Broadband Boosts Growth

Expanding a country''s broadband infrastructure dramatically increases national economic growth. According to research by Nina Czernich and colleagues, a 10 percentage point increase in the proportion of the population with access to high-speed broadband internet can raise annual growth per person by up to 1.5 percentage points.

Their study, published in the May 2011 issue of the Economic Journal, analyses the economic growth of 25 OECD countries between 1996 and 2007. It finds that if the UK had as much broadband in 2003 as the leading broadband users in the OECD, its GDP per capita by 2007 could have been around £1,350 higher.

The authors describe broadband internet as a ''general purpose technology'', which fundamentally changes how and where economic activity is organised. It supports new business models, allowing information to be shared more quickly and stored more efficiently. This can lead to lower start-up costs for new companies, greater competition, increased labour productivity and ultimately stronger economic growth.

The authors conclude that to increase investment in broadband infrastructure, regulatory institutions should provide incentives for the private sector to invest in broadband rather than relying on government interventions. Private investment increases an economy''s long-term growth path without increasing government debt.

Modern economic growth is driven by innovation and knowledge. Access to fast internet via broadband infrastructure facilitates their diffusion. High-speed internet via broadband infrastructure facilitates the spatial distribution of large batches of information that previously had to be co-located, which in turn allows for new business models and collaboration of firms producing specialised inputs.

By facilitating decentralised information processing and supporting new working modes, broadband has an impact on growth distinct from other technologies emerging around the same time. This study estimates that a 10 percentage point increase in broadband penetration raises annual per capita growth by between 0.9 and 1.5 percentage points.

The study analyses the growth experience of 25 OECD countries between 1996 and 2007. In 2003, the broadband penetration rate in Germany was about 10 percentage points below the leading OECD countries. The size of the estimated effect suggests that German GDP per capita would have been between 3.7% and 5.9% higher in 2007 if Germany had been among the leading broadband countries in 2003 (see Figure).

"Broadband Infrastructure and Economic Growth'' Nina Czernich, Oliver Falck, Tobias Kretschmer and Ludger Woessmann is published in the May 2011 issue of the Economic Journal.