New age economy: already here or still coming?

OECD Observer

In one of the OECD Forum 2000’s most topical sessions, panel members’ opinions were divided Tuesday as to whether or not the new economy had actually arrived, or was still on the way. It was both a question of definition and of analytical observation. Panellists’ views ranged from outright endorsement of the proposition to a healthy scepticism that more evidence was needed before a clear-cut verdict was possible.

Economist editor Bill Emmott said traditional methods of evaluation were still valid in considering the question. He noted that what was happening was mainly at the micro level, so the appropriate attitude was that of the French wine-grower, i.e. that of “paranoid optimism”. This meant that everything looked fine except that the best-ever harvest could still be ruined by a late rainstorm. In fact, said Mr. Emmott, the world was witnessing a repetition of an earlier surge in productivity growth and the technological advances were the prolongation of a sequence that could be traced back 150 years. A bigger, wider phenomenon had been the development of globalisation over the past 50 years. If one was looking for a really key change over the last 10 to 15 years “then I would say it is the fall of communism which has brought 3 to 4 billion people into the modern world economy”. The second key change had been the arrival of the new anti-inflation orthodoxy in macroeconomic policy. In some business sectors there certainly was something very new going on, notably concerning new forms of intermediation. One had to look at what the new economy would bring, and be ready to avoid booby traps on the road, such as financial crises – which could be worsened by technological innovation – and political risks. Even so, Mr. Emmott remained optimistic.

Kim Kihwan, chairman and CEO of the Korean Media Valley company, defined the new economy as one in which “high growth occurs as a result of extensive application of information technologies”, reducing transaction costs and facilitating virtually all economic activities. More than a third of the phenomenal growth of the US economy in the 1990’s could be attributed to information technology, and the Internet market was valued at 14 per cent of GDP. The new economy was now spreading to the rest of the world, with Europe investing $20 billion in 1999 to build up the needed infrastructure, and planning to add another 30 per cent this year. The Asian picture was mixed though Korea has a fast-expanding e-commerce market, and some 16 million Internet subscribers, more than one-third of the population. Active in training software engineers, India was now the leading Asian software producer.

Dr. Kenneth Lay, chairman and CEO of the US Enron Corporation, expressed his certainty that the new economy already existed, its creation facilitated by four factors. These were market liberalisation, falling information costs, increased shift to services and the flow of venture capital. People had taken more quickly to the Internet than other media, easily surpassing the adoption rates of radio, television, and cable. His own firm was doing more and more business on the net, having handled $74 billion in the first six months of this year.

Taichi Sakaiya, Japanese minister for economic planning and for the 2001 Japan Internet fair, said the knowledge value revolution brought by the software in information technology had been followed by a kind of “human ware” now launched globally through the Internet. Turning to the information revolution in Japan, he said the industry was expanding at a rapid pace. Some 27 million Japanese were now connected to the Internet.

OECD chief economist Ignazio Visco looked at the economic aspects of the new economy. Now that productivity statistics were beginning to come through they showed that the computer age had finally arrived. But, even so, it was still too early to say how much of the productivity pick-up was really part of a “new economy”. The difficulty was in separating out cyclical and structural effects. “Could it be,” he asked, “that we are simply living in a period of euphoria confusing excessive market valuations of high-tech companies and perceived technical progress?” On the whole he thought not, but for the moment one could not be sure that one was not witnessing a sequence of important “level” shifts and nothing more than that.

Assessing the dimension of the new economy, session moderator Martin M. Baily, chairman of the US Council of Economic Advisers, said there were three key factors. First, American productivity growth had accelerated from about one and a half percent a year over 1973-95 to about 3 percent a year over 1995-99. This speeding-up was related to technology, i.e. hard and software, but also the extraordinary productivity of the industries producing the technology. Some of the acceleration was surely temporary, linked to demand growth, but much appeared structural and would result in sustained productivity improvement. Secondly, there had been a dramatic increase in the stock market valuation of US corporations, and thirdly there had been large increases in the accumulation of knowledge and intangible capital. “Use of the Internet and the Web is exploding”, he said.

Small companies were competing by entering the market at narrow points in the value chain, technology development was forging ahead, innovation too, with access to talent being a key feature of the human resources aspect. Mr Baily reminded his audience “the old economy is driving the new economy”. But he concluded “It is appropriate to talk of a new economy. But recall that most of the jobs and most of the GDP remain in traditional industries. These are driving the new economy as they themselves are being changed by it.”

On policy, the private sector was at the heart of the new technology, “but at critical points the government has played a central role through support for basic and pre-commercial research.” Governments needed to set the rules of the game, affecting competition, labour and product markets, in an open framework supporting economic evolution and change.

OECD FORUM 2000, Tuesday 27 June

Moderator: Martin M.Baily

©OECD Observer June 2000 

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