There is ample evidence making the case for states taking a proactive role in the technological revolution, says affiliated researcher, Antonio Weiss.
2024 is likely to be a year of major elections, occurring in the US, UK, Mexico and many other countries. Despite the ratcheting up of populist or culture war rhetoric by many politicians, the economic fundamentals remain foremost in the concerns of the electorate in different nations. Amidst this political backdrop, rapid advances in technology are presenting political leaders with a dilemma. To turn the advances into economic growth, should they leave technology to the market or instead seek to harness its potential via the state?
1. Directive states can grow faster
Received wisdom states that public services – in a perilous state in both the UK and US – can only be funded through either tax rises or economic growth. With tax rates at historic highs in most Western states, politicians are increasingly looking to growth as the solution. As the UK Labour Party’s Shadow Chancellor of the Exchequer. Rachel Reeves, said last year: “we need a growing economy to pay for modern public services.”
But the question few are asking is: “how can public services help grow the economy?” There is copious literature such as that from Mariana Mazzucato on entrepreneurial advanced states, or the vast literature on developmental states by economists such as Dani Rodrik, which point to the potential. ‘Developmental’ states mean those governments that use an ‘active’ industrial policy which can take many forms but in recent years has focussed increasingly on technological innovation. This is backed up by imperfect – yet politically salient – GDP growth figures. Analysis of GDP per capita figures highlights that large, rich nation states which took an entrepreneurial or development state approach – using the public sector to drive economic growth – outgrew the OECD average, and significantly outperformed the UK during 2000-2019 (Table 1).
Table 1: Development states outperform in terms of GDP growth[1]
| Cluster | GDP per capita growth rate 2000-2019 |
|---|---|
| ‘Developmental states’ | 82% |
| OECD | 57% |
| United Kingdom | 26% |
Of course, such high-level figures mask a wealth of nuance. But from Taiwan’s pivot to semiconductors, Japan’s focus on the steel industry, or Singapore’s ICT-growth ambitions, a picture emerges of state-directed growth. Rather than a passive recipient of public funds, the state can be an important contributor to economic growth.
2. Investment in digital states makes public services better
With so much of the economy and day-to-day life now taking place online, undoubtedly accelerated by the Covid-19 pandemic, an inevitable gap risks being created between citizens’ digital lives in the private sector and their experiences of public services. This risks not only dissatisfaction with public services but threatens the social contract which underpins the state-citizen relationship: your taxes help to pay for public services.
Digital technology provides a huge opportunity to bridge this gap. From digital identity schemes to simplified, transactional services, technology can take the pain away from engaging with state bureaucracy. Over the past three years, The PSC, a public services consultancy, undertook user research with over 1,000 UK citizens asking them what they wanted from public services. Three common demands emerged: 1) digital-first public services which made their lives easier; 2) services which were personalised to them; 3) and for services to be focused on citizens’ requirements rather than government structures or operations. Digitisation is a perfect tool to address all of these needs.
Quantitative research also backs up the case for digital public services being, in many respects, better public services. Comparing the United Nations’ (UN) E-government index with a 2022 Deloitte analysis of the gap between citizen satisfaction between private and public services demonstrates that leading e-governments deliver state services which the public is generally more satisfied with (Figure 1).
Figure 1: States with more digitally advanced government services have a smaller gap in citizen satisfaction levels compared with private sector services
3. Digital states can make public services more efficient
The history of failed IT projects makes this a dangerous argument for civil servants to make, but digital states can be more efficient. At a time, particularly in the UK, where fiscal responsibility is of paramount importance to any government, demonstrating value for money in terms of public services is essential. Yet the UK government itself can point to significant achievements when it led the pack internationally. In 2016, UN e-government rankings placed the UK first.
Table 2: UN e-Government Survey – UK Rankings
It was during this period around 2016 that significant efficiencies were achieved:
- UK Cabinet Office digital spend controls saved the exchequer £391mn during 2014-2015
- Gov.UK central website saved government departments £61.5m
- Built in 2015, Gov.UK Notify was forecast to save £175m over five years
It is striking that during the intervening years post-2016 when, as the UK Science and Technology Committee heard, GDS (the central Digital Government Unit which drove much digital transformation in the UK) “lost its way somewhat”, and efficiencies became fewer and less celebrated.
4. State technology delivers significant spillover benefits
States heavily invested in technology deliver major spillover benefits to their wider economies; increased productivity, higher levels of in-country skills, and higher levels of external investment. Whilst the causality needs unpicking, it is striking that high-performing digital states correlate well with GDP per capita: states looking to break into the rich club of nations cannot afford to neglect state digitisation. Whilst more research – and better data – is needed to truly establish causality here, it is notable that the best performing e-governments appear to enjoy high economic productivity too. Currently, Denmark’s (ranked first in UN e-government index) labour productivity exceeds Nordic peers. And South Korea (ranked third) has experienced the fastest productivity growth of OECD countries over the past 25 years.
Figure 2: Digitally advanced states tend to have higher GDP per capita
But beyond pure GDP figures, highly invested digital states also have higher levels of digital skills and greater technology clusters. Using data from the Global Skills Index ranking, states with strong e-government capabilities correlate strongly with nations with significant numbers of citizens possessing digital skills (Figure 3).
Figure 3: Digitally advanced states have higher levels of digital skills in the population
In addition, technology centres from San Francisco to Tel Aviv, the UK’s Golden Triangle, Taiwan’s Hinschu Science Park and Canada’s superclusters not only bring in external funding from venture capital but also generate economic returns to their locales.
5. Digital transformation doesn’t need to cost the earth
Finally, though governments are large and inevitably the sums involved in technology adoption are significant, there are ways to keep the costs of digital transformation manageable. Close partnerships with industry – which is currently keen on AI investments – can help to share investment risks.
And governments should also remember that they already spend enormous sums each year on technology. The UK government currently estimates nearly £2.5bn each year is spent merely servicing the multitude of legacy, often COBOL-based, systems developed during the 1970s and 1980s. Effective political leadership and imagination can be redeployed to make better use of this public expenditure; setting a roadmap for migrating away from legacy systems and using the savings from decommissioned legacy services to build new, effective digital public infrastructure.
Public services can be at the heart of economic growth, and technology can drive this. It won’t be easy but the benefits for citizens are real.
[1] This analysis is based on Our World in Data on GDP per capita growth rates between 2000-2019, based on a comparison of OECD nations and select ‘developmental state’ nations. This latter category focuses on high income states (of GDP PPP above the bottom quintile of OECD nations), which are commonly determined to have an ‘entrepreneurial’ or ‘developmental’ focus in academic analyses, with a population over three million. These comprise: Hong Kong, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan, Thailand.
The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.
