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The Information Technology Revolution and Economic Development

Nagy K. Hanna

World Bank Discussion Papers

Copyright © 1991

The International Bank for Reconstruction and Development/The World Bank

1818 H Street, N.W. Washington, D.C. 20433, U.S.A.

All rights reserved

Manufactured in the United States of America First printing March 1991

Second printing December 1995

Discussion Papers present results of country analysis or research that are circulated to encourage discussion and comment within the development community. To present these results with the least possible delay, the typescript of this paper has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available.

The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use.

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The complete backlist of publications from the World Bank is shown in the annual Index of Publications , which contains an alphabetical title list (with full ordering information) and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, The Information Technology Revolution and Economic Development 1

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avenue d'Iéna, 75116 Paris, France.

ISSN: 0259−210X

Nagy K. Hanna is chief staff officer in the Policy and Strategy Staff of the World Bank's Information, Technology, and Facilities Department.

Library of Congress Cataloging−in−Publication Data Hanna, Nagy.

The information technology revolution and economic development / Nagy K. Hanna.

p. cm.—(World Bank discussion papers; 120) Includes bibliographical references.

ISBN 0−8213−1784−9

1. Information technology—Economic aspects—Developing countries 2. Information services industry—Developing countries. 3. Economic development. I. International Bank for Reconstruction and

Development. II. Title. III. Series.

HC59.72.155H36 1995

025.06´3389—dc20 95−11622 CIP

Abstract

Information ranks with other major development resources: human, natural, and financial resources. Development assistance agencies must thus understand the role of information and information technologies (informatics) in the developing countries to respond to a rapidly evolving global environment. Recent experience applying

information technology in developing and industrial countries that appear to offer promising solutions to information problems is the basis for that understanding.

The ongoing information explosion in the industrialized economies contrasts sharply with the information poverty of the developing countries. This poverty takes many forms: planning without facts, poor information support for macroeconomic and sectoral policy formulation and implementation, inadequate financial control and

cumbersome reporting and monitoring systems, underdeveloped decision support systems at all levels of management, limited access to information for the rural populations, isolation of researchers and professionals from international research findings, lack of information on natural resources, poor access to timely information on national and international markets, and so on.

Information technology is the driving force for a new techno−economic paradigm (radical technological change) with far−reaching effects for all types of industries and services and for the competitive position of developing countries. It is transforming the industrial and financial sectors and becoming indispensable to economic competition in an increasingly integrated and information−intensive global economy. Even the least developed countries cannot be insulated from its pervasive impact.

Informatics applications offer new ways to make the most of the managerial and institutional resources of developing countries, in both the public and private sectors, by creating new capabilities for learning and adaptation within and among organizations. Informatics is a powerful tool to simultaneously integrate and decentralize.

Abstract 2

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The most widespread benefits for developing countries are likely to come from applying informatics to priority sectors. Information technology can improve the planning, management, and productivity of all types of economic development activities: agricultural and rural development, poverty alleviation, environmental management, infrastructural development, and population and human resources development. It can improve policy analysis, macroeconomic management, debt management, enterprise management, financial intermediation, financial accountability, and popular participation.

Governments are recognizing their roles as information providers and users, facilitators of information technology diffusion, and providers of information and communication infrastructures, as well as their role in setting policies for informatics. In accepting a stronger role in each of these areas, they will have to pay special attention to: (1) regulatory policies governing the supply and use of information technology and information services; (2) priorities for information resources development and the infrastructural requirements to support them and to diffuse the best practices; (3) educational and employment policies to prepare human resources to exploit information technology; (4) proactive public policies to provide equitable and easy access to national

communication and information resources and to develop information markets; (5) public−sector procurement and standardization of information technology; and (6) international informatics policy issues, such as standards, intellectual−property rights, and transborder data flows. While the OECD countries and a few NICs now have in place powerful public policies and business strategies conducive to a wider diffusion and effective exploitation of information technology, most developing countries are falling further behind.

The impact of information technology will be felt increasingly in the 1990s. Developing countries at all levels of development must stay abreast of the information revolution: they cannot afford to ignore this "second industrial revolution."

Acknowledgements

Many people have contributed to the development and review of this paper. In particular, the members of an informal Bank−wide task force on information technology for development have provided insight, examples of applications, and a forum for debate. Special thanks to Anthony Churchill, Bruce Ross−Larson, James Cowie, Carl Dahlman, Robert Schware, Ramesh Chander, Ian Scott, Bernard Woods, Shahid Akhtar (IDRC), and Dieter Ernst (OECD). The policy staff and the Operations Consulting Group of the Information, Technology, and Facilities Department also provided useful comments. The paper evolved out of the task force's discussions to highlight the importance of information technology and the need of the World Bank to take a more proactive and deliberate strategy to support borrowers in joining the information age and managing its implications.

Table of Contents

The Information Explosion link

Information Poverty link

Changing Competitive Advantage link

Industrial Development link

The Service Sector link

Public Sector Management link

Agricultural and Rural Development link

Acknowledgements 3

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Infrastructure link

Human Resource Development link

Decentralization and Organizational Change link

Information and Informatics Policies link

Diffusion of Information Technology link

Conclusions link

1. The rapid advance and the diffusion of information technology (informatics) in industrialized countries pose major new challenges for developing countries.1 They also raise fundamental issues for development assistance.

2. Understanding the ongoing transformation. Understanding the basic, ongoing transformations in the

industrialized economies caused by the information technology revolution is important in two respects. First, for many years these transformations will remain a major feature of the international trade and competition that the developing countries must face. Second, the experiences and best practices of "front−runner" organizations in advanced economies could suggest approaches for the successful application of information technology to the developing economies.

3. For development assistance agencies to respond to a rapidly evolving environment, they must understand the current and potential roles of information and information technologies in developing countries. This

understanding should be based on recent experiences with informatics applications in developing countries as well as on widespread applications in industrialized countries, which appear to offer promising solutions to information problems of fundamental importance to development.

4. Information as a strategic resource. Information now ranks with other major development resources: human, natural, and financial. Moreover, information can accelerate and reinforce the development of these resources.

Leading industrial societies recognize the importance of information as important to their economic health and to global competition. Daniel Bell and Peter Drucker, among others, have characterized the coming of the

post−industrial society as one in which knowledge has become one of society's most important resources. Japan's economic success is attributed largely to the relentless pursuit and diffusion of information by government 1 Information technology , used interchangeably with the term informatics , is defined here broadly to include the supply side (computer hardware and software, telecommunications equipment, and electronics−based industries) as well as the demand or user side (informatics applications in all economic sectors, information services industry, electronic publishing, broadcasting, management information systems, and so on).

agencies, businesses, communities, and working groups.2 Information and communication systems have become the nervous system of modern economies.3

5. Rapid technical change. A primary force for the ongoing information revolution is the continuing high rate of technical change in the information technology industries. These technical improvements in computing and communications include:

A continual 20 percent annual decline in the real cost of hardware for storing, processing, and transmitting information for the last four decades; this rate of technological improvement far outstrips the decline in energy costs (50 percent over a 30−year period) that fueled the 18th−century Industrial Revolution;

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Increasing miniaturization, portability, and diversity of information−processing and communication devices (personal computers, optical disks, facsimile, satellite dishes, etc.);

Ability to present information in all media—data, text, voice, image, and video—in ways that increasingly match human preferences and cognitive styles;

Recent advances in artificial intelligence, expert systems, optical storage discs, and other cutting−edge technologies with unlimited possibilities for information−intensive decision−making; and

Convergence and synergy among all these technological advances so that they now offer extremely versatile applications in all sectors of the economy (see Figure 1: Freeman).

2 Ezra Vogel, Japan as Number One , Cambridge: Harvard University Press, 1979.

3 The growing role of information in the economy suggests the need to reorient the traditional categories of economic analysis. The classical factors of production—capital, labor, and land—reflected the social classes and activities of 19th−century Europe. Some argue that these classifications maybe useful for the analyses of

agriculture or manufacturing, but they have become inadequate for services−based economics. Perhaps a more useful trinity as Kenneth Boulding has suggested, would be material, energy, and information. See Gerald Faulhaber, et al. , eds.m Services in Transition , Cambridge: Ballinger Publishing Co., 1986. A vast amount of literature is now available on the growing importance of knowledge and timely information for gaining and maintaining competitive advantage.

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Figure 1

SOME KEY EVENTS IN THE CONVERGENCE OF INFORMATION TECHNOLOGY Source: Christopher Freeman

The Information Explosion

6. Growth of information−based activities. The explosive growth in the amount of information generated and in the demand for information are often referred to as the information explosion. The rapid growth of information or knowledge−based activities in industrialized economies is typified by the results of a US Department of

Commerce Study of the US economy in 1967: more than 46 percent of the GNP and 53 percent of labor income was accounted for through knowledge, communication, and information work. In recent years information technology has become the largest component of fixed capital formation in OECD countries. In manufacturing, most of this capital formation is not applied directly to manufacturing processes but to tools for gathering information for research and development, design, marketing, and management.4 Investment in information technology tools is a necessary response to the information explosion.

7. New ways of handling information. As a consequence of the information explosion, knowledge workers will process, store, and retrieve information in new ways, responding to specific and urgent information needs.

Specialization and collaboration will increase, as will the use of information intermediaries and information scientists.

8. Joint ventures in information acquisition. The information explosion in science and technology has caused a fundamental shift in the ground rules that guide enterprises in their acquisition of knowledge. These changes include partnerships in research and development among firms on national and international levels;

university−industry scientific collaboration; technology ventures that couple new entrepreneurial firms with large established corporations; and research and technology scanning on a worldwide basis. Enterprises are striving to stay in the information loop. Information technology has accelerated the pace of research and innovation and significantly cut the lead time for bringing innovations to the market place. In an increasingly competitive environment for science−based industries, taking advantage of this shorter lead time has become cruciaL 9. Competition and information overload. The accelerating rate of change in demand patterns and products and the growing complexity of economies are placing heavy demands on acquiring and managing information within organizations. These demands are reflected in the ''information overload" experienced by most managers,

increased attention to gathering information about the

4 OECD, Information Technology and Economic Prospects , 1987.

external environment, and heavy investments in management information systems. The globalization of

competition in manufacturing, finance, and services is accelerating as information flows more freely to consumers everywhere, who are demanding high−quality products and services. Information is a strategic resource in

shaping competitive advantage and business strategy. Within firms, information resources are increasingly used to reinforce or enlarge business strategies, to develop and market new products and services, to increase flexibility, and to help strategic management.

Information Poverty

10. The computing and information gap. Almost two decades ago, it was predicted that computing power would one day be within the reach of every nation. In its 1970 plan for the decade, the United Nations (UN) wrote:

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Computers will play an increasingly important role in developing countries which intend to participate in the world economy in ways other than the supply of raw materials. Developing countries will find computers a necessary ticket of admission. The next decade should see developing countries even more active in closing the computer gap.5

11. Unfortunately, the UN prediction did not hold true for most developing nations. While the OECD countries and a few NICs now have in place powerful policies and strategies conducive to a wider diffusion of information technologies, developing countries are falling further behind. Moreover, many changes have occurred since then, including the introduction of the microcomputer. Although this could assist the diffusion of informatics in developing countries, the new information technologies and their fast diffusion in the industrial countries could further exacerbate this gap, which ultimately translates into an information gap, a competitive gap, and a development gap.

12. Information poverty. The ongoing information explosion and the extensive use of information technology in industrial economies contrast sharply with the "information poverty" of the developing countries. This poverty takes many forms: planning without facts, unreliable information on external debt and poverty, poor information support to top decision−makers,

5 The Application of Computer Technology for Development , United Nations, Department of Economic and Social Affairs, New York, 1971.

inadequate financial control and cumbersome reporting and monitoring systems, poor information on the performance of public enterprises, limited access to development information for the rural populations, limited channels for exchanging development experiences within and among countries, professionals and researchers without access to national statistics and international research findings, scarce information support to knowledge workers, insufficient information on natural resources, underused indigenous and locally produced knowledge, poor access to timely information on national and international markets, and so on. Developing countries (their policy−makers, managers, knowledge workers, and entrepreneurs) face major problems in acquiring, retrieving, processing, and disseminating various types of information.

13. Planning without facts. The problems of planning without facts have been well documented in Africa. With the onset of the debt crisis, the world learned of the dangers of ignorance about a country's financial position. A recent report by the Economic Commission for Africa asserted that the lack of data describing the demographic, social, environmental, and economic situation seriously hampered development management. Statistical systems in many developing countries are not oriented to support macroeconomic management and policy analysis, and they have failed to respond to changing information needs.

14. Lack of reliable socioeconomic information. Information problems for macroeconomic management are widespread beyond Africa.6 For instance, many Latin American countries lack current and adequate national accounts, balance of payments estimates, and price series as they grapple with the challenges of adjustment. The highly populated Asian countries lack current and reliable information on the nature and extent of poverty and on the effect of various national programs on poverty alleviation and population control. Despite the importance of external trade for countries like Mexico, the latest information on exports is two to three years old.

15. Rigid information structures. Top decision−makers often have to respond to complex and strategic issues on short notice and in a crisis situation; their decisions are often based on poorly organized and unreliable

information. The current rigid information structures are suitable neither for exploring alternative policy scenarios nor for providing quick information inputs to decision−makers. Even when the problem is not the lack of data, frequently the information is not current or in readily usable form. Budget officers and financial managers face similar problems in planning and controlling public expenditure programs and in preparing the annual budget for

The Information Explosion 7

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the

6 For details, see R. Chander, "Building National Statistical Capabilities: a Role for the Bank," 1989 (draft paper).

government. Existing information systems do not adequately support budget analysis, assessment of the financial implications of various programs and policies, or up−to−date expenditure control.

16. Cumbersome reporting and poor support. Reporting and monitoring systems on national development programs are usually voluminous, overlapping, and burdensome for field managers and field workers as well as slow and massive for any effective use at the center. These systems overload senior managers with data, but do not give field managers the necessary problem−solving support. An impressive amount of primary data may be collected at the lowest level of the bureaucracy, but its potential for decision−making is not exploited since manual information systems are not suited for quick processing of large amounts of data. Senior managers in developing countries often have to make up for the skill gap at the subordinate level; hence their scarcest resource is time.

17. Inadequate monitoring systems. Reliable and relevant information on the performance of large organizations is scarce or nonexistent in many developing countries. This is mainly due to monitoring and evaluation systems that are poorly designed for decision−making and strategic control. This causes major problems in managing public enterprises (as well as private companies) and in developing adequate levels of autonomy, accountability, and incentives.

18. Lack of access to local information. Developing−country workers do not often analyze or use their own data to formulate policies and development assistance programs. Population and demographic surveys are sometimes sent overseas for processing and analysis; thus opportunities for verification of data are lost and results are slow to return to the originator of the data. Similarly, large amounts of information are collected from field levels;

however, without the appropriate processing and communication systems, results are slow to come and often not reported back to the field. Government economists and planners provide large amounts of data to visiting aid agency professionals, but they often are not involved in analyzing this information to jointly reach the conclusions and prescriptions with the external agencies. This lack of cooperation reduces the chance not only to build local capacity for policy analysis, but also to build commitment for the results. Similarly, many development activities and public investments fail because of poor communication with and involvement of the stakeholders and beneficiaries.

19. Poor information on natural resources. Information on natural resources (forests, water, fish, minerals, oil, and so on) is extremely poor in most developing countries. Yet little technological and methodological assistance has been given developing countries to address the information requirements for environmental policies and national resource development strategies.

Remote sensing and the recent development of geographic information systems (GIS) provide powerful tools for integrating and analyzing spatial information in urban and regional planning, land use and water resources planning, natural resource assessment, mineral resource exploration, and environmental protection. The challenge is to build local capability to exploit these new tools and to organize and analyze the vast amount of data involved in environmental and natural resources management

20. Isolation from current developments. Researchers, scientists, engineers, and other knowledge workers in developing countries are often isolated from current developments in their professions. This stunts their professional development and lowers their productivity. Lack of information services, a weak communication infrastructure, and scarcity of information sources result in needlessly repeated research, poor−quality research,

The Information Explosion 8

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and ignorance of relevant development elsewhere. Even more relevant is professional practitioners' lack of timely access to research findings for use by professional practitioners. Developing−country professionals waste their valuable time and scarce skills on inefficient information searches and routine information−handling activities.

Similarly, development practitioners and policy−makers in developing countries are isolated, since they have limited access to databases and networks for sharing their cross−country experience.

21. Underuse of locally produced information. Indigenous information and locally−produced knowledge are underused. There is a need to capture and record local knowledge and experience and to make them readily available to a larger audience within countries and regions. Information is not tailored or packaged for different target audiences. For example, local research on agriculture, health, and environment often is not adapted and made accessible to policy makers, administrators, extension workers, or farmers. Oral traditions, an important link in the information chain in Africa, can be used to disseminate information on health, sanitation, and farming methods. Putting indigenous as well as outside knowledge within reach of the people would allow them to fit the information into their own problem−solving processes. However, attempts to tap and disseminate indigenous knowledge are thwarted by negative attitudes toward traditional farmers, local researchers, and other sources of pragmatic, indigenous information. Central planners, administrators, and scientists too often what the local community knows. Because local efforts to generate development information are largely uncoordinated, underfunded, and isolated, excessive reliance on Western experts continues. Lack of resources, particularly in Africa, also limits the publishing and the dissemination of local research. An unknown but appreciable amount of research fails to be published, and its results are largely wasted.

22. Few guides to local information. Moreover, information on the location and scope of local information resources is often scarce. There is little investment in information directories, bibliographic systems, libraries, and documentation centers. Institutional memory is idiosyncratic and development studies, often funded by outside aid agencies, are lost to future planning efforts. Information resources are not yet viewed as important assets to develop, exploit, maintain, and market.

23. Information for negotiation. Information is a key factor in the capability of developing countries in various bilateral and multilateral negotiations. Skillful use of information may be the most crucial factor for a negotiating advantage; however, many developing countries have yet to redress the growing gap in their bargaining power arising from poor information support.7

24. Lack of information on markets. Information on national and international markets and business opportunities is difficult to find for local entrepreneurs. The marketing and intelligence functions of domestic enterprises are typically underdeveloped. The governments in most developing countries are not yet equipped to play roles similar to those of Korea and Japan in providing information on domestic and foreign markets and technologies.

25. Institutional and infrastructural weaknesses. Information poverty is the product of many basic institutional and infrastructural weaknesses. Information management and statistical methodologies, especially in data processing and communication, have not been sufficiently diffused and adapted to local conditions. Institutions concerned with information resources management, such as libraries and central statistics offices, lack the necessary investments and managerial capabilities because of the absence of strong information−based traditions in decision−making and because of the absence of an organized, articulate, community of information users.

Policy−makers often assign low priority to information development and management. This is reflected in the low salaries and limited career opportunities of statistical staff and information professionals in the government.

Libraries, information services, and statistical offices are first to suffer from budget cuts.8

7 For details of specific negotiating situations where information is crucial to the bargaining power of developing countries, see Information, Economics and Power by Rita Cruise O'Brien, ed., Boulder, Colo.: Westview Press, 1983.

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8 Chander, op. cit.

26. Poor communications infrastructure. The institutional and physical infrastructure for information services at the village and local government levels is extremely poor. Information scientists have yet to understand the special and basic information needs of rural populations. The communications infrastructure is also lagging in many developing countries; for example, Tokyo alone has more telephones than the whole of Africa. Developing countries, representing 80 percent of the world population, account for only 2 percent of the total global

expenditure on informatics.

27. Centralized information infrastructure. In developing countries, institutions concerned with information management and national statistics typically lack user−orientation. Information flow is unidirectional, with little or no feedback to local levels for local problem solving. District and community−level development workers have no access to the data concerning their constituencies, and the aggregate published statistics are not useful for particular community needs.

28. Information management practices. Information is commonly perceived as a source of power, and there are many cultural, political, and institutional barriers to sharing it and to using it for decision−making. Dealing with these constraints in developing countries is essential to alleviating information poverty and to promoting informed decisions. The information profession is still relatively new in developing countries, and its potential contribution to solving common development problems is not yet widely recognized.

28. Illiteracy. Access to the formal education system is still limited and may get worse for the foreseeable future.

When levels of illiteracy are high, the majority of the population does not have access to even those few information resources available within the country. Visual and tailored information becomes critical. The prevailing educational and communication technologies are an important cause of this limited reach. Moreover, the prevailing pedagogy does not encourage and teach students to gather information from various sources and to analyze rather than learn by rote.

30. Increasing premium on alleviating information poverty. Policy and economic changes in developing countries put an increasing premium on alleviating information poverty and on generating an efficient flow of information.

The ongoing changes require enhanced intelligence capabilities for an effective supply response to trade

liberalization and export promotion policies (in order to exploit market opportunities); reliable and timely flow of information on the health of financial intermediaries; sophisticated internal management information systems; and effective supervision systems for more liberal and open financial systems; and reorientation of the information systems of government and private enterprises to support deregulation and the movement toward increased market−based competition.

31. Consensus on development strategies. Timely accounting and evaluation of project activities and their effect on the ultimate beneficiaries have become increasingly important to many donors and aid agencies (particularly in Africa). National consensus on reforms and development strategies are essential for successful and sustainable development. Attaining such consensus requires broad participation, information sharing, and intensive interaction among all levels of the society. Generally, strategic change and structural adjustment in developing countries can be managed only when key performance indicators, of the social costs of adjustment, supply responses, and the effect of changing policies and programs are reliably and continuously monitored.

32. Information technology can make a difference. Countries where improved statistical software packages have been introduced for household surveys, have reduced the time lag between field collection of data and the availability of tabulated results from the traditional two to four years to about six months. The introduction of microcomputers in many information environments and offices has increased awareness of and interest in how

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information is generated, how it flows within organizations, and how it is used. Microcomputers, when properly introduced, have motivated local staff to learn new analytical skills; to change their thinking and

information−gathering behavior; to review their office procedures; to impose discipline upon information handling activities; and to improve data quality. The power of informatics is not merely in automating existing information processing activities, but also in encouraging "what if" questions, conducting new "thought experiments," examining implications of various assumptions, and expanding the range of strategic choices.

Improved telecommunications, shared databases and analytical tools, and local data processing could also assist mutual learning and information sharing among developing−country professionals and between them and aid professionals, thus contributing to capacity building and ownership of solutions.

33. Information resource management can also make a difference. Emphasis should be on treating local and outside information as a strategic asset to be maintained and exploited. Farming−systems research is one example of capturing and building on the indigenous knowledge of local farmers within similar ecological conditions and production systems. Information technology could also revolutionize information services (such as libraries) that consolidate and share information resources among a large network of village− and district−level information centers and that repackage information to fit the needs of diverse users. Desktop publishing offers an attractive means of producing and disseminating local scientific material and research among otherwise isolated local scientists and researchers. Vast amounts of agricultural research and information on

crop protection and pest management (the equivalent of 400,000 abstracts) were put on one optical disc

(CD−ROM), which can be mass produced. This pilot project successfully demonstrated the capabilities of the new technology as a cost−effective means of improving agricultural information and research findings.

Microcomputer−based software has been developed in Chile to make small−area census information available for planning purposes at affordable cost to public− and private−sector users.9

34. Many Latin American countries have developed electronic−based information networks to share all types of information—bibliographical, statistical, ongoing research, referral, and so on. Such networks promote the transfer of experience within and among developing countries, as well as the dissemination of information produced in a particular region or area of knowledge and communication among otherwise isolated researchers in developing countries. Communication technology can assist the free flow of information and widespread use of indigenous knowledge, with equal access regardless of where people reside or where information is located.

Changing Competitive Advantage

35. Changing market forces. The rapid and efficient transmission of information has been a driving force for greater international integration of markets, industries, and services. Accelerated international transfer of technology and greater mobility of service industries are among the probable consequences. Changes within the financial services industry have had major consequences for the mobility of capital and the relative decoupling of capital flows from trade flows (capital flows were estimated in 1986 at about 35 times the value of world

trade).10 Deregulation and liberalization trends in many countries have accelerated the international integration of economies and the demand for transborder flow of information. Multinational enterprises are contributing to this process now that their telecommunication networks allow them to share information in real time for research and development, engineering, manufacturing, marketing, finance, distribution, planning, and management.

36. Changing global economy. Empirical research on technological change indicates that the ongoing change in the techno−economic paradigm brought about by the information revolution

9 Shahid Akhtar, "Regional Information Networks: Some Lessons from Latin America," IDRC, 1989.

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10 Peter Drucker, "The Coming of the New Organization," Harvard Business Review, JanuaryFebruary, 1988.

accentuates the technological and competitive advantages of the leading countries and contributes to a severe disequilibrium in international trade.11 The current structural crisis will spur the transition of the world economy to a new technology based on information−intensive products and processes, just as the structural crisis of the 1930s spurred the transition to an energy−intensive assembly line and flow−production system. Such changes give rise to great instability, intensify the uneven development of the world economy, and call for new regulatory and institutional frameworks at the national and international levels. They are also associated with shifts in the international division of labor and international technological leadership. Newcomers are sometimes more able to make the necessary social and institutional adaptations than the established leaders who may have more rigid social structures. On the other hand, countries lacking the necessary educational, research, and design capabilities may be even more seriously disadvantaged in international competition.

37. Impact on competitiveness. 12 The likely effect of information technology on the competitive position of developing countries in the world economy may be illustrated by the following:

The knowledge advantage enjoyed by enterprises in developed economies is greatly enhanced by informatics applications.

Information technology applications for manufacturing and product design are reducing demand for raw materials and energy supplied by developing countries.

The continued growth of electronic networking and communications for various purposes, such as global research and development and Just−In−Time procurement, is disadvantageous for developing countries outside the loop of shared information.

Information technology allows foreign competitors better access to timely information on the local market and on consumer preferences in a developing

11 C. Freeman, Technology Policy and Economic Performance: Lessons from Japan , University of Sussex, Printer Publishers Ltd., 1987.

12 The literature on the growing impact of information technology on the competitiveness of nations and firms is extensive, and the brief treatment here may not do justice to this fundamental issue. For further insight and good examples, see: Ernst and O'Connor, Technology and Global Competition: The Challenge for Newly

Industrializing Economies , OECD's Development Center, Paris, 1989; Emil Herbolzeimer, "The Effects of New Technologies on Exports of Manufacturing Goods from Developing Countries," and other articles in ATAS Bulletin , United Nations, October, 1987; and Soete (1988), Child (1987), Aoki (1989), and Mody (1989).

country than even the local suppliers have, thus putting the domestic industry at an increasing disadvantage.

Informatics applications are likely to speed up the integration of the global economy and the transmission of market signals and producers' responses; even the least developed countries will feel the effects of this fundamental change in the global economy.

Information technology has the potential to affect global distribution of employment, possibly promoting production of labor−intensive parts to developing countries or relocating employment in traditionally labor−intensive activities back near the final markets in the richer countries.

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Informatics is increasing the mobility of service activities, with the result that services are far more easily traded between countries.

38. There is nothing predetermined about how the new technologies will affect the distribution of competitive advantages and world market integration of different groupings of developing countries. Much of the impact can be shaped by national and international policies. So far, the new, knowledge−intensive technologies have worked principally to the benefit of the industrialized countries. The new technologies can both drastically increase barriers to entry, and at the same time open up new possibilities for destabilizing established market structures.

They can strengthen both spatial decentralization and reconsolidation of production and complementary support services within and among nations. However, since the late 1970s, access to advanced international technology has become increasingly restricted and politicized. Moreover, users and procurement officers in developing countries are poorly informed about available technologies and the benefits and risks involved. The world

economy is thus at a critical juncture. If ''neo−mercantilistic" trade and industrial policies are followed, inequality and concentration in the international economy are bound to increase. If the manifold possibilities for revitalizing international technology diffusion and for assisting developing countries to absorb these powerful technologies are pursued, the chances for more equitable worldwide development could be improved substantially.13 13 See Ernst and O'Connor, op. cit.

Industrial Development

39. Industrial transformation. Advances in information technology constitute a new techno−economic paradigm, sometimes likened to the invention of the steam engine and electricity in its profound transforming effects.14 Some of these pervasive effects are reflected in mutually reinforcing changes in the design of products and processes and in the nature of industrial competition. Market horizons have become broader, due not only to more information available on markets, but also to competitor responses to developments in those markets. Timely and detailed information about markets, point−of−sale information, and electronic linkages to clients and distributors has enhanced the capability to tailor products and services to consumer groups and market niches (and to track changes). The use of computer−assisted design permits greater flexibility and speed in product design changes, while built−in software and "intelligence" in products, automatic diagnosis of malfunctions, and

electronically−assisted after−sales service increase the value added of physical products.

40. Quality and flexibility. The quality of products and services can be improved through real time monitoring and control of outputs, and the reduction in electro−mechanical components provides material and energy savings in products and processes. Greater speed and flexibility in manufacturing systems are achieved through flexible automation techniques (flexible manufacturing systems), which efficiently accommodate changeovers from product to product and changes in volumes, processes, sequencing, and materials.15 Taken together, design, production, procurement, sales, administration, and technical service functions within enterprises are united through computer−integrated manufacturing systems and electronic office systems. Increased subcontracting and tighter coupling of enterprises is occurring in various industries, both within and among nations.

41. Industrial competitiveness. The effect of information technology on the industrial competitiveness of developing countries is likely to vary between countries at different levels of

14 See Paul−David, "Computer and Dynamo: The Modern Productivity Paradox in a Not−Too−Distant Mirror,"

Center for Economic Policy Research, Stanford University, 1989.

15 The impact of information technology on flexibility and quality in various industries is pervasive and

profound, and this is not limited to engineering or high−tech industries. For example, in the textiles and clothing

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industry, an industry traditionally labor−intensive and of high importance to developing countries, informatics has permitted a much closer link between design, supply of inputs, production, and marketing, thus facilitating rapid adjustments to the demand for changing combinations of yarns, fabrics, and colors. Informatics has also increased design and cutting speed and accuracy, and reduced wasted material, thus enhancing product quality and the industry's flexibility to respond to frequent fashion changes.

industrialization. Flexible automation technologies and organizational innovations are coalescing into a new best−practice manufacturing system that is spreading throughout industry in advanced economies. Its diffusion in developing countries is still very limited, occurring primarily among the newly industrialized countries (NICs), and even there, diffusion may be slow. In the course of this process, the determinants of international

competitiveness, at least in industry, are being rewritten. For example, while the NICs may enjoy good export performance in those industries where products are simple and where the effects of flexible automation are relatively minor, they are likely to run up against new obstacles in many other industries (such as machine tools) where these techniques are being rapidly adopted by the OECD countries (with substantial improvement to their competitiveness). There is a real concern that significantly differing rates of the diffusion of information

technology would undermine the low−wage advantage of developing countries that are already major exporters of manufactured goods. Some researchers argue that some NICs are already losing competitive advantage in low market segment products based on cheap labor, but they do not know yet how to implement successful strategies of upgrading competitive advantage, which increasingly depends on mastering information technology.16 42. New locations for industries. The uneven diffusion of the new industrial paradigm has important long−term implications for decisions about locating industries. A case in point is the ongoing restructuring of the automobile industry, with massive investment in automation technology and in new inter−firm relations of production. The rigors of Just−In−Time and Total Quality Control demand proximity. Supplier and assembler need much closer working relationships than ever before, from predesign stages to delivery. The supplier's design and product technologies are also becoming important determinants of competitiveness due to the growing use of

microelectronics. These trends create both new problems and unexpected opportunities for developing countries.

The outcome depends in part on whether flexible automation, other applications of information technology, and new organizational practices can be successfully introduced in industrializing developing countries. One could argue that the complexity of the new systems, their engineering intensity and capital cost, and the increased coupling between suppliers and assemblers would work strongly against the introduction of these systems in all but the advanced NICs. On the other hand, the flexibility and lower−scale economies of these systems might well be suited to the market conditions of many developing countries, and, if successfully adopted, could enable these countries to become attractive locations for global industries.

16 See Ernst and O'Connor, op. cit.

43. Industrial restructuring. Management information systems (MIS) are an essential component of the ongoing industrial restructuring process in many developing countries. For example, two Industrial Restructuring Projects in Hungary (assisted by the World Bank) provide financing to the major manufacturing organizations (rubber, chemical, electrical goods, instruments, and so on) to enhance organizational and production capacities. Each participating organization is installing new MIS and production management systems. These information systems are considered essential to planning, programming, and controlling production processes, particularly for

enterprises that are expected to generate hard currency through the export of manufactured goods.

44. Industrial research and extension. Informatics can be used to improve industrial research and extension services in ways similar to its applications in agricultural research and extension. Information technology can bring affordable information to small and medium industries in such areas as markets, products, technology, raw materials, and industrial standards. It can provide access to information from government agencies, research

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institutions, patent offices, international databases, trade and industrial associations, and non−governmental organizations directly involved with small and medium enterprises. This information can be repackaged for various users, such as the managers and engineers of these enterprises and the associations and agencies that support them.

45. Electronics industry. These technical changes and the demands generated by the information explosion have spurred not only the revitalization and modernization of old industries, but also the rapid growth of the electronics industry itself. The electronics industry now accounts for about 10 percent of worldwide manufacturing, and estimated worldwide production reached US$ 500 billion in 1987. At present, electronics ranks as the

fourth−largest industry in the world. Research and development expenditures in information technology industries are, by far, the largest among all industries in all industrialized countries, accounting for almost one−third of total research and development.

46. Involvement of developing countries. The participation of developing countries in the production of information technology (as opposed to the use of information technology in other industries) poses significant opportunities and challenges. Information technology industries are likely to constitute the largest industrial subsector before the end of the 1990s. The Indian electronics industry, although growing under protectionist conditions, has accelerated its growth from 10 percent annually in the 1970s, to 18 percent annually in the first half of the 1980s, to

nearly 25 percent annually from 1985 to 1987. Korea has moved in less than a decade from virtually no production capacity in semiconductors to become the third largest manufacturer in the world. Developing countries with large technical manpower and markets, such as India, have promising opportunities in certain important areas of information technology such as the software industry. Mexico, Brazil, Korea, India, Singapore, and other developing countries consider the information technology industries as "strategic" because they offer high value−added services, attractive market opportunities, import−substitution potential, and close ties to many other industries.

47. Dangers of protectionism. Developing countries face the danger of growing protectionism in the industrial sector. Policies regarding the electronics industries, as well as regarding the incorporation of electronics in other industries and services, are high on the political agenda of industrially advanced economies. The role of

government in this sector is quite widespread, and in some aspects essential. The rationale for "infant industry"

protection of information technology production within developing countries must be reexamined in view of the special nature of this technology, which continues to change at a fast pace, requiring substantial spending on research and development and continuous adaptation and learning. The lack of responsive financial institutions and venture capital is a major constraint to local private−sector participation in the information technology industry and information services. Trade and foreign investment policies are therefore essential, but there are no simple or uniform strategies for the development of the sector. These strategies should be guided by the potential contributions of various information technologies to the rest of the economy and by the varied skill and capital requirements of these different but related technologies.17

48. Lessons of experience. Industrializing countries that wish to participate in information technology industries can learn several lessons. First, a combination of nurturing and protection during the initial phase of development may be necessary, but this must be combined with constant pressure to improve performance through strong domestic competition and by encouraging firms to export. Second, access to foreign technology and market trends is needed because of continuous innovation and rapid change in this sector, and this often requires emphasis on exports, foreign investment, and strategic alliances. Third, rather than targeting the electronics sector as a whole (as in India, Brazil and China), many developing countries may be selective and broaden their coverage

progressively and sequentially as capabilities build up (like Korea and other Asian NICs).

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17 William R. Cline, Informatics and Development , Economics International, Inc., 1987.

Fourth, the role of government is to promote competition through appropriate incentive regimes, to provide an environment for flexible adjustment through appropriate training and financing institutions, and to strengthen the technical infrastructure by improving access to technological research and information and by developing technical human capital.18

49. Country−specific strategies. A competitive strategy for informatics development must be country−specific. It should recognize the interdependencies within the information technology industry as well as among user

industries and in the economy at large. The most advantageous route for the development of the electronics sector itself cannot ignore the short− and long−term effects on domestic user sectors. Developing countries that are latecomers to industrialization or that are unlikely to become major participants in the export of mass−produced information technology products still need to build technological capabilities that would support the requirements of local user industries. Microelectronics−based technology is unique in its malleability to fit an infinite variety of user needs, and this adaptation process depends on design capabilities and understanding of the special needs of local industrial users. This opens up dynamic opportunities for industrial latecomers. Accordingly, many developing countries may choose user−oriented industrial strategies that would put emphasis on information technology products, activities, and capabilities that would support local user advantages and flexibility.19

The Service Sector

50. Transforming the private service sector. Informatics is profoundly changing private services in the industrialized countries. The nature and structure of banking, financial services, insurance, marketing,

distribution, retail, and travel are changing because of the speed, reliability, and low cost of manipulating vast quantities of information related to financial, inventory, and sales transactions. Information technology is increasing the fixed capital and information intensity of services, such as banking, and is breaking down barriers among other service industries; for

18 See Carl Dahlman, "Electronics Sector Development Strategy—The Role of Government," Washington, D.C.:

World Bank, 1989.

19 Application−Specific Integrated Circuits (ASIC) is one example of a technology that requires intensive

interaction between information−technology suppliers and users. ASIC may prove to be one of the most important segments of the information−technology industry in terms of its contribution to the overall industrial sector and the economy in industrializing developing countries. For details, see Carlota Perez, "Electronics and Development in Venezuela: Strategic Options and Policy Implications," Technological Change and the Electronics Sector:

Implications for Newly Industrializing Economies , Ernst (ed.), OECD Development Center, Paris (forthcoming).

example, American Airlines, through its reservation system (SABRE), is now in the business of hotel

reservations, car rentals, software development, and rapidly supplying spare parts. Service providers, traditionally small and decentralized, are being linked nationally and globally through communications technology.

51. Information−intensive services. Information−based services, such as publishing, broadcasting, libraries, engineering, and professional services, are being transformed, and new information services, such as data

communication and processing and databanks, are being created. The information services industry (for example, commercial databases) is still a small part of the service sector, but it is growing very rapidly.

52. Growing interdependence of industries and services. Goods−producing industries have become highly

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dependent on service activities, either performed within the firm or purchased from producer−services vendors (see Figure 2: Quinn). Services have become critical to industrial competitiveness. The role of services in the globalization of competition and economic integration has forced virtually all large manufacturers to consider their supply sources, markets, and competition on an worldwide scale. The services industry has become a major employer in the industrial economies: in the U.S., about 75 percent of employment is directly in the services industries; in addition, within manufacturing, about 75 percent of all costs (and a much higher percentage of value added) are generally for services activities.20

53. Improving the quality of life. In contrast to the advanced effect of information technology on producer services, its effect on consumer services is still at an early stage. However, over time, information technology is likely to revolutionize many consumer services such as telebanking, teleshopping, teleworking, on−line

equivalents of many public services, increased self−service and entertainment options, and High Definition Television. Applications of informatics outside the workplace are likely to be pervasive in their effect on expanding human choice and improving the quality of life. Informatics promises novel ways of self−education and self−training, such as the Open University model of the United Kingdom and computer−aided instruction.

This role will be particularly important for the continuing education and retraining of qualified teachers in industrial and developing countries alike. Another potentially major field of information technology applications is health care. Health monitoring systems in the home will play the role of "electronic house nurses" by

transmitting key health parameters to the nearest medical center to spot any

20 Office of the U.S. Trade Representative, U.S. National Study on Trade in Services , Washington, D.C.: U.S.

Government Printing Office, 1983.

Figure 2

SOME MUTUAL INTERACTIONS AMONG MANUFACTURING AND SERVICES ACTIVITIES Note: Double−headed arrows indicate that each party benefits from the presence of the other in the trade.

Source: Quinn/Doorley

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apparent deterioration in the patient's condition. The effect of information technology on the cultural arena is likely to be as profound, since all hobbies have a strong information component, and information technology products and services could facilitate participation in diverse cultural and audio−visual activities.

54. Public services in industrialized countries. The potential effect of informatics on the delivery of public services in the industrialized countries is likely to be as great as in the private services, although the pace may be slower. Information systems are becoming a basic tool for improving the management, productivity, and

responsiveness of diverse public services. The governments of developed countries are setting up information and communication systems in support of policy formulation, planning and budgeting, financial and personnel

management, taxation, coordination among public agencies, office automation, paperwork reduction and procedures simplification, contract management, communication between various levels of government, monitoring and control of various public programs and services, and monitoring the environment and the management of natural resources.21 Increasingly, communication in various media is used to generate national consensus on public policy issues and socio−economic priorities and for increasing participation by the private sector and the public at large in the delivery of various services.

55. The public sector in most industrialized countries is exploiting informatics to make fuller use of the

substantial information resources that governments collect from businesses and citizens. This is particularly the case with regard to demographic, trade, and business information. An interesting example is the set of guidelines recently issued by the Commission of the European Communities for improving the coordination between the public and private sectors in the information market.22 Public administrations regularly collect basic information on the performance of their governmental functions and the economy. Member states are asked to publicize the information and to clarify the procedures by which it can be obtained and exploited by the private sector. These guidelines also clarify the role of the public sector as a provider of electronic information services. The U.S.

government has formulated similar policies for improving the private sector's access to public information. This sharing is common practice in

21 See, for example: Management of the United States Government , Office of Management and Budget, Washington, D.C.: U.S. Government Printing Office, 1988.

22 Commission of the European Communities, "Guidelines for Improving the Synergy Between the Public and Private Sectors in the Information Market," 1989.

Japan. Governments are also disseminating scientific and technological information as they realize that their economic competitiveness depends timely access to this information.

56. Financial services in developing countries. Information technology applications to banking and financial service institutions are spreading rapidly in developing countries, often parallel to financial sector reforms and liberalization. To manage increased competition and uncertainties, financial institutions need to improve their management information, supervision, and monitoring systems and to use information technology to innovate new services and to improve the quality and efficiency of current services. For example, a World Bank−assisted Financial Systems Modernization Project for Hungary intends to implement the new regulatory and institutional framework of the banking and securities market; to improve the financial health of participating banks; and to improve reliability of enterprise accounting. An effective monetary policy and management and an electronic inter− and intra−banking transactional network are goals of the project. The informatics components, constituting almost 80 percent of the project cost, will provide an effective operational framework for the mobilization of resources from the private sector, decentralization of foreign exchange operations, improved customer service, and effective liquidity management

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57. Participation in global service industries. The mobility of service jobs (within and across national boundaries) and international trade in information−based services are increasing. Causes for this increase are the demand created by multinational corporations, the substantial and increasing service inputs required by modern manufacturing systems, the emergence of international networks, and the advances in microelectronics.23 Accordingly, international networking, including the establishment of network services in the country within which trade is to take place, are becoming imperatives for participation in the fast−growing international trade in information−based services, and for competing in international trade in general.

58. Developing countries' participation in international trade for services will depend on their successful exploitation of information technology. For example, computer−assisted design (CAD) is transforming

engineering services and displacing traditional engineers and draftsmen. As manufacturing industries rely more on information−based producer services to reduce lead time, differentiate product quality, and support customer service after sale, the competitiveness of developing countries in these industries could be substantially eroded.

However, the vast new 23 Faulhaber, op. cit.

labor−intensive industry for information creation, processing, and transmission presents new opportunities for developing countries. Data entry services for U.S. companies are provided via telecommunication by such

developing countries as India, Jamaica, Barbados, Mexico, China, and the Philippines. Indian software companies are being subcontracted to develop large information systems for U.S. corporations.

59. Adapting software to local conditions. One major barrier to the diffusion of information technology in the service sector of developing countries is that commercially available software packages for various business applications are not adapted to local conditions, which differ in accounting rules, business culture, and language.

Local capability to adapt software applications to the local business environment is a precondition for exploiting the power of technology and of the knowledge embedded in these software packages. Similar arguments can be made about the relevance of most international databases to the business−support services in developing countries because the information content is geared more to the developed world.

60. Need for telecommunications. Aid agencies and developing countries have grossly underestimated the role of telecommunications in supporting various services and in contributing to the economy as a whole. Extending and adapting the telecommunications infrastructure should be central to the emerging role of telecommunications as the distribution or communication channel for an increasing number of services, including information services.

UN−financed studies in countries such as Kenya and the Philippines have estimated the benefits to be derived from improved telecommunications. Direct benefits are savings of personnel time and reduced expenditures on more expensive communications media (such as messengers or telegrams) or on alternative transportation

services. Other benefits come from the use of a more effective communications medium such as in the acquisition of supplies, the operation of organizations, and the sale and marketing of goods or services. Business expansion is achieved mainly through reaching a wider range of customers. Studies have also assessed the benefits of

telecommunications in agriculture, health care delivery, wholesale/retail trade, services, transportation,

construction, and light industry. Many developing countries have underestimated the substantial indirect benefits and externalities arising from telecommunications, and this may have led to serious underinvestment in

communication systems. In some cases, the total estimated benefits of telecommunication investments were 40 to 80 times greater that the usual measure of benefit, namely, revenues or even willingness to pay?24

24 Philip F. Palmedo, ''Microcomputers, Informatics, and Development Issues for Foreign Assistance," Policy Issues in Microcomputer Applications for Developing Countries (report of an ad hoc panel), Boulder, Colo.:

Westview Press (forthcoming).

The Service Sector 19

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