Is the European Broadband Public Spending a Sensible Project? The Opportunity Cost Concept and Implications of the Input-Output Analysis
18 Pages Posted: 7 Feb 2012
Date Written: September 13, 2009
Currently, the European Union is proposing the broadband as part of government responsibility to combat digital divide and as part of the European economic recovery package. However, from a public policy point of view, any recommendation of using government funds should consider the opportunity cost: whether the other alternative of spending the available money will create higher/less benefit to the society. This paper will address a methodology to evaluate the opportunity cost of using government funds for broadband, in the context of a future European proposal to publicly fund broadband infrastructures. The report will provide implications on the welfare implications of public broadband investment in Europe.
In particular, this study will investigate the macroeconomics analysis in justifying the opportunity costs of broadband policy using the input-output table (IO). The IO is a table that shows transaction flows across sectors, assuming that each sector does not only produces a particular output but also consume an input from other sectors as well.
Moreover, IO multipliers measure total change throughout the economy from one unit change for a given sector, providing thus a compact measurement of the effect of economic activities in one sector on the rest of the economy. In order to capture the opportunity cost, this study applies several steps of analysis. The first part is consists of defining the broadband sector. Here, the definition builds upon OECD’s definition the ICT sectors as a proxy for the broadband sector. The next step consists of evaluating the benefit of investing in broadband by calculating aggregate multiplier of the relevant ICT sectors. The third step is to compare the multiplier with the aggregate multiplier for the rest of economy, and with the non-broadband (non-ICT) sector. Finally, a feasibility analysis is proposed based on some threshold requirements for accepting or rejecting the broadband support policy. The threshold level is determined by the multiplier of the non-ICT sector, which thus captures the opportunity cost of spending public money on broadband, instead of spending the same funds in other sectors.
Comparing the result for the eight most European advanced countries in broadband, the study suggests that, except for Spain, Sweden and Germany, the broadband sectors produced a greater or at least the same multiplier effect compared to other non-broadband sector. Thus, it implies that the opportunity cost of spending the budget in a non-ICT sector is considered lower or at least the same than the broadband project. Consequently, the broadband project is then so called feasible for most of the European Union countries.
The paper provides suggestions for further research especially in building a relation between the production sector (the basis of the IO analysis) and the consumption side, the latter necessitating a deeper analysis of the household sector. The paper will also raise other methodological issues, as well as a critique of recent broadband support evaluation studies, which find a positive impact from government broadband investment, but which implicitly assume no opportunity costs.
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