The amount of information packed into economic activity worldwide is rising, but the use of information technology is not catching on as fast in developing countries as it has in industrial countries. Nor is this technology a panacea---it is a tool for efficiency. And to make it work requires planning, organizational capabilities, managerial skills, and entrepreneurship.
In a special issue of World Development devoted to information technology, World Bank policy researchers Ashoka Mody and Carl Dahlman examine the potential and the constraints of the information revolution.
As the unit costs of computers and modern communications have come down, their use has rapidly grown, vastly improving the capability of users to store, process, and retrieve a variety of data, ranging from simple numbers to video images.
Information technology, which includes computers, communications technology, and the associated software, is being applied to fields as diverse as science, manufacturing, finance, and marketing. In each area, the technology creates the potential for greater operational efficiency and often leads to a change in the way business is done.
Information technology provides a striking example of benefits that developing countries can gain by tapping international sources of knowledge. While industrial economies have spent large sums on the development of information technologies, many products and services are now available at prices that continue to decline in international markets. Information technology has additional relevance in developing countries because it is applicable in small modules. The personal computer and associated storage technologies have brought the technology within the range of small users, offering them an opportunity to leapfrog over generations of equipment. The economically efficient size of telecommunications networks has also declined, although not as much as for computers.
Despite these advantages, however, the aggregate impact of information technology on productivity in developing countries has been disappointing. Studies of industrial countries suggest that productivity gains from computer use have thus far been limited. And Nobel Prize winner Robert Solow is reputed to have said that one sees computers everywhere except in productivity statistics.
To explore the link between information technology use and per capita income, it is necessary to assess the role of information in modern economies. Why have information services become a larger part of economic activity? Is it because the value of these services has increased relative to other economic activity? Or is greater information intensity merely a reflection of lower unit costs of information technology services? The first influence can be thought of as shifting the demand curve for information technology services outward. The second is a shift in the supply curve down the demand curve. This difference between shifting the demand curve and shifting the supply curve highlights the potential and the limits of information technology diffusion in developing countries. Unless the demand curve begins to shift outward or the demand for information is highly price elastic, the technology will continue to play a limited role in developing countries.
Over the past four decades, the share of information services in national and international economic activity has increased steadily. The proportion of "information" workers in the working population, even in the early 1980s, was as high as 45 percent in the United States. Other industrial countries, while behind in this, were quickly catching up.
An information worker is one engaged in knowledge creation, in knowledge and information transfer, and in economic coordination, including the operators of "low-end" information processing infrastructure. Economic coordination---which includes certain banking and financial services, movements of goods and services, and legal services---has traditionally accounted for the bulk of information workers. But the number of workers who create and transfer knowledge is growing much faster.
According to another classification, growth has been especially rapid in business services (advertising, consulting, accounting, electronic information services, credit reporting, and airline computer reservations). Some of these business services were conceived and implemented wholly on the basis of a modern information technology infrastructure. Business services grew at almost 50 percent a year in the United States during 1975-87---from about $3 billion to $130 billion.
Not surprisingly, developing and newly industrializing economies have a smaller fraction of workers in the information industry than industrial countries do. Interestingly, Hungary had more than 30 percent of its workers in the information business in the early 1980s, while the Republic of Korea had only about 15 percent. The Indian share of information workers was even lower, at less than 15 percent in the late 1980s. Studies show, however, that the trends are very similar to those in industrial economies. Countries as varied as Hungary and Korea show a sharply increasing share of information workers over time. Moreover, business services, though accounting for a small proportion of information services, are growing very rapidly.
These national trends are reflected in international commerce. Trade in services grew significantly faster than merchandise trade during the 1980s. Moreover, the growth in service trade has been faster than trade in manufactured products, the most dynamic element of merchandise trade. And knowledge-intensive services seem to have been growing faster than other services.
Anecdotal evidence abounds on the increasing value of information services relative to other activity. In apparel industries, it is now common for international producers and distributors to be connected through telecommunications links to shorten delivery time and reduce losses due to excess stocks or undersupply. The potential value of such losses (in relation to, say, costs of production) has increased in recent years as competition has focused on high-quality fashion and time-sensitive products rather than products that have a long shelf life. Producers and distributors in these businesses have thus been active in adopting various information technology-based systems to lower their transaction costs and inventories.
Overall, developing economies have less need for such time-sensitive information and hence are likely to place less value on information technology. But, since many developing countries have very deficient information recording and dissemination systems, the marginal returns from simple information technology are likely to be higher in these countries than in industrial economies where information systems are already quite sophisticated. A further complicating factor is that even the use of simple information technology requires certain organizational skills and incentives that may be absent in particular developing country contexts.
On the whole, therefore, the diffusion of information technology can be expected to proceed at a slower rate in developing economies than in industrial economies because the value of information is lower and the complementary skills to absorb information technology are lacking.
In Korea and Taiwan (China), the use of information technology by a few large companies is extremely advanced. But both economies lag behind Singapore in information technology diffusion. Use of the technology in corporate operations is just beginning in Korea, and there is considerable variation by size of firm. In 1990, all Korean firms with annual sales of more than $20 million had used computer systems; half of them had at least three years of experience with such technology, and nearly 23 percent had more than five years of experience. In contrast, about half of all small firms (with annual sales of less than $6.7 million) had no experience in computerized operations and none of the firms had more than three years of experience.
Overall, corporate commitment to investment in information tech-nology is low. Most Korean firms invest less than 0.1 percent of their total sales in information tech-nology. Only 14 percent of the firms surveyed allocated more than 0.5 percent of total sales to developing information technology. In contrast, spending on research and development in Korea's corporate sector runs at just over 2 percent of sales.
The immaturity of information technology applications by Korean firms can be further illustrated by software use. Less than half of a sample of firms surveyed had used software programs for corporate operations other than for such basic functions as personnel management, wage calculation, and accounting. Only a quarter used software in production. Thus, while management information system software has been widely adopted, material requirements planning and material stock management software packages are rarely used.
The most important constraint on adapting information technology to corporate operations in Korea is the lack of long-term planning and standardization of business operations. In contrast, functional or technical difficulties as well as limited capital are relatively subordinate constraints. Such adaptation may also be constrained by a corporation's entrenched information structure, which can be very slow to change. Issues such as these usually require a steady, long-term effort before they can be resolved.
Operational productivity at the Port of Singapore has increased significantly through the use of information technology. There, the effective use of information tech-nology required substantial investments in equipment. The port had no option but to steadily adopt such technology since customers demanded quick turnaround of their vessels, which is not feasible without it. Moreover, customers also demand that the port be able to connect them electronically to other links in the distribution chain. These imperatives aside, the adoption of information technology must be slow, with each successive stage being mastered before moving ahead.
Singapore's National Computer Board has noted the problems faced by the smaller companies in exploiting information technology. These include a lack of understanding of the technology, a lack of trust in vendors, and the lack of affordable software.
The newly industrializing economies have been experimenting with manufacturing automation in several industries. For the most part, the experimentation has involved adapting available technologies to their specific needs. But the more advanced firms in these economies are also researching ways of improving machinery and processing techniques.
Microcomputers have spread the promise of information technology to the developing world. The gap between industrial and developing countries has narrowed considerably: a decade ago, a typical developing country would begin to use a generation of computers only many years after its introduction. Now, new microcomputers are diffused worldwide in months. But that adoption is tentative, exploratory, and mostly confined to large firms.
The use of information technology in developing countries is predominantly in service sectors. Government use often accounts for over half the application in the early phases of a country's computerization, with the banking sector following close behind.
A report on Indonesian banks concludes that automation has had almost no impact on their financial performance. In automating, banks have tended to underestimate the importance of changing process routines. In the next several years, however, the productivity gains from automation are bound to increase, even in Indonesia, as the current learning phase is completed. An international consulting company advised a major Indonesian bank on its information tech-nology strategy---with very poor results, due in part to inadequate organizational skills. And the spread of further banking automation in Indonesia and other developing countries, such as automatic teller machines, is being held back by unreliable telecommunications---one of the biggest impediments to the general use of information technology in developing countries.
In Poland, where retail banking is also becoming computerized, telecommunications are a major constraint to further automation. And in China, despite poor telecommunications, Barclays Bank has obtained dedicated leased lines to link some of its branches, allowing account verification at any one of the connected branches. Brazilian banks, which have operated in an inflationary environment and have traditionally had geographically dispersed branches, have benefited from the use of computer systems. Distributed data processing was an innovation tailor-made to their needs. Even so, the productivity gains have not been uniform.
To compete with newly industrializing economies in the manufacturing sector, low-wage economies are being pushed into examining the potential for automation. In booming Southern China, computerized sewing machines for selective operations are common; sophisticated surface-mount machines for printed circuit board assembly are also used.
The effective use of information technology has several requirements. Knowledge must flow worldwide with the greatest possible freedom. The incentives to adopt new technologies must be in place. The national infrastructure to support the adoption of those technologies must exist. And the organizations (such as a firm or a government entity) must have the capacity and structure to absorb the technology.
Although much of the underlying knowledge is available "free," in the sense that much of the cost to develop technologies does not have to be paid for by developing countries, potential users must be open to the technology flows. They must also be open to the flows of services and investment in which the technology is often embodied. This requires the full liberalization of international information flows.
In addition, complementary investments to apply the information technologies are typically needed. Telecommunications infrastructure is central to the effective use of information technology, and large investments in tele-communications have been integral to the successful strategy of information technology in East Asia (see box 3).
Organizational innovation should focus on the decentralization of decisionmaking, which in turn requires better trained and more experienced decisionmakers. Information technology is used best when small decisionmaking units are part of a network that facilitates the flow of new and complementary information, which can in turn be tailored to local needs.
Drawn from Ashoka Mody and Carl Dahlman, "Performance and Potential of Information Technology: An International Perspective," World Development, Special Issue, vol. 20, no. 12 (December 1992).