ReviewEssays.com - Term Papers, Book Reports, Research Papers and College Essays
Search

The New Economy

Essay by   •  October 1, 2010  •  Research Paper  •  2,438 Words (10 Pages)  •  1,678 Views

Essay Preview: The New Economy

Report this essay
Page 1 of 10

THE NEW ECONOMY

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 from its slump, Merrill Lynch & Co. is forecasting 3.3% world growth for 2000, with inflation slowing down (chart). Corporate restructuring has begun in Europe and Asia, financial markets are being rebuilt to support innovation, and there is more willingness to take risks. ``I'm seeing the entrepreneurial response almost

everywhere,'' says Clyde V. Prestowitz Jr., president of the Economic Strategy Institute.

``It's not Silicon Valley yet, but there's a lot of ferment.'' Even in slow-growing Japan, ``I

think there will be a New Economy,'' says Toshiba Corp. President Taizo Nishimuro,

though he cautions that ``it won't be the same as the U.S.''

Nevertheless, the process of shifting to a fast-growth track is still in its early stages in most of the world. Europe is at least two or three years behind the U.S., with Asia lagging even farther behind. While there are pockets of entrepreneurial vigor in places such as Finland, it has turned out to be an enormous challenge to reshape cultures to allow more risk-taking in Europe and Asia, where caution is a virtue.

It also takes time for policymakers to adjust to the New Economy. In the U.S., Federal Reserve Chairman Alan Greenspan, an enthusiastic proponent of technology-driven productivity gains, resisted great pressure to raise rates in the face of fast growth and low unemployment. By contrast, the two biggest central banks in Europe, the European Central Bank and the Bank of England, have adopted a policy of aggressively raising rates at the slightest hint of inflation, thus choking demand needed to justify business investment.

Moreover, investment in risky innovation--a linchpin of the New Economy--depends on open global markets, since national markets do not provide a big enough payoff for taking big risks. But as shown by the demonstrations against the World Trade Organization in Seattle, there are groups in every country who feel threatened by free trade. A widespread backlash against globalization could remove a key underpinning of the New Economy.

Ironically, skeptics also worry that a worldwide investment boom could itself trigger global inflation. The reason? Slow growth in Europe and Asia in the 1990s helped keep commodity prices and interest rates low in the U.S., despite strong growth in America. But as the rest of the world picks up steam, that slack is slowly disappearing. By sometime later this year or early 2001, unemployment in the major industrialized

economies should drop below the level that triggered inflation in the late 1980s. ``That's

when you get a reasonable test of the New Economy thesis on a global basis,'' says

Stephen S. Roach, chief economist at Morgan Stanley Dean Witter in New York.

But despite these obstacles, a shift to a U.S.-style economic model is looking increasingly attractive as a guide to development. Based on the American example, technology-driven growth creates many more jobs than it destroys. Combined with big productivity gains, that allows the unemployment rate to fall without igniting inflation--something that would be welcome in European countries that have long struggled with high unemployment. Faster growth would also ease the long-term burden of funding the retirement of aging populations in Japan and Europe.

OPEN ACCESS. Moreover, the global economy is not a zero-sum game: Faster growth in the rest of the world would have a big payoff for the U.S. as well. Commodity prices might rise at first, but so would exports, bringing down the swelling trade deficits and creating manufacturing jobs at home. U.S. companies would start to see overseas profits accelerate.

And then there's the innovation factor. For corporations, the most important

...

...

Download as:   txt (15.3 Kb)   pdf (173.9 Kb)   docx (16.9 Kb)  
Continue for 9 more pages »
Only available on ReviewEssays.com
Citation Generator

(2010, 10). The New Economy. ReviewEssays.com. Retrieved 10, 2010, from https://www.reviewessays.com/essay/The-New-Economy/3052.html

"The New Economy" ReviewEssays.com. 10 2010. 2010. 10 2010 <https://www.reviewessays.com/essay/The-New-Economy/3052.html>.

"The New Economy." ReviewEssays.com. ReviewEssays.com, 10 2010. Web. 10 2010. <https://www.reviewessays.com/essay/The-New-Economy/3052.html>.

"The New Economy." ReviewEssays.com. 10, 2010. Accessed 10, 2010. https://www.reviewessays.com/essay/The-New-Economy/3052.html.