The transport sector is of key importance for wider economic activity, including global supply chains; however, it has been notably slow to digitise. In a new multi-country study, Filip Mandys and Diane Coyle investigate a practical question for policymakers – does investing more in information and communication technologies (ICT) boost productivity and energy efficiency in the transport sector? It does: small increases in ICT capital translate into gains in labour and energy productivity; but those modest gains change over time, and are not evenly distributed.
Productivity growth in major economies has slowed considerably, particularly since the 2008 financial crisis (Figure 1). Countries such as the UK, France, or Germany, which consistently grew at 3-4% in the 1970s and 80s, now grow at less than 1%. This slowdown represents a ‘productivity puzzle’, as the same period saw strikingprogress in digital technologies – technologies that should, in theory, make the economy significantly more productive. Historically, technological progress was one of the main drivers of productivity growth, and our expectation therefore is that modern information and communication technologies (ICTs) would similarly lead to a boost in productivity.
Figure 1: The growth of productivity across major economies, 1970 – 2022, five-year moving average. Data source: OECD.
ICTs represent digital technologies such as laptops, tablets, telecommunications networks, smartphones, software, and artificial intelligence (AI). Such technologies have the potential to make our work more efficient – simplifying difficult tasks, lowering transaction costs, and speeding up decision making. Representing a general-purpose technology, ICTs may also foster other complementary innovations across the general economy. Consequently, many countries implemented specific policies to boost the uptake of digital technologies, such as the German Breitbandstrategie, the American National Broadband Plan, or the French Plan France Très Haut Débit. The share of ICT capital in total capital has thus been growing steadily in major economies over the last several decades.
Figure 2: The growth of ICT capital as a share of total capital across major economies, 1995 – 2019.
The transport sector is particularly well placed to reap the potential benefits of digitisation. It represents a crucial part of global supply chains and is an important input to other industries of the economy. Yet the sector has significantly contributed to productivity growth slowdown. It is also one of largest emitters of global greenhouse gases (23% in 2022), and one of the least digitised sectors across the economy. Therefore, greater digitisation may not only lead to a boost in productivity and economic growth, but also reduce overall energy use and lead to lower emissions, contributing to reaching net-zero emissions by 2050.
In our latest research paper, Digitisation and Productivity in the Transport Sector, we investigate whether greater investments into ICT capital can lead to substantial gains in productivity levels, as well as improving energy efficiency. We also examine the extent these effects vary across countries and time. Our analysis covers the transport sector in full, including land, maritime, and air transport, freight logistics, warehousing, and manufacturing of vehicles, and focuses on the 1995 – 2019 period. This period captures the majority of the modern digital-technology era, and ends just before the shock of the Covid-19 pandemic. During these years, a range of transformative digital technologies were introduced, including Wi-Fi, 3G and 4G networks, cloud computing, big-data frameworks, the internet of things, and breakthroughs in machine learning, creating new ways of boosting energy efficiency and productivity across the transport industry. These developments, therefore, likely played a substantial role in influencing productivity and efficiency in the sector.
Digitisation boosting productivity
Our research found several consequences of the impact of digitisation of the sector on productivity:
- ICTs boost productivity and efficiency: An increase in the ICT capital share from 10% to 11% leads to a rise of about 1% in labour productivity and 1.5% in energy productivity in transport. This pattern suggests that digitisation can be particularly effective in delivering climate benefits, thus reducing the sector energy intensity.
- Drivers of productivity: Computing hardware is the main driver of the gains in labour productivity, while software explains most of the improvements in energy productivity and efficiency. This could include software allowing for a real time optimisation of fuel and electricity use.
- Impact of ICTs over time: The effect of digitisation in the transport sector was larger before the 2008 financial crisis than after the crisis, mirroring the wider slowdown in productivity growth across major economies.
- Investments are key: Sustaining ICT investment levels 1 % higher then their actual level since 1995 would have increased labour productivity by four percentage points and energy productivity by six percentage points by 2019, compared to the actual outcomes (Figure 3). This highlights the importance of continuing ICT investment, rather than one-off investment.
Figure 3: Increase in productivity if the annual growth of ICT capital was 1% higher, for (a) labour productivity, and (b) energy productivity.
The fact that hardware boosts output per worker while software lowers energy intensity becomes more intuitive when examining the underlying technologies and production processes. Hardware, such as fleet telematics, on-board computing, and automated loading equipment, can directly increase how much a single worker can do, as well as reduce idle time – this would manifest as a higher gross value added per employee. On the other hand, software can improve fuel and electricity use in real time, lowering energy use per unit of output through aspects, such as optimisation algorithms, predictive maintenance, or dynamic routing.
Interestingly, we also find an unexpected negative correlation for communication-device capital, such as smartphones or messaging infrastructure. One interpretation of this finding is that cheaper, more frequent communication can increase interruptions, consultations with managers, and re-centralise decision-making, which can reduce organisational efficiency. This is an illustration of the fact that not all digital investment is equally productive – the design of work and management practices matters.
Policy implications
The transport sector accounts for a very large share of emissions in advanced economies, as well as globally. Improvements in labour and energy productivity therefore yield not only economic benefits but also climate benefits.
Our findings suggest that digital investments targeted at energy-saving applications can contribute to both higher output per worker and lower electricity intensity, accelerating the progress to net-zero while also supporting growth.
We find that the returns to digitisation are unequal across countries, however – high-productivity countries and those with lower transport intensity capture larger returns from ICT investment. This heterogeneity creates a policy risk, where, without targeted policies to accelerate adoption in lagging regions, gaps in both productivity and decarbonisation could become wider. This points ti the following policy recommendations:
- National ICT policies should explicitly include transport. Currently, transport is frequently treated as an afterthought in ICT strategies. Given its importance as an input into other sectors, supply chains, and potential spillover effects elsewhere, national ICT strategies should include specific measures for the sector. For example, policies can be closely aligned with wider “smart city” initiatives, allowing for interoperability with modern aspects, such as smart energy grids.
- Long-term ICT investment frameworks are needed. As small but sustained increases in ICT investments can have significant compounding effects on productivity, governments should focus on developing long-term ICT investment frameworks. These should focus on promoting continuous and predictable investments into digitisation.
- Target energy-saving digital technologies. Given that our results showcase a particularly strong impact of ICTs on energy productivity, transport policies should focus more on the diffusion of energy-saving digital technologies. These may not only boost economic growth but also contribute to greater efficiency and reaching net-zero by 2050.
- Implement a blend of incentives. Pairing carbon pricing and fuel taxes with ICT adoption subsidies can better incentivise firms to adopt energy-focused ICTs. This would increase their motivation to adopt energy saving technology by raising the private return of installing energy-focused digital systems.
- Support catch-up through regional funds. Regional development funds, international finance, and best practice public procurement should focus on logistics digitisation in lagging regions, to avoid a widening of the productivity gap.
Digitisation of the transport sector represents a unique policy opportunity, which can jointly boost productivity and reduce energy intensity. The policy challenge is not to merely offer subsidies, but rather to build a complementary system of continuous ICT investment, human capital, market standards, and policy frameworks, that can encourage digital transformation. A set of well-designed incentives and deployment programmes can help the transport sector become a source of resilient, low-carbon growth.
Read the research paper: Digitisation and Productivity in the Transport Sector
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.
