The New Economy: Opportunities and Challenges Joseph E. Stiglitz Bull Presentation May 11, 2000

The New Economy Is there a new economy? Have the remarkable technological changes transformed the way our economy operates? And if so, what are the implications for individuals, businesses, and governments?

The New Economy (continued) Characteristics of the New Economy: New technologies Increased capacity to produce and disseminate information Increased demand for information Lower cost of information

Have new technologies led to a new economy? The new economy and old economic laws –Despite major changes in the way economy operates, some of the old economic laws still relevant (scarcity) but may need new laws since knowledge and information, which are at the heart of the new economy, are fundamentally different from conventional commodities The changing structure of the new 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% to 17% in 1959 and 1996 respectively; service went from 9% to 20% in 1959 and 1996 respectively.

Changing structure of the new economy (examples from England) Increasing ratio of services to manufacturing outputs:

Changing structure of the new economy (examples from England)

The new economy? (continued) Improved performance of the economy –increasing productivity (at least in the U.S.)- due to new technologies 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 10 year trendline 5 year trendline

Changing structure of the new economy (examples from England) Diminishing business cycle:

The new economy? (continued) Lower unemployment without inflation –increased competition as a result of better information –increasing wages matching increasing productivity (converse to productivity slow-down in 1970s) Increasing the Pace of Innovation –lower fixed cost of innovation –institutionalized innovation –“mechanized” innovation –more rapid dissemination of new ideas due to new technologies

Making the most of the new economy Marked difference in extent to which different economies - even industrialized economies - have been affected by new economy Ability to harness new technologies based upon: –Role of government in fostering new technologies –Pre-requisites in country’s capital, labor, and product markets –Role of venture capital firms - providing not just capital, but managerial and marketing assistance

Making the most of the new economy (continued) Ability to harness new technology based upon: –Competitive financial markets –Presence of less bureaucratic organizations that are willing to take risks –Competitive markets spurs innovation –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

Internet hosts per 10,000 people

Mobile phones (per 1,000 people)

Different challenges across countries and regions Japan –“invented” just-in-time inventory –Problems posed by life-long contracts Europe –Opportunities afforded by integration –But integration must go beyond common currency, free trade –Problems posed by multiplicity of languages –Highly centralized education systems in some countries

Different challenges across countries and regions Challenges to Europe (continued) –Rigid labor 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 Cultural Diversity –How worried should we be about how new technologies leading to cultural homogenization?  Network externalities, standardization lead to less diversity (standardized language, ways of thinking) –New broadband technologies offer opportunity for more diversity—more channels through wider pipe

Imperfections in the new economy Significant competition imperfections –Increased possibilities for monopolies Network externalities (advantage of a common language) can create dominant operating systems –Implication: Given network externalities, need to look at role of government in addressing standard setting competitive effects

Implications for the Structure and Conduct of Business Changes in production, dissemination, and use of information due to new technologies: –Increased importance of role of information in economy –Increased capacity for processing, and producing information; lowered costs of information –Changes in “industrial structure” of mediation: Removal of middleman? Or increased efficiency of middleman? –Need more nimble firms to keep up with faster pace Small firms? Less bureaucratic firms? More decentralized firms?

Implications for the Structure and Conduct of Business (continued) –Firms rethinking modes of operation –Creation of new industries, while others diminish (Schumpeterian process of creative destruction) –New problems in valuing securities –Supply of information growing faster than ability to process it –Challenge of controlling supply and monitoring quality of information –Increased concern about privacy and security

The New Economy and Equality The Digital Divide Inequality within countries –Will new economy lead to increased inequality, or will it help narrow the gap? –Inequality related to “computer literacy” - New economy values skills that can manage the new information technology - those without these skills will be left behind.

The New Economy and Equality Inequality across countries –Closes the divide between the developed countries and the most advanced of the developing countries integration with global markets –conventional production –IT services –availability of information, knowledge (improved information will lead to improved economic performance) –E commerce will provide direct access to Western markets –But the new economy will increase the gap between the poorest and the richest countries –Countries without access to new technologies will fall farther and farther behind

Public Policy Issues New technology will affect governments’ functions, governments’ relationship to its citizens, and governments’ expected role: E-Government More direct communication between government and citizenry; more direct democracy Improved overall government efficiency Increased openness and transparency – reduced corruption and enhanced confidence in government

Debate over appropriate role for government in new economy Role in: –Establishing (strengthening) internet –Setting regulatory structure –Standard setting –Ensuring privacy and security –Dealing with and processing information (public good) –Dealing with private technology sector –Establishing the appropriate intellectual property regime –Enforcing competition

Role of government in establishing (strengthening) internet In U.S., long involvement of government in telecom - back to 1842 Temporary exemption from sales tax unjustified - worst form of industrial policy But raises difficult enforcement/implementation issues Regulatory issues have major impact on cost of access –Worst examples in Africa –But other examples

Role of government in standard setting Three approaches –Let markets do the sorting –Industry standard setting –Government Conflict between U.S. and Europe over preferred approach Global markets may require global standards Poses another example of global governance without global government And interests of developing countries may not coincide with interests of developed countries –developing countries less interested in 3rd generation reforms –more interested in basic services

Role of government in standard setting (continued) With network externalities, there are major advantages for standard setting but both governments and markets may fail to pick optimal standards government agencies may be “captured” by special interest or an industry group may adopt anticompetitive standards Suggestion: if there is standard setting, any standard must be freely licensed at “fair” price (arbitration) –note conflict among intellectual property protection, competition policy, and “standard setting” How important are “network externalities”?

Government role in ensuring privacy and security Public demand for privacy and security  government involvement required, but excessive intrusiveness of government may have adverse effects on sector  government must be “nimble” in light of fast changing sector  Is main concern protecting individuals from government?  Or from the private sector?  That is, is the government part of the problem, or the solution?

Role of government in establishing intellectual property regime Intellectual property is at the core of the new economy But increased intellectual property protection increases the price of the key input into the production of knowledge---knowledge The effect of increased intellectual property protection on the pace of innovation is thus ambiguous Key example of conflict arises in copyright protection of data processing of public information  How far should government go in processing information itself?  Should government be worried about displacing the private sector, e.g. in the case of tax preparation? Moreover there may be important tradeoffs between intellectual property protection and competition concerns

Role of the government  Knowledge (information) as a public good might suggest a larger role of government  But faster pace of change puts government at a disadvantage—government as a less nimble institution—suggesting a smaller role  Implies partnerships between the private sector and government  Key question; nature of those partnerships

Government’s role in laying the foundations for the new economy Government’s Key Roles: Reducing digital divide Promoting new economy

Government’s role continued Government to accomplish these two objectives by: Redesigning the education program –promote innovation –promote life-long learning –avoid growing digital divide Redesigning financial system –assure funds for new industries Making labor markets more flexible Promoting competition Promoting new technologies Change will be evolutionary -hopeless to think about planning” the process

Three keys to success in the new economy Flexibility –but still maintain hard-fought rights and fundamental values (e.g. worker safety and environmental protection) Competition Education –improve skills –life-long learning –change mindsets