The world is in the midst of an all-purpose technological revolution based on information technology (IT), defined here as computers, computer software, and telecommunications equipment. The macroeconomic benefits of the IT revolution are already apparent in some economies, especially the United States. Historical experience has shown that such revolutions have often been accompanied by financial booms and busts, and the IT revolution has been no exception. But, while spending on IT goods is likely to remain weak in the immediate future, as past over investment unwinds, the longer-term benefits for global economy are likely to continue, or even accelerate, in the years to come. This attachment summarizes the comments on the major IT-related Asian countries by IMF World Economic Forecast Report 2001.
1. Characteristics of All-purpose Technological Revolution
While technological change is an ongoing process, there are periods during which technological progress is especially rapid, resulting in new products and falling prices of existing products that have widespread uses in the rest of the economy. Such period are generally identified with all-purpose technological revolutions. Earlier examples include textiles production and steam power in the industrial revolution, railroads in the nineteenth century, and electricity in the early twentieth century (the automobile could also be included, but its development was relatively gradual). The effects of such revolutions have generally occurred in three (often overlapping) main stages. First technological change raises productivity growth in the innovating sector; second, falling prices encourage capital deepening; and finally, there can be significant reorganization o f production around the capital goods that embody the new technology.
2. The Core of IT Revolution is the Advances of New Materials Science
At the core of the current IT revolution are advances in material science leading to increases in the power of semiconductors, in turn resulting in rapidly declining semiconductor prices. Over the past four decades, the capacity of semiconductor chips has doubled roughly every 18-24 months-a phenomenon known as "Moore's Law". The rapidly falling prices of goods that embody IT have stimulated extraordinary investment in these goods, resulting in significant capital deepening. This capital deepening has led, in some countries, to an acceleration in overall productivity growth and may be encouraging changes in the organizations of production, which could lead to further improvements in productivity growth.
3. Comparison between IT Revolution and the Past All-purpose Technological Revolutions
The main all-purpose technological revolutions in the past have been textile production, steam power, railroads, and electricity. Information technology has a number of striking similarities with past revolutions, but also some notable differences. Of the similarities, four stand out:
(1). The gains from the new technology initially came through the capital deepening caused by the fall in relative prices, but-when the efficiency gains from the reorganization of production were large-these benefits dominated in the long run. Table 1 shows that, in the case of the adoption of electricity in the United States, the contribution to growth was dominated by capital deepening over the initial period (1899-1919) bit but gains from reorganization in usage at the end of the period (1919-1929).

The initial gains were focused on industrial countries. For example, Table 2 shows how railroads were initially adopted in the advanced economies of the day. Almost a century passed between the opening of the Liverpool and Manchester Railway in 1830 and the global adoption of railroads by 1920.

(2). The gains went largely to users, not producers. The benefits were mostly transferred to users through the fall in the relative price of good embodying the new technology, while profits and wages in producing industries were rarely exceptional by comparison. The classic case is textiles production in the industrial revolution in Britain. Where about half of the benefits from falling prices were exported via worsening terms of trade.
(3). Technological revolutions have generally led to financial market excesses. The best documented cases are railroads and electricity. Figure 4 compares the paths of the stock prices of innovating firms, investment in goods embodying new technology, and real GDP in the "railway mania" in Britain in the 1840s and in the "IT mania" in the United States in recent years. As in other cases, while the collapse or the railroad bubble in the 1940s did not lead to an economy-wide recession, it did lead to significant consolidation in the industry.
There are also two important differences:
(1). The fall in the relative price of IT goods has been exceptionally sharp-there appears to be no historical equivalent to the sustained, rapid fall in semiconductor prices associated with Moore's Law. As a result, which recognizing the difficulties of comparing data across historical episodes, the benefits of IT seem to be coming faster than those of previous all-purpose technological revolutions.
(2). Compared to past episodes, the production of goods embodying the new technology is much more globalized. This reflects the high price-to-weight ratio of IT goods, which makes them readily tradable. The closed historical parallel is cotton textiles in the industrial revolution in Britain, where about half of production was exported.

4. Effects of IT Revolution in Labor Productivity
Information technology can contribute to labor productivity growth through both capital deepening and total factor productivity (TFP) growth. Capital deepening refers to the change in labor productivity attributable to higher levels of capital per worker. TFP growth refers to improvements in the efficiency with which capital and labor are combined to produce output. The existing literature has established that IT is contributing to labor productivity growth through both increases in the levels of IT capital per worker and TFP growth in IT production, though the precise magnitudes of these contributions remain a subject of debate. The main outstanding issue is whether IT has contributed to TFP growth more generally by increasing the efficiency of production, either through usage of knowledge spillovers from the production of IT goods. The literature consists of country-specific and cross-country studies.

4.1 Country-Specific Studies
4.1.1 Countries with labor productivity growth
(1) The United States
According to the study on the United States, it is generally agreed that IT-related capital deepening and TFP growth in IT production made important contributions to the acceleration in labor productivity in the late 1990s. Labor productivity growth in the non-farm business sector increased from about 11/2 percent in 1973-95 to about 2/12 percent in 1996-2000. About 1/4 to 1/2 percentage point to the acceleration in labor productivity was attributed to capital deepening, more than accounted for by investment in IT, and about another 1/4 percentage point to TFP growth in IT production (Table 3). However, there is no consensus on the effect of IT on generalized TFP growth. The debate focuses on whether the remainder of the acceleration reflects cyclical factors or an increase in underlying TFP growth. One study attributes the additional 1/2 percentage point acceleration in labor productivity to cyclical factors, while other studies view this acceleration as structural. More recent studies suggest that little of the acceleration in labor productivity is due to changes in factor utilization, factor accumulation, or returns to scale, and that virtually all of the acceleration is accounted for by IT-using and IT-producing industries. Together, these results suggest that we may soon see an impact of IT on generalized TFP growth.
(2) Australia
Another economy that has seen an acceleration in labor productivity in the 1990s is Australia. Using data released by the Australian Bureau of Statistics, work done by the IMF suggests that IT-related capital deepening and generalized TFP growth played important roles in the acceleration in labor productivity. In particular, IT-related capital deepening increased rapidly during the 1990s, accounting in recent years for about two-thirds of the growth contribution of capital deepening. While the national accounts do not separately identify IT producing sector, employment and trade data suggest that IT production in Australia is very small, implying that TFP growth in IT production was not important in the acceleration in labor productivity. Conversely, IMF staff does find some evidence across Australian industries of a positive relationship between IT-related capital deepening and TFP growth. This evidence is consistent with the idea the increased IT use has been associated with a reorganization of economic activities, supported by structural reforms. Table 3.4. Contribution of Information Technology (IT) to the Acceleration in Productivity in the United States
Gordon(2000) Jorgenson and Stiroh (2000) Oliner and Sichel(2000) U.S. Council of Economic Advisers (2000)
Period under studyAoceleration in labor productivityCapital deepeningIT-relatedOtherTotal factor productivity growthIT productionRest of economyOther factorsCyclical effectPrice measurementLabor quality 1995-19991.330.33------0.310.290.020.690.500.140.05 1996-19980.950.290.34-0.050.650.240.410.01------0.01 1995-19991.160.330.50-0.170.800.310.490.04------0.04 1996-20000.630.380.62-0.231.190.181.000.040.04---0.00
Source: Stiroh (2001) and U.S. Council of Economic Advisers (2001). See studies for data and methodological differences. The estimates do not reflect the recent revisions to the U.S. national income and products accounts, which were substantial for 2000.

4.1.2 Countries without labor productivity growth
In most other advanced economies, labor productivity has not accelerated in recent years, implying that any positive contribution of IT must have been offset elsewhere;
In Japan
Labor productivity growth did not increase during the 1990s, despite relatively high levels of overall and IT-related capital deepening. An official study finds that the contribution of IT-related capital deepening to growth increased by about 1/2 to 3/4 percentage points between the early and late 1990s. However, the contribution of non-IT-related capital deepening de clined by a corresponding amount. There are no Japan-specific studies on the contribution of IT production or use to TFP growth.
In France
Labor productivity growth fell in the second half of the 1990s. Work by IMF staff attributes this fall to a decline in overall capital deepening, reflecting reduced investment in labor saving equipment as wage growth remained moderate. Although overall capital deepening fell, the contribution of IT-related capital deepening to growth increased from zero to 1/4 percent. While TFP growth rebounded in the second half of the 1990s, this was likely related to the overall economic recovery and not to IT production, which is relatively small in France. The extent to which this rebound may, or may not, have been related to IT use remains to be established.
In the United Kingdom
Labor productivity has not accelerated, despite a rate of investment in IT capital that is al most as high as in the United States. Work by IMF staff suggests that both IT-related capital deepening and TFP growth in IT production made important contributions to labor productivity growth in the late 1990s. However, these contributions were offset by decreases in TFP growth outside of the IT sector.
In most developing countries
Labor productivity growth fell in the late 1990s, partly reflecting the crisis-related slowdown in output growth. Preliminary work by IMF staff finds that the contributions of IT-related capital deepening and TFP growth in the IT sector to labor productivity growth increased during the course of the 1990s, but were more than offset by declining contributions from other sectors. The increase in IT-related capital deepening reflected the maintenance of high levels of IT investment despite the growth slowdown associated with the Asian crisis.

4.2 Cross-Country Studies
Cross-country studies also find that IT-related capital deepening and TFP growth in IT production contributed to labor productivity growth in the second half of the 1990s. The cross-country evidence comes in two forms: one set of studies estimates the contribution of IT-related capital deepening using the conventional growth accounting framework, while the others focus on the role played by IT-using (and IT-producing) sectors. Studies following the first approach find that IT-related capital deepening has indeed made an important contribution to growth across a range of countries (Table 4). Given the rapid nominal share in investment. For example, one study finds that falling prices of capital goods accounted for about one-third of the real growth of the capital stock in the United States between 1995-99.

In another studies, the contribution of IT is measured as overall capital deepening by IT-related sectors, rather than as the IT-related capital deepening of all sectors. The findings of one such study are reported in Table 5. This study suggests that industries producing IT equipment or industries using IT equipment intensively contributed between 0.5 and 0.9 percentage points, or between 28 and 57 percent, to economic growth. For most G7 economies, the contribution of IT-using sectors is much stronger than the contribution of the IT-producing sector.
The contribution of technological progress in IT production to labor productivity growth is also fairly uncontroversial. Substantial TFP growth in the IT sector made significant contributions to labor productivity growth in countries with relatively large IT-producing sectors.
In summary, the weight of the evidence suggests that IT is already making an important contribution to labor productivity growth through technological progress in IT production and IT-related capital deepening. Convincing evidence of the impact of IT on the general efficiency of production is not yet available.

5. Who benefits from Information Technology?
While most of the existing literature on the macroeconomic consequences of IT has focused on labor productivity, the allocation of the potential welfare benefits has received less attention. In principle, the benefits of a technological revolution could accrue to owners (in the form of higher profits), labor (through higher wages), or users (through lower prices). In the IT revolution, profits and wages have raised some-what but these changes are small relative to the sharp fall in the relative prices of IT goods. This suggests that IT-using countries tend to benefit somewhat more than IT-producing countries, because producing countries lose some of the gains through deteriorating terms of trade. The main beneficiaries of technological evolutions have in practice been the users. This is well illustrated by the experience with texitiles production in the industrial revolution in the United Kingdom, where about half of the welfare gains were exported through terms of trade losses.
One way of demonstrating the impact of falling technological prices on the international distribution of IT benefits is through an illustrative exercise to calculate the impact of introducing hedonic prices for IT goods and chain weighting on real domestic demand. As shown in Table 7, on the production, side, the technological improvements incorporate in the fall in relative prices of IT goods raise the annualized growth in output, most notably in Singapore and Malaysia. However, because most of these goods are exported to the rest of the world, and hence exchanged for non-IT goods, which are rapidly becoming relatively more expensive, the benefits to real domestic demand are significantly smaller. Conversely, countries that import IT goods from abroad gain from the continuing improvement in their terms of trade.
Another more theoretically attractive way of looking gat the welfare gains from falling IT prices is to calculate the change in consumer surplus, broadly defined. The increase in consumer surplus in represented by the area between the initial price, P0, and the final price, P1, under the demand curve for IT products (see Figure 5). IMF staff estimated demand curves for IT hardware, software, and telecommunications equipment, using panel data on IT-related sales for 41 countries over the years 1992-99 and exchange rate adjusted prices from the U.S. National Income and Products Accounts. Based on the estimated demand curves, the consumer surplus for the year 1999 was then calculated as the gain from the fall in prices between 1992 and 1999. The increases in consumer surplus are quite large, already amounting to several percentage points of GDP (Figure 6). At last, the IT revolution also affects the distribution of labor income within countries. Compared with non-technicians, the development of IT revolution increases the IT technician's salary. However, over the longer terms, as IT equipment becomes more readily available and easier to use, such influence will disappear gradually.

6. Information Technology and Growth in Emerging Asia
While most of the literature on information technology (IT) and growth covers the advanced economies of North America, Europe, and Japan, many emerging market economies in Asia are important producers and users of IT goods. The IMF has begun a cross-country study of the impact of IT-related capital deepening on labor productivity growth in China. Hong Kong SAR, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan Province of China, and Thailand. Estimates of IT capital stocks for emerging Asian economies and the United States are shown in the Figure 7. IT capital stocks as a ratio of GDP are largest in the United states and the newly industrialized economies (NIEs), followed by the ASEAN-4 countries, and then China.
Hardware and the IT software. In addition, the proportion differ significantly, with hardware and being the much larger part of the IT capital stock in the United States and the Asian NIEs than elsewhere. The relative price declines that drive the additional benefits to IT, as opposed to other capital investment, are much larger in the hardware sector than elsewhere.
The data show that the contribution of IT-related capital deepening to labor productivity growth in emerging Asia increased during the 1990s (see the Figure 8). This contribution was already important in the first half to 1990s in the newly industrialized economies of Asia, and increased even further in the second half of the 1990s. In the ASEAN-4 and China, the contribution of IT-related capital deepening stared from a low base and roughly doubled to around 1/4 percent in the ASEAN countries and in China.
This capital deepening, however, has occurred against a background in which labor productivity growth in the emerging market economies of Asia dropped from 5 percent in the first half of the 1990s to 21/2 percent in the second half of the 1990s. The sharp decline in labor productivity growth in Asia's emerging markets between the early and late 1990s mainly reflected the crisis-related growth slowdown. In particular, the abrupt deceleration in total factor productivity (
TEP) and the slowdown in non-IT-related capital deepening in the Asian NIEs and the ASEAN-4 were related to the 1997-98 crises, as suggested by the contrast with China. It is remarkable, therefore, that the contribution of IT capital to growth increased in all countries, reflecting continued strong IT investment. Indeed, in some crisis-affected countries. Strong IT investment helped growth to recover.

7. Information Technology slump and Short-term Growth Prospect in East Asia
The sensitivity of East Asia's economic performance to cyclical developments in global information technology (IT) markets has increased significantly over the past two decades, with the rapid growth of the IT sector's share of regional production, investment, and exports. By 2000, IT sector exports accounted for 30 percent of total exports of goods from East Asia, equivalent to nearly 10 percent of GDP. This increased sensitivity is clearly reflected in the region's recent growth performance: the slump in global IT markets since mid-2000 is one of the principal factors dampening exports and GDP GROWTH IN east Asia in 2001, just as the boom in the IT sector boosted the regional economic recovery in 1999-2000.
The slump in the IT sector began in the first half of 2000 with a significant reversal of the earlier speculative run-up in IT sector stock prices worldwide, and was followed by a sharp weakening of global sales volumes and prices for IT components and products in late 2000 and into 2001. In the first four months of 2001, global sales of semiconductors were down around 10 percent from the same period in 2000. The impact on Asia of the downturn in the electronics sector is being felt both through trade channels, including weaker trade volumes and prices, and through financial market channels, including the impact of lower regional stock market prices on investment and consumer spending, and weaker foreign direct investment and portfolio investment inflows to the region.
This section examines the impact of the IT sector slump on East Asian growth through the trade channel. More specifically, a simple model is used to estimate the impact on region economies of a 10 percent decline in the growth to the volume of IT sector exports. The analysis highlights the importance of three factors influencing the effects of the exports shock across the region; (1) the magnitude of exports of electronics, net of imported intermediate inputs, relative to GDP; (2) the responsiveness of other GDP expenditure components to weaker export earnings; and (3) indirect trade spillovers from weaker growth elsewhere in the region.
Electronics exports are equivalent to nearly 10 percent of GDP for the Asian region as a whole, and to 20 percent of GDP in the smaller regional economies (see the Figure 9). For most countries in the region, however, electronics production and exports include a high proportion-between 50 and 75 percent-of imported intermediate inputs, sourced within the region. As a result, a fall in electronics exports leads automatically to a decline in such imports, significantly dampening the spillover into domestic expenditure. The size of IT sector net exports relative of GDP varies substantially across the region-from as much as 25 percent of GDP for Malaysia, to less than 2 percent of GDP for Hong Kong SAR (including re-exports)-so the estimated initial impact on the region's economies also varies widely.
An additional consequence of the high import content of electronics exports in most countries in the region is that the fall in electronics process affects both import and export prices within the region, having an ambiguous effect on terms of trade. The most commodity-like electronics components, such as memory chips, have experienced much larger price falls than many other electronics components. As a result, countries importing such components and exporting other electronics products could even experience terms of trade improvements. The estimates and assumptions employed in this analysis regarding the responsiveness of different expenditures to lower export growth suggest that, in Malaysia and Singapore in particular, lower multipliers (reflecting higher marginal savings rates) will tend to cushion the impact of the IT stock. Conversely, in Indonesia and Japan, higher multipliers (reflecting lower marginal savings rates) tend to accentuate the impact of the external shock. In the Philippines, the effect of a low savings rate is substantially offset by the high responsiveness of non-electronics imports to weaker domestic demand.
Overall, the direct impact of a 10 percent fall in regional electronics exports is estimated to cut GDP growth in the region by about 1/2 percentage point. The adverse impact on growth in Malaysia, Singapore, Korea, the Philippines, and Taiwan Province of China is substantially greater, largely reflecting the importance of IT net exports to their economies. In addition to the direct impact of the IT shock to growth in the region, weaker growth will also reduce non-electronics imports by countries in the region, leading to a further, second-round contraction of other countries non-electronics exports and GDP. Indonesia is likely to be the country most strongly affected by the second-round trade spillover effects, reflecting the unusually high proportion of its exports going to other countries in the region, as well as relative sensitivity of Indonesian consumption to changes in export income.

8. Information Technology Revolution Prospect in Developing Countries
At present, although the demands of IT products in the world declined sharply, which reflected partially the sustained high-level demands one year before had declined, information technology may be widely used in a medium length of time. When users list IT expenses into demands of medium length of time, contributions on labor productivity growth of IT productive countries and IT related capital intensification may be confined in a short time. However, the wide use of information technology may do tremendous contributions on labor productivity growth, as computers and electronic communication equipment simplify the commercial process, improve the efficiency of organization as well as use efficiency of other factors in production.
Looking ahead, it appears likely that usage of information technology products will continue to expand rapidly in developing countries, but productivity benefits will accrue only slowly. As in advanced economies, expanded usage is driven by the rapid decline in prices of information technology products. Enhanced productivity through that use, however, is a development task that may require complementary human capital, efficient regulation of the telecommunication infrastructure and of information flows, and, more generally, overcoming organizational rigidities that limit the benefits from new ideas and technologies. As such, even though information technology will contribute to raising the absolute levels of productivity in developing countries, it may increase the productivity gap between advanced economies and developing countries.
The rate of diffusion of IT to developing countries has been rapid compared to earlier all purpose technologies. Just 10 years after the "start" of the IT revolution, developing countries (with about 85 percent of the world's population) already had about a 10 percent share of Internet subscribers in 2000. By contrast, it took more than 80 years from the opening of the first rail line in 1830 for developing countries to account for 30 percent of the world's rail track in 1913. Though from a low base, IT expenditure rose throughout the 1990s for most developing countries and for many of them at a rate significantly greater than in advance economies (table 6). Investment spending slowed when economic conditions were unfavorable, as in Indonesia in the late-1990s, but the expenditures typically grew substantially, with the result that much larger numbers of personal computers and telephone lines per capita were in use at the end of the 1990s than at the start, which, in turn, enabled a more widespread use of the Internet. This trend toward more widespread use is likely to continue.
What explains the patterns of diffusion of these new technologies? A recent analysis points to several important factors. Countries with relatively high growth rates, greater urbanization, and a superior economic policy environment have expanded their use of cell phones and Internet connections at a faster pace than others. Once these factors are controlled for, those with low usage have caught up. Other studies reinforce these findings. High levels of human capital are strongly correlated with the rate of adoption of information technology. Since the new technology is typically embodied in new equipment, high investment rates speed up adoption (Chile, for example, has one of the highest investment rates in Latin America and Malaysia and Korea achieved historically high investment rates in the 1990s). Finally, a policy regime that is open to imports and foreign direct investment creates a window to the world and hence raises the likelihood of adopting new technologies in general, and computers in particular.

Strong growth and good policies raise the rate of IT adoption, which, in turn, has long-term beneficial growth effects, this implies the likelihood of a "virtuous" circle-with growth, policies, urbanization, education, and information technology reinforcing each other. However, those with the least developed infrastructures are also closing the IT usagegap. An important finding is that in some of the poorest countries, the ratio of Internet users to telephones is no lower, and often higher than in advanced economies. Therefore, is the latent demand for access to IT is strong even in poor countries. The critical question in the case of such countries is whether the new thchnologies could be productively used to accelerate the pace of development.
Information Technology presents the attractive possibility of bypassing older technologies ("leapfrogging"). For example, countries with old-fashioned mechanical telephone systems can skip the analog electronic era and go straight to advanced digital technologies. And that certainly is happening. Leapfrogging is also made possible in a more radical developmental sense. Education can potentially be delivered at much lower expense to a much wider group of people. People on the margins of domestic and international markets can be brought into the mainstream through the provision of better information and the reduction of transactions costs. Again, some are realizing this potential. Bangladesh's Grameen Bank, a pioneer in the area of micro finance, has launched an effort to build cell phone and Internet access in rural areas. The range of IT applications and their creative deployment for raising productivity is large and includes factories, banks, ports, and, more recently, the business of governments themselves. Continued innovation and the relentless decline in costs is likely to further bolster these trends.
Despite the many specific examples of IT benefits in developing countries, the aggregate impact has thus far been limited. This reflects in part some fundamental constraints, including the lack of complementary human capital, telecommunications sectors that are not yet sufficiently responsive, and organization rigidities. With regard to human capital, IT may in some instances reduce the demand for human capital by embodying "intelligence" in information products and services, thus facilitating development. For example, electronic course content may sometimes substitute partially for trained teachers. Such substitutability between human capital in the old-fashioned sense and IT is likely to increase with the maturation of the technologies and the delivery systems. By contrast, the complementary human capital requirements of IT are often significant, especially in business and government applications.
Telecommunications infrastructure is paramount. The latent demand for connections to the web-despite the high costs of doing so inmost developing countries -is being constrained by the availability of telephone line connections. Privatization has brought significant gains but the process of awarding privatization contracts and the extent of subsequent market competition has remained controversial. Facts proved that governmental interferences should reserve rooms, as regulatory oversight has proved complex. For the government, new challenges lie ahead in setting standards and regulations, taxing and regulating electronic transactions, undertaking antitrust actions, and protecting privacy.
Finally, the widespread adoption and effective use of new technologies requires organizational flexibility and the willingness to take risks. For example, though the potential exists for considerable efficiency improvements, in the running of governments, rigid bureaucratic structures have often prevented amore aggressive adoption.
In summary, the unprecedented decline in IT prices has implied a faster rate of diffusion than in previous technological revolutions. The present constraints on more productive uses of the technology are real, but a continued vigorous effort to harness the potential of IT is likely to pay, dividends, as these become available over the next two or three decades.