The New Economy

Powerful Essays
It works in America. Will it go global?

It seems almost too good to be true. With the information technology sector leading the way, the U.S. has enjoyed almost 4% growth since 1994. Unemployment has fallen from 6% to about 4%, and inflation just keeps getting lower and lower. Leaving out food and energy, consumer inflation in 1999 was only 1.9%, the smallest increase in 34 years.

This spectacular boom was not built on smoke and mirrors. Rather, it reflects a willingness to undertake massive risky investments in innovative information technology, combined with a decade of retooling U.S. financial markets, governments, and corporations to cut costs and increase flexibility and efficiency. The result is the so-called
New Economy: faster growth and lower inflation.

Most corporate executives and policymakers in Europe and Asia, once skeptical about the U.S. performance, have taken this lesson to heart. There are still widespread misgivings about the U.S. model of free-market capitalism. But driven by a desire for faster growth, combined with a fear of being left behind, the rest of the world is starting to embrace the benefits of a technology-driven expansion.

But a global New Economy will not happen overnight. True, spending on technology, the most visible part of the New Economy, while not yet up to U.S. levels, is on the rise everywhere. Semiconductor sales were up 17% worldwide in 1999, while the number of Internet users in Western Europe and the Asia-Pacific region is expected to more than double over the next five years (chart). Even in a developing country such as India, the software industry is growing at a rate of 50% to 60% annually.

OLD VIRTUES. But the worldwide proliferation of mobile phones and Web accounts by itself will not bring about a more vibrant global economy. What are also needed are dramatic changes in core institutions that will translate technology into faster productivity growth. That means financial markets better able to fund innovation, more flexibility in corporations and labor markets, a faster pace of deregulation, and increased competition (table). ``The New Economy is built on old virtues: thrift, investment, and letting market forces operate,'' says Treasury Secretary Lawrence H. Summers.

There are signs that the process of change has started. With growth picking up in Europe, and Asia emerging fro...

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...dents accounted for two-thirds of the growth in science and engineering doctorates at U.S. universities. Most of them planned to stay and work in the country.

Like many other aspects of the New Economy, opening up the doors to foreign workers won't come easily in many countries. But the genie is out of the bottle--now that the U.S. has shown that faster growth is possible, no country will be able to resist it. In the end, the benefits will be well worth the pain.

The Road to the New Economy

Here's what countries must do to get a high-productivity, low-inflation economy

BOOST INVESTMENT SPENDING on information technology as a share of GDP

RESTRUCTURE CORPORATIONS to cut costs, improve flexibility, and make better use of technology

OPEN FINANCIAL MARKETS to direct capital to the best uses

DEVELOP VENTURE CAPITAL and IPO markets to aid innovative companies

ENCOURAGE AN ENTREPRENEURIAL CULTURE and make it easier to start new businesses

INCREASE THE PACE OF DEREGULATION especially in telecom and labor markets ADJUST MONETARY POLICY to the realities of the New Economy by waiting for inflation to appear before raising interest rates
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