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1. Three channels linking ICT withgrowth

Figure 1-4 shows an overview of the channelslinking ICT with economic growth. Roughly speaking,four contributing factors to economic growth can betaken into consideration. They are firstly an increaseinput of‘production factors’, such as capital andlabor, secondly an increase in productivity, thirdly anaccumulation of‘human capital’, such as educationand knowledge, and fourthly an accumulation of‘social capital’, such as community ties and gover-nance. The first and second factors mainly highlight

the production side of economic activities1 , and thesefactors will be considered channels of‘economicpower’since they are closely related with each other.The third factor focuses on human resources/educationand the sharing of knowledge and information, whichare seen as‘human capital2’, and will be consideredchannels of‘intellectual power’. The forth factorfocuses on bonds, such as trust and sense of security ofthe nation or local community, which are the founda-tion of our lives, and aspects of governance, such asfairness and transparency. They are seen as‘socialcapital4’, and will be considered channels of‘socialpower’.

Section 2Channels Linking ICT with Economic Growth

So far we have seen that there is a statistically clear correlation between ICT and economicgrowth, which has prompted many countries to formulate national ICT strategies aiming for eco-

nomic revival. However, it is possible that the correlation between ICT and economic growth is merely superficial,and therefore, it is essential to carefully examine the theoretical relations and causal relationships.

This section identifies the channels linking ICT with economic growth and examines them using specific data.This type of approach is important for planning and formulating policies. It is necessary to be thoroughly aware of thetheoretical connections between policy goals and policy measures in order to effectively and efficiently implementpolicies with limited policy resources.

Figure 1-4 Channels linking ICT with economic growth

1 When a production coefficient is used, it is represented asY=A f(K,L) . (where Y is production, A is technology level, K iscapital, and L is labor). When a simple production coefficientcalled the Cobb Douglas model is used, you get Y=A+αK+(1-α)L (where α is capital allocation ratio and 1-α is labor alloca-tion ratio). Economic growth rate is decomposed into the growthrates of (1) productivity, (2) capital and (3) labor. This method iscalled“growth accounting”and is widely used to decompose

the contributing factors to economic growth2 Sometimes referred to as `intellectual capital` or `knowledgecapital`

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2. Channel‘‘Economic power’’

(1) Verification of a channel by increasing input ofproduction factors (the first channel of‘‘eco-nomic power’’)

A. CapitalFigure 1-5 shows an international comparison

(comparison between Japan, Europe and the U.S.) interms of factor decomposition of economic growth.Factor decomposition was obtained by dividing capitalinto information capital and non-information capitaland labor into labor hours and labor quality.

When looking at information capital within pro-duction factors--the first channel--contribution ofinformation capital to GDP growth rate is positive inevery cluster. However, if we look at the periodsbetween 1980 and 1995 and between 1995 and 2005,we can see that the contribution of information capitalto growth increased in Europe and U.S. (from 0.38 to0.57 in Europe and from 0.52 to 0.77 in the UnitedStates), while it remained at the same level (0.46) inJapan. In other words, it is fair to conclude thatalthough a channel from ICT to growth in the form ofincreased input of information capital does exist inmajor economies, such as Japan, Europe and U.S., thischannel has not been fully utilized in Japan despite theIT revolution that started in 1995 with the spread ofthe Internet.

B. LaborIf we look at labor in figure 1-5, we can see that

labor input generally has a positive effect in the U.S.and Europe but it has had a negative effect in Japansince 1995. ICT could support the labor force if theproductive population, which is the core of labor force,is declining, as in the case of Japan’s aging popula-tion, which is accelerating at the world’s fastest rate.Figure 1-6 shows the relation between the GenderEmpowerment Index, formulated by the UnitedNations Development Programme (UNDP), and theInternet subscriber ratio. This index indicates the rateof women’s participation in society, which tends to behigh in Scandinavian countries and low in Africa andAsia. Penetration of the Internet has a positive rela-tionship with this index and the more informatized theregion is the more women participate in society. It isconsidered that an environment that fosters women`swork is developed alongside the spread of the Internetand mobile phones.

(2) Verification of channel by increasing produc-tivity (the second channel of‘‘economic power’’)Next, let us look at productivity--the second

channel. In figure 1-5 above, an index called TotalFactor Production (TFP)3 indicates productivity.Figure 1-7 shows the relationship between the increaserate of productivity and the increase rate of informa-tion capital input. This suggests that the higher the rate

Figure 1-5 Factor decomposition of economic growth (Japan, Europe and U.S. comparison)

Compiled from EU KLEMS database

3 It is understood that Total Factor Productivity (TFP) refers to apart of economic growth that cannot be explained by anincrease in capital input or labor input, and generally containsvarious factors, such as stock of knowledge, including tech-

nology renovation, management knowhow, corporate organiza-tion reforms, change in industrial structure. It is fair to say thatan increase in productivity through ICT innovation mainly consi-tutes an increase in TFP.

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of increase in information capital input is, the higherthe rate of growth of productivity is.

As seen above, it is clear that there is a channel ofeconomic power connecting ICT and economic growthbut it has not been fully utilized in Japan since 1995.Therefore, future growth strategies in the mid and longterm need to clearly consider and strengthen thischannel.

3. Channel of‘‘Intellectual power’’

(1) Accumulation of human capital and growthThe channel of‘intellectual power’refers to the

contribution of the accumulation of human capital togrowth. Specifically, human capital comprises educa-tion human resources and knowledge/information. Themost notable characteristics of human capital are that

Figure 1-6 Internet subscriber ratio and empowerment of women

NB. Targeting 88 countries with both dataInternet subscriber ratio per 100 people (2007): Compiled from the ICT statistics database of the ITU; Gender Empowerment Index: Compiled from the Human Development Report 2007/2008, UNDP (2008)

Figure 1-7 Relationship between growth rate of information capital input and increase rate of pro-ductivity (Comparison between Japan, Europe and U.S.)

Compiled from EU KLEMS database

6 ICT and Economic Growth, OECD (2003), also indicates thatthere is a strong correlation between increase in TFP andincrease in ICT investment (correlation of 0.66). There is also a

strong correlation between ICT investment rate and ICT-relatedpatent rate (correlation of 0.59) in OECD countries.

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it is more or less seen as a public commodity, unlikephysical capital, such as facilities and equipment. Thelevel of education and human resources is after allknowledge or information and is characterized assomething that can be used simultaneously by anyoneand that anyone cannot prevent others from using.Because of this, it is highly external and the effect ofthe accumulation of human capital is widespread. Theoptimal utilization of this will make sustainablegrowth possible4 without necessarily lowering theprofits of the investments of society as a whole. It canbe a model to more accurately explain the mechanismof the knowledge economy of today, where innova-tion-led intellectual production has become an engine

for growth.The following are the specific ways in which ICT

contributes to the accumulation of human capital inthis channel:● Education/human resources: Through

improvements in educational effects and thepenetration of remote education with the useof ICT, the enrolment rate/advancement ratein higher education and participation rate inlife-long education will increase

● Knowledge/information: Network such asthe Internet, etc, will promote sharingknowledge/information, which can be easilyused by anyone

Figure 1-8 Relationship between knowledge/information and economic growth and ICT

4 The theory that emphasizes this point is the so-called NewEconomy theory, which attracted a lot of attention in Japan as

an economy with increasing returns to scale.

The growth rate of per-capita real GDP (with controlled initial values) is obtained in the following manner: (1) Obtain estimates by theleast-squares method using explanatory variables, such as initial value of per-capita real GDP, and (2) Using the resulting coefficients,subtract the variables of interest (educational level index or the number of science and technology papers) and items other than errors. Per-capita GDP: Complied from the World Economic Outlook database (April 2009 edition), IMF (2009)Internet penetration rate: Compiled from the ICT statistics database, ITU

(Knowledge/information per capita and GDP )

(Internet subscriber rate per capita and knowledge/information)

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(2) Verification of the channel of‘‘intellectual power’’The relationship between human capital and eco-

nomic growth has been widely studied since the 1990sin research in labor economics and economic growththeory. A certain consensus has already been reachedthat an accumulation of human capital--mainly usingeducation level (literacy rate, enrollment rate, years ofeducation) as a surrogate variable5--contributes to anincrease in income or economic growth6.

For example, there tends to be a positive correla-tion between per-capita GDP--after controlling variousfactors that may have impact on growth other thanhuman capital--and the Educational Level Index7 for-mulated by the UNDP. Furthermore, there may beinsufficient previous research8 on the relationshipbetween human capital, in the sense ofknowledge/information, and economic growth. Sinceit is difficult to measure knowledge/information. Butthe upper graph in figure 1-8 shows, when the numberof science and technology papers is used as a roughsurrogate variable reflecting science and technologyknowledge, a correlation with per-capita GDP hasbeen observed.

Then, what kind of relationship is there betweenICT and human capital? With the penetration ofremote education using satellite communications andthe Internet, etc., it is understood that the base oflearners has expanded and the level of education hasbeen effectively raised with an improvement in educa-tional effectiveness through digital materials. At thesame time, the sharing of knowledge and informationhas drastically progressed with an advancement of net-works, such as the Internet and corporate LAN, andeveryone must have felt the benefits of such “exter-nality”.

The lower graph in figure 1-8 shows a positive cor-relation between the aforementioned number of sci-ence and technology papers and the Internet subscriberratio. A similar result was obtained when the ICTcompetitiveness index of the World Economic Forumwas used instead of the internet subscriber ratio. This

suggests that there is a close relationship between thepenetration of ICT and the accumulation of humancapital, such as educational level and technology-related knowledge.

It is still necessary to conduct further examinationinto and case studies on the existence of causal rela-tions of the channel from ICT to human capital, suchas education human resources and knowledge/infor-mation. Nonetheless, we intuitively know that the useof ICT effectively contributes to the accumulation ofhuman capital. The World Bank supports the incorpo-ration of ICT into education in developing countriesby including‘ICT and education’in its programcalled‘Education for the Knowledge Economy’.

In the current age of the knowledge economy,intellectual production is increasingly becoming anengine for growth. In order to ensure that ICT leads toeconomic growth at the policy level, we must empha-size measures that would accelerate the accumulationof human capital through education human resources,and knowledge/information, for example, through theinformatization of education and establishment of dig-ital archives, while giving due consideration to thepresence of this channel.

4. Channel of‘‘Social power’’

(1) Accumulation of social capital and growth The channel of‘social power’refers to the con-

tribution of social capital to growth. There are severalspecific definitions of social capital, but here we referbroadly to the‘quality of a country or local commu-nity--the foundations of our lives. Specifically, weconsider two areas: local community bonds (trust, reci-procity, networks9) and governance (voice andaccountability, political stability and absence of vio-lence/terrorism, government effectiveness, requlatoryquality, rule of raw, controll of corruption).Characteristics of social capital include high exter-nality, as in the case of human capital, as well asstrong cultural and societal aspects that cannot be

5 UNDP annually compiles and releases indices related tohuman resources development of the world (human resourcesdevelopment index and gender empowerment index). SeeUNDP (2008) Human Development Report for details. 6 There are many previous studies, including Barro (1991),“Economic Growth in a Cross Section of Countries”TheQuarterly Journal of Economics, vol. 106(2)7 An index developed by the UNDP, consisting of adult literacyrate the enrollment rate in elementary and secondary educationof different countries.8 There are previous studies, including Chen and Dahlman(2004), which use such data as patents and science and tech-nology papers.9 According to Robert Putnam, social capital“refers to featuresof social organization, such as trust, norms and networks, thatcan improve the efficiency of society by facilitating coordinated

actions.”He makes distinctions between‘thick trust’in one’sintimate personal relations and‘thin trust’in the generalizedothers and the latter is more important from the perspective ofsocial capital since it leads to the promotion of wider coopera-tive actions. In norms, he places particular importance on reci-procity, and generalized reciprocity (sustained exchange rela-tions containing a misbalance in the value of exchanged goodsin every moment but with an expectation of striking a balance inthe future) is more important than balanced reciprocity (theexchange of goods of the same value at the same time). Thereare vertical network between, for example, boss and subordi-nates and horizontal network found in, for example, volunteergroups. In the aspect of social capital the latter is more offec-tive. See Social Capital: For Profound Human Relations andVirtuous Circle of Civil Activities, Cabinet Office (2002) fordetails.

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traded on the market, such as a sense of security, trust,transparency and fairness. These factors are hard tomeasure; however, it is known from previous studiesthat they have a substantial impact on economicgrowth when analyses are conducted using surrogatevariables. It is intuitively understood that the afore-mentioned channel of economic power does not suffi-ciently explain economic growth and therefore, anexamination of social capital, in addition to humancapital, would help us better understand the mecha-nism of economic growth in the today’s global compe-tition.

The following are examples of specific ways inwhich ICT contributes to the accumulation of socialcapital in this channel: ● Local community bonds: Through the use of

ICT, local community bonds will deepenand trust and stability in society willincrease

● Quality of systems and organizations:Through the use of ICT, transparency oforganizations and systems will increase andineffective economic activities will be elimi-nated.

(2) Examination of the‘‘channel of social power’’With respect to the relationship between bonds in

the local community (social capital) and economicgrowth, various verification studies have been con-ducted10 since Robert Putnam presented the concept ofsocial capital in his work Making Democracy Work in1993. The history of verification studies is rathershort, but many studies report correlations with eco-nomic growth using the responses of different coun-tries to the question “Can people be trusted?”in theWorld Values Survey11 as surrogate variables. Forexample, there is a positive correlation between thegrowth rate of per-capital GDP--after controlling var-ious factors that might have an impact on growth otherthan social capital and trust in the World ValuesSurvey as a surrogate variable of social capital. Also,there are many studies on the relationship betweengovernance and economic relations12. As a result, theWorld Bank operates a website called‘GovernanceMatters’13 and annually formulates and discloses indi-cators regarding governance of countries worldwide.For example, the upper graph in figure 1-9 gives anexample of the relationship between‘ (comprehen-

sive) degree of governance’, which gives the simplemean values of six indicators developed by the WorldBank, and the growth rate of per-capita GDP, andshows a positive correlation between the two.

Now the question is what kind of relationship isthere between ICT and social capital. First of all, forlocal community bonds, Putnam (1993) contends thatit is important for people to have direct contact witheach other and that online networks without directcontact supplement networks based on face-to-facecommunication, and concludes that online networks inthemselves are not important for creating bonds. Hepoints out that one of the major reasons for the declinein these bonds in the United States is the effect of tele-vision14. On the other hand, there is a growing need forcommunity activities that promote information sharingon the Internet and online donation. Thus one cannotdeny the importance of the Internet for local commu-nity bonds with which one can establish and maintainhuman connections without restrictions of place ortime and irrespective of the number of peopleinvolved. One study shows a positive relation betweenthe use of the Internet and participation in volunteergroups or political activities. It is thus not easy to pre-dict whether ICT will have positive or negative impacton local community bonds.

ICT is also believed to play an effective role ingovernance. It is intuitively understood that the spreadof the Internet drastically increased information distri-bution and raised awareness of information disclosureand accountability, thus improving the transparency ofpolitics, administration and corporations. Also, there isno doubt that one individual can easily send andreceive information through the Internet, which pro-vides great potential for improving the governance ofan organization or a system.

Recently the so-called alpha bloggers have gainedgreat influence on public opinion, together with themass media. However, it is also necessary to bear inmind that there is a danger of people overreacting toopinions on the Internet, leading to radical action inthe real world, as seen in Korea and China.

Let us now look at data relating to the relationshipbetween ICT and social capital described above.Focusing on governance, the aforementioned‘degreeof governance was used as a surrogate variable and apositive relation with the Internet subscriber ratio wasalso found. A similar result was obtained when the

10 There are many previous studies using country and region-based data, including Knack and Keefer (1997),“Does SocialCapital Have an Economic Payoff? A Cross-CountryInvestigation,”The Quarterly Journal of Economics, Vol. 112,No. 4.11 The World Values Survey Association conducts the WorldValues Survey and discloses survey results on points such as“neighbors can be trusted”.

12 There are many previous studies using country and regional-level data, including the World Economic Outlook -Growth andInstitutions, IMF (2003).13 See Governance Matters 2008, World Bank (2008) for details14 Fukuyama (1999) too points out that ties cannot be estab-lished by electronic network alone without human contact. SeeCabinet Office (2002)

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Degree of governance: Compiled from Governance Matters 2008, World BankInternet penetration rate/100 people: Compiled from ITU’s ICT statistics database

Figure 1-9 Relationship between the degree of governance and economic growth and ICT

(Internet subscriber ratio and degree of governance)

ICT competitiveness index developed by the WEF wasused as a variable for ICT. This suggests that the dis-semination of ICT is closely related to the level ofsocial capital, namely, local community bonds andgovernance.

In order to ensure that a connection is establishedbetween ICT and economic growth in terms of policy,

policy makers should place importance on measuresthat would accelerate the accumulation of social cap-ital by, for example, promoting regional informatiza-tion programs to strengthen bonds in the local commu-nity as well as information disclosure to improve gov-ernance of organizations and systems.

(Degree of governance and per-capita GDP)