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KAUTILYA
Is
The New All That Hot?
A
new research paper in the US questions the hype over the 'new economy'
By
Jairam Ramesh
We
are being constantly bombarded with a great deal of hype on the "new
economy". The Internet, computers and telecommunications are all
supposed to transform our lives in an unprecedented fashion. But now a
new paper from one of America's most respected economists pours cold water
on these claims. Robert Gordon, a professor at Northwestern University,
has just released "Does the New Economy Measure up to the Greatest
Inventions of the Past" as a working paper under the aegis of the
prestigious Cambridge (US)-based National Bureau of Economic Research.
Ironically, the "new economy" has ensured its instant and wide
dissemination.
Economics
textbooks say that there is a trade-off between wage inflation and unemployment.
Low inflation means high unemployment whereas rising prices are inevitable
if there is to be low unemployment. This relationship is called the Phillips
Curve after A.W. Phillips who first came up with this finding in 1958
based on the UK experience. The Phillips Curve has led to a concept called
the non-accelerating inflation rate of unemployment (NAIRU)-the employment-inflation
nirvana. In the 1960s, America's nairu was 4 per cent and in the 1970s
it was 4.9 per cent. The best-selling MacroEconomics by Rudiger Dornbusch
and Stanley Fischer, first published in 1978, put America's NAIRU in the
1980s and 1990s at between 5 and 6 per cent.
But something
stunning has happened in the US in the past 10 years. Yes, it is running
high current account deficits, and savings rates have plummeted. True,
income distribution has become more unequal. But the American economy
has seen unexpectedly high rates of economic growth in the 1990s. Inflation
has remained low at around 3 per cent despite increasing wages and falling
unemployment, which is currently at around 4 per cent. But instead of
rising, the NAIRU has fallen. This profound transformation, many think,
has been wrought by the dramatic gains in productivity made possible because
of it.
Gordon disagrees
and points out that the spurt of 1.35 percentage points in productivity
(weighted average of labour and capital productivity) during 1995-99 over
1972-95 comprises 0.54 percentage points of unsustainable cyclical effect
and another 0.81 percentage points of an acceleration in trend growth.
His contention is that productivity grows rapidly when output itself grows
faster than its trend.
Gordon
divides the US economy into a "new economy" sector that consists
of computers, peripherals, telecom and other types of durables and a "traditional"
sector. The "new economy" sector, according to his calculations,
accounts for 12 per cent of the US economy and it has seen fantastic advances
in productivity. The entire acceleration in trend growth of productivity
for the overall economy has come from this 12 per cent segment. But the
balance 88 per cent of the economy has seen no acceleration in productivity
growth. However, this "macro" result may not square with "micro"
impacts: the oil industry, for example, has been claiming that drilling
productivity has increased by about 25-30 per cent because of the use
of the "new economy" tools.
Gordon identifies
five clusters that formed the core of the Second Industrial Revolution:
electricity, internal combustion engine, oil/gas/chemicals, telegraph/
telephone/radio/motion picture/TV and running water/indoor plumbing/ urban
sanitation. US economists have been debating why productivity growth lagged
during 1972-95. Gordon argues that we should, instead, be asking a more
basic question-why is it that productivity growth was so phenomenal during
1913-72? The answer lies in the revolutionary impact of these "clusters".
Against
each of these clusters which transformed the world as we know it, Gordon
finds the "new economy" falling woefully short. This is mainly
because the Internet:
- has really
not boosted demand for PCs and has not created truly new content;
- simply
substitutes existing activities for other forms of information and entertainment
and duplicates existing forms of commerce and information;
- triggers
investment that represents competition for market share which, in turn,
redistributes rather than creates sales;
- has resulted
in social returns being far less than private returns.
Undoubtedly,
the "new economy" has an unusually great potential and its best
is yet to come. But we could certainly do with a much larger dose of sobriety
and a sense of balance than what is on offer these days through the media,
stock market pundits and from the it industry gurus themselves.
(The author is with the Congress party. These are his
personal views.)
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