New wine and old bottles

Business and Industry Advisory Committee (BIAC) to the OECD

To understand the changes being driven by the new economy, policymakers will need to look at the big picture.

The term “new economy” has captured the attention of everyone who makes or thinks about public policy, in a way no other metaphor has done in recent years. Certainly, it brings many oversimplifications, but it is a useful catchword: it helps us focus on the expanding frontier of economic possibilities. However, the real meaning of the term ‘new economy’ is broader than Internet technology itself; it has a scope that reaches everywhere in the “old economy” where new technology is applied.

Our initial reflections in BIAC, largely drawing upon the output of OECD’s studies, indicate that some of the most challenging issues in policymaking are arising from the interaction between the ‘new wine’ of new technology and the contents of the ‘old bottles’ into which it is being poured.

Issues include the institutional framework for markets in labour, capital, goods and services; the quality of regulation; and the style of governance, to name but a few.

From innovation to growth

The rate and remarkable persistence of downward price movement in ICT (information and communications technology) industries was one of the key factors which prepared the way for powerful Internet technologies, enabling, in turn, significant efficiency gains. It is not possible to overemphasise the fact that this was achieved in an industry characterised by fierce competition and internationalisation of production, where attempts to pick winners have been distinctly unsuccessful.

While the widening availability of ICT equipment itself is merely a precursor of the new economy, an even more powerful factor is the tremendous increase in the quality and range of business opportunities enabled as a result. To be able to grow, the markets for new goods, services or ways of doing business have to be open to competition, which would benefit from greater international compatibility in policymaking.

During the past year, OECD has carried out a number of studies, under the heading of the Growth Study, which go a remarkable way towards clarifying analytical issues and data on the relationship of ICT-led innovation to growth in productivity. But, inevitably, the available information is heavily focused on the experience of the United States, an economy where highly flexible labour markets and a regulatory framework strongly conducive to business creation can be taken for granted, relatively speaking.

But one of the aims underpinning the ‘new economy’ debate is to elucidate what needs to be done to enable other countries to benefit from technological innovation to a similar extent. If so, there is a need to build the policy recommendations emanating from this project on a number of policy pillars: innovation policies; labour and capital market policies and conditions; and the policies aimed at improving the quality of the regulatory framework – plus their interaction.

A rapid glance at the results of OECD’s past studies lends considerable support to the hypothesis that it is indeed the juxtaposition of good indicators on ICT-readiness, labour market adaptability and regulatory framework, that tends to be associated with either good or improving performance in the growth of productivity and output, and, especially, of both.

Indeed, it is hard to imagine how heavy investment in ICT and skills can lead to a widespread increase in productivity growth, in an economy where the dismantling of redundant economic activities is routinely subject to negotiation with interests vested in their protection. OECD should be careful to convey this message clearly and not inflate false expectations.

An area which is in urgent need of policy attention is the quality, coverage and international comparability of data on the inputs and outputs of new technologies and new business models, especially in the services sector.

Last but not least, innovation in new technologies from life sciences is likely to offer new opportunities for productivity and output growth in the rest of the economy, and solutions to some of the seemingly intractable social policy challenges facing the OECD economies. The simple logic stream – innovation raises productivity which raises living standards – should be the starting point for all policy deliberations.

From international trade to innovation

The key motivation behind the OECD Growth Study is to determine and purvey a policy formula that can enable a sustainable increase in the rate of productivity growth (as a result, non-inflationary output growth) which is broadly based in the economy (i.e., can show up in macro-economic statistics). But the ‘new economy’ debate has so far been conducted almost exclusively within a closed economy logic, as if the growth and transformation of a modern economy can be considered in isolation from its cross-border interaction with others.

On the business side, there are ICT-based opportunities to insert competing business models in the existing market structure. Regulatory reform in favour of increased competition in markets therefore is a sine qua non of developing e-business and transforming the old into the new economy.

The point is that, while all the myriad of micro-economic and social policies routinely highlighted to develop human and physical capital and underpin the markets are all eminently relevant, their real impact will be limited as long as firms are not forced to innovate in highly competitive markets. Widening the reach of international trade and investment among economies is the most effective, if not the only practical way of opening sectors to competition, and spreading this innovation-led economic evolution.

With manufacturing already subject to significant trade liberalisation, from the point of view of the OECD economies, a strong push towards liberalisation of telecommunications and trade in other services is an essential element of their policies to enhance innovation, market development and growth.

Global commitment to these aspirations is best effected by a re-commitment to the market-based economy, to the world trading system – with its roster of previous agreements and ongoing negotiations – and to the commencement of a new Trade Round.

©OECD Observer No 224, January 2001

Economic data

GDP growth: -9.8% Q2/Q1 2020 2020
Consumer price inflation: 1.3% Sep 2020 annual
Trade (G20): -17.7% exp, -16.7% imp, Q2/Q1 2020
Unemployment: 7.3% Sep 2020
Last update: 10 Nov 2020

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