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Editorial — The new economy: technology is not enough
by Donald J. Johnston, Secretary-General of the OECD
Over several months I have participated in many discussions with experts from all over the world on the issue of the new economy. The question usually raised: is there a new economy? The consensus answer seems to be "perhaps". There may be an element of media hype about it all, but there is also substance behind the headlines. As OECD chief economist, Ignazio Visco, points out in this special edition of the OECD Observer, trends are finally emerging in the economic data that the new economy might help to explain, especially in the area of productivity.
The reference for most people in assessing this new economic wave is the United States. Many credit the US phenomenon - the longest period in history of uninterrupted expansion, high productivity growth, low inflation and low unemployment - in part to the invasion of information and communication technologies (ICT) and their effect not only on the technology sector itself, but on their application to old and new industries alike.
Take the Internet for example. It is in much greater use in the United States than in most other countries, and between September 1999 and March 2000, the US added twice as many Internet hosts to its stock in per head terms than Germany, Japan and the United Kingdom together. It is estimated that between 1990 and 1996, investment in ICT accounted for about 0.4 percentage points of overall 2.8% growth in US output. In both absolute and relative terms, that was significantly more than in other G7 countries.
Such figures make the argument about ICT being behind the new economy seem compelling. But as Socrates said, doubt is a sign of intelligence. It is also a prerequisite of asking the right questions, making progress, legislating and making policy intelligently. All the more reason to look at the arguments closely. Is ICT the only reason? Well, personally I remain a sceptic. ICT is clearly important in improving information flows and productivity, but so were many "transformational" technologies in the past. There was the spinning jenny, for example, which revolutionised the textile industry, though it did migrate into industry more generally because of its specific applications. The electric motor was transformational because it had applications far beyond its immediate area, as did its predecessor, the steam engine. After all, the latter even entered the automobile age with the Stanley Steamer! It is interesting to note, as Alan Greenspan has often done, that the electric generator took decades to transform the way industry worked on the plant floor!
There can be little doubt that what we are dealing with today is also a truly transformational technology. Electronic commerce has challenged us all, consumers, producers and governments alike. Notions of work and workplaces are being recast. The key force of the new economy is speed, not just because the velocity at which information and finance travels around the globe is bewildering, sometimes even alarming. In fact, the speed with which technology is introduced, diffused and mastered has become a fundamental component of success. This point may help to explain why the United States took such a remarkable, if not unassailable, lead in recent years; as Risaburo Nezu underlines in his article on e-commerce, the technology was available everywhere, but for many reasons, some unexplained, the United States harnessed it first. And now other countries, including technology-minded Japan, are scrambling to catch up.
Clearly, there is more to the success of the US economy and its nine years of expansion than the existence and spread of ICT. Those who wish to emulate the US experience will not, in my judgement, find it by simply moving rapidly to invest in and disseminate these exciting new technologies.
For ICT to make a solid contribution to long-term growth, the markets must be allowed to work, and not be held back by non-supportive regulatory frameworks. Macro-economic policies must be supportive, especially monetary policy, whose aim remains that of maintaining price stability, the concomitant result being to keep interest rates low, thereby providing more interest and opportunities for equity capital.
Entrepreneurial "animal spirits", to quote Keynes, must be encouraged by the right framework conditions, with venture capital being available to entrepreneurs. Of course, exit strategies for venture capitalists must also exist, which is why well functioning and properly regulated financial markets and stock exchanges are so important.
Success does not come easily to entrepreneurs. This means that many failures are to be expected. They must be tolerated as part of the dynamic process. Is this cultural? A good and important question. Certainly in North America this tolerance by lenders and investors seems fairly well established. Those who fail in business are not ostracised, provided they have been transparent and honest. They can start again and usually do. But in other OECD countries, this may not be the case. Honest entrepreneurs should not be prevented from making a new start; they are the catalysts that marry up the components of economic growth. Without these risk takers, this world would still be plodding on with 19th century technology at best.
Another quality of the United States is its low administrative barriers to business start-ups, its efficient capital markets, and open and competitive markets for goods and services. It actively promotes links between science and industry. It is open to the new ideas that immigrant populations can bring. It makes a virtue of labour mobility and workplace flexibility, a notion which should not be confused with the idea of job insecurity. In short, it is not technology alone which drives a new economy, nor the success of the United States.
The United States is the largest country in the OECD, but look for a moment at the case of one of the smallest, Ireland, which not long ago was one of the poorest. Ireland has been the OECD's fastest growing economy for several years and is now in the top ten OECD countries in terms of its GDP per head. Ireland is also one of the world's leading software exporters. How can this be explained? Some cite its tax policy to attract investment, yet other countries offer that too, without the same results. Some will point to EU funds, yet other recipients have not transformed their economies to the same extent. The English language and traditional links with the United States are also assets, although these did not make a difference 20 years ago. Could it be investment in skills, or indeed the government's prudent policy management since the late 1980s and its partnerships with unions and employers, that has produced today's stable business environment? The answer seems to be a combination of all of these. In short, correct policies breed advantages that are self-reinforcing over time.
It may be true that a country like Ireland might not have enjoyed this success without the emergence of ICT, with its weightlessness and global applications. Nevertheless, it emphasises the extent to which the new economy is a great opportunity, provided the policies are right.
The new economy is therefore not exclusively a US affair; its global dimension is part of its vitality. We are effectively living in a "global village". This phrase, coined by Marshall McLuhan some 40 years ago, was at first original, then for me a dreadful cliche, and is in fact now a reality of our time.
As the UN High Commissioner for Human Rights, Mary Robinson, argues in the pages of this Observer special issue, the new economy has the potential to act as a liberating force for a whole generation of underprivileged people. Already, in both developed and developing countries, we are seeing ICT delivering new business opportunities to even quite modest people. Used wisely, it gives people everywhere an opportunity to participate in new sources of economic growth and expression, while acquiring skills and trades along the way. Policymakers have an important responsibility to work alongside business, unions and civil society to ensure that these opportunities are not missed. Through ICT and the network, we have effectively entered the global village from which we must never exit.