Trade in Information Services and Economic Development: On the implications of ICT for less developed countries

The diffusion of information and communication technology has reduced cost of information substantially in recent years. Even in the poorest countries in the world, the share of the population with access to telecommunications and the Internet has increased at double-digit growth rates during the last few years. Privatisation, deregulation and liberalisation of trade and investment in the service sectors have further contributed to this development. The paper analyses the impact of better access to information services on development. For this purpose a two-country model of trade in differentiated intermediate services, which captures some of the most significant properties of information services is developed, and the effects of better access to information services under various assumptions on technology, preferences and relative size of the two countries are explored. Our results suggest that there are significant welfare gains from liberalisation of trade and investment in information services, and that small, poor or labour-intensive countries gain the most in all our scenarios. Small developing countries will benefit a lot from better access to information services, while developing countries in which consumers have relatively low preference for information-intensive goods are less likely to obtain large benefits. It is further shown that improvements of infrastructure and increases in human capital in one country improve welfare in both countries. Thus, investments in rich countries to some extent spill over to poorer countries, which get access to a broader variety of services. We finally derive the welfare optimum and the taxes that reproduce the social optimum as a competitive equilibrium.