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China`s accelerating `Internet revolution`


By John Ross. Published on June 7, 2015.




China is further speeding up its "Internet revolution." Premier Li Keqiang has launched the concept of "Internet Plus," which emphasizes integrating the mobile Internet, cloud computing, big data and the Internet of Things with manufacturing and e-commerce. To further boost Internet use, the premier recently urged China`s telecommunications operators to enhance Internet speeds and cut prices.


China`s increasing emphasis on the Internet is even more impressive when viewed within the context of the existing volume of Internet use in the country. China already has the world`s greatest number of Internet users by far, 642 million in 2014, compared to the United States` 280 million and India`s 243 million. From a global perspective, 21 percent of the world`s Internet users are in China, compared to only 9 percent in the U.S.


Equally striking is the buildup of China`s investment in information and communications technology, the core of which is Internet technology. Over the last two decades, China`s investment in ICT has already generated 1 percent of total GDP growth a year out of an average 8.8 percent annual expansion rate. As Table 1 shows, over the last 20 years, China`s annual GDP growth created by ICT investment was already significantly higher than any other major industrial or BRIC economy. For example, it was two-thirds higher than that of the U.S., over twice that of Germany and three times that of Japan.


But even given this high level of achievement, China`s further push into the Internet sector is vital to economic strategy. The Internet has now expanded far beyond its original application in computers to become the most rapidly growing sector of telecommunications, retailing and advanced manufacturing, hence the key idea of "Internet Plus."


But because China is a developing economy, despite its high number of Internet users, the percentage of China`s population that is using the Internet is lower not only than rate of Internet use seen in the U.S. or Europe but also lower than that seen in developed Asian countries. In 2014 46 percent of China`s population were Internet users, whereas this figure stood at 87 percent for the U.S., 86 percent in Japan and 92 percent in South Korea. In China, lowering the price of Internet connectivity is key to further expanding Internet use, hence the premier`s drive to reduce Internet usage costs.


Because the Internet is crucial for the development of a modern economy, there have been numerous international studies of the Internet`s development. These have arrived at clear conclusions showing why expanding Internet use and ICT investment are inextricably interlinked.


From a fundamental economic perspective, it is important to understand that the pure technology of the Internet and ICT does not increase productivity and economic growth by itself. Winner of the Nobel Prize in economics Robert Solow noted in 1987, six years after the beginning of the mass introduction of personal computers into the economy, that computer technology was not speeding up U.S. productivity growth."You see the computer age everywhere but in the productivity statistics," he explained.


This has not changed. As Figure 1 shows, in 1980, the year before the introduction of the modern personal computer, U.S. annual productivity growth was 1.2 percent over a five-year average that removes the effects of short-term business cycle fluctuations. By 2014 U.S. productivity growth was still only 1.2 percent. Therefore, 34 years of revolutionary technological developments in the Internet and ICT have led to no increase in U.S. productivity!


Indeed, the latest U.S. figures are even worse. In May Federal Reserve Chairwoman Janet Yellen admitted that the U.S. was experiencing "relatively weak productivity growth." In 2014 despite publicity about iPhones, Apple Watches, Google, e-tailing and other Internet-centric products and services, U.S. productivity increased by only a snail-like 0.5 percent.

The data therefore clearly shows that technological advances in the Internet and ICT sector alone do not lead to productivity increases.



As can be seen in Figure 1, however, there was one phase during the past 34 years of the Internet and ICT revolution when U.S. economic efficiency sharply increased. In the period leading up to 2003, U.S. annual productivity growth reached its highest level in half a century, 3.6 percent. This was explained by a huge surge in ICT focused on fixed investment. U.S. investment rose from 19.8 percent of GDP in 1991 to 23.1 percent of GDP in 2000, fell slightly after the dot-com bubble`s collapse, and then reached 22.9 percent in 2005.The majority of this investment was in ICT. Afterward, this U.S. investment fell, leading to the sharp slowdown in productivity.


It was therefore not purely the ideas or technology of the Internet that led to rapid economic efficiency growth. Growth in efficiency could rather be attributed to the embodiment of these in a massive wave of investment focused on ICT. This is the unambiguous lesson of the U.S., and therefore a key one for China to study as it seeks to cut costs and boost speeds in order to accelerate its own "Internet revolution."


The author is a senior research fellow at Chongyang Institute for Financial Studies, Renmin University of China. 


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Key Words: John Ross   Internet Revolution  

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