Raising European Productivity Growth Through ICT

Abstract

Most commentary on Europe’s economy focuses on its precarious financial system and anemic employment recovery since the Great Recession. But Europe faces a challenge of equal or even greater magnitude that has received far less attention: lagging productivity. After a long period during which Europe was closing the productivity gap with the United States, since 1995 that gap has widened steadily and shows no signs of narrowing. If Europe is going to catch back up it must follow the same path that drove U.S. productivity growth: more ubiquitous adoption — as distinct from production — of information and communication technologies (ICTs) by all organizations (for-profit, nonprofit, and government) throughout the European economy. Increasing productivity is the key way that countries can raise their per-capita income. It should not be surprising, then, that two decades of lackluster productivity growth have left many European companies uncompetitive, European incomes stagnant, and European government finances in turmoil. Only one EU-15 country, the relatively small Ireland, managed productivity growth rates that exceeded those of the United States in the two periods since 1995. Given the demographic challenges and increasing international competition that Europe faces in the coming decades, it is crucial that Europe find a way to reverse these growth trends. The scholarly evidence strongly suggests that increased ICT adoption, and the transformative change it can bring to organizations, is a key piece of Europe’s productivity puzzle. ICT is a general purpose technology (GPT) that has wide-ranging effects throughout an entire economy, reshaping entire systems of production and distribution. Around two-thirds of U.S. total factor productivity growth between 1995 and 2004 was due to ICT, and ICT has contributed roughly one-third of growth since then. These gains are primarily due to the efficiencies of ICT capital, as well as associated complementarities and spillovers.