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Information Technology and the Services Sector
Jan 7, 2001

Among the sectors with greater potential to achieve productivity gains from the information technology revolution are the health care services industry, transportation services and financial services.

At the E-Business Transformation Sector Developments and Policy Implications conference that took place in September 26 and 27, 2000 Patricia Danzon and Michael Furukawa from the Wharton School at the University of Pennsylvania pointed out that the health care sector, which is information intensive and contributes to 14% of the US GDP has a great gains to reap from the information technology revolution. For instance, Electronic Data Interchange (EDI), a health care provider projects cost reductions of processing claims from $10-15 per paper claim to $2-4 per claim, and Web-based processors may drive costs further down to 2-4 cents per claim. Until now, about 40 percent of doctorís claims are processed electronically. In turn, Robert Litan of the Brookings Institution and Alice Rivlin, a former Federal Reserve vice chairman in a paper presented at the American Economic Association meeting that took place this past weekend in New Orleans estimate that the health care industry could save up to $20 billion in insurance processing.

Litan and Rivlin also estimate that the trucking industry could reap huge gains from cost savings by managing trucks electronically ensuring fuller loads and more efficient routes. In total, the authors estimate that companies in various industries could save from $100 billion to $230 billion during the next five years by implementing internet-based technologies.

Financial services based on customer-provider relationships tied to geography and the providerís knowledge of the customer contrast with savings offered by on-line markets for standard financial products. The tension is perhaps most evident in brokerage services, where the Internet has precipitated a split between the relationship-dependent services of investment advising and portfolio management and the standardized service of stock trading. Customers benefit from cheaper trading on-line, assuming they do their own research, forego advice, and shop for lower commissions by searching the Internet.

In the February 2000 Economic report of the President The Council of Economic Advisers claim that financial services and retail and wholesale trade garnered the greatest benefits of new information technologies and experienced high productivity gains from 1995 to 1999. Retail trade experienced an annual productivity growth rate that was 4.25 percentage points higher in the period from 1995 to 1999 than in the previous six years.

Sources: Council of Economic Advisors. Economic Report of the President 2000.Transmitted to the Congress | February 2000 The report is available at: http://w3.access.gpo.gov/eop/

Litan Robert and Rivlin Alice (2001). Brookings Institution--The Economic Impact of E-Commerce. American Economic Association 2001 Conference. Litan Robert and Rivlin Alice (2001). Brookings Institution Conference Report No. 4. The Economy and the Internet: What Lies Ahead? The brookings Institution.

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