By: Abdurahman Ame,
ETHA Managing director,
The co-existence of stark poverty and islands of
technology innovation in many developing countries has received little
attention in the literature. This paradox provides the motivation for our
research regarding the relationship between technology and state of economic
development in developing countries. Convergence between Information and
Communications Technologies (ICT), in particular the internet, and its related
applications, has enabled low-cost diffusion of information technology products
and services in developing economies. A number of researchers (Norton, 1992)
have hypothesized that ICT infrastructure lowers both the fixed costs of
acquiring information and the variable costs of participating in markets. They
point out that as the ICT infrastructure improves, transaction costs reduce,
and output increases for firms in various sectors of the economy (Roller & Waverman, 2001). Thus investment in ICT infrastructure and
derived services provide significant benefits to the economy. In the recently
concluded First World Summit on Information Society, Professor Klaus Schwab, Founder
and Executive Chairman of the World Economic Forum pointed out that ICT
continues to be the best hope for developing countries to accelerate their
development process. However, in terms of the Network Readiness Index (NRI)
published by the World Economic Forum (2003), developing countries continue to be far behind. Wong (2002)
finds that the disparity in the intensity of ICT adoption among Asian countries
is wider than disparities in their GDP per capita, and that
The general
objective of the research project is to systematically examine the role of IT
in facilitating and promoting overall banking operations and its social and
economic impact on various actors in the system with the view to investigating
and proposing possible solutions on how to meet the challenges ahead.
The views on the possible impact of the
information revolution on African countries can be grouped in two opposing
schools of thought. The first school predicts that as African countries incur
an increasing 'technological deficit' the welfare gap between them and the
industrialized world would increase. This school stresses that
The basic
issue separating the two schools with regard to the impact of information
technology on African countries is the question of whether Africa and other
developing regions could, in the first place have adequate access to the global
information Infrastructure, and hence to the information technology age. The
prediction of the first school stems from the notion that, starting from an
initial position of poverty, African countries would
not be able to finance the investments in information infrastructure and
computer hardware and software required to access the information technology
age. This would, in turn, mean that they would risk increased marginalization
in the global economy with severe competitive disadvantage for their goods and
services, and hence for their development prospects. The prediction of the
second school is based on the argument that the information technology, itself,
would provide the means for countries to turn their disadvantages into
advantages; adjust to the new ways of doing business; and, put in place the
required infrastructure of telecommunications and information systems
http://www.afdb.org/.
It has been a
matter of much debate whether or not investment in Information Technology (IT)
provides improvements in productivity and business efficiency. For several
years, scholars and policy makers lacked conclusive evidence that the high
levels of spending on IT by businesses improved their productivity, leading to
the coining of the term “IT Productivity Paradox”. Morrison and Berndt (1990)
concluded that additional IT investments contributed negatively to
productivity, arguing that “estimated marginal benefits of investment [in IT]
are less than the estimated marginal costs”. Others, such as Loveman (1994) and Barua et
al. (1991), posit that there is no conclusive evidence to refute the
hypothesis that IT investment in inconsequential to productivity. Of late,
researchers working with firm-level data have found significant contributions
from IT toward productivity (Lichtenberg 1995, and Brynjolfsson
and Hitt 1996, for example). Most of these firm-level
studies have been restricted to the manufacturing sector, in large part owing
to lack of firm-level data from the service sector.
Aside from
national income and product account concerns, there are some particular reasons
for examining the productivity of the providers of financial services. First,
as shown in Fixler and Zieschang
(1992b), from measures of the relative productivity (efficiency) of individual
institutions, inferences can be drawn about the distribution and central
tendency of the relative efficiency of institutions in the financial services
industry for given time intervals. Second, temporal movements in the
productivity of institutions have implications for aggregate technological
change and capital accumulation over time. Both of these dimensions are
important from the perspective of examining the money transmission story. An
unmeasured change in either the distribution of individual institution
productivities or in the prevailing transactions technology (i.e., e-cash,
Automatic Teller Machines, etc.) will affect the money multiplier relating a
change in reserves to its effective monetary services impact http://www.csls.ca/journals/sisspp/v32n2_14.pdf.
The relationship
between the output and performance of the financial services sector and
monetary policy is also linked to the measurement of the monetary aggregate at
a given state of technology. In fact, the best developed area of application of
the user cost principle to financial services is in the measurement of monetary
aggregates that was pioneered by Barnett (1978, 1980). A preponderance of
results favour the use of
user-cost-weighted indexes of monetary components over the simple sum
aggregates that have traditionally measured monetary stocks. In general, the
broad ‘Divisia’ user cost weighted aggregates have a
more intuitive and reliable relationship with the associated aggregate user
cost prices, and greater explanatory power in models of the demand and supply
of money and its relationship to aggregate production and consumption. See
Anderson et al. (1996) for a review of this now substantial literature.
With respect to the composition of growth, it is true that
traditional considerations such as labour utilisation – and unemployment – remained important in the
1990s. In the
The
other significant change concerns the factors in growth. It has long been recognised that traditional investment and labour input could explain only a minor part of the overall
variation in growth rates. Solow (1957) lumped
together the remaining factors in a residual referred to as “technical
progress”, viewed by many as a black box of undefined, exogenously determined factors.While some studies showed the importance of better
measurement of the various inputs of growth (Jorgenson and Griliches,
1967), and other work, such as the “new growth theory” (Romer,
1990) explicitly sought to unravel endogenously determined processes, the
problem of capturing the fundamental determinants of growth has remained, and
in some respects has become even more difficult to solve. Psacharoulos
(1994) found that a sizeable share of cross-country variation in growth
performance over the last decades could be put down to education. In the 1990s,
however, several studies (Barro and Lee, 1996; Nehru
et al., 1995) cast doubt on the robustness of this relationship.
Solow’s remarks in the 1970s that information and communications
technology (ICT) seemed observable “everywhere except in the productivity
statistics” might thus not have been surprising. In recent years, however, the
focus on the evasive influence of ICT was replaced by a conviction that it played
a major role in an acceleration of
There
has been much discussion about whether the impacts of ICT are on a par with
what was observed in earlier technological revolutions”, such as those of the
railways or electricity. Kranzberg (1985) noted that
the development of new technology is always evolutionary in the sense that its
point of departure is existing technology. A technological “revolution” is characterised by a series of complementary innovations
accompanied by processes of social and institutional adaptation. David (1990)
and Freeman and Perez (1990) argued that, in the past, such revolutions were characterised by stepwise developments in which
productivity growth remained low for many decades – generally half a century or
more – before taking off. ICT may be viewed as fitting this pattern, since
partial impacts have been observed for decades whereas an up-take in overall productivity
growth was identified only in the
late 1990s. For various reasons, ICT may gradually come to exert a more rapidly
accumulating impact than what has been seen in connection with new technologies
in the past. There has clearly been an unprecedented fall in prices and
increases in quality. Also, ICT is diffused with greater speed, particularly
through the Internet, creating a potential for rapid network growth with
associated externalities. Effects may become visible once certain thresholds of
use have been passed. On the other hand, sceptics
(Gordon, 2000) argue that ICT and the Internet have little content of their own
and merely replace other technologies.
Multi-factor
productivity (MFP) can broadly be defined as the overall efficiency with which labour and capital are employed in the economy, see further
OECD (2000a).
More
recently, researchers began to find positive relationships between IT
investment and various measures of economic performance at the level of
individual firms. Harris and Katz (1991) examined data on the insurance
industry from the Life Office Management Association Information Processing
Database. They found positive but sometimes weak relationships between IT
expense ratios and various performance ratios. Alpar
and Kim's [1991] studied 759 banks and found that a 10% increase in IT capital
is associated with a 1.9% decrease in total costs. Several case studies of IT's impact on performance have also been done. Weitzendorf and Wigand (1991) developed a model of
information use in two service firms.
Estimating
a production function, Brynjolfsson and Hitt (1993) found that for the service firms in their
sample, gross marginal product averaged over 60 percent per year. According to
their study reports IT contributes as much output in the service sector as in
the manufacturing sector (Brynjolfsson and Hitt, 1995). Because they used firm-level data, this result
suggests that the productivity "slowdown" in the service sector may
be an artifact of errors in measurement of output in aggregate datasets.
Indeed, even when firms were classified into "measurable" and "unmeasurable" sectors as defined by Griliches (1994), no noticeable difference in IT
productivity between the sectors was found using this firm-level data.
Diewert and Smith (1994) provided an interesting
case study of a large Canadian retail distribution firm. They found that the
firm experienced an astounding 9.4% quarterly multifactor productivity growth,
for six consecutive quarters starting at the second quarter of 1988. They argue
that "these large productivity gains are made possible by the computer
revolution which allows a firm to track accurately its purchase and sales of
inventory items and to use the latest computer software to minimize inventory
holding costs."
Lorin Hitt Erik Brynjolfsson (1995) Applying methods based on economic
theory, we are able to define and examine the relevant hypotheses for each of
these three questions, using recent firm-level data on IT spending by 370 large
firms. Our findings indicate that IT has increased productivity and created
substantial value for consumers. However, these benefits have not resulted in supranormal business profitability. We conclude that while
modeling techniques need to be improved, these results are consistent with economic
theory. Thus, there is no inherent contradiction between increased
productivity, increased consumer value and unchanged business profitability.
Baba Prasad, Patrick T. Harker,
(1997) econometric
results found out that IT capital makes zero, and even perhaps slightly
negative, contribution to output both when Total Loans + Deposits is considered
as the measure of output (following the value-added approach discussed in
Section 4), and when Net Income of the bank (or Revenues) is the output measure
(as per previous studies such as Brynjolfsson and Hitt 1996). This result is significantly different from
previous studies in the manufacturing sector (Lichtenberg 1995, Brynjolfsson and Hitt 1996), and
seems to be more in conformity with those obtained in Parsons et al. (1993),
the only formal study on IT in banking to date. While Parsons et al. report
slightly positive contribution to IT investment, we see zero or slightly
negative contributions. Moreover, it is interesting to note that when Net
Income is the output measure (if, for a moment, we ignore the significance
levels of the coefficients), the marginal product of IT Capital is much more
negative than non-IT capital. Thus, IT has a much more significant negative impact
on output than non-IT capital investment. IT labor presents a very different
picture. Both with Total Loans and Deposits and with Net Income as output
measures, we see that IT labor contributes significantly to output. Its
marginal product is at least 10 times as much as that of Non-IT labor in both
cases. Rather than make the simplistic conclusion from this that a single IS
person is equivalent to 10 non-IS persons, it is better perhaps to speculate
that this may simply reflect the fact that there is significant difference
between the types of personnel involved in IS and non-IS functions. It is more
interesting to compare the marginal product of IT Capital versus IT Labor. It
is striking that while IT labor contributes significantly to productivity
increases, IT capital does not. Thus, these results state that while the banks
in our study may have over-invested in IT capital, there is significant benefit
in hiring and retaining IT labor.
Measurement
problems are more acute in services, partly because many service transactions
are idiosyncratic, and therefore not amenable to statistical aggregation. Even
when data are abundant, classifications sometimes seem arbitrary. For instance,
in accordance with one standard approach, Parsons, Gottlieb and Denny (1990)
treat time deposits as inputs into
the banking production function and demand
deposits as outputs. The logic for such decisions is sometimes tenuous, and
subtle changes in deposit patterns or classification standards can have
disproportionate impacts.
The importance of variables other
than IT is also particularly apparent in some of the service sector studies. In
particular, researchers and consultants have increasingly emphasized the need
to reengineer work when introducing major IT investments. As
A 24 percent jump in Internet
sales from last year helped ward off an otherwise lackluster Christmas shopping
season for the nation's retailers. Consumers' growing comfort with Internet
shopping coupled with aggressive campaigns promising gift deliveries by
Christmas - even if ordered as late as Dec. 23 - helped propel Internet sales
to the best showing since online sales records began being tracked in 1999.
Electronic sales rose to an estimated $20 billion compared with $4.7 billion
six years ago. http://www.baltimoresun.com/technology/
The results of studies conducted at African level (Odebiyi and Soriyan, 2003) emphasize the application of new IT innovations and talents in banking industry. At macro-level they suggested that governments should play major roles in creating a friendly socio-economic environment that enables financial and banking house to widely apply IT in their systems and flourish.
5.
Ethiopian Situation
Despite
skepticism concerning the use of computer technology, the volume of computer
sales to
In
this regard, proper utilization of automated information technology in any
modern business organization particularly in a modern banking system is seen as
having a significant impact on survival and success in the industry.
Although
IT is considered to be one of the necessary inputs for facilitating banking
operations, one can say that application of computer technology in the
Ethiopian banking system is yet in its infantry stage.
Recognizing the importance and the necessity of having
accurate and timely information/data, the Ethiopian banking institutions took
up mechanization of their key functions as back as early 1970's with
implementation of electromechanical accounting machines typically used for
posting of transactions and processing limited computations with the account
information maintained on the ledger cards (CBE'S Forum, 2003). With the
objective of implementing automated systems and facilities for all state owned
banks and the Ethiopian Insurance Company in a centralized manner, the National
Bank of Ethiopia (NBE) established the Electronic Data Processing Center.
Following this NCR 8568 computer system of mainframe category and the so called
Total Concept Banking System (TC2) were developed and supplied by Baton Rouge
International to support online banking operations at all branches and
International Banking Division (IBD) of the CBE. And TC2 banking systems
solutions was implemented at IBD and 4 branches of the CBE and there was a plan
to extend it to 20 more branches (CBE, IT Department, 2003). This was failed
due to mainly capacity limitations. Since then the CBE and the NBE and other
financial institutions/banks have been utilizing the results of IT in their
operations at different stages. Except some private banks particularly Dahen Bank, which is finalizing the process to connect is
branches through networking, no bank has so far successfully managed to connect
its system through networking, indicating that banks in
Tassew Belachew and Abdurahman
Amehttp://www.atpsnet.org/content/files/documents/2003%20Annual%20Workshop%20&%20Conference%20Report.pdf.
Modern
banking in
Issues
But
the exact figures and the impact of this increase are difficult to quantify.
Phone companies recognize that although more and more people worldwide are
using mobiles, barely 15% of the population in developing economies own
portable phones, compared to 70% in industrialized countries. It is not
uncommon in the developing world for several people to share the same mobile.
In
A
similar disparity exists with the Internet. Slow access hampers use, and most
enterprises in developing countries resort to the Internet mainly to send
e-mails and look for information. Although Internet use remains high in large
and medium-sized enterprises, very few small and micro firms are connected,
particularly in rural areas. For instance, only 9% of companies in
Yet
ICT statistics are critical for identifying areas where governments can use ICT
to improve and implement their development strategies. Quality data can help
them define strategies for more advanced banking and financial services,
e-government and e-business. They also help governments monitor their own
policies and draw comparisons with other countries. At the enterprise level,
data on ICT use helps companies – particularly SMEs –
take business and investment decisions. Appropriate ICT strategies, for
instance, can help them increase their productivity and competitiveness, and
participate more fully in national and international supply chains.
It is important for governments to support new
initiatives to collect ICT data and increase their consistency and
comparability. Not only will this make the statistician's task easier but it
will also help economists monitor the digital divide between developed and
developing countries.
6. Recent Developments
Annex 1: CBE
to Launch Electronic Payment System, The Daily Monitor (
The
Commercial Bank of Ethiopia (CBE) is finalizing preparations to introduce
electronic payment system that will enable Visa branded card holders withdraw
money from accounts overseas in local currency, Media Relations Head of the
bank Welela Siyoum told The
Daily Monitor.
The
bank will start providing the service through the ATMs (Automated Teller
Machines) installed in eight of its branches in Addis Ababa, which currently
serve CBE's card holders withdraw cash from their
local accounts at the bank.
CBE
has also recently installed an ATM at the Addis Ababa Hilton and will soon
avail another at the
The
bank will launch the electronic payment system in partnership with Visa
International, the world's leading electronic payment solutions provider,
according to Welela. Having a Principal plus
Membership status with Visa International, CBE will be both accepting and
issuing visa branded cards. The latter enabling cardholders with accounts in
foreign currency at the bank access it elsewhere overseas.
The
PR Head however did not disclose the exact time the bank will start rendering
the service. According to Welela, the payment system
will for the time being enable customers only to withdraw from their accounts.
With additional software packages, the service will eventually allow depositing
cash using the same cards, she said.
The
launching of the service will boost incoming flows of foreign currencies,
thereby contributing to the growth of the economy, according to Welela.
Annex 2.
E-payment a Challenge for
By Matthew
Baker, 17 March 2006
Electronic means of payment, otherwise
known as e-payment, though practiced in some countries such as
This is one of the main conclusions of
the three-day forum on ICTs, trade and economic
growth held from 14-16 March 2006 here in
The Department of Mathematics and
Computer Science of the
Challenges for e-payment in Africa
included lack of inadequate telecommunication infrastructure because of the
rural divide which exists in
Noted problems related to infrastructure
include frequent connectivity failure in telephone lines; low bandwidth for
Internet, high cost of Internet, availability of Internet, which especially at
peak hours is low, unavailability of dedicated data service networks and closed
financial networks including frequent power interruption.
However, it was also revealed that banks
in
"To a large extent Africa and many
African countries remain a cash-based society and using credit cards is not an
option which hampers the growth of e-commerce", according to Dr Dawit Bekele, Addis Ababa
University. Consequently, the absence of proper legal and regulatory frameworks
in many African countries and the low level of credit card access are a clear
indication of the main challenges of e-payment in
Dr. Bekele
proposed a vision for "establishing a secure, affordable and open
e-payment system for
The forum however recognised
the advantages of e-payment, including increasing efficiency - in that every
e-payment can reduce costs, among other things.
Participants called on ECA to document
and disseminate best practices in ICT, trade and economic growth in Africa and organise a special workshop focusing on e-payment in
This
came about as a result of DISD's Internship programme for
7. The Way Forward
Critical to the debates is how
governments play a strong role in the creation of an enabling policy
environment to support digital economy activities. The diffusion of ICTs and the intensification of information activities do
not necessarily lead to economic growth, unless countries and indeed,
businesses determine the kind of changes needed in their mode of operation and
the delivery of services. To this end, there will be an assessment on how to
map, through research, the impact of ICTs on
macro-economic growth in
The general objective of the research project is to systematically examine the role of IT in facilitating and promoting overall banking operations and its social and economic impact on various actors in the system with the view to investigating and proposing possible solutions on how to meet the challenges ahead.
Specific Objectives
a. Assess the computerization process including IT packages within the banking system and associated implementation and structural problems as well as measures taken to solve the problems.
b. To review the government policy in promoting IT and procedures of other IT providers, and its implications in banking operations.
c. To examined the relationship between firms' IT investment and banking performance in terms of providing efficient and effective customer services by reducing average delivery services, shortening processing of loans and reducing check clearance time.
d. Study the impact of IT in overcoming delays in the provision of timely, quality (reliable and accurate) data and information for decision and policy makers.
e. Study the contribution of IT in enhancing security measures and curbing fraud in banking operations and easy transaction capturing possibilities from each branch in case of problems.
Alpar and Kim's (1991) "A Microeconomic
Approach to the Measurement of Information Technology Value," Journal of
Management Information Systems, Fall, 7(2): 55-69.
Brand,
H. and Duke, J. (1982), "Productivity in Commercial Banking: Computers
Spur the Advance," Monthly Labor Review, Vol. 105: 19-27, (December).
Brynjolfsson, Erik (1994), "Technology's True
Payoff," Informationweek, October 10, pp. 34-36.
Diewert, W. Erwin and Smith, Ann Marie, (1994), "Productivity Measurement for a Distribution Firm," National Bureau of Economic Research Working Paper No. 4812, (July).
Erik Brynjolfsson, Shinkyu Yang. 1996. Information Technology and Productivity: A Review of the Literature, MIT Sloan School of Management Cambridge, Massachusetts Published in Advances in Computers, Academic Press, Vol. 43, P. 179-214, http://ccs.mit.edu/papers/CCSWP202/
Franke, Richard H. [1987], "Technological
Revolution and Productivity Decline: Computer Introduction in the Financial
Industry," Technological Forecasting and Social Change, Vol. 31: 143-154.
Odediyi A. and Soriyan
B. (2003). Impact of Computer Technology on Banking Operations in
Weitzendorf, T. and Wigand, R. [1991], "Tasks
and Decisions: A Suggested Model to Demonstrate Benefits of Information
Technology," Institute for Information Science Working Paper,
Wilson,
Diane. D. [1995], "IT Investment and Its Productivity Effects: An
Organizational Sociologist's Perspective on Directions for Future
Research." Economics of Innovation and New Technology, Vol. 3: 235-251.
Adedoyin Soyibo, Kolawole Olayiwola, Abiodun S. Bankole,
Information Technology And Economic Development: Challenges For
Dennisfixler , Kimberlyzieschang The productivity of the banking sector: integrating financial and
production approaches to measuring financial service output
“Has the new and
emerging information technology improved efficiency in the
banking sector in