ECONOMIC ANALYSIS - The new millennium will usher in a new kind of world economy. But...

As the new millennium dawns, economists and pundits are talking of a “New Economy” – a radically altered world of business which will overturn conventional patterns of economic behaviour. This new world is being created by three forces that are coming together – information technology, increased competition and the emergence of the global marketplace. The most visible symbol of change is the Internet, which is vastly expanding access to information and providing a platform for e-commerce. According to one industry expert, there could be a billion Internet users worldwide by the end of next year. This Internet growth is creating new competition, with online trading challenging existing distribution channels. But competition is also being strengthened by other forces – deregulation of markets, privatisation and a reduction in trade barriers. The Anglo-Saxon world – led by the US and UK – has been in the vanguard of this drive to give more rein to market forces. But Europe has played its part with the creation of the single European market. The collapse of communism has also seen the extension of the market economy in eastern Europe, Russia and China. New technology and increasing competition have provided the platform for globalisation, the third force shaping the new order. The global market is no longer segmented by national boundaries, and as trade barriers have come down, firms have entered new markets and shifted to lower-cost centres of production. Now China is set to join the World Trade Organisation, opening up its massive markets. Also, the development of global markets has encouraged companies to come together across national boundaries to exploit economies of scale – leading to mega-mergers such as BP-Amoco, Exxon-Mobil and Daimler-Chrysler. Cynics might argue that none of this new. After all, technology and trade have been reshaping our economies for the past 50 years and more. And the drive to deregulation, which has opened up so many markets, began in the US as long ago as the 1970s. But I still think it is right to talk about a New Economy. One reason is the sheer pace of change. Multi-billion dollar businesses – such as on-line bookshop amazon.com – have sprung up almost overnight and radical new ways of doing business, such as on-line auctions, are emerging. A second key change is the vast increase in the power of consumers. Global competition and the Internet provide consumers with access to more information and a wider choice. This competitive pressure ripples down the supply chain as purchasing managers use e-commerce and competitive tendering to drive down prices. The Asian “tigers” – Hong Kong, Singapore, Taiwan and Korea – have shown how poorer countries can use access to trade and technology to transform living standards in a generation. Now other countries are following in their footsteps, including China – the world’s most populous nation. Technology and competition are stimulating a wide variety of “knowledge-based” industries, including IT suppliers and heavy IT users, such as finance, consultancy and the media. Projections show these industries increasing their share of the US economy from just over 40% in the mid-1990s to over 50% by 2006. A similar trend is likely in Europe, Japan and other mature economies. However, there is a flip side to this brave new world. Increased competitive pressure pushes down prices and forces radical change on established companies, accelerating business restructuring. Incumbent firms are under threat as never before, challenged by new competitors with new products, innovative ways of offering existing products and radically different approaches to business. Traditional retailers and distributors – such as travel agents, car dealers and supermarkets – are particularly threatened by the Internet. Nor should we assume that these new Internet channels will lead to large profits for their operators. With competition increasing, consumers, rather than shareholders, could see the greatest benefits. We also need to be wary of claims that the New Economy will lead to a world of permanently stronger growth and low inflation. Global competition and new technology will help to hold down prices, making the job of central bankers easier. There may also be a one-off boost to growth as economies become more productive and unemployment comes down, as we have seen in the US and UK. However, the longer-term boost to conventionally measured economic growth in mature industrialised economies is likely to be modest. Rather, the countries of the developing world stand to gain the most from the New Economy – following the trail blazed by the Asian “tigers”. Nor has the economic cycle been abolished. In the US, after its long 1990s expansion, we still need to worry that boom will be followed by bust. Dr Andrew Sentance is chief economist at British Airways.