The New Economy Essay Example For Students

The New Economy Essay THE NEW ECONOMYIt works in America. Will it go global?It seems almost too good to be true. With the information technology sector leading the way, the U.S. has enjoyed almost 4% growth since 1994. Unemployment has fallen from 6% to about 4%, and inflation just keeps getting lower and lower. Leaving out food and energy, consumer inflation in 1999 was only 1.9%, the smallest increase in 34 years. This spectacular boom was not built on smoke and mirrors. Rather, it reflects awillingness to undertake massive risky investments in innovative information technology,combined with a decade of retooling U.S. financial markets, governments, andcorporations to cut costs and increase flexibility and efficiency. The result is the so-calledNew Economy: faster growth and lower inflation. Most corporate executives and policymakers in Europe and Asia, once skeptical about the U.S. performance, have taken this lesson to heart. There are still widespreadmisgivings about the U.S. model of free-market cap italism. But driven by a desire forfaster growth, combined with a fear of being left behind, the rest of the world is starting to embrace the benefits of a technology-driven expansion. But a global New Economy will not happen overnight. True, spending on technology, the most visible part of the New Economy, while not yet up to U.S. levels, is on the rise everywhere. Semiconductor sales were up 17% worldwide in 1999, while the number of Internet users in Western Europe and the Asia-Pacific region is expected to more than double over the next five years (chart). Even in a developing country such as India, the software industry is growing at a rate of 50% to 60% annually. OLD VIRTUES. But the worldwide proliferation of mobile phones and Web accounts by itself will not bring about a more vibrant global economy. What are also needed are dramatic changes in core institutions that will translate technology into faster productivity growth. That means financial markets better able to fund in novation, more flexibility in corporations and labor markets, a faster pace of deregulation, and increased competition (table). The New Economy is built on old virtues: thrift, investment, and letting market forces operate, says Treasury Secretary Lawrence H. Summers. There are signs that the process of change has started. With growth picking up in Europe, and Asia emerging from its slump, Merrill Lynch Co. is forecasting 3.3% world growth for 2000, with inflation slowing down (chart). Corporate restructuring has begun in Europe and Asia, financial markets are being rebuilt to support innovation, and there is more willingness to take risks. Im seeing the entrepreneurial response almosteverywhere, says Clyde V. Prestowitz Jr., president of the Economic Strategy Institute. Its not Silicon Valley yet, but theres a lot of ferment. Even in slow-growing Japan, Ithink there will be a New Economy, says Toshiba Corp. President Taizo Nishimuro,though he cautions that it wont be the same as the U.S. Nevertheless, the process of shifting to a fast-growth track is still in its early stages in most of the world. Europe is at least two or three years behind the U.S., with Asia lagging even farther behind. While there are pockets of entrepreneurial vigor in places such as Finland, it has turned out to be an enormous challenge to reshape cultures to allow more risk-taking in Europe and Asia, where caution is a virtue. It also takes time for policymakers to adjust to the New Economy. In the U.S., Federal Reserve Chairman Alan Greenspan, an enthusiastic proponent of technology-driven productivity gains, resisted great pressure to raise rates in the face of fast growth and low unemployment. By contrast, the two biggest central banks in Europe, the European Central Bank and the Bank of England, have adopted a policy of aggressively raising rates at the slightest hint of inflation, thus choking demand needed to justify business investment. Moreover, investment in risky innovationa linchpin of the New Economydepends on open global markets, since national markets do not provide a big enough payoff for taking big risks. But as shown by the demonstrations against the World Trade Organization in Seattle, there are groups in every country who feel threatened by free trade. A widespread backlash against globalization could remove a key underpinning of the New Economy. Ironically, skeptics also worry that a worldwide investment boom could itself trigger global inflation. The reason? Slow growth in Europe and Asia in the 1990s helped keep commodity prices and interest rates low in the U.S., despite strong growth in America. But as the rest of the world picks up steam, that slack is slowly disappearing. By sometime later this year or early 2001, unemployment in the major industrializedeconomies should drop below the level that triggered inflation in the late 1980s. Thatswhen you get a reasonable test of the New Economy thesis on a global basis, saysStephen S. Roach, chief economist at Morgan Stanley Dean Witter in New York. But despite these obstacles, a shift to a U.S.-style economic model is looking increasingly attractive as a guide to development. Based on the American example, technology-driven growth creates many more jobs than it destroys. Combined with big productivity gains, that allows the unemployment rate to fall without igniting inflationsomething that would be welcome in European countries that have long struggled with high unemployment. Faster growth would also ease the long-term burden of funding the retirement of aging populations in Japan and Europe. OPEN ACCESS. Moreover, the global economy is not a zero-sum game: Faster growth in the rest of the world would have a big payoff for the U.S. as well. Commodity prices mig ht rise at first, but so would exports, bringing down the swelling trade deficits and creating manufacturing jobs at home. U.S. companies would start to see overseas profits accelerate. And then theres the innovation factor. For corporations, the most important justification for spending big bucks on information technology is that it supports restructuring and cost cutting. But from a global perspective, a critical benefit of the Information Revolution is that for the first time it makes data available worldwide. Historically it has taken years, if not decades, for even the most important technological and business innovations to spread across national borders. But thats changing. Now, an engineer in China, say, can log on to the Internet and have immediate access to the treasure trove of data on U.S. Web sites. More important,engineers in developing countries can communicate much more quickly with counterpartsin other countries and learn what works and what doesnt. The gains from f astertransmission of innovation can add up to 1% to global growth rates, according to researchby economists Jonathan Eaton and Samuel S. Kortum of Boston University. Thats anenormous potential boost. But new technology has to be nourished within a larger framework of institutionalchanges. For one thing, openness of domestic markets to foreign trade is vital for turning innovations into real improvements in output. Without competition from overseas, companies make changes slowly and reluctantly. The big gains only come, according to a 1999 study by Catherine L. Mann of the Institute for International Economics, when trade encourages and diffuses the fullest uptake of globally available technological innovation by all firms within an industry. Equally important for sustained no inflationary growth is access to well-run financial markets that can move savings to the most productive investment opportunities, while cushioning the inevitable excesses to which markets are prone. Even small improvements in the way capital is allocated in an economy have enormousconsequences, says Summers. Under a reasonable set of assumptions, an increase in theefficiency of financial markets that decreases interest rates by 20 basis points can add 6%to output over several years. AMERICAN ADVANTAGE. One area where the U.S. excels is the ability to fund innovative companies at an early stage. U.S. venture capital spending doubled to more than $40 billion in 1999. And according to a study by Kortum and Josh Lerner ofHarvard business school, a dollar of venture capital produces three to five times morepatents than a dollar of research and development spending. Venture capital is muchmore potent, notes Kortum. Other countries in Europe and Asia are trying to catch up. In China, for example, the southern city of Shenzhen has just put together its own $120 million venture-capital fund in an effort to stimulate local high-tech developmentjust one of several Chinese cities that has done so. Th e problem is that the new venture funds in Europe and Asia often have corporate or government affiliations, which tend to make them less effective. They dont have the autonomy that we associate with U.S. venture-capital funds, says Lerner. And even if the funding is available, its a slow process to adopt a culture that favors risk-taking and makes it easier for new businesses to start up. This wont take sixmonths, says Bernard P. Vergnes, chairman of Microsoft Europe. Well have to start inthe schools to change the bankers and the politicians of the future and make them lessaverse to risk. It may become easier in the future to entice politicians to jump aboard the NewEconomy bandwagon, as the political advantages become clearer. In India, for example,the new Bharatiya Janet Party government decided to use the vision of an IT-literateIndia as an election promise. In Sweden, Bjorn Rosengren, the minister for industry,employment, and communications, is promising broadband in every home. This comingsummer, the national government is expected officially to give a contract to develop anationwide broadband network to Svenska Kraftnat, which operates the main electricitygrid. There is a growing willingness to back away from central control over national economies, even in the most hidebound of regulated industries. The wave of telecom mergers in Europe shows that the old idea of national monopolies is dead. And in Japan, where high telecom charges were holding back e-commerce, Nippon Telegraph Telephone last fall introduced a flat-rate high-usage Internet access serviceaimed primarily at small offices and heavy individual usersfor $75 a month in parts of Tokyo and Osaka, the two largest cities. Now its contemplating cutting the price, possibly by 50%, by the time it launches the service in major centers around Japan in the next year or so. Nevertheless, the changes are occurring piecemeal. Outside the U.S., there are nodefinitive signs yet of a productivity accelerati on. Countries such as Britain and Japan areactually showing a productivity slowdown, based on measured data. However, it tookyears in the U.S. before productivity data reflected the Information Revolution, and thelag in the global statistics could be much longer. The reason? Starting in the 1980s, U.S. Descriptive Essay Introductionstatistical agencies started adjusting the economic data to take into account the growingpower of computers. Most other industrialized countries have not adopted similarmethodologies, so that New Economy effects will take longer to show up in the numbers. Its become quite an issue, says Jon Beadle, a statistician in Britains Office for National Statistics. What could stop the New Economy from going global? Simultaneous rapid expansion in Europe, the U.S., and Asia could push up the prices on world commodity markets. But unless there is a carte that holds supply downas in the case of oilsuch increases are likely to be temporary and not result in lasting inflation. Take steel, for example. With the worlds mills operating at close to full capacity, we are forecasting a shortage of steel, says Peter Marcus, managing partner of World Steel Dynamics, an Englewood Cliffs (N.J.)-based consulting firm. He predicts that prices of hot-rolled band steel could spike up by 50% later this year. But as buyers and suppliers of industrial products and tools increasingly move onto the Web, it will hold down prices. Improvement in e-commerce will make the pricing structure more competitive, notes Marcus. Sandvik Coromant, a unit of Swedishspecialty steel manufacturer Sandvik, expects 40% of its Scandinavian sales to be via theInternet within three years, allowing it to cut order costs in half. Similarly, soaring demand for the core products of the Information Revolutionmemory chips, microprocessors, and liquid-crystal displaysis likely to push up prices in the short run. Companies such as Gateway Inc. have already complained of shortages. But recent experience shows that new capacity can be quickly created in these industries. The biggest constraint on the spread of the New Economy globally will not becommodity inflation or product shortages. Rather, the main problem will be finding enough highly skilled and computer-literate workers to staff rapidly growing informationindustries. Europe and Japan will have to find a lot of highly skilled workersquicklyasthey try to beef up their New Economy industries. The one big inhibitor is the shortageof skilled labor, says Andrew Milroy of International Data Corp. in London. IDCestimates that the demand for skilled workers will exceed supply by 20% in WesternEurope in 2002. And engineers comprise some 40% of Chinas enormous crop of annualgraduates. It will be necessary to draw on the enormous supply of college-educated workers in countries such as India and China. Asia accounts for two-thirds of the global increase in college and other post-high-school enrollments in the 1990s. Indian universities turn out 122,000 engineers every year, compared with 63,000 in the U.S. And engineerscomprise some 40% of Chinas enormous crop of annual graduates. The growth of the U.S. high-tech industry has been fueled by a steady flow of highly educated immigrants and foreign students. Between 1985 and 1996, foreign students accounted for two-thirds of the growth in science and engineering doctorates at U.S. universities. Most of them planned to stay and work in the country. Like many other aspects of the New Economy, opening up the doors to foreign workers wont come easily in many countr ies. But the genie is out of the bottlenow that the U.S. has shown that faster growth is possible, no country will be able to resist it. In the end, the benefits will be well worth the pain. The Road to the New EconomyHeres what countries must do to get a high-productivity, low-inflation economy BOOST INVESTMENT SPENDING on information technology as a share of GDP RESTRUCTURE CORPORATIONS to cut costs, improve flexibility, and makebetter use of technology OPEN FINANCIAL MARKETS to direct capital to the best uses DEVELOP VENTURE CAPITAL and IPO markets to aid innovative companies ENCOURAGE AN ENTREPRENEURIAL CULTURE and make it easier to startnew businesses INCREASE THE PACE OF DEREGULATION especially in telecom and labormarkets ADJUST MONETARY POLICY to the realities of the New Economy by waiting for inflation to appear before raising interest rates Words/ Pages : 2,438 / 24