The New Economy: facts, impacts and policies

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Abstract

The world economy is undergoing a fundamental structural change driven by the globalization of business on the one hand and by the revolution in information and communication technology on the other. The New Economy is the superior economic structure that is expected to arise as an outcome of these two forces. The papers is this special issue attempt to assess the significance of the New Economy, to estimate its impacts on economic growth, location of production and on income and wealth inequality, and to evaluate its prospects for economic development. Policies for promoting the New Economy are also discussed.

Introduction

In the late 1990s, many business leaders, investors, journalists and politicians became firmly convinced about the fact that the world economy is undergoing a fundamental structural change driven by both globalization and the revolution in information and communication technology (ICT). The superior economic structure expected to arise as an outcome of these two forces was coined the ‘New Economy’ in the business press. The argument was simply that a business firm, an industry or an economy which is able to successfully utilize these global trends would eventually outperform its rivals. And, indeed, the casual evidence for the New Economy was strong. The stock market boomed, powered by ICT and ‘dotcom’ companies. Productivity and economic growth as well, took off in the United States. As a consequence, even average Americans warmed up to the idea that there really is a New Economy. According to an opinion poll conducted in March 2000, 57% of them believed that the United States has entered ‘a new kind of an economy’ that is ‘significantly different from the industrial economy’ (Business Week, 2000).

Given the interest shown by the policy-makers worldwide, it is surprising to find how scant the research on the impacts of the New Economy really is, especially outside the United States. Even the definition of the concept is rather vague. As Cohen et al. (2000) point out, the ongoing transformation of our economy has been given many names: a ‘post-industrial society’, an ‘information society’, an ‘innovation economy’, a ‘knowledge economy’, a ‘network economy’, a ‘digital economy’, a ‘weightless economy’, and an ‘e-conomy’. They all have their merits in emphasizing the different aspects of the structural change but are also vulnerable to misinterpretation. For example, the economy has always been driven by knowledge and innovation. Therefore, we prefer the term New Economy as it is the one generally adopted in the business and financial press.

Section snippets

A definition of the New Economy

In its original meaning, the New Economy is a well-defined concept. As mentioned above, it was coined by the business press to mean two broad trends in the world economy that have been under way for some time (Shepard, 1997). The first is the globalization of business. Simply explained, this means that, after the collapse of socialism, capitalism is spreading around the world. Markets are being introduced, and trade and capital flows are being deregulated. International trade and investment now

Measures of the New Economy

Information and communication technology is both an output from the ICT-producing industries and an input into the ICT-using industries. As mentioned above, the defining characteristics of this technological revolution are the fast improvement in the quality of equipment and software, and the concomitant sharp decline in their quality adjusted prices. Rationally behaving consumers and business firms respond to the change in relative prices by substituting ICT equipment, software and services

Impacts of the New Economy

Attention will be first devoted to the role that information and communication technology has in generating economic growth, creating spatial as well as income inequalities and in promoting economic development. Modern theories of economic growth and economic geography argue that basically the same forces—increasing returns, knowledge spillovers and skill complementarities—drive economic growth and development, increase the spatial agglomeration of production and generate income differentials

Prospects for economic development

Given its strong economic performance in the 1990s, the United States is generally regarded as the leading New Economy. But why the United States? A recently published book entitled A Nation Transformed by Information, edited by Chandler and Cortada (2000), argues that information has been a driving force in America for 300 years. The book explains the success of the United States by listing many possible factors, ranging from the strong protection of intellectual property rights, to the large

Policies for the New Economy

The last two papers of this special issue consider policies for the New Economy. The former Secretary of the Treasury of the United States, Larry Summers is reported to have once said that ‘the New Economy is based on old virtues; thrift, investment, and letting market forces operate’. But what else is needed?

Kiiski and Pohjola consider policies for improving access to the Internet by studying the factors which determine the diffusion of the Internet across countries. The Gompertz model of

Acknowledgements

I am most grateful to all the project and workshop participants for their inputs and insights. Special thanks go to Liisa Roponen for efficiently organizing the workshop and skilfully editing the papers. UNU/WIDER gratefully acknowledges the financial contribution to this project by the Ministry for Foreign Affairs of Finland.

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Cited by (0)

The papers in this special issue of Information Economics and Policy were among those prepared within the UNU/WIDER project on Production, Employment and Income Distribution in the Global Digital Economy and presented at the project workshop in Helsinki on 12–13 January, 2001. These studies are a continuation of the Institute’s earlier project on the impacts of information technology, the results of which are published in Pohjola (2001).

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