Reference no: EM13373190

Case Study - Technology and Economic Change: Getting the Benefits from

Tasks to be undertaken:

• Read Chapter 13 in particular to get a good understanding of the theory of Government Policy. Other chapters are equally important to understand macroeconomic theory in context to the case.

• Read the case study on- Technology and Economic Change: Getting the Benefits from Technological
Progress.

• Make notes, which will help you to answer the questions by applying the theory to real life example of economics at work, from the relevant chapters.

• Apply the DADA (Definitions, Assumption, Diagram and Analysis) while answering the economic questions. On campus students will be attempting some exercises in the workshop sessions. Off campus students should attempt weekly activities from the textbook boxed case studies. These exercises will help and guide you how to think like an economist. Look for theory and apply it to real life examples from "Case Study.

• Make sure you include in-text references and provide a reference list.

• The focus of your task for this assignment in the next four weeks is to elicit and apply economic concepts and theory to the problem discussed in the case, to grasp how long term economic grow is influenced by - technological change, and effects real life economics.

• Conduct research (find related articles) relevant to technology as the key factor in promoting economic development and long term growth. You will need this additional information to draw conclusions and justify your answers.

• In preparing your assignment, you need to ensure that you refer to the "essay writing guide for students studying economics" available on the course website in moodle. It is important in economics that you interpret the question clearly, use diagrams in an essay and write like an economist.

Technology and Economic Change: Getting the Benefits from Technological Progress

A powerful new technology, such as that represented by the computer, fundamentally reorganises the infrastructure of our material world. It eliminates former alternatives. It creates new possibilities. It necessitates fresh choices.

Technology has always been a key element in economic development: whether machine technology in the industrial age or computer technology today. With investment in technology, not only is the productive capacity of resources increased, but the ability of business to create new products and production processes is enhanced.

Ultimately it is technology that is crucial for long-term economic growth. Without constant technological advance, economies are likely to stagnate and fall behind their rivals, as new products emerge and as markets grow.

So with each wave of technology, economies must change and adapt if they are to ‘stay in the game'. The high-technology wave, which the world economy is currently experiencing, is of massive proportions - and it is widely accepted that the wave is not as yet at its full height! Not only is it changing the structure of production, trade and international competitiveness, it is also changing employment patterns, skill requirements and the direction of investment. In addition, businesses have been forced to reorganise to reflect the enhanced flexibility that new technologies offer. Governments also have had to assess and reassess, in this new technological age, how they can best aid their industries in creating the right conditions to achieve economic success. In many respects these policies are quite different from those pursued in the past.

It is hardly surprising, then, to find that many aspects of economic life are reflecting this ever- changing technological position.

• The OECD economies are more strongly dependent on the production, distribution and use of knowledge than ever before. Output and employment are expanding fastest in high-technology industries, such as computers, electronics and aerospace. In the past decade, the high-technology share of OECD manufacturing production and exports has more than doubled, to reach 20 to 25 per cent. Knowledge-intensive service sectors, such as education, communications and information, are growing even faster. Indeed, it is estimated that more than 50 per cent of GDP in the major OECD economies is now knowledge-based.

• Investment is thus being directed to high-technology goods and services, particularly information and communication technologies. Computers and related equipment are the fastest-growing components of tangible investment. Equally important are more intangible investments in research and development (R&D), the training of the labour force, computer software and technical expertise. Spending on research has reached about 2.3 per cent of GDP in the OECD area. Education accounts for an average 12 per cent of OECD government expenditures ... Purchases of computer software, growing at a rate of 12 per cent per year since the mid-1980s are outpacing sales of hardware. Spending on product enhancement is driving growth in knowledge-based services such as engineering studies and advertising. And balance of payments figures in technology show a 20 per cent increase between 1985 and 1993 in trade in patents and technology services.

Jobs and skills

The traditional view has been that technology destroys employment, as computerisation and automation dispenses with the need for labour. What employment is created by the new technology tends to be small scale and highly skilled and insufficient to offset the number of jobs lost. An alternative view is that technological change offers employment opportunities as new industries and new processes create new demands for labour.

But even if the technological revolution is creating job opportunities, it would appear that increasingly the acquisition of high-level skills is necessary if a worker is to attain both employment and higher wages. OECD figures suggest that the employment of high-skilled workers increased on average 2 to 3 per cent faster than that of low-skilled workers during the 1980s and early 1990s. For example, the average annual growth in employment of high- skilled workers over this period in the six richest OECD countries ranged from 1.9 per cent in Italy to nearly 3 per cent in Canada. The growth in employment of low-skilled workers, by contrast, ranged from -0.6 per cent in France to 1.4 per cent in the USA. Such trends are likely to continue as the technological revolution advances.

Not only are high-level skills going to be increasingly necessary to get a job, but they will be vital in supporting and maintaining levels of productivity growth. Does technological progress destroy jobs? The obvious answer may seem to be yes. After all, new technology often involves machines taking over jobs that were previously done by people. There is another view, however. This argues that a failure to introduce new technology and ultimately to remain competitive will offer an even worse long-term employment problem. Markets, and hence employment, will be lost to more efficient competitors.

The relative merits of each of these views are difficult to assess, since they depend greatly upon the type of technology, its organisation in the workplace and the market within which it is located. It is possible to identify four stages in the effects of new technology on jobs.

• Stage (1) Design and installation. Here labour requirements grow as first designers and then construction workers are employed. As construction/installation is completed, employment from this source will then disappear.
• Stage (2) Implementation. Here labour requirements decline, especially if the technology is concerned with improving existing processes rather than creating new products.
• Stage (3) Servicing. Maintenance and repair may have positive employment effects.
This may gradually decrease over time as ‘teething troubles' are eliminated, or it may increase as the stock of initially new machines begins to grow older.
• Stage (4) Market expansion. This represents the long-term impact of technology on employment levels as the improved and/or cheaper products lead to more sales.

The optimistic view holds that, historically, technology has generated more jobs than it has destroyed. Total employment today is much higher than a hundred years ago, and yet technological progress has allowed many goods and services to be produced with far fewer workers. What has happened is that increased output has more than compensated for the growth in labour productivity. There is no reason, say the optimists, why this process should not continue.

The pessimists, however, are less certain about the potential employment benefits of new technology. Even in growth industries, such as pharmaceuticals, electronics, optical technology and high-value plastics, there has been a decline in employment.

But cannot workers who are displaced from high-tech industries simply find jobs in other parts of the economy? There are two problems here. The first is that of structural unemployment. Displaced workers may not have the skills to take up work elsewhere. Clearly what is needed is a system of retraining that enables workers to move to alternative jobs. The second is that of income distribution. If the only alternative jobs are

relatively low-skilled ones in the service sector (cleaners, porters, shelf packers, check-out assistants, etc.), the displaced workers may have to accept a considerable cut in wages.

Productivity and knowledge networks

Any individual firm introducing a new technology or industrial process is likely to see an improvement in its productivity. To be truly beneficial to a country, however, such innovation must be diffused throughout the whole economy. The success or otherwise of technological diffusion depends on the knowledge network of the economy.

The success of enterprise, as of national economies, is determined by their effectiveness in gathering and using knowledge and technology. This may in turn reside in the tacit abilities of individuals and firms to link up with the right networks and use all relevant items of information. Increasingly, the ability to innovate and enhance technological performance depends on obtaining access to learning-intensive relations. The result is a society composed of networks of individuals and firms, usually linked electronically ... Innovation stems largely from the feedback loops or the continuing interactions which exist between science, engineering, product development, manufacturing and marketing. It is fed by the interplay among the different institutions and individuals involved - firms, laboratories, universities and consumers. The patterns of technology-related interactions in a national economy combine to form national innovation systems which are composed of the contacts and flows between industry, government and academia in the development of science and technology. The links within this system, and its ability to diffuse knowledge and technology, influence the innovative performance both of firms and of economies as a whole.

Government policy and the new technological age

We have seen that both workers' skills and a knowledge network are vitally important within the current technological revolution. In fact, the two are intimately related:

... [Skills] are essential to selecting, using and manipulating the knowledge which can be codified. The ability to select relevant information, to recognise patterns in information and to interpret and decode information is not easily bought and sold.

This aspect of new technology has significant implications for government policy. Workers require relevant training and education, and such training and education must be updated continuously. Education is thus at the centre of the knowledge-based economy.

Education, whilst of vital importance, is not the only target of government policy on technological diffusion. Governments in many advanced industrial economies have adopted some or all of the following measures:

• The promotion of innovation and the encouragement of greater levels of R&D.
• Support for small and medium-sized enterprises. SMEs have received particular attention because of their crucial role in enhancing innovation, creating employment and contributing to skills development, especially in high-tech areas.
• The improvement of infrastructure. This includes both physical transport, such as roads and railways, and information highways.

Massive investments in up-grading the telecommunications infrastructure, reform of regulation and advances in digital technology underlie the creation of the global information infrastructure. Digitisation has made possible the processing, retrieval, communication and dissemination of all forms of information worldwide.

• The protection of intellectual property by more effective use of patents and copyright.
By reinforcing the law in these areas, it is hoped to encourage firms to take the risks of developing new products and commit themselves to research.

Sources: OECD Economic Observer, No 198, 200 and 204

Answer the following questions:

NOTE: Chapter reference refers to theory to be applied to this case with an example of any country. It is important that you apply the theory to a country (developed or a developing country) and show how by investing /not investing in constant technological advancement, economies are likely to stagnate and fall behind their rivals, as new products emerge and as markets grow.

Question 1: What is the significance of the observations made by OECD in this case study regarding "The OECD economies are more strongly dependent on the production, distribution and use of knowledge than ever before"? Why does OECD suggest that technology is the key element in economic development and long term economic growth?

Question 2: What are the causes of economic growth in potential output in the long-term? Apply the theory to illustrate and explain your answer with an example.

Question 3: In what areas of the economy jobs are growing more rapidly? Is this due to a lack of technological innovation in these areas? Explain your answer with an example.

Question 4: Why have rural regional areas generally seen a smaller decline in high-tech employment than urban areas, and in some cases seen an increase? Explain.

Question 5: In what way might the government and the business sector contribute to improving the knowledge networks with an economy to promote technological progress to achieve faster rate of economic growth?