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Abstract
Using cross-country panel data, we found evidence that the Internet plays a
positive and significant role in economic growth after investment ratio,
government consumption ratio, and inflation were used as control variables in the
growth equation.
We would like to thank Kyeongwon Yoo, Yong-Hwan Noh and other participants for their
comments at the International Finance Study Group seminar held at the Bank of Korea, November
2005.
Corresponding author: Myung Hoon Yi, Department of Economics, Myongji University, 50-3
Namgajwadong, Seodaemungu, Seoul 120-728, Korea Tel.: +82-2-300-0687; fax: +82-2-3000654. E-mail address: yimh@mju.ac.kr (M.H. Yi).
1. Motivation
The Internet has influenced the economy in every respect. The history of the
Internet, however, is not that long. Also, there is little research on the Internet and
economy.
The effect of computers, as opposed to the Internet, on an economy has been
studied. For example, Krueger (1993) analyzed the effect of computer use on
wage structure using Current Population Surveys (CPS) data and found that
workers who use computers earn higher wages. Sichel (1999) found that computer
hardware contributes to economic growth. Oliner and Sichel (2000) and Oliner et
al. (2007) said that productivity growth after 1995 in the US has been driven in
large part by greater use of information capital goods. Gust and Marquez (2004)
found that productivity divergence is driven in part by differences in both the
production and adoption of information technologies, and that the adoption of
information technologies has been impeded by regulatory labor market practices.
According to Freund and Weinhold (2000) and Choi (2003), the Internet has had a
positive effect on bilateral trade and foreign direct investment, respectively. Yi
and Choi (2005) found that the Internet lowers the inflation rate by cross-country
panel data analysis.
With broad use of the Internet starting in the 1990s, we used cross-country
panel data to gather enough observations to analyze the Internet-growth nexus. In
section 2, we derived a simple growth equation incorporating the Internet
variable. In section 3, we perform several estimations for the growth equation.
Section 4 concludes the paper.
2. Model
Data for 207 countries from 1991 to 2000 were taken from the World
Development Indicators 2002 CD-ROM of World Bank (2002). Internet users, the
number of people with access to the worldwide network, is divided by total
population to get the internet users ratio. Annual percentage growth rate of GDP
per capita (gross domestic product divided by midyear population) is based on a
constant local currency. Gross domestic investment consists of outlays on
additions to the fixed assets of the economy plus net changes in the level of
inventories. General government final consumption expenditures includes all
government expenditures for purchases of goods and services. Inflation is
measured by the consumer price.
Table 1 lists the regression results. We estimated the growth equation (1) by
various estimation methods: (a) pooled ordinary least squares (OLS), (b)
individual random effects, (c) individual fixed effects, (d) time fixed effects, (e)
individual random effects and time fixed effects, and (e) generalized method of
moments (GMM) estimation.
According to the benchmark pooled OLS regression (column (a) in Table 1),
the estimated coefficient of Internet is 5.710 and significant at the 1% level as
expected. This means that when the Internet-user ratio increases by 1% point, the
growth rate increased by 0.057% point. The estimated coefficient of Investment is
0.167 and significant at the 1% level. This means that when the investment ratio
increases, growth rate increases, too. The estimated coefficient of government
consumption is insignificant. The estimated coefficient of Inflation is -0.003 and
significant at the 10% level. When the inflation rate increases by 1% point,
growth rate decreased by 0.003% point.
As we used panel data in our regressions, we re-estimated growth equation
(1) by panel data regression methods such as individual random effects (column
(b) in Table 1), individual fixed effects (c), time fixed effects (d), and individual
random effects and time fixed effects (e). The estimated coefficients of Internet
range from 4.931 to 5.886 and are significant at the 1% level in (b) and (d) and at
the 5% level in (c) and (e). This means that when the Internet user ratio increases
by 1% point, the growth rate turned out to increase by between 0.049 and 0.059%
point. The estimated coefficients of Investment are very similar to pooled OLS
estimation in (a). The estimated coefficients of government consumption are
negative and significant at the 10% level in equations (b), (c), and (e). The
estimated coefficients of Inflation are all negative and significant at the 1% level.
Because explanatory variables such as the Internet, investment ratio, and
government consumption ratio, can be influenced by economic growth, we
performed GMM estimation to take into account any endogeneity of the
explanatory variables (column (f) in Table 1). The coefficient of Internet is 5.517
5
Insert Table 1.
4. Conclusion
government consumption ratio, and inflation were used as control variables in the
growth equation.
References:
Barro, R.J., 1995, Inflation and economic growth, NBER Working Paper No.
5326.
Barro, R.J., 1997, Determinants of economic growth, The MIT Press.
Choi, C., 2003, Does the Internet stimulate inward FDI? Journal of Policy
Modeling 25, 319326.
DeLong J.B. and L.H. Summers, 1991, Equipment investment and economic
growth, Quarterly Journal of Economics 106, 445502.
Fernndez Valdovinos, C.G., 2003, Inflation and economic growth in the long
run, Economics Letters 80, 167173.
Freund, C. and D. Weinhold, 2000, On the effect of the Internet on international
trade, International Finance Discussion Papers, Board of Governors of the
Federal Reserve System.
Gust, C. and J. Marquez, 2004, International comparisons of productivity growth:
the role of information technology and regulatory practices, Labour
Economics 11, 33-58.
Hansen, L.P., 1982, Large sample properties of generalized method of moments
estimators, Econometrica 50, 10291054.
Hansen, L.P. and K.J. Singleton, 1982, Generalized instrumental variables
estimation of nonlinear rational expectations models, Econometrica 50,
12691286.
Krueger A.B., 1993, How Computers have changed the wage structure: Evidence
from micro data 1984-1989, Quarterly Journal of Economics 108, 33-60.
Table 1
The Internet and Economic Growtha
b
(a)
Pooled OLS
Constant
Internet
Government
Inflation
R2
(c)
Individual
Fixed
(d)
Time fixed
(e)
Individual
Random &
Time fixed
b,c
(f)
Panel
GMM
-1.173*
-1.447*
-1.186
0.389
(0.701)
(0.742)
(0.801)
(1.070)
5.710***
(1.566)
Investment
(b)
Individual
Random
0.167***
5.641***
(2.018)
0.195***
4.931**
(2.194)
0.281***
5.886***
(2.034)
0.168***
5.678**
(2.324)
0.197***
5.517***
(1.724)
0.085**
(0.023)
(0.024)
(0.038)
(0.019)
(0.024)
(0.041)
-0.039
-0.061*
-0.198***
-0.033
-0.054*
-0.024
(0.032)
(0.031)
(0.071)
(0.022)
(-0.032)
(-0.034)
-0.003*
-0.003***
-0.003***
-0.003***
-0.003***
(0.001)
(0.0004)
(0.0005)
(0.0004)
(0.0004)
0.27
0.43
0.46
0.29
0.45
J-statistic
[p-value]
Sample size 1004
1004
1004
1004
1004
0.001
(0.002)
10.320
[0.112]
565
Notes:
a. ***, **, and, * indicate significance at the 1%, 5%, and, 10% levels, respectively.
Standard errors are in parentheses.
b. Newey and Wests (1987) heteroscedasticity and autocorrelation consistent covariance
matrix assuming a lag length of one is used for standard errors.
c. Instrumental variables include constant, (Growth)t-2, t-3, (Internet Users/Pop)t-2, t-3,
(Gross Investment/GDP)t-2, t-3, (Government Expenditure/GDP)t-2, t-3, (Inflation)t-2, t-3
10