Together but Apart: ICT and Productivity Growth in Israel

48 Pages Posted: 11 Jun 2008

See all articles by Saul Lach

Saul Lach

Hebrew University of Jerusalem - Department of Economics; CEPR

Gil Shiff

Tel Aviv University - Eitan Berglas School of Economics

Manuel Trajtenberg

Tel Aviv University - Eitan Berglas School of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

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Date Written: March 2008

Abstract

There is widespread agreement about the important role played by Information and Communication Technologies (ICTs) in the US productivity revival and in the evolving US-EU productivity gap. In Israel, the ICT sector grew very rapidly during the 1990s and became a hotbed of innovation and technological advance by worldwide standards. Yet, Israel's overall productivity growth remained sluggish, with traditional sectors both in manufacturing and services seemingly unable to benefit from the success of the ICT sector. The main goal of this paper is to shed light on these twin developments. We use newly constructed data on industry-level ICT investments between 1990 and 2003 and estimate production functions for manufacturing industries augmented to include ICT capital. We find a significant elasticity of value-added with respect to ICT capital, which increases considerably with the technological sophistication of the industry. We also find that ICT capital deepening is the most important factor contributing to value added growth in manufacturing during 1995-2000, before the burst of the dot.com bubble. Because most ICT capital is concentrated in high tech industries, growth in manufacturing has been mostly confined to the high-tech sector. Facilitating the adoption of ICT in traditional industries is therefore crucial to achieving economy-wide growth. The Israeli experience described here - although restricted to the manufacturing sector - provides a useful example of the benefits and limitations associated with a growth strategy centred on a local ICT producing sector, however successful it might be.

Keywords: GPT, ICT, productivity growth

JEL Classification: O3, O4

Suggested Citation

Lach, Saul and Shiff, Gil and Trajtenberg, Manuel, Together but Apart: ICT and Productivity Growth in Israel (March 2008). CEPR Discussion Paper No. DP6732, Available at SSRN: https://ssrn.com/abstract=1141638

Saul Lach (Contact Author)

Hebrew University of Jerusalem - Department of Economics ( email )

Mount Scopus
Jerusalem, 91905
Israel
+972 2 588 3253 (Phone)
+972 2 581 6071 (Fax)

HOME PAGE: http://economics.huji.ac.il/facultye/saul/saul.html

CEPR

London
United Kingdom

Gil Shiff

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel

Manuel Trajtenberg

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3640 9911 (Phone)
+972 3640 9908 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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