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OECD Forum 2001Sustainable Development and the New Economy

Paris, 14-16 May 2001

Policy Implications of the New Economy

by Ignazio ViscoOECD

Chief Economist and Head of the Economics Department

Growth patterns in the OECD area

r A number of factors explain cross countrydifferences

l New capital, in particular ICT (figure)l Increased use and quality of labour resourcesl Greater efficiency in how capital and labour are

combined, multi-factor productivity

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Key policy recommendations fromthe OECD growth project

r Strengthen economic and social fundamentals

r Facilitate the diffusion of ICT

r Foster innovation

r Invest in human capital

r Stimulate firm creation

Policy implications of a new economy:Structural

r The importance of traditional frameworks has notlessened

r In particular:l openness to trade, investment and ideasl efficient regulatory and administrative frameworksl effective financial systemsl adaptable labour marketsl competitive product markets

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Policy implications of a new economy:Macroeconomic

r Monetary policy (figure)l short-run reasons for an easier monetary stancel short- and long-run reasons for a tighter monetary stance

r Fiscal policy (figure)l new economy provides room for tax cutsl … or an increase in public spending and reductions in

public debtl but also an opportunity to address long term fiscal

sustainability pressures from ageing populations

Conclusions

r An increase in trend productivity has taken place inthe U.S. and in some other OECD countries

r … and it might be reasonably expected in themajor European nations

r Spillover effects of communication networks mayalso be coming

r But...

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Conclusions

r “It is in the nature of progress that it looks muchgreater than it really is” (L. Wittgenstein)

r Traditional framework conditions for flexible andcompetitive markets are needed also for the neweconomy

r So are suitably adapted macroeconomic policies

r This does not necessarily imply an easier monetarystance nor - given the still extensive uncertainty -substantial fiscal easing

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ICT Capital and GDP Growth

Percentage points contribution to annual average GDP growth,business sector

Source : OECD, The New Economy: Beyond the Hype , F ina l Repor t on the OECD Growth Pro jec t , Par i s , 2001.

0.0

0.2

0.4

0.6

0.8

1.0

United States Japan G e r m a n y France Italy Austral ia F i n l a n d

Percen tage po in t s

1990-95 1995-99

Output Gap in the United States: Estimates and Projections

Deviation of actual GDP from potential GDP

Source: OECD, Economic Out look No. 69, 2001, forthcoming.

-3

-2

-1

0

1

2

3

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Percent of potential GDP

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The New Economy Impact on U.S. Budget Surpluses andthe U.S. Administration's Proposed Tax Cuts 1

1. The impact on budget revenues is calculated based on an estimated 0.7 percentage point increase in potential output growth since 1995 and its budget sensitivity as estimated by the CBO. The tax cut is equivalent to $1.6 trillion over the period.

Source: OECD and CBO (2001), The Budget and Economic Outlook, 2002-2011.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Per cent of GDP

Impact of the new economy on budget surpluses

Impact of the Administration's proposed tax cuts on budget surpluses

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Changes in labour utilisation contribute to trend growthin GDP per capita

Total economy, percentage change at annual rates, 1990-99 1

1. 1991-99 for Germany; 1990-98 for Korea and Portugal.2. Trend growth in GDP per person employed.3. Trend growth in labour utilisation, measured as persons employed to the total population.

Source: OECD, The New Economy: Beyond the Hype, Final Report on the OECD Growth Project, Paris, 2001.

=Trend growth of GDP per capita

-2 0 2 4 6

Ireland

Korea

Luxembourg

Norway

Portugal

Spain

Australia

Netherlands

United States

Turkey

Finland

United Kingdom

Belgium

Denmark

Austria

Greece

Canada

Japan

Italy

France

Iceland

Sweden

Mexico

Germany

New Zealand

Switzerland

Trend growth in labour productivity (2)

-2 0 2 4 6

Change in labour utilisation (3)

-2 0 2 4 6

+

Trend multi-factor productivity growth increased in manycountries

Average annual percentage change from 1980-90 to 1990-99

Source: OECD, The New Economy: Beyond the Hype, Final Report on the OECD Growth Project, Paris, 2001.

-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5

Spain

United Kingdom

Japan

France

Netherlands

Italy

Germany

Belgium

New Zealand

United States

Norway

Denmark

Sweden

Canada

Ireland

Australia

Finland

8

Projected expenditure on public pensions in selected OECD countries 1

Projected public

pension expenditures in 2050 at 2000

prices,

Index 2000=100

Average annual percentage change

in pension spending, 2000-

2050

Average annual percentage change

in GDP, 2000-2050

Share of public pension

expenditure in GDP, 2000

Share of public pension

expenditure in GDP, 2050

Average annual additional GDP

growth required to maintain public

pension expenditure share

constant through 2050

Australia 429.6 3.0 2.2 3.9 5.6 0.7Austria 286.2 2.1 1.7 10.2 12.8 0.5Belgium 310.9 2.3 1.7 10.7 13.3 0.4Canada 501.8 3.3 1.7 5.3 11.0 1.5Czech Republic 408.1 2.9 1.8 7.7 15.8 1.4Denmark 282.8 2.1 1.6 10.7 13.0 0.4Finland 337.8 2.5 1.7 13.3 16.0 0.4

France 2 257.7 1.9 1.3 12.2 16.2 0.6Germany 284.8 2.1 1.4 11.7 16.9 0.7Hungary 202.8 1.4 3.2 8.3 3.3 -1.8Italy 196.3 1.4 1.4 13.4 13.9 0.1Japan 179.9 1.2 1.0 6.8 8.4 0.4Korea 1829.1 6.0 2.9 0.4 10.5 6.6Netherlands 430.1 3.0 1.8 7.2 11.6 1.0New Zealand 568.8 3.5 1.9 5.5 10.6 1.3Norway 429.9 3.0 1.2 7.3 16.9 1.7Portugal 634.4 3.8 3.0 9.2 14.2 0.9Spain 447.1 3.0 1.8 9.5 17.4 1.2Sweden 265.8 2.0 1.8 12.1 12.1 0.0United Kingdom 195.0 1.3 1.7 4.3 3.6 -0.4United States 448.0 3.0 2.3 5.3 6.9 0.6

1. Includes old-age pensions and early retirement expenses which are an integral part of pension systems.2. To 2040.

Source: OECD

Pick-up in MFP growth and increase in ICT use

Source: OECD, The New Economy: Beyond the Hype , Final Report on the OECD Growth Project, Paris, 2001.

United States

United Kingdom

Sweden

Spain

Norway

New Zealand

Netherlands

Japan

Italy

IrelandGermanyFrance

Finland

Denmark

Canada

Belgium

Australia

0

10

20

30

40

50

-2 -1.5 -1 -0.5 0 0.5 1 1.5

Change in PC intensity per 100 inhabitants, 1992-99

Change in MFP growth corrected for hours worked

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A large ICT hardware sector does not guaranteerapid MFP growth

Source: OECD, The New Economy: Beyond the Hype , Final Report on the OECD Growth Project, Paris, 2001.

United StatesUnited Kingdom

Sweden

Norway

New Zealand

Netherlands

Japan

Italy

Ireland

Germany

France

Finland

Denmark

Canada

Belgium

Austria

Australia0

0.5

1

1.5

2

2.5

3

0 1 2 3 4 5

Growth in MFP, 1995-99

Share of ICT manufacturing in business value added, 1998 (in %)

Output Gap in the United States: Estimates and Projections

Deviation of actual GDP from potential GDP

Source: OECD, Economic Outlook No. 69, 2001, forthcoming.

-3

-2

-1

0

1

2

3

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Percent of potential GDP