NZ's internet economy is warm but fuzzy

The first broad-ranging studies of the internet's effect on the New Zealand economy are mostly encouraging

The first broad-ranging studies of the internet’s effect on the New Zealand economy, by two leading consultancy firms find a variety of marked potential positive effects.

Both studies also emphasise a number of difficulties in quantifying the internet’s impact, but they should provide plenty of ammunition for continuing debate as NetHui kicks off in Auckland (click here for live video feeds).

The studies, by Infometrics and NZIER, were commissioned by InternetNZ and released yesterday. InternetNZ CEO Vikram Kumar says they “form an initial step towards strengthening InternetNZ’s understanding of the subject”: they raise questions as well as setting out initial thinking, he says.

“We asked Infometrics and NZIER to look at the internet from an economist’s point of view, and to explore the impact it has across the economy. These studies do not look at the ‘Internet economy’ or the broadband market. They explore how the internet can change everything,” Kumar says.

Reviewing previous international studies for credibility, Infometrics estimates a probable existing economic impact of between 5 and 9 percent of GDP in developed economies, depending on internet take-up. However, many of these studies cover periods in the late 1990s, with 2007 as the most recent date. There are further gains from improved consumer welfare that aren’t captured in economic statistics, Infometrics says.

Both New Zealand studies identify potential increases in productivity and efficiency of service to the customer by improving communications lines.

Making collaboration and outsourcing easier could bring more business New Zealand’s way through outsourcing, NZIER suggests. “Firms are stimulated by the possibilities (or just the information) of the web to re-evaluate how and where their production processes are structured and located. It may now make sense for an American company to outsource a specific part of its production to a software firm in Wellington that is more efficient,” it says.

However, this also means outsourcing traffic could go the other way, both acknowledge; and Infometrics in particular identifies “evidence that the internet is more beneficial for more concentrated population centres, which in turn implies that the economic benefit for [NZ’s rurally slanted economy] from the internet may be less marked than in other places around the world.”

Beyond productivity boost and more effective resource allocation “the final and most dramatic stage is dynamic efficiency, when firms take the opportunity of the new technology to transform the way they operate; this ranges from the manner in which they produce goods and services, to whether to create new products,” says NZIER.

Both studies attempt analogies between the internet and previous industries and economic phenomena; Infometrics compares its impact with that of “general-purpose technologies” such as the telegraph and telephone. NZIER likewise considers the internet through a transport-efficiency lens.

Infometrics, with a blizzard of graphs based on fundamental economic theory, argues one important effect of the internet is to shift allocation of resources to industries to produce a closer fit between what is produced and what consumers desire.

But both studies also identify potential negative effects. Infometrics points to loss of GST income for the government and growing tendency to purchase overseas as a result of increasing online sales facilitation. It also fingers potential facilitation of criminal activity.

The Infometrics study explores the “conundrum” that, contrary to expectations, internet trading seems to have increased the spread of prices for the same commodity from different suppliers (price dispersion). It was expected that through better information flows and greater consumer awareness of choice, prices would converge.

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