The New Economy:Opportunities and Challenges

Joseph E Stiglitz

Characteristics of the New Economy

• New technologies

• Increased capacity to produce and disseminate information

• Increased demand for information

• Lower cost of information

The New Economy is Real While the laws of economics have remained unchanged,

the new economy is real:

– Changes in the structure of the economy• weightless economy• manufacturing declining, services increasing (change as dramatic as

change from agriculture to industry)• In United States - As a percentage of GDP, manufacturing went from

27% in 1959 to 17% today; service went from 9% in 1959 to 20% today.

– Lead to higher productivity (faster growth) and less volatility

* The fact that the new economy is real does not mean that the valuations of all the new economy stocks are sound

Changing Structure of the New Economy

Higher Productivity and Less Volatility in New Economy

• Improved performance - higher productivity growth

• End of the business cycle?– Fluctuations reduced (not eliminated); shocks will

happen– Better control of inventories– Decreased importance of sectors that relied on

inventories

United State’s increasing productivity

-2

-1

0

1

2

3

4

5

6

7

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

Year

pe

rc

en

t c

ha

ng

e in

pro

du

cti

vit

y

10 year trendline

5 year trendline

Less Volatility (example from England)

Diminishing business cycle:

Keys to New Economy• Just as the industrial revolution was a change in the

production of good, the new economy can be thought of as a change in the production of knowledge

• Changes in innovation– lower fixed cost of innovation– institutionalized innovation– “mechanized” innovation– more rapid dissemination of new ideas due to new technologies– changes force businesses to rethink core competencies and

ways of doing business

• Changes in communication costs and processes

Making the Most of the New Economy

• Country’s ability (even industrialized countries) to penetrate the new economy differs, especially across regions.

• Depends on two main factors:– Role of government in fostering new

technologies– Pre-requisites in country’s capital, labor, and

product markets

Effectiveness at Harnessing New Technologies

• Competitive financial markets – Role of venture capital firms - providing not just capital, but

managerial and marketing assistance

• Competitive Product Markets– Presence of less bureaucratic organizations that are willing to take

risks– Spurs innovation

• Labor Markets– High skilled Labor

• willing to take risks• lifetime employability rather than lifetime employment• emphasis on learning how to learn, rather than simply learning skills

– Adaptable education systems– Labor more willing to take risks when unemployment is low

Conditions Making U.S. Particularly Hospitable to New Economy

• Flexible Labor Markets– but still maintain hard-fought rights and fundamental values

(e.g. worker safety and environmental protection)– Ability to adapt quickly to new technologies

• Competition• Education

– improve skills– life-long learning– change mindsets

• University-Government-Business nexus (Silicon Valley replication across countries)

• Innovativeness• Entrepreneurship

Growing U.S. Economy

0

0.5

1

1.5

2

2.5

3

3.5

4

GDP Growth Rates

Source: Economic Report of the President, 2000

Challenges Facing Europe

• Financial markets– Lack of competition and venture capital

• Product markets– Bureaucratic barriers to establishing new enterprises

• According to three studies, the average cost of administrative burdens is between 6 and 30 times higher for SMEs than that for larger businesses

• Labor Markets– Rigid labor markets– Highly centralized education systems in some countries– Absence of nexus between universities and innovative

research

Asia’s Success in New Economy

• GDP growth rate - fastest in the world (6.5%)

• Increasing productivity

• High degree of investment in technology and innovation

GDP growth rates in 1999

6.5

0.12

1.88 2.1

3.69

5.6

2.09

0

1

2

3

4

5

6

7%

Asia’s Potential to Succeed in New Economy

• Demonstrated adaptability and flexibility

• Highly competitive structures

• Large numbers of highly educated individuals, especially in technology and science

• High levels of entrepreneurship

• Strength is broad based, reflected in high levels of literacy

• Compared to many other countries, the lower levels of inequality suggests less danger of a growing digital divide and more broad-based participation in the new economy

The New Economy and EqualityThe Digital Divide

• Inequality within countries– Will new economy lead to increased inequality, or will it help

narrow the gap?

– New economy values skills that can manage the new information technology

• Inequality across countries– Closes the divide between the developed countries and the most

advanced countries

• integration with global markets

– But the new economy will increase the gap between the poorest and richest countries

– Countries without access to new technologies will fall farther and farther behind

Increasing Productivity in East Asia

Reasons for Recovery• Principle of shared growth• High investments in human capital

– Low inequality in education (which reinforced low economic inequality)

– Investment in technical training• High Savings and Investments

– Sound macro-economic policies• Leading to less economic volatility—fewer recessions-- than elsewhere

• Openness to foreign technology• Promotion of specific industries• Export push• Strong entrepreneurship and management

Investment in Technology