Asia and the New Economy

Joseph Stiglitz

Tokyo

January 20001

Outline

• Review of Previous Lecture

• Role of Government

• Asia and the New Economy

Summary

• The new economy is real– Even if it sometimes has been exaggerated– And even if market values of new economy

stocks are not real

• Changes are already affecting economy, society, and pace of innovation

• Causing changes in economy’s structure

Concomitant Changes in Other Aspects of Society

• Including political life– Government will continue to have a role– The nation state will continue to have a role– But both will need to redefine those roles

• Success in the new economy – as well as inequalities between and within countries – will depend on how well a country can manage the process of reshaping those roles

Rethinking the Role of Government: Some Basic Observations

• Existing rules for evaluating governmental activities need to be updated to reflect the ongoing shift toward a digital economy

• At turn of the century, rethinking led to new government roles

• Evidenced by– the creation of the Federal Reserve System

– the Sherman and Clayton Anti-Trust Acts

– the Constitutional amendment allowing a Federal income tax

The theoretical underpinnings behind private versus public production shifts as the economy moves toward a digital one

• The public good nature of production in a digital economy, along with the presence of network externalities, may suggest a larger public role than in a bricks-and-mortar economy.

• An information-based economy may also improve the quality and reduce the cost of obtaining information, which by itself makes private markets work better than before.

• Government failure may be even more pronounced in the context of rapidly moving information-laden markets than in traditional bricks-and-mortar markets.

• The appropriate role of government in the economy is not a static concept: It must evolve as the economy and technology do.

What is Required to Succeed in the New Economy

• Innovativeness

• Ability to adapt quickly to new technologies • Entrepreneurship • Flexibility • Competition

Keys to Success in the New Economy

• Entrepreneurship – A willingness to accept risk—and failure—on

all parts, including• Capital markets that supply funds (e.g. venture

capital) to new risky ventures—going beyond deal-making involving rearrangement of existing assets

• Workers that are willing to accept risk

– A respect for, and a willingness to accept, innovativeness

Keys to success in the new economy (continued)

• Flexibility– Flexible labor markets

• No life-long jobs• Life-long employability

– Requires life-long learning

• Education system that teaches the ability to learn• Safety nets for those displaced in the process of change• but still maintain hard-fought rights and fundamental values (e.g. worker

safety and environmental protection)

– Flexible capital markets– Flexible product markets– Flexible government

• Supporting innovation• Instead of suppressing innovation with oppressive bureaucratic regulations

that divert attention from innovation and inhibit the establishment of innovative firms

Keys to Success in New Economy

• Competition– A driving force for innovation– Monopolies try to suppress innovation,

threatens vested interests

• Balanced view of the role of government– In US, tendency for ideology and special

interests to prevail

Role of Government in Establishing

(Strengthening) Internet • In U.S., long involvement of government in

telecom - back to 1842

• Temporary exemption from sales tax unjustified - worst form of industrial policy

• But raises difficult enforcement/implementation issues

• Regulatory issues have major impact on cost of access – Worst examples in Africa– But other examples

Role of Government in Standard Setting• Three approaches

– Let markets do the sorting– Industry standard setting– Government

• Conflict between U.S. and Europe over preferred approach

• Global markets may require global standards

• Poses another example of global governance without global government

• And interests of developing countries may not coincide with interests of developed countries– developing countries less interested in 3rd generation reforms– more interested in basic services

Role of Government in Standard Setting (continued)

• With network externalities, there are major advantages for standard setting

• But both governments and markets may fail to pick optimal standards

• Government agencies may be “captured” by special interest or an industry group may adopt anticompetitive standards

• Suggestion: if there is standard setting, any standard must be freely licensed at “fair” price (arbitration)– note conflict among intellectual property protection,

competition policy, and “standard setting”

• How important are “network externalities”?

Government Role in Ensuring Privacy and Security

• Public demand for privacy and security– Government involvement required, but excessive

intrusiveness of government may have adverse effects on sector

– Government must be “nimble” in light of fast changing sector

– Is main concern protecting individuals from government?

– Or from the private sector?– That is, is the government part of the problem, or the

solution?

Role of Government in Establishing Intellectual Property Regime

• Intellectual property is at the core of the new economy• But increased intellectual property protection increases the price

of the key input into the production of knowledge---knowledge • The effect of increased intellectual property protection on the

pace of innovation is thus ambiguous• Key example of conflict arises in copyright protection of data

processing of public information– How far should government go in processing information itself?

– Should government be worried about displacing the private sector, e.g. in the case of tax preparation?

• Moreover there may be important tradeoffs between intellectual property protection and competition concerns

The Role of the Government

• Knowledge (information) as a public good might suggest a larger role for government

• But faster pace of change puts government at a disadvantage—government as a less nimble institution—suggesting a smaller role

• Implies partnerships between the private sector and government

• Key question; nature of those partnerships

Government’s role in laying the foundations for the new economy

• Government’s Key Roles:

– Reducing digital divide

– Promoting new economy

Government’s Role continuedGovernment to accomplish these two objectives by:• Redesigning the education program

– promote innovation– promote life-long learning– avoid growing digital divide

• Redesigning the financial system– assure funds for new industries

• Making labor markets more flexible• Promoting competition• Promoting new technologies• Change will be evolutionary -hopeless to think about

“planning” the process

Asia’s Potential to Succeed in the New Economy

• Demonstrated adaptability and flexibility• Highly competitive structures• Large numbers of highly educated individuals, especially

in technology and science • High levels of entrepreneurship • Strength is broad-based, reflected in high levels of literacy

– A more balanced view of the role of government

• Compared to many other countries, the lower levels of inequality suggests less danger of a growing digital divide and more broad-based participation in the new economy

Asia’s Competitive Advantage in the New Economy

• Technology is becoming increasingly crucial to keeping business relevant - and competitive - in the new economy

• East Asia is the world’s largest producer of electronics hardware

• East Asia must leverage its competitive advantage in hardware production (as market for technology products will likely continue to increase)

• While increasingly applying the new technologies to boosting domestic economy efficiency

INSERT 4 SLIDES from HK LECTURE

Concluding Remarks

• Asia’s Miracle was real and based on real strengths• All market economies have fluctuations - what is

remarkable is how stable East Asia has been • All market economies have weaknesses - what is

remarkable is the resolve with which so many are being addressed

• Asia is poised for a full recovery, partly based on taking full advantage of the new economy

• And looking beyond, China and East Asia are poised for a second generation of the Asia Miracle