1. Global Perspectives on the New Economy: US, Asia and Europe Tokyo January 2001

2. 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?

3. BACKGROUND QUESTIONS: Is there a new economy? How does the new economy impact the way the economy works?

4. 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

5. 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

6. 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)

7. 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)

8. 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

9. 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

10. Taking Advantage Of The New Economy Labor markets Capital markets Product markets Research

11. Labor Markets Willingness to take risk – life-time employability, not life-time jobs Life-long learning

12. Requirements for Labor Market Full employment Safety nets Good education system, focusing on technology and science Flexible labor markets -portability of pension -health insurance

13. Scorecard: Labor Market USEuropeJapanEast Asia High employment Risk taking, moderately flexible labor market Rigidities in labor market Lifetime employment Highly flexible Some weaknesses in education system Some rigidities Mixed

14. 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

15. Scorecard: Capital Markets U.S.EuropeJapan Best 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

16. Product Markets Competition drives innovation Real dangers--e.g. Microsoft Standard setting –can help promote competition –but can also stifle competition

17. Product Markets U.S.EuropeJapan 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

18. Research Synergies between research and business Inter-linkages - Silicon Valley Key role of government

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. Electronics Production Data from earlier HK talk

26. 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):

27. 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

28. CHART

29. 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

30. Uncertainties in Short Run Outlook: Japan Failure to resolve long standing problems Mounting national debt Aging population

31. 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

32. 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