the Nordic economies and Ireland. 30 The reasons why the behavior of productivity in most of the rest of the world differs from the US remains elusive, but possibilities focus on measurement differences, nature of capital deepening (e.g. investment in different types of capital), flexibility of labor markets, and trade patterns. On measurement issues, some pundits initially surmised that the US use of hedonic price indexes to deflate some of the categories of information and communications technologies must account for some of the difference in performance. More careful examination revealed that this methodological difference is not a key source of the difference in productivity growth.
31 Capital investment in total is not the source either. Looking at capital investment alone, or capital-labor ratios, there is little evidence that there is insufficient capital in the production process in other industrial economies. 32 But, focusing in on the ICT sector reveals more differentiation. Domestic production (e.g. size) of the ICT sector is relatively small in the EU economies and in Australia compared to the US. 33 Investing in ICT capital and adding it into the production process (e.g. capital deepening via ICT) has been lower in the EU, but about the same for Australia.
34 What is key, looking at the US and Australian data, is that diffused use of ICTs are key for productivity growth. On balance, the lower share of ICTs in the capital investment of firms in most other economies (which precipitates the transformation of the production process overall) is likely the main reason for their relatively lack-luster performance to date. Whether firms in other industrial economies will follow the US and Australian pattern and significantly increase capital investment via ICTs is another question. First, capital-labor ratios are, if anything, higher in most non-US industrial economies.
Raising capital intensity further via more investment in ICTs might not make sense. Moreover, one must ask whether an economy’s financial market structure (in conjunction with accounting rules and corporate governance) can facilitate a change in the composition of capital. Thus banking and financial structure and the policies that underpin banking and financial structure appear to be important factors underlying the ability of an economy to transform its physical capital structure. 30 OECD (2001), The New Economy: Beyond the Hype, Executive Summary. 31 Gust, Christopher, and Marquez, Jaime. 2000. Productivity Developments Abroad. Federal Reserve Bulletin (October). Schreyer, Paul (2001).
Computer Price Indices and International Growth and Productivity Comparisons. Paris, France: OECD. 32 Scarpetta, Stefano, Bassanini, Andrea, Pilat, Dirk, and Schreyer, Paul. 2000.op. cit. 33 For EU see Roeger, Werner. 2001. The Contribution of Information and Communication Technologies to Growth in Europe and the US: A Macroeconomic Analysis. Economic Papers No. 147. Brussels: European Commission. See Gruen, David, “Australia’s Strong Productivity Growth: Will It Be Sustained?” RBA Bulletin, February 2001. (Table 1) for Australia. 34 Gust, Christopher, and Marquez, Jaime. Op. cit. Schreyer, Paul. 2000. The Contribution of Information and Communication Technology to Output Growth:
A Study of the G7 Countries. STI Working Paper Series 2000/2. Paris, France: OECD. Elmeskov, Jшrgen, and Scarpetta, Stefano. 2000. New Sources for Economic Growth in Europe? Paper presented at “The New Millennium-Time for an Economic Paradigm, Oesterreichische NationalBank, Vienna (15-16 June). Gruen, David, “Australia’s Strong Productivity Growth: Will It Be Sustained?” op. cit. - 28-