(CEP's CentrePiece June 1997) THE WEIGHTLESS ECONOMY: THE MASS OF…

(CEP's CentrePiece June 1997)

THE WEIGHTLESS ECONOMY: THE MASS OF EVIDENCE

In the second of his regular columns on dematerialisation, Danny Tyson Quah looks at the size and
growth of the world's weightless activity.

In my last column, I tried to clarify the substance underlying weightless-economy
rhetoric. I highlighted the economic issues and ideas at stake in the discussion; and
described some mechanisms by which the economic landscape might alter as
dematerialisation proceeds.
      But, while far from exhausting the circle of relevant ideas, that column also left
open whether the economic issues discussed were merely hypothetical, i.e., had no
empirical content. Elsewhere other writers--including, notably, Diane Coyle, in her
forthcoming The Weightless World--have in different ways addressed this matter of
real-world relevance. So I am now going to try to add to that discussion by pulling
together some numbers on increasing weightlessness and national economic
performance.


How it all adds up

This is not as straightforward as it might seem: it certainly calls for more legwork,
say, than peeling off from a computer database the latest timeseries on GNP, and
then testing it for this or that serial correlation property. An initial thought for
assessing the empirical importance of the weightless economy might have been to
compare, perhaps, value added in services--weightless if anything is--to value
added in manufacturing--heavy metal surely. But that would not be right:
semiconductor and microprocessor production count, appropriately, as part of
manufacturing, whereas the semiconductor and microprocessor chips that result are
themselves the key driving force in ongoing dematerialisation. Within their wafer-
thin silicon forms, semiconductors and microprocessors contain ever increasing
value inside ever reduced physical material. They provide the means to translate
seemingly nonsensical bitstrings of 1s and 0s into valuable economic commodities,
and, in so doing, remove geography and other physical barriers between production
and consumption.
       In modern warfare, semiconductor operation is the first capability of an enemy
one aims to disable, and thus semiconductors compare in importance with railways
in earlier times. However, unlike railways, semiconductors and microprocessors
directly help improve the design and production of better versions of themselves,
and thus differ dramatically from earlier technologies--at least from the perspective
of understanding economic growth.
       Be that as it may, in national income accounts the manufacture of these chips
gets lumped with the production of railway sleepers, building cranes, lumber and
wood products, or stone, clay and glass. The implications of each of these for
economic growth differs, and so the classification misleads. Just as inappropriate,
however, would be to put these dematerialised high-tech products in together with
services such as gardening, hairdressing, hotel bed-making, or valet parking. A
critical aspect of weightless economic activity is its healthy disrespect for physical
geography and national boundaries; the services just mentioned, by contrast, are
quintessential examples of non-tradeables in traditional reasoning on international
trade.
       The upshot of this is that the usual national income product accounts cannot
directly inform on the importance of the weightless economy in daily economic life.
And, while computers and information technology (IT) form a large part of high-
tech activity in the weightless knowledge-based economy which I described last
time, they are not everything: financial services, communications, media
entertainment all show economic properties similar to IT's, and so should be
considered together.


Big numbers but weightless

A first step then is to look under the surface on the national income product
accounts. In 1993, total US GDP came to six thousand five hundred and fifty billion
dollars. Within the services category for US national income and product accounts,
the sum total of : finance, insurance, and real estate; business services; motion
pictures; and educational services averaged 23% of total US GDP between 1987 and
1994. This collection of weightless economic activity thus accounted for close to a
quarter of all US economic production. And aside, perhaps, from the real-estate
component, all of these services are readily exportable. In 1995, 40% of the
earnings of American makers of movies, CDs, and videos came from abroad.
      By contrast, all of construction and manufacturing put together ( except for
electronic and other electrical equipment) came to a fifth of GDP. By the mid-
nineties, business services alone already matched construction in the contribution to
US GDP. Looking at dynamics magnifies these effects: the construction and
manufacturing component I outlined has been declining during this period; the
weightless element increasing.
      One can do all the sums differently to emphasise instead the high-tech,
weightless-economy activity in computers and telecommunications. US spending
on computers, telecommunications, and peripherals, together with net IT exports,
contributed 5% of total GDP in 1996: this exceeded all of traditional construction,
and was one third of traditional manufacturing.
      In 1993, the US exported one hundred and eighty eight billion dollars' worth
of traditional manufactures (excluding electronic and electrical goods) to the other
members of the OECD. (It makes sense to look specifically at exports to the OECD,
since those countries would be the ready market for high-tech, weightless economy
exports). But recall the numbers I cited earlier: total exportable weightless economy
services were fifteen hundred billion dollars; actual high tech expenditure and
exports a further three hundred and fifty billion dollars ­ ten times traditional
manufacture exports to the OECD.


Just an American dream?

But is the scale of this shift to the weightless economy peculiar to the US? Hardly.
In 1995, five high income economies were classified as having services as their major
export category. Of those five, only one was an OECD economy ­ the UK. All the
other OECD economies fell into one of three groups: i) exporters primarily of

 The others were the Bahamas, Cyprus, French Polynesia, and Kuwait.
manufactures (including, significantly, Canada, Germany, Italy and Japan);
ii) exporters mainly of primary products (Iceland and New Zealand); and
iii) diversified exporters (among these, France and the US). I have documented
elsewhere (the Bank of England Quarterly Bulletin February 1997) the importance of
services ­ weightless economic activity ­ to the UK.
       In providing this fresh new face on exports and economic activity, the UK and
the US might well be leading the way, while Germany and Japan continue to rely on
more traditional manufacturing. However, the increased emphasis on weightless-
economy production and activity is growing among all the richest economies. In
1994, the world IT market amounted to over four hundred billion dollars, with 95%
of that in the OECD alone. More striking still, over four fifths of world IT
expenditure was spent in just five countries: the US, Japan, Germany, France, and
the UK. By 1996, the world was trading five hundred billion dollars' worth of IT a
year: to put things in perspective, that's just a little less than one tenth of US GDP.
       One can play more games with disaggregated data: computer engineers and
scientists and systems analysts are among the fastest growing categories in US
employment; and while, during the 1990s, wages of the median US worker have
fallen in real terms, those of computer programmers have risen consistently ­ real
wages for male programmers by 13%, for females by 20%.
       The picture that emerges is that successful economies are increasingly reliant
on the weightless economy. And those people in the who, in a fractal fashion
relative to their home economies, have shown similar specialisation, have similarly
been among the most economically successful. It really is happening out there.


Danny Tyson Quah is Director of the CEP's National Economic Performance Programme, and
Professor of Economics at the LSE.
http://econ.lse.ac.uk/homepage/dquah/

(1243 words)