Global Perspectives on the New Economy: US, Asia and

Europe

Tokyo

 

January 2001

KEY QUESTIONS:

• How is the "new economy" likely to affect differently US, Asia, and Europe?

• What does each need to do to take full advantage of the new economy?

BACKGROUND QUESTIONS:

• Is there a new economy?

• How does the new economy impact the way the economy works?

IS THERE A NEW ECONOMY?

• Short answer: yes

• Marked changes in costs of communication and computers, lower transportation costs, reductions in artificial cross-boundary barriers, etc.

• Have lead to: - globalization - innovation revolution

NEW ECONOMY • Industrial revolution was a major change in structure

of economy and society:– from agriculture to industry– from rural to urban

• Innovation revolution--change in how ideas are produced and the importance of ideas (the weightless economy):– from manufacturing to service sector – together with globalization has had profound implications

for location of production

NEW ECONOMY (continued)

• Knowledge and information, which are at the heart of the new economy, are fundamentally different from conventional commodities

• Economic laws--scarcity--still hold sway

• But there are still some fundamental differences– importance of net work externalities– importance of fixed costs (research)

The New Economy And Macro-Economics

• Changing nature of economic fluctuations– Inventory cycles less important– Crises caused by huge movements in short term capital

• From inflation to deflation– Importance of global competition

• Increased pace of innovation– At least in the U.S. (figure)

The New Economy And Micro-Economics

• New, upstart firms played key role in innovation

• But network externalities, "winner take all" have resulted in increased potential for monopolization-- Microsoft

The New Economy And Inequality

• “Rents" generated by innovation--no profits in commodity production– are differences in ability to innovate greater than

differences in ability to produce?

– if so, will this imply greater inequality

• Increasing concerns about the digital divide within and between countries

Taking Advantage Of The New Economy

• Labor markets

• Capital markets

• Product markets

• Research

Labor Markets

• Willingness to take risk– life-time employability, not life-time jobs

• Life-long learning

Requirements for Labor Market

• Full employment

• Safety nets

• Good education system, focusing on technology and science

• Flexible labor markets- portability of pension

- health insurance

Scorecard: Labor MarketUS Europe Japan East AsiaHigh employment

High employment

High employment

High employment

Risk taking, moderately flexible labor market

Rigidities in labor market

Lifetime employment

Highly flexible

Some weaknesses in education system

Some rigidities Some rigidities Mixed

Capital Markets

• Venture capital markets• Strong, competitive banking• Good securities markets regulations

– auditing rule

– accounting standards

– disclosure

• Key objective: achieving right balance– dangers of over and under regulation

Scorecard: Capital MarketsU.S. Europe JapanBest developed venture capital firms

Most competitive banking (but banking reforms might reduce competition)

Strong disclosure regulation particularly important, but will this weaken in the new administration?

Limited competition in banking

Venture capital spreading, but basis (endowed universities, foundation, institutional savings) weaker

Weak banks

Product Markets

• Competition drives innovation

• Real dangers--e.g. Microsoft

• Standard setting– can help promote competition– but can also stifle competition

Product MarketsU.S. Europe Japan High degree of competition

Partly result of strong anti-trust law vigorously enforced under Clinton: will new administration has as strong a resolve?

Competition less vigorous

Anti-trust authorities are becoming important

Competed vigorously in the international market place

But in many areas, competition has been limited, with little spur to innovation

Research

• Synergies between research and business

• Inter-linkages- Silicon Valley

• Key role of government

Keys to Success in The New Economy• Flexibility [ should we omit the finer points? -nn]

• Flexible labor markets– No life-long jobs– Life-long employability– Requires life long learning– Education system that teaches the ability to learn– Safety nets for those displaced in the process of change

• Flexible capital markets• Flexible product markets• Flexible governments

– Supporting innovation– Instead of suppressing innovation with oppressive bureaucratic

regulations that divert attention from innovation and inhibit the establishment of innovative firms

Keys to Success (cont.)

• Competition• A driving force for innovation• Monopolies try to suppress innovation, threatens

vested interests

• Education• Improve skills• Life-long learning• Change mindsets

• Research

Keys to Success (cont.)

• Entrepreneurship• Willingness to accept risk—and failure—on all

parts, including:– Capital markets that supply funds (e.g. venture capital) to

new risky ventures—going beyond deal-making involving rearrangement of existing assets

– Workers that are willing to accept risk

• A respect for, and a willingness to accept, innovativeness

Asia’s Potential to Succeed in the New Economy

• Demonstrated adaptability and flexibility

• Highly competitive structures

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

• High levels of entrepreneurship

Asia’s Potential (cont.)

• Broad-based strength, reflected in high levels of literacy

– Balanced view of the role of government

• Lower levels of inequality, compared to other countries

– suggests less danger of a growing digital divide and more broad-based participation in the new economy

Asia’s Competitive Advantage in the New Economy

• Technology is becoming increasingly crucial to keeping business relevant - and competitive - in the new economy

• East Asia is the world’s largest producer of electronics hardware

• East Asia must leverage its competitive advantage in hardware production (as market for technology products will likely continue to increase) while increasingly applying the new technologies to boosting domestic economy efficiency

Electronics Production

• Data from earlier HK talk

High-technology exports (% of manufactured exports) in 1998

• IT ands Telecommunications

• East Asia needs to increase application of new technologies

• Internet Hosts (per 10,000 people):

Key Roles For Government

• In maintaining stability of macro-economy– with weak macro-economy, there will be weak

investment (see chart)

• In maintaining sound financial system• In promoting competition• In promoting high quality education• In promoting research• In creating an entrepreneurial risk-taking climate• In ensuring that the fruits of the gains are widely

shared

CHART

Uncertainties In Short Run Outlook: U.S.

• Bursting of U.S. technology stock bubble Problems with electricity in California?

• Political gridlock

• High levels of corporate and household debt

• High level of trade deficit

• Potential for huge capital outflow

Uncertainties in Short Run Outlook: Japan

• Failure to resolve long standing problems

• Mounting national debt

• Aging population

Long Run Outlook?

• In the long run, though, economic fundamentals are likely to win out

• For the U.S. and Asia as a whole, return to

high growth

What about the Asian Miracle?

• Asia Miracle was real and based on real strengths• All market economies had fluctuations - what is

remarkable is how stable East Asia has been • All market economies have weaknesses - what is

remarkable is the resolve with which so many are being addressed

• Asia is poised for a full recovery, partly based on taking full advantage of the new economy

• And looking beyond, China and East Asia are poised for a second generation of the Asia Miracle