are the development policy implications of the new economy, new? all that is old is new again

Journal of International Development

J. Int. Dev. 18, 639–648 (2006)

Published online 16 March 2006 in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/jid.1254

ARE THE DEVELOPMENT POLICYIMPLICATIONS OF THE NEW ECONOMY,NEW? ALL THAT IS OLD IS NEWAGAIN

MATTHEW CLARKE*

School of Social Science and Planning, RMIT University, Australia

Abstract: There is an (optimistic) view within the literature that the convergence of two

long-run broad trends, globalization and advances in information and communication

technology, has resulted in a ‘new’ world economy. Within such a new economy, knowledge

replaces traditional productivity input as the primary driver of economic growth. Evidence

of this new economy is scarce, yet proponents are optimistic that such an economy offers

great hope for developing countries. If this optimism is warranted appropriate government

policies would include improving access levels and quality of telecommunication and

electricity infrastructure, education and providing both direct and indirect support to

encourage local firms to become engaged with the global economy. Ironically, these policies

are consistent with current orthodox development policies currently pursued within the

‘old’ economy. In this regard, it seems that all that is old is new again. Copyright# 2006 John

Wiley & Sons, Ltd.

Keywords: development; globalization; economy; government policy;

telecommunications

1 INTRODUCTION

Over the last two decades, there has been increasing discussion within the literature that a

‘new’ global economy has emerged (see Solow, 1987; Sheehan et al., 1995; OECD, 1996a,

1996b; World Bank, 1999; Pohjola, 2002a). This new economy is the result of two long-

run broad trends converging: globalization and advances in information and communica-

tion technology (ICT). This ‘new’ economy differs from the ‘old economy’ in that

knowledge has become the primary ingredient for economic growth, rather than traditional

productivity inputs, such as labour and natural resources (Drucker, 1993). Evidence of this

new economy is scarce, yet proponents are optimistic that such an economy offers great

hope for developing countries.

Copyright # 2006 John Wiley & Sons, Ltd.

*Correspondence to: Matthew Clarke, School of Social Science and Planning, RMIT University GPO Box 2476V,Melbourne, Victoria 3001, Australia. E-mail: [email protected]

Characteristics of this new economy include a rising knowledge intensity in all

industries, including in the services sector, a corresponding decline in the material

resource-intensity of economic activity, a global focus resulting from increased interna-

tional flows of capital, technology and skilled labour, the opening of markets and

improved transport and communications technologies, and high and rising productivity

levels in manufacturing, especially in advanced countries, together with a growing link

between technology and quality and the use of technology to replace even low-cost labour

(Mansell et al., 1999; World Bank, 1999; Mansell, 2002).

This new economy has been presented in very optimistic terms. Castells (2001) states

‘my starting point, and I am not alone in this assumption, is that, at the end of the twentieth

century, we lived through one of these rare intervals in history. An interval characterised

by the transformation of our ‘‘material culture’’ by the works of a new technological

paradigm organised around information technologies’ (op. 28). Others sharing Castells

optimism include Mansell (2001, 2002), Mansell et al. (1999), Drucker (1993), Kransberg

(1985), Neef (1998), World Bank (1999) and Tapscott (1996). Indeed, Drucker claims that

knowledge has become the ‘basic economic resource’ (1993, p. 7).

Within this optimistic literature, the central tenet of the new economy is the significance

of knowledge to the global economic process. Knowledge can now be quickly and cheaply

delivered to where it is needed, be transformed as required and be made effective in

machines and other production and service delivery processes (also see Quah, 2001). This

degree of incorporation of knowledge into global economic activity is so significant, that it

has caused structural and qualitative changes in how the world economy operates. Despite

this optimism of a new economy, evidence of a change in productivity is scarce (Mansell,

2001). Solow’s (1987) oft-quoted quip ‘you can see the computer age everywhere but in

the productivity statistics’ holds true. Positive correlation between investment in technol-

ogy and growth exists for the United States but is weak for other developed countries

(Pohjola, 2001). Within the United States for example, the direct contribution of ICT

investment to (non-farm) business output increased during the 1990s. At the same time,

contributions to (non-farm) business output from non-ICT capital declined in the 1990s

compared to the previous two decades (Javala and Pohjola, 2001). These overall benefits

are around twice as much as that of Europe in terms of ICT contribution to economic

growth. Further, within Europe itself, disparity also exists with the UK, Sweden and the

Netherlands outperforming Italy, Greece and Spain (Pohjola, 2001b).

If the optimistic evaluations of the new economy do hold, it is important to investigate the

policy implications of such a context as it may represent a major opportunity for future

development (Mansell, 2002). Within the new economy, development policies would need to

recognise and focus on achieving knowledge-intensive development or e-development. If this

new economy does exists, then developing countries must adapt their development approaches

and policies to achieve progress in the future (Heeks, 2002; Xue and Sheehan, 2002).

Governments have an important role in defining and establishing an enabling environ-

ment in which e-development occurs. This enabling environment sets the parameters and

structures that encourage economic and non-economic activities that increase progress.

There has been therefore increasing interest in the impact of the new economy on

economic growth (see Pohjola, 2001 for a collection of these studies). The policy

implications of these empirical studies are important for developing countries when

planning development strategies. This paper argues that even if a new economy does exists

(judgement is suspended in this paper), governments in developing countries should not

react in haste in terms of shifting public policies (and scarce resources). The same policies

640 M. Clarke

Copyright # 2006 John Wiley & Sons, Ltd. J. Int. Dev. 18, 639–648 (2006)

required for progress in the ‘old’ economy remain valid for achieving progress in this new

economy. Governments must remain focused on improving access levels and quality of

telecommunication and electricity infrastructure, education and provide both direct and

indirect support to encourage local firms to become engaged with the new economy. These

policies are basically the same as traditional development policies.

In this regard, it seems that all that is old is new again. Public policies that encourage

investment in infrastructure, physical capital and education are therefore the key to

enabling both traditional development and e-development.

2 E-DEVELOPMENT IN THE NEW ECONOMY

If the new economy exists, it provides a fundamentally different global environment in

which progress will occur. This new economy would be different from the context of

recent decades and far removed from that in which developed and even East Asian tiger

economies achieved progress (Wong, 2001). It is ‘the potential of using ICTs to construct

an enhanced knowledge base for development (Mansell, 2002, p. 321) that makes

development in the new economy possible.

Within the new economy, information is unbundled from its physical carrier (Quah,

2001). In short, this means that the economics of information can be separated from the

economics of physical objects. This weightless or dematerialised economy means that an

increasing fraction of GDP comes to reside in economic goods with little or no physical

manifestation. Through the process of dematerialization, producing and distributing bits of

logic rather than atoms of physical material increasingly creates economic value. While

computers and information technology form a large part of this activity, the digitization of

production and consumption means that an increasing number of products and services

become idea-like goods. Development policies must re-focus so that national economies

increasingly become weightless, thus overcoming traditional barriers of natural resources

and other inputs of the old economy.

In the new economy, a poor country is not burdened necessarily by the ‘object gap’. A

lack of raw materials or physical capital is no longer the barrier to development as it was in

the old economy (Mansell et al., 1999). The opportunity for developing countries is that

they might experience accelerated development by taking advantage of freedom from their

‘object gap’ within the new economy and achieve progress through e-development

(Mansell, 2001).

Yet, the digital gap is significant. Over 90 per cent of Internet users come from the

richest 20 per cent of the world’s population, whilst the poorest 20 per cent contain only

0.2 per cent of the world’s Internet users. Less than 10 per cent of the population in

developing countries have access to telephone lines and less than half of all humanity will

ever make a phone call. Low-income countries account for 40 per cent of the world’s

population and 11 per cent of the world’s gross national income, yet only 2 per cent of the

world’s Internet users. The number of personal computers and Internet users per capita is

10 times higher in rich countries than in developing countries. The number of telephones is

six times higher, and the number of mobile phones seven times higher (World Bank,

2003). Whilst the relative divide is becoming narrower over time, the absolute differential

is increasing. The contrast is even more stark when the rich countries are compared with

the least developed ones. There are as many Internet users in Finland, with a population of

five million, as there are in Sub-Saharan Africa, with a population of 643 million. It is

Development Policy Implications of New Economy 641


therefore arguable that technology inequality now exceeds income inequality (Kenny,

2002; Kapur, 2002; Muller, 2002).

Further, for developing countries without the history of information infrastructure or

large domestic markets, some sectors of the ICT industry, such as microprocessors,

operating systems, etc., appear closed off due to the standards being set by leading firms.

Other segments require massive capital investments and specialised skills (Wong, 2001).

Presently, no developing country has large-scale access to ICT technology (Arora and

Athreye, 2001; Joseph, 2001).

The optimistic view is that this digital gap can be overcome (in a short time) and

therefore there is great hope that e-development within the new economy will provide a

short-cut to prosperity by allowing developing countries to bypass certain traditional

phases of development in the conventional, long-lasting and belt tightening process of

structural change from an agrarian to an industrial and, ultimately, to knowledge-based

service economies (Wong, 2002). ‘With communications costs plummeting, transferring

knowledge is cheaper than ever. Given these advances, the stage appears to be set for a

rapid narrowing of knowledge gaps and a surge in economic growth and human well-

being’ (World Bank, 1999, p. 2). Poor countries once burdened by the ‘object gap’ now

have the opportunity to overcome the limitations of natural resources by focussing future

development strategies on increasing knowledge-intensive investment. Specific policies

that might facilitate e-development will be discussed in the next section.

3 POLICIES FOR E-DEVELOPMENT

Public policy in developing countries is important in setting development strategies.

Globalization has limited the influence governments have over the economic activities

within their nations. However, governments still have an important role in defining and

establishing an enabling environment for development. An enabling environment supports

and encourages development. It sets the parameters for economic activities and puts in

place public policies that encourage economic and non-economic activities that will

increase society’s well-being.

With the rise of the new economy, an enabling environment must be designed through

appropriate public policies to ensure that progress within this new world setting can be

achieved. The following draws.

3.1 All that is Old is New Again

This section will review the policies that have been identified as central to development

being achieved within a new economy (assuming the new economy as conceptualised

previously, does exist). It concludes that these policies are not dissimilar to orthodox

public policy prescriptions. The possibility of achieving development in either the new

economy or the old economy is therefore not mutually exclusive.

3.1.1 Telecommunications infrastructure

Within the new economy, the importance of telephone mainlines is not related to voice

communication, but as the infrastructure for access to the Internet and associated ICT

(Kapur, 2002; Mansell, 2002). ‘Expanding telecommunications holds the promise to

642 M. Clarke


improve every developing country’s capacity to absorb knowledge’ (World Bank, 1999,

p. 10). In developing countries, telephone lines per 100 people average 2.6, compared with

66.4 in the United States. It is not surprising given these limitations that computer

ownership is 4.4 per thousand people in developing countries compared to 511 per

thousand in the United States (World Bank, 2003). Northern America and Western Europe

have high ICT density whereas South Asia and Sub-Saharan Africa have low ICT density.

The rest of the world that is, East Asia and the Pacific, falls in between. Investment in

telecommunications is therefore essential to ensure access to the new economy. Invest-

ment in telecommunications is also essential to ensure participation in the old economy.

3.1.2 Other infrastructure

Investment in physical capital is a key factor in economic development in both developed

and developing countries. To secure maximum benefits from ICT investment, nations must

build up a mature stock of physical infrastructure that supports, enhances and amplifies the

effects of ICT (Kapur, 2002).

Participation in the new economy is firstly reliant on access to electricity and

telecommunications infrastructure. Even if some countries (such as Djibouti, Mauritania,

Maldives and Qatar) have digitalised its telephone networks (World Bank, 1999),

electricity infrastructure is still a basic necessity. This ‘lack of generally available and

reliable electricity supply, especially in the villages of lower income countries, is also a

major problem in establishing network connectivity’ (Mansell, 2002, p. 318). Two billion

people do not have access to electricity with lack of access in almost all rural populations

(particularly Africa) (IEA, 2002).

The future provision of electricity infrastructure is problematic, as it is more expensive

to provide in developing countries due to the high rural population levels. It is also

associated with lower returns to investments. However, priority must be given to its

provision despite these high costs due to its central role in economic productivity.

3.1.3 Education

Literacy is a fundamental criterion for full participation in the new economy. Governments

must prioritise educating their labour force to fully capture the benefits of the new

economy. Investment in an educated workforce must be increased. Indeed, investment

in human capabilities is as important, if not more important, than investment in ICT

(Mansell, 2002). An outcome of this investment is not only increased technical skills but

also complimentary behavioural and interpersonal skills required for the successful

adoption of new technologies (Mansell et al., 1999). Investment in specialised ICT

professionals is central to this training component (Kapur, 2002). Such a focus on

human capabilities has long been recognised as part of the wider development process

(Abramowitz, 1986).

Even if firms in developing countries do invest directly in ICT, substantial investment is

also required in staff training and support. Where human capital is limited, these non-

physical costs are likely to be significantly higher. Income differentials in developing (and

developed) countries are increasing between those with and without appropriate skills. In

parts of Africa, basic computer trained locals can earn up to 15 times that of national GDP

per capita (Kenny, 2002). It is likely that this differential will widen, as approximately

one-third of adults in developing countries are illiterate (World Bank, 2003).

For those who are literate in their local language, a significant barrier to ICT use is

the predominance of English as the language of the new economy. Across a range of



non-English speaking countries, the large majority of those who do use the Internet also

consider themselves fluent in English, whereas those that report low levels of English

proficiency also report low levels of Internet usage. Governments must therefore prioritise

English language education within the primary, secondary and tertiary sectors (Kapur,

2002).

3.1.4 Government promotion and use

The promotion and or use of ICT by governments, such as that implemented by the

European Commission, is important (Joseph, 2001; Pohjola, 2002b). The EU’s ‘Promotion

and Use’ policy aims to introduce all citizens, businesses and administrations into the

digital age and create a digitally literate community, whilst ensuring that the whole process

is socially inclusive, builds consumer trust and strengthens social cohesion. Given the

developed world’s initial advanced standing in the use of ICT and this emphasis for future

expansion of ICT, bridging the ‘digital divide’ between the rich and poor will be an

enormous task. It will require significant investment and public policy interventions for

developing countries and developed countries to make ICT affordable and available in

developing countries.

National governments therefore have a responsibility to promote the use of ICT (Wong,

2001). Governments must lower taxes, tariffs and other trade barriers on computer

imports, encourage competition in telecommunications, become sophisticated users of

ICT themselves, and promote the use of the Internet in schools, libraries and other public

institutions (Stenbacka, 2001).

3.1.5 Access and diffusion of the ICT and the internet

Governments must enact legislation in which wide access and diffusion of the Internet is

achieved. Given the low level of competition with the telecommunications markets within

the developing world as a whole, competition will not be sufficient to guarantee that this

occurs.

Given the infinite expandability of knowledge products, the simple supply of ICT is no

longer a restraining factor to economic growth. Factors that will affect growth now include

consumer attitudes to sophisticated goods, supportive government policies for adoption of

ICT and protection of investors through enforced intellectual property regimes (Joseph,

2001; Stenbacka, 2001).

Bridging the ‘digital divide’ requires nation states, the private sector and other key

stakeholders (such as UN bodies) to act as equal partners in making ICT affordable and

available in developing countries. ECOSOC have initiated a Task Force to investigate new

and innovative policy approaches that will encourage and support technological solutions

that can help developing countries leapfrog traditional technologies and stages of

development (Niitamo, 2000; Pohjola, 2002b). An important policy aspect, as seen in

South Africa, is the creation of a more liberalised telecommunications sector (Cogburn

and Adeya, 2001).

3.1.6 Intellectual and property rights

If the new economy is weightless, wealth creation depends upon ideas more so than on

physical resources. Therefore, the protection of intellectual property rights is paramount to

encourage investment in the new economy. In the old economy, governments were

required to enforce the rule of law and contract to ensure property ownership was

respected to encourage investment. Within the new economy, physical property has lost

644 M. Clarke


its importance to ideas and digital property (Drucker, 1999; Mansell, 2002). Governments

must encourage investment in new technologies by both consumers and producers through

the rigorous enforcement of intellectual property rights.

3.1.7 Financial and legal sectors

Legal and regulatory structures have a significant influence on institutional development.

A thriving new economy requires a high degree of diversity in financial and legal

institutions, investments and forms of control. To increase the potential for e-commerce,

emphasis must be placed on increasing financial systems as access to capital and modes of

finance that insulate investors from excessive risk. A distinguishing characteristic of the

financing of high technology firms within the developed world is their evolving pattern

of control by different investor groups. The financing of new high tech firms appears

less reliant on the stock exchange and more reliant on own funds, families and friends.

Once these are exhausted, external equity comes from private investors (Mayer, 2002).

Governments must be supportive of this evolution and not constrain different types of

ownership at the infancy stage of firms’ development.

3.1.8 Competition policy in the new economy

In the new economy, competition policy instruments need to be modified so as to fit not

only the traditional and static views of competition, but also the dynamic features of

competition in the high-technology network industries (Stenbacka, 2001; Kapur, 2002).

The benefits of the ICT revolution will be optimal and most efficiently experienced

within a free and decentralised market economy. As the core industries of the new

economy are characterised by imperfect competition, asymmetric information or external

effects, well-designed microeconomic policies, in the form of competition policies,

technology policies or combinations of these, have the potential of generating welfare

improvements and promoting social efficiency (Stenbacka, 2001; Kapur, 2002).

The new economy is fast moving and companies employ different strategies than those

found in the more traditional or static sectors of the economy. Therefore policy makers

must be more attuned to these strategies. For example, demand-side economies of scale

associated with network externalities are particularly important in dynamic high-tech

industries and this form of scale economics adds to traditional, technologically determined

scale economies on the supply side.

3.2 Balancing the Old and New

There are presently more people living in absolute poverty than at any other time in human

history (World Bank, 2003). Development is clearly required to relieve this misery.

Governments are faced with the dilemma of allocating scarce resources to maximise

development potential. If the new economy presents a new paradigm for future develop-

ment, governments need not abandon current policies in order to secure possible

development benefits. The policies that are required to support e-development also

support traditional development. A focus on infrastructure, education and a functioning

market maximises the potential benefits from both. Perhaps then, e-development and

traditional development should not be seen as mutually exclusive within the new economy

but rather be seen as complimentary. Governments must therefore seek to achieve both e-

development and traditional development simultaneously, at least in the short term. The

policies required to achieve this do not significantly differ from one another (see Table 1).



The impact of the new economy on development is yet to be fully understood, but

consideration of the new economy by policy makers is important. Governments can

recognise that the gap between rich and poor could be made significantly worse if the

present digital divide widens but that a focus on achieving current old economy policy

targets such as improved infrastructure, education and market liberalization will assist

development in both old and new economies.

The development of policies and strategies to encourage ICT deployment must be

embedded in and co-ordinated with social and development strategies. When ICT

strategies are formulated without achieving this they generally become technology

driven and detached from the reality of the way people organise their social and eco-

nomic lives (Mansell, 2002, p. 322).

As always, designing public policies is a balancing act between competing needs. The rise

of the new economy has changed the environment, but the balancing act remains.

Development strategies must be made cognizant of the comparative ignorance of the

potential impact of the new economy on development. For example, if participation in the

new economy is considered necessary to ensure businesses remain internationally

competitive, does government policy focus on ensuring business access at the cost of

equitable access? Similarly with education: if exploiting the new economy requires

tertiary education, do governments re-channel resources from primary education for the

many to university funding for the few? Given the limited evidence of benefits, the great

state of uncertainty and the immediate equity costs of such actions, the answer should be to

support equitable access and primary education.

Overall, the largest determinant of the impact of the new economy in developing

countries is likely to remain the broader environment outside the information infrastruc-

ture sector. This environment will also play by far the predominant role in determining the

quality of life in developing countries. For this reason, Microsoft Chairman Bill Gates’

argument about the place of direct support to the ICT in development priorities might well

be correct. Gates suggests that if equity is a central concern, than fewer resources should

be spent on ensuring access to ICTand more resources spent on ensuring access to literacy

and health (Kenny, 2002).

Table 1. Summary and relevancy of various policies

Policy e-development Traditionaldevelopment

Improve telecommunication infrastructure Yes Yes

Improve other infrastructure (i.e. electricity) Yes Yes

Improve education in all sectors (including English) Yes Yes

Government use and promotion of ICT Yes Less relevant

Increase access and diffusion of ICT and the Internet Yes Less relevant

Improve domestic demand for ICT Yes No

Encourage software development by local firms Yes No

Encourage adaptation and imitation by local firms Yes No

Encourage use of ICT by local exporting firms Yes Yes

Foster democracy Yes Yes

Strengthen intellectual property rights Yes Yes

Strengthen financial and legal sectors Yes Yes

Revise competition policies Yes Less relevant

646 M. Clarke


4 CONCLUSION

Three previous communication revolutions have had significant impacts on our lives but

failed to deliver on the optimistic predictions first hoped for. The railway was to spark the

dictatorship of the proletariat, the telegraph was to engender world peace and the

television was to revolutionise education. It is unlikely therefore that the rise of the ICT

and the new economy alone will end global poverty through e-development.

Investment in infrastructure, physical capital and education remain the keys to

economic development. This is, of course, an old policy prescription in the economics

of development.

New economy optimists must remain cognizant that not all past communication

revolutions have had significant impacts on developing countries. Whilst the new economy

will present some opportunities, most developing countries lack the requisite physical and

human capital to immediately exploit these opportunities.

E-development is important, but so is traditional development. The policies that are

required to support e-development also support traditional development. Perhaps then, e-

development and traditional development should not be seen as mutually exclusive within

the new economy but rather be seen as complimentary.

In this regard, it seems that all that is old is new again. Investment in infrastructure,

physical capital and education is therefore still the key to both traditional development and

e-development.

ACKNOWLEDGEMENT

The author is grateful to helpful comments of an anonymous reviewer.

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are the development policy implications of the new economy, new? all that is old is new again

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