The IT sector, income convergence hypothesis and the human development index

International Journal of Business Research, March, 2007 by Bala Batavia, Nandakumar Parameswar, Cheick Wague

ABSTRACT

The income convergence hypothesis is reformulated in terms of the gap in Human Development Index values, rather than the per capita income gap, and seen to be applicable to a large sample of developing countries and emerging market nations. When stated as customary, in terms of the per capita income gap, it fails for this sample, falling in line with earlier results in the literature, which hold up the income convergence hypothesis as relevant only for a richer, OECD member, convergence club. Globalization is seen to have a positive impact on income convergence, but in a limited sense; higher FDI inflows have a positive, significant impact, but increased export-orientation is seen to have negligible impacts on income growth. Economic integration in this era of globalization does have a significant impact on income convergence, with membership in a trade bloc enhancing the income catch-up process of poorer nations.

KEYWORDS: IT, globalization, income convergence, human development index

1. INTRODUCTION

A rapid process of income convergence or catch-up of per capita income occurred in the industrialized group of countries in the post-war years. But, as Baumol (1986, 1994) characterizes it, the process was limited to the rich group of nations, to a "convergence" club. This project investigates the possibility that the globalization process, which started off in the late 1980s in many developing countries, may have brought them into the fold of this elite convergence club--and helped to narrow the income differential with industrialized nations.

Further, it is noted that within the convergence club itself, fortunes have risen and declined in the recent decades. The post-war convergence thrust lasted only till the mid-1970s roughly, up to the period of the oil shocks and supply-side disturbances--and the ensuing productivity slow down. However, the process of economic integration in Europe has, again, visibly reduced income differentials within the bloc, with countries like Ireland gradually overtaking older industrialized nations like the U.K in measures of per capita income. But the question is whether the mere fact of EU membership did the trick, or whether other factors such as the advent of the "new economy" (information technology) have played a role.

It may be mentioned here that the literature on convergence does not go into the issue of causation in any real depth. However, there is some evidence now (discussed in the literature survey) that the "new economy" did contribute in some measure towards narrowing the income gap in the 1990s between the leading countries and the laggards within the OECD bloc. This motivates the question: did the ICT sector also play such a positive role within the developing--and emerging market--bloc of nations?

The present study takes up this issue, along with an analysis of the effects of globalization in a cross section of developing nations and emerging market countries. In what follows, the next section provides a brief overview of relevant literature. Section 3 sets forth the models to be estimated, along with a description of data requirements and variables used. Section 4 provides the empirical results. There is a final, concluding section.

2. REVIEW OF RELEVANT LITERATURE

The income catch-up hypothesis basically postulates that countries with lower per capita income will grow faster than the leader with the highest income per capita in a group of trading nations. The rate of growth will be related to the income gap relative to the leading nation. Generally speaking, the hypothesis has been considered relevant only in explaining the catch-up process within the group of industrialized nations (Baumol 1986, 1994), among whom the process may have waned; but European economic integration may have provided a fresh impetus, as studies on aggregate trade seem to imply (Rose, 2000; Persson, 2001).

Testing of the catch-up hypothesis has not been limited to the use of the variable income per capita. The convergence processes with respect to labour productivity levels as well as total factor productivity has been the subject of scrutiny in recent years, and are important in their own right as indicators of international competitiveness. Normally, convergence in income per capita would imply catch-up also in productivity terms, but there need not be a one to one correspondence. The importance of such a distinction can be seen in Pilat et al. (2002), who show that labour productivity growth in IT-using and IT-manufacturing sectors has been stronger than in other sectors, in the OECD countries. Thus there seems to be a clear case for distinguishing between IT-using and non-IT-using sectors.

Calmfors et.al. (2006) disaggregate the capital stock in EU nations into IT and non-IT capital and examine the effect of expansion of the "new economy" in a growth-accounting framework. They find that growth in IT capital has been more important (for output growth) than growth in conventional capital in the case of Finland, Sweden and the U.K. In contrast, growth in labour input has been the key factor for Spain, and, for both Spain and Greece, growth in non-IT capital has been also important. Batavia, Nandakumar and Wague (2006) examine income and productivity catch-up in the IT-using and non-IT-using manufacturing and services sector separately, and find evidence for convergence only in the IT-using sectors of OECD countries. In this study, investment in human capital is also seen to be important in the convergence process in the 1990s within the OECD bloc.