Value of the Digital Economy

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Discussion

Clancy Yeates:

"Some of the biggest improvements the internet is making to our lives, and the economy, are still largely absent from the much-cited measures of economic growth and productivity.

That's one conclusion of a recent report by Ric Simes and John O'Mahony from Deloitte Access Economics, who were commissioned by Google Australia to update research measuring the internet's benefits.

Their latest report, published in late March, puts the value of the digital economy at $79 billion, or 5.1 per cent of gross domestic product (GDP), in 2013-14.

The figures are not directly comparable with previous data from 2011, which found the internet's contribution was $50 billion, because the methodology has changed.

However, the bottom line is the digital economy is growing very quickly: they estimate it could be worth $139 billion, or 7.3 per cent of GDP, by 2020.

There's no doubt this growth is impressive.

But equally important – if not more so – are the big non-monetary benefits for consumers that are not picked up by any of the economic statistics you'll commonly hear quoted, like GDP, employment or retail spending.

Think of all the saved time from not having to visit bank branches, or from paying bills online, for instance.

The share of people who pay their bills or do their banking online has risen to more than 70 per cent, the latest official figures show.

Across the population, that equals a huge amount of saved time that can be spent doing better things. If you value this saved time at the average after-tax wage of $24 an hour, it's worth about $10 billion a year to the country.

And that's just the time saved by paying bills, dealing with government, and managing bank accounts online. The ability to quickly search for information – such as finding a new home, car or job online, rather than trawling through the classifieds – is estimated to be worth $8.4 billion a year by Simes and O'Mahony.

Recreational use of the internet – such as time spent on Facebook or watching videos online – was estimated to be worth $47 billion a year.

On top of these consumer benefits, there's every chance we are underestimating what the digital economy is doing to productivity: which compares an economy's outputs with its inputs of labour and capital.

Technological advancement has been the biggest contributor to long-term productivity growth because it allows us to work smarter. However, gains from working smarter are also hard to measure in many industries.

The Deloitte report estimates the 2013 economy was 3 per cent bigger than it would have been because of the productivity impact of digital technology.

However, it also highlights the large potential for future gains in the "non-market" sectors of the economy: health, education and government.

Big public institutions like schools and hospitals have typically been slower to adopt technological advances than the private sector, research suggests, giving them greater scope for improvement. This means they could significantly improve their "output" by using digital technology.

Take the example of electronic medication management, a system for the supplying and prescribing of drugs in hospitals.

The benefits of a change like this for patients are pretty clear: fewer medication errors, which can be a serious cause of harm in hospitals.

However, a benefit like that will not show up in GDP, which remains the main measure of the economy's progress.

GDP will pick up the spending on the new digital systems but not the health benefits, even though they are the main point of the exercise.

In other words, we know the online revolution is improving output in the non-market sector but much of this will not turn up in the figures that economists pore over, or estimates of productivity.

"We think that some of the biggest benefits from the digital economy are going to happen in those non-market areas. And we're going to miss them in the statistics. Few of them are going to be in GDP or our productivity estimates," O'Mahony says.

Economists have always struggled to measure productivity in the non-market sector because it is notoriously hard to measure the quality of the "outputs" of a health or education system." (http://www.smh.com.au/business/comment-and-analysis/matter-of-stats-unseen-in-productive-digital-economy-20150407-1mfnco.html)