The Role of ICT in Economic Development – A Partial Survey

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of the telecom infrastructure variables on growth are expected to be positive. The inclusion of a
more comprehensive set of regressors is designed to reduce the possibility of overestimating the
effect of telecom infrastructure on growth. The use of the two infrastructure variables is an
attempt to address the endogenous nature of telephone density and growth. Norton argues that a
measure of telephone density prevalent during the early years of the sample is less susceptible to
endogeneity bias than a variable which captures the mean telephone density during the entire
time period.
The results indicate that the two measures of telecom infrastructure are statistically
significant and exert positive effects on mean growth rates. For instance, increasing the 1957
telephone density by one standard deviation (9.909) leads to an increase in mean GDP growth of
around 0.73 percent. The effect of the average density variable is greater, but potentially more
susceptible to reverse causality. The second set of estimates examines the effect of the telecom
infrastructure variables on the mean investment-output ratio. Similar to the earlier results, there
is a positive impact on the investment ratio, indicating that telecommunications may be reducing
transaction costs, increasing the efficiency of investment markets and consequently leading to
increased investment levels. Increasing tele-density by one standard deviation leads to an
increase in the investment ratio of around 3.5-4.5 percent. An interesting result is that inclusion
of the telecom-infrastructure variables appears to raise investments by leading to a decline in the
negative effects associated with monetary shocks. This suggests that telecommunications may be
boosting investments by reducing event uncertainty.
Despite the consistency of Norton’s results and the use of a lagged measure of tele-
density, it is not clear that the reported estimates are free of endogeneity bias. Röller and
Waverman (1996) tackle this problem in a more explicit manner by specifying a four-equation
structural model with an aggregate production function, telecommunications demand and supply
functions and a telecommunications production function. Using data from 35 countries for the
years 1970 through 1990, they estimate this four-equation system jointly. Country fixed effects
are included to control for other growth-inducing characteristics that might be correlated with a
given country’s telecom infrastructure. Estimates taking these econometric problems into
account indicate that tele-density has no impact on growth.
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As argued earlier, the use of ICTs generates network externalities (i.e., an increase in the
size of a network leads to greater benefits than those obtained by the marginal user). The
presence of these externalities suggests that the impact of telecommunications on growth may
not be linear, i.e., the effects of these technologies may be greater (or may become perceptible
only) when the size of the network has reached a certain threshold.
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This result is similar to the broader literature which investigates the impact of public infrastructure on growth.
Allowing for the endogenous nature of GDP and infrastructure availability and including fixed effects causes the
strong infrastructure-growth link to evaporate (for a survey, see Jimenez, 1995).
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