The impact of broadband on the economy: research to date and policy issues Dr. Raúl L. Katz, Adjunct Professor, Division of Finance and Economics, and Director, Business Strategy Research, Columbia Institute of Teleinformation 10 th Global Symposium for Regulators Dakar, Senegal 10-12 November, 2010
Broadband has multiple economic impacts BROADBAND ECONOMIC IMPACT Broadband deployment Direct benefits Investment in infrastructure deployment Residential penetration Business penetration Household income Total factor productivity Consumer surplus Contribution to GDP growth and employment 2
Research to date confirms the contribution to GDP growth but the amount of impact varies widely Contribution to GDP growth of 10% increase in broadband penetration RESEARCH EVIDENCE OF BROADBAND IMPACT ON GDP GROWTH 1.6 1.4 1.2 1.0 0.8 0.6 1.38 1.21 1.50 0.90 0.85 0.82 0.67 0.61 RESEARCHER /INSTITUTION 0.4 0.2 0.0 Low-Med. Income High Income Qiang OECD-High OECD-Low Czernich Koutroumpis Waverman UK US France Germany OECD-High 0.31 0.23 0.26 0.24 0.14 0.16 0.17 0.08 0.08 0.09 OECD-Med. OECD-Low Germany-High Germany-Low L. America Katz World Bank U. Munich LECG Imperial C. U. Columbia Brazil Chile India Malaysia 3
However, these estimates are consistent with growing evidence of increasing returns to broadband penetration INCREASING BROADBAND IMPACT ON GDP GROWTH 0.025 0.0045 Country Average % Impact of BB on growth 0.02 0.015 0.01 0.005 0.004 0.0035 0.003 0.0025 0.002 0.0015 0.001 Cluster average impact on growth High penetration Denmark, Norway, Netherlands, Sweden, Switzerland Average contribution to GDP growth: 0.023 0.0005 Low penetration Greece, Portugal, Italy, New Zealand, Austria, Hungary, Spain, Ireland Average contribution to GDP growth: 0.008 0 7% 14% 16% 17% 21% 22% 22% 24% Broadband Penetration (2007) Source: adapted from Koutroumpis (2009) 25% 30% 33% 0 Medium penetration Germany, France, Japan, Belgium, UK, Australia, US, Canada, Luxemburg Average contribution to GDP growth: 0.014 4
Broadband impact on job creation comprises two effects IMPACT OF BROADBAND CONSTRUCTION DIRECT JOBS Employment generated in the short term in the course of deployment of network facilities INDIRECT JOBS Employment generated by indirect spending (or businesses buying and selling to each other in support of direct spending) INDUCED JOBS Employment generated by household spending based on the income earned from the direct and indirect effects DEPLOYMENT OF BROADBAND Telecommunications technicians Construction workers Civil and RF engineers PRODUCTIVITY Employment generated in the short term in the course of deployment of network facilities Marketing of excess inventories Optimization of supply chains Metal products workers Electrical equipment workers Professional Services IMPACT OF BROADBAND EXTERNALITIES INNOVATION Employment generated by indirect spending (or businesses buying and selling to each other in support of direct spending) New applications and services New forms of commerce and financial intermediation Consumer durables Retail trade Consumer services VALUE CHAIN RECOMPOSITION Employment generated by household spending based on the income earned from the direct and indirect effects Outsourcing of services Virtual call centers Core economic development clusters 5
Estimates from several countries indicate that broadband network construction effects and multipliers are significant NETWORK CONSTRUCTION EFFECTS OF BROADBAND COUNTRY RESEARCHER / INSTITUTION STIMULUS INVEST. (US$ million) DIRECT NETWORK DEPLOYMENT JOBS ESTIMATE INDIRECT INDUCED TOTAL MULTIPLIERS TYPE I (*) TYPE II (**) UNITED STATES Katz (Columbia) Atkinson (ITIF) $ 6,390 $ 10,000 37,300 63,660 31,000 59,500 165,815 127,800 229,475 1.83 2.58 3.42 3.60 SWITZERLAND Katz (Columbia) ~$ 10,000 ~80,000 ~30,000 N.A. ~110,000 1.38 N.A. GERMANY Katz (Columbia) $ 47,660 281,000 126,000 135,000 542,000 1.45 1.94 UNITED KINGDOM Liebenau (LSE) $ 7,463 76,500 134,500 211,000 2.76 AUSTRALIA Government $ 31,340 ~200,000 (*) (Direct + indirect)/direct (**) (Direct + indirect + induced)/direct 6
The contribution of broadband externalities to employment comprises three simultaneous effects + e-business impact on firm productivity + Macroeconomic productivity - Impact on employment - Incremental broadband penetration + Enhanced innovation + + Impact on employment Impact on employment + + -/+ Outsourcing of services + Displacement to service sector Note: This causality chain was adapted from a model originally developed by Fornefeld et al., 2008 in a report for the European Commission 7
These effects result in different output and employment impact depending on broadband penetration High Broadband Penetration Regions Low Broadband Penetration Regions HI GDP HI GDP Economic Impact LO Employment Economic Impact LO Employment Increase in BB penetration T+1 T+2 T+3 T+4 Increase in BB penetration T+1 T+2 T+3 T+4 High economic growth initially, diminishing over time ( supply shock effect) New Economic Growth (innovation, new services) High stable economic growth ( catch up effect) Capital/labor substitution limits employment growth ( productivity effect ) 8
The importance of economic effects of broadband points to the criticality of a policy tool kit aimed at maximizing adoption National broadband plans outline coverage and service targets, assign spectrum to maximize the impact of wireless broadband, focus on demand stimulation, define competition policy, and tackle any potential supply obstacles Articulate a vision and create awareness within polity and civil society Coordinate policies and involvement from public and private sector Develop state policies Build ownership and accountability at the highest level of government Competition policies aimed at stimulating private sector investment and innovation are critical At the same time, governments should acknowledge that they will need to intervene Address any market failures through universal service funds Alleviate investment constraints to stimulate private sector flows Potential entry as an investor of last resort 9
Coverage and service targets need to be defined on the basis of rigorous analysis of level of investment and social and economic returns Existing infrastructure Coverage and service targets Infrastructure gap Modernization of existing lines to deliver target service levels Deployment of new lines to achieve coverage targets Required technology by zone Economic benefits Construction effect (multipliers) Contribution to GDP growth Job creation Spill over effects (innovation, new business creation) Consumer surplus Access to public services and information Savings in transport time Health and education services Cost per line Total investment requirement RETURN ON INVESTMENT 10
A broadband policy should also address the demand gap: why are there households that could buy broadband but do not? Australia Denmark France Israel Italy Spain Sweden Country Germany Republic of Korea United Kingdom United States BROADBAND DEMAND GAP Households passed (*) 89 % 96 % 100 % 98 % 100 % 95 % 100 % 93 % 100 % 100 % 92 % Households connected 69 % 76 % 77 % 58 % 83 % 55 % 93 % 61 % 89 % 68 % 62 % Demand Gap 20 % 20 % 23 % 40 % 17 % 40 % 7 % 32 % 11 % 32 % 31 % (*) Note: Household passed is defined as a residence where the broadband network is deployed; this differs from connected, which means the residence is linked to the network for provisioning the service. REASONS FOR NOT ACCESSING TO THE INTERNET AT ALL Reasons Relevant ( lack of interest, busy doing other tasks, other reasons) Price (the cost of broadband is too high, does not have a computer) Service availability Easy to use (difficulty senior citizen physical handicap) United States 45 % 15 % 16 % 22 % Sources: Horrigan, J. (2009); Ofcom (2008) Percentage of answers United Kingdom 60 % 28 % 14 % 16 % Sources: Analysis by the author, based on data from EU; FCC; BMWi; OECD; PTS - Sweden; and Israel Minister of Communication. 11
Finally, it is imperative that fiscal policies affecting broadband adoption be coordinated with national objectives TAX PERCENTAGE OF TOTAL COST OF OWNERSHIP OF MOBILE SERVICES Tax as a proportion of TCMO 50 45 40 35 30 25 20 15 10 5 Turkey Brazil Zambia Argentina Tunisia Tanzania Mexico South Africa Malaysia Taxation has a negative impact on deployment of mobile broadband: there is a negative relation between mobile taxes and 3G handset penetration If taxes limit adoption of wireless broadband, they ultimately affect economic growth 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 Country Distribution Source: Adapted from Katz et al. (2010c) 12
In summary Research evidence is consistently pointing to the positive economic of broadband Data analysis also indicates that economic impact increases with broadband penetration Economic impact varies by region indicating that broadband deployment needs to be carefully coordinated with economic development policies (training, firm relocation, etc.) to maximize impact Broadband policies are critical to maximize the economic impact of technology (national broadband plans, competition policies, demand stimulation, alignment of taxation with development and technology objectives) Policy development needs to be based on rigorous economic analysis which requires an important effort in data generation 13
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