# Section 3 ICT Contribution to Economic Growth: Quantitative and Comprehensive Verification

### 1. ICT contributions to economic growth

## (1) Economic growth based on an ICT growth scenario

Using macro production functions, we attempted to answer the question: how much will aggressive investment by ICT enterprises accelerate the latent economic growth rate by around 2020? We verified our estimate by comparing 2 scenarios: a baseline scenario that assumes the future economy will transition at the current latent economic growth rate, and an ICT growth scenario that focuses on developments in IoT, big data, AI and other new forms of ICT that will stimulate ICT investment and productivity improvements by enterprises (Figure 1-3-1-1).

The estimates found the ICT growth scenario will add 0.7 percent to real capital investment and 0.5 percent to the employed population by 2020. Furthermore, total factor productivity (TFP) rose to 1.8 percent from 1.1 percent under the baseline scenario. These additions are predicted to expand the real GDP by 2020 by 33.1 trillion yen (+5.9 percent) (Figure 1-3-1-2).

Figure 1-3-1-1 Scenario assumptions and calculation methods

Indicator	Baseline scenario	ICT growth scenario
Approach and references	The baseline scenario assumed the real GDP growth rate from the Cabinet Office's estimated baseline case. $ ^{2} $ In this estimate, the future economy is assumed to transition at the current latent economic growth rate. Using this rate, the real economic growth rate over the mid-to-long term will be just under 1 percent and the nominal growth rate will be around 1.5 percent. The baseline scenario takes into consideration the planned consumption tax rate hike (from 8 percent to 10 percent) in FY 2017. $ ^{3} $ The real GDP growth rate from FY 2015 on was broken down into labor contributions, capital contributions, and TFP contributions for each industry using the calculation methods described below.	The ICT growth scenario was estimated using findings from a survey given to enterprises (covering all industries except public services). After finding specific economic contributions from ICT, the survey looked at how much ICT investment, worker numbers, and labor productivity will change at each enterprise by FY 2020. This scenario also takes into consideration the planned FY 2017 consumption tax rate hike.
(1) Labor contributions	The employed population growth rate from FY 2015 on was set in accordance with 2020 forecasts in labor supply and demand estimates (Progressive Labor Participation Cases: Realistic Scenarios) by the Japan Institute for Labour Policy and Training (JILPT). Note that the labor allocation rate was calculated after dividing, as added value, “operating surpluses and mixed income + employee compensation” from the SNA input-output table (FY 2013).	The scenario assumed that the FY 2020 employed population will increase from the baseline by the rate of increase in the employed population as calculated in the survey of enterprises above.
(2) Capital contributions	Capital contributions were calculated in reference to the “real net capital stock by sector” from the JIP database. The calculation assumed the real capital investment growth rates and capital stock removal rates for each industry would continue at their average values since FY 2010.	Capital contributions were calculated by applying the increase in ICT investments to the real capital investments in FY 2020 (the product of the ICT investment increase rate and the proportion of ICT investment).
(3) TFP contributions	TFP contributions were calculated as the residual value of labor contributions and capital contributions.	Assumed that the FY 2020 TFP will increase from the baseline by the rate of increase in labor productivity as calculated in the survey of enterprises above (with adjustments for the effect of capital stock).

(Source) “Study Report on a Structural Analysis of the ICT Industry in the IoT Era and Verification of ICT’s Multifaceted Contributions to Economic Growth,” MIC (2016)