-33), Radio, TV, and telecommunication (ISIC 32), Services (ISIC 50-95), Renting, computer, and other business activities (ISIC 71-74), ICT (ISIC 30, 313, 32, 331, 642, 72). Source: Statistics and authors calculations. The Swedish productivity revival has not gone unnoticed. There seems, on first consideration, to be reason to doubt that the revival in productivity growth during the 1990s owes something to the growing high-tech sector.6 Indeed, a number of economists now emphasize fast capital accumulation and the latest investment boom in high-tech equipment, while others point to other factors such as genuine technological change in high-tech industries.7 There are also economists who emphasize the usual procyclical response of productivity when output grows faster than trend. Yet others lay emphasis on enhanced methods for measuring price deflators. My reading of the empirical literature to date – for the most part based on U.S. data – is that the empirical evidence does seem to favor the argument that substantial improvements in the produc- tion of ICT equipment – typified in particular by faster and better semiconductors and rapid decline in quality-adjusted prices on ICT apparatus – has contributed right away to economy-wide gains in total factor productivity (TFP).8 However, although users of high- tech equipment contribute directly to ALP through high-tech capi- tal deepening, there still appears to be difference of opinion con- cerning the TFP payback from the use of high-tech equipment.9 Recent attempts to analyze the productivity gains from ICT in- clude, for example, and Stiroh (2000). Using a standard growth-accounting framework, they found that a combination of large technological improvements in high-tech sectors and the fol- low-on investment boom in ICT equipment are the principal driv- ing forces behind the recent U.S. labor productivity resurgence. and Sichel (2000) confirmed this result. (2001) argued that the productivity growth revival is above all due to the sharp decline in ICT prices – deep-rooted in the development in semiconductor technology.10 (2000), in turn, argued that labor productivity gains could for the most part be traced to the production of computers (thus, higher TFP growth in this produc- 6Other potential explanations for higher trend productivity growth include, for example, the ongoing globalization of the Swedish economy and increased competitive pressure. 7Note that parts of the massive investments in high-tech equipment in the late 1990s were due to the year-2000 (Y2K) adaptation of computer hardware and software as well as the overhaul of commercial and financial systems. 8Total factor productivity is sometimes called multifactor productivity (MFP). 9It is, of course, logically possible that the use of high-tech equipment also boosts TFP growth (and not only ALP growth) through production spillovers (learning by do- ing/investing) and network effects (enhanced knowledge spillovers). If so, ICT capital deep- ening can be characterized as productive, and if not ICT capital deepening can be said to be unproductive. 10Jorgenson therefore pointed out that one important aim for future research is to find out the product cycle of successive generations of modern semiconductors. tion) and cyclical factors.11 (1999) stressed that there has in fact been a labor productivity hold back in U.S. production of non-computer durable goods in the second half of the 1990s. Bryn- jolfsson and Hitt (2000) argued that the surge in U.S. productivity originates from over a decade of computer-generated administrative (white-collar) investments that reduce the costs of co-ordination and information processing within organizations. In addition, Stiroh (2001) found that the revival in U.S. labor productivity in the 1990s reflects both the production and the use of high-tech capital equipment. Stiroh (2002) found that high-tech capital use (ICT capital deepening) is a driving force behind more rapid U.S. labor productivity growth, as predicted by conventional economic theo- ries, and that the effect from high-tech capital use on total factor productivity growth is negligible. This finding hence supports the view that the contribution of high-tech capital use on labor pro- ductivity operates through traditional capital deepening effects and not through higher total factor productivity growth. In , we have so far lacked useful data on high-tech capital outlays. One exception, however, is the information on computer investments that, until 1994, were officially published every year in so-called Investment Surveys provided by Statistics . These data have been used earlier by and (1999) and et al. (2001), who constructed real computer capi- tal by combining these investment data with standard national ac- counts data. While officially published data on computer hardware and software are still in very short supply (they do not exist), this study investigates brand new data on ICT from 1993 through 1999 (these preliminary data are provided by Statistics and are yet to be officially published and available). This additional infor- mation on high-tech capital has been produced specifically for the present analysis and the Commission on the Review of Economic Statistics. The aim of the article is twofold. First, the principal objective of this paper is to take a closer look at the Swedish productivity revival in the second half of the 1990s. , at the most direct level this paper tries to explore the pro- ductivity effects of a growing high-tech sector in the Swedish eco- nomy. In particular, I study how productivity growth (average la- 11 found that although the productivity numbers are impressive for the economy as a whole, the U.S. productivity revival appears to have occurred primarily in the production of computer hardware and telecommunications equipment (and the embedded semiconduc- tors), including about 10 percent of the economy involved in manufacturing of durable goods. also stressed that the effect of ICT capital equipment on TFP growth has by and large been zero in the rest of the economy. bor productivity and total factor productivity) in different sectors has varied from 1994 through 1999 and how these variations relate to high-tech capital formation. The second objective is to try to explain and draw attention to a number of measurement difficulties that typically show up, and have to be dealt with, in this kind of empirical analysis. For example, all the usual data limitations as re- gards the true utilization and quality of capital and labor inputs are to a great extent amplified by technical hitches associated with the computer operation time and the true cost of computer power. Conceptually, labor should, of course, be divided into hours worked and labor quality – and quality should in turn take account of, among other things, sex, age, and educational composition of the labor force. Similarly, the perfect measure of capital input should take into account the operation time (utilization rate) as well as quality differences among different types of capital. A fast- growing and, in this context, fairly new high-tech sector certainly brings with it additional data issues and, as a consequence, makes this division much more complicated. The analysis suggests that a fairly broad labor productivity re- surgence took place in during the 1990s (in the manu- facturing sector, labor productivity accelerated in the second part of the 1990s) – with all principal sectors showing significant labor productivity gains in comparison with the 1980s. The analysis more- over shows that producers of high-tech equipment have experi- enced an exceptional total factor productivity growth (and thus an exceptional labor productivity growth) – a finding that provides straightforward evidence of information technologys role in the Swedish productivity resurgence. In short, the analysis suggests sizeable total factor productivity growth in high-tech producing sectors and high-tech capital deepening in the rest of the economy. Interestingly, for high-tech producers, high-tech capital deepening has as a rule contributed negatively to the annual labor productivity growth from 1994 through 1999 – a result above all driven by large increases in hours worked in high-tech industries (this has thus resulted in a fall in ICT capital per hours worked). The analysis also documents that in the business sector, the contribution from high-tech capital deepening to labor productivity growth increased from 1.3 percent in 1994 to 10.5 percent in 1999. Taking into ac- count various difficulties associated with the measurement of fac- tor costs moderates this contribution somewhat from 0.7 percent in 1994 to 6.2 percent in 1999. To my knowledge, this is the first study to document statistically the productivity effects in the Swedish economy from high-tech capital investments and a grow- ing high-tech sector.12 Aother issue is the so-called new doctrine (new economy or new era) which, as usually stated, rejects the deep-rooted idea that the risk for inflation limits the possibilities for economic growth. The new doctrine explanation for the strong run-up in share prices, for example, is faster long-term growth in the economy (due to, among other things, technological progress) and the corresponding growth of corporate earnings. Although this article does not first and foremost focus on this subject, it presents some results that can be of interest when it comes to discriminating between this new doctrine and old thinking. For instance, it appears as if the Swedish productivity revival of the 1990s for the most part can be described by traditional economic theory: strong total factor pro- ductivity growth in high-tech industries and high-tech capital deepening elsewhere seem to be the chief causes of the rise in Swedish labor productivity growth.