ABOUT THE NEW ECONOMY

A work paper presented to professor: RADY KHAZEM

By MBA student: ANJAD QUSAIBATY

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WHAT IS THE MEANING OF THE TERM “NEW ECONOMY”?

Before we talk about the “new economy” It may be helpful to give a short definition of the “old economy”. According to the Longman dictionary, the Old Economy is an economic system that is based on older types of industry such as steel, energy, and machinery, in other words: the economy that is based on traditional methods of doing business rather than on the new high-tech Internet business activity. Some economists would like to give a timeframe for the old economy era between the 1950s and 1970s.Now Starting from the late years of the 20th century (between the 1970s and 1990s), all the developed economies (followed later by the underdeveloped economies) started to go through fundamental transformations. Some of the most obvious outward signs of these changes or transformations are in fact among the root causes of it:Revolutionary technological advances including: powerful personal computers, high-speed telecommunications, and the Internet.The market environment facilitated by these and other developments in the last decade has been variously labeled the “information economy”, “network economy”, “digital economy”, and “knowledge economy”. Together, the whole package is often simply referred to as the “NEW ECONOMY”.

WHAT IS NEW IN NEW ECONOMY? / IS THE NEW ECONOMY REALLY NEW?In my opinion there is no one definite answer for this question, therefore I will try to answer it in five ways and from different points of view: Beyond the technological advances, what is actually new about the so-called New Economy? In one respect: nothing. Humans still work at jobs for a living, and they still buy, sell, and trade products and services, just like they always have. As the former Federal Reserve Chairman Alan Greenspan has noted, the heart of the economy is, as it always has been, grounded in human nature, not in any new technological reality. In Greenspan’s analysis, “The way we evaluate assets, and the way changes in those assets affect our economy, do not appear to be coming out of a set of rules that is different from the one that governed the actions of our forebears.... As in the past, our advanced economy is primarily driven by how human psychology molds the value system that drives a competitive market economy. And that process is inextricably linked to human nature, which appears essentially immutable and, thus, anchors the future to the past.” Nonetheless, Greenspan and other economists agree that some of the key rules of the game are changing, from the way we organize production, to our patterns of trade, to the way organizations deliver value to consumers.

Some economists dealt with this question from a historical perspective and concluded that the new economy is not necessarily something really new . Sirkka Hämäläinen, a Member of the Executive Board of the European Central Bank, and Jaakko Honko a Lecturer at Helsinki School of Economics, adopted this side of the argument, and to prove their point of view, they made a comparison between the wide effect of the technological revolution on the economy in the recent years and the wide effect of discovering electricity on the economy in the past years. (In conclusion, we would like to underline once again that the new economy is not necessarily something really new. History shows that there have been many similar quantum leaps which have led to long periods of adjustment with increased productivity and higher potential growth. There are, however, some elements in the current

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process which are somewhat different from past "revolutions". Many important enabling factors have coincided with the development of digital technology and the "information revolution". The synergies of these enabling factors are creating a process which is very likely to become more far-reaching than previous "revolutions". Nevertheless, the ongoing "revolution" is not changing basic economic laws.) On the other hand, some other economist adopted the opposite point of view and tried to give a precise answer to this question. One of those is The German economist Horst Siebert (March 20, 1938 – June 2, 2009) in his paper titled “The New Economy-What Is Really New?” presented to Kiel Institute of World Economics in august 2000. According to Horst what is really new is “first of all the technological innovation. In economic terms what is new is a new product. The new IT product brought about by the new technology means two different things: a new device to handle data and to communicate and new good “information”. This should lead to an increase of productivity, to a larger production potential and to a higher growth rate. The new economy has implications for capital markets and especially for labor. Major issues are regulation and taxation.”The key words in his answer were: - New technology: consists of the combined technological advancement of the

microprocessor, software and network facilities.- New products: IT products (information and technological devices). - And the impact of two former factors on productivity, growth, labor, capital market,

regulation, and taxation.

Another attempt to answer this question came from another two economists Robert D. Atkinson and Randolph H. Court in their report presented to the Progressive Policy Institute titled “The new economy index: understanding America’s economic transformation”. Under the question “what’s new about the new economy?” they answered by giving thirteen indicators classified under four main categories that collectively illustrate the emergence of the structural roots of this New Economy. (Note: this report was especially made about America but I think it could give us a general idea about what is new in the new economy) A- INDUSTRIAL AND OCCUPATIONAL CHANGE:

1- More People Work in Offices and Provide Services: Since 1969, virtually all jobs lost in goods production and distribution sectors have been replaced by office jobs.

2- High-Wage, High-Skill Jobs Have Grown: For example, there were fewer than 5,000 computer programmers in America in 1960, and there are over 1.3 million today.

B- GLOBALIZATION:3- Trade Is an Increasing Share of the New Economy: One indicator of the extent of

the trend toward globalization is the growing value of exports and imports as a share of the economy.

4- Foreign Direct Investment Is on The Rise Around The World. C- DYNAMISM AND COMPETITION:

5- The Economy Is Spawning New, Fast-Growing Entrepreneurial Companies: or so called gazelles (companies with sales growth of at least 20 percent per year for four straight years). The economy is increasingly made up of these gazelles. Since 1993, the number of gazelles has grown 40 percent, to over 355,000. These

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companies are responsible for creating 70 percent of the net new jobs added to the economy between 1993 and 1996.

6- Fierce Business Competition: for example: In 1965, IBM faced 2,500 competitors for all its markets. By 1992, it faced 50,000.

7- “Cooptation” In The New Economy: Collaboration Among Competitors: A lot of experts have suggested that the collaborative dynamic of networks, partnerships, and joint ventures is a main organizing principle in the New Economy.

8- The New Economy is Constantly Churning: while firms can grow fast, they can go out of business or downsize just as quickly. In fact, 30 percent of all jobs a year are in flux (either being born or dying, expanding or contracting).

9- Consumer Choices Are Exploding: For example: An estimated 50,000 new products are announced every year in America, up from only a few thousand annually in 1970.

10- The New Economic Order: Speed Is Becoming The Standard: For example: One study found that in 1990 new U.S. products took an average of 35.5 months to complete, but by 1995 companies were introducing new products in an average of approximately 23 months.

D- THE INFORMATION TECHNOLOGY REVOLUTION11- Microchips Are Everywhere: For example: From 1982 to 1996, the world

semiconductor market has grown from a $20 billion market into well over a $100 billion market in constant 1992 dollars. In the same period in the United States, semiconductor sales as a percentage of GDP rose from less than 0.2 percent to as high as 0.65 percent, all while dropping in price.

12- Computing Costs Are Plummeting: the cost of computing is dropping by nearly 25% per year.

13- Data Transmission Costs Are Plummeting: The cost to transmit one bit of data over a kilometer of fiber optic cable declined by three orders of magnitude between the mid- 1970s and the beginning of the 1990s, allowing more data to be transmitted over longer distances at lower prices.

Some of the economists prefer to answer this question by making a comparison between the old and the new economy to help reveals the new sides and characteristics of the new economy:

ISSUEOLD INDUSTRIAL

ECONOMYNEW KNOWLEDGE

ECONOMY

Markets

Economic DevelopmentSteady and linear, quite

predictableunsteady and very hard to

predict

Market changes Slow and linear Fast and unpredictableEconomy Supplier-driven Customer-driven

Lifecycle of Products and Technologies

Long Short

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Key Economy Drivers Large industrial firmsInnovative entrepreneurial

knowledge-based firms

Scope of Competition Local Global hyper competition

Work Force

Leadership VerticalShared: employee

empowerment & self-leadership

Work force characteristics Mainly male, high proportion of semi-skilled or unskilled

No gender bias; high proportion of graduates

Skills Mono-skilled, standardized Multi-skilled, flexibleEducation Requirements A skill or a degree Continuous learningManagement-Employee

RelationsConfrontation Cooperation, teamwork

Employment Stable Affected by market opportunity / risk factors

Employees Seen as Expense Investment

Enterprise

Pace of business Slow Appreciably faster with ever-rising customer expectations

Business Development Approach

Strategy pyramid: vision, mission, goals, action plans

Opportunity-driven, dynamic strategy

Key Drivers to Growth Capital People, knowledge, capabilities

Main Sources of Competitive Advantage

Access to raw materials, cheap labor, and capital for

conversion; cost reduction through economies of scale

Distinctive capabilities: institutional excellence,

moving with speed; human resources, customer

partnership; differentiation strategies; competitive

strategies

Scarce Resource Financial capital Human capital Strategic Alliances with Other

FirmsRare, "go alone" mindset Teaming up to add

complementary resources

Business Model Traditional: command-and-control

New: refocused on people, knowledge, and coherence

DOES THE NEW ECONOMY NEED NEW ECONOMICS?

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I would like to answer this question from two different perspectives:

1- THE MACROECONOMICS PERSPECTIVE:

Macroeconomics sees the economy as an aggregate. It study the performance and operation of the economy as a whole: the nation’s gross domestic product (GDP), consumption, saving and investment, employment and unemployment, price levels, interest rates, imports and exports, exchange rate, capital flows, etc. From this perspective I think that the basic economics laws are still the same and we don’t need new economics laws. In other words, The focusing here is not on inventing new economic laws, it is on studying the Impact of the new economy on the aggregate statistics of the economic performance that reflects the fundamental changes taking place in the world economy. (For example: U.S. exports and imports have increased from 11 percent of GDP in 1970 to 25 percent in 1997 as a result of increasing share of trade under the new economy)

2- THE MICROECONOMICS PERSPECTIVE:

Microeconomics focuses on the interaction of individual participant in the economy (consumers, producers, etc). From this perspective I think that changes must take a place in basic laws of microeconomics to take in consideration the new factors brought by the new economy (new technology, new products, etc) that has a deep effect on the behavior of economic individuals.

for example: in the classical production functions, production was studied as a function of capital and labor, while under the new economy, new factors that affect production must be added to the function such as technology, knowledge, managerial abilities, etc, to make the mathematics modules more close to reality.

Q= f(K,L) Q=f(K,L,T, N, M…)

THE END

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