The U.S. economy and Europe's hour

By Lei Da

SEOUL: The U.S. economy is noticeably and inevitably reverting to the traditional cycle approach after more than 100 months of amazingly uninterrupted growth.

Since the end of last year, the U.S. growth rate has been declining drastically, casting doubts on the durability of the New Economy paradigm that has drawn so much attention during the last few years, and altering the balance of global growth in 2001.

As it seems to be a worldwide acceptance that when the U.S. sneezes the world economy catches a cold, somebody may suspect that the American slow-down may be signaling the epilogue of the New Economy era for the global economy. The fade-out of the U.S. high growth image is about to raise the curtain for the prologue of Europe's New Economy.

Technological progress is one of the most important factors propelling economic growth. Throughout history, technological innovation had impetus effects on most industrial countries for over a decade.

The very first and direct beneficiary was the core country where new technologies were invented and applied. Then the spillover effect gradually spread the new technologies to peripheral countries.

The extent to which a single nation could take over and benefit from this effect depended largely upon its level of economic development and natural resources. In the late 1990s, when the United States enjoyed its super-long growth period, boosted by information technology innovations, the rest of the world was left behind.

Most Asian countries were striving to recover from financial crises. In Europe, particularly in the euro zone, a conspicuously weak euro, coupled with low interest rates characterized a relatively weak real economy.

Thus it is evident that so far only the United States -- the core country -- has benefited from information technology innovations in terms of economic growth.

Other economies, including Europe's, though reaping initial gains from IT innovations in some individual industries, have not seen the great improvement that ought to have been brought about by technologies for the economy as a whole.

If history repeats itself in the sense that the spillover effect of IT spreads from the United States to other countries and boosts economic development in these countries, then the slowdown of the U.S. New Economy implies the beginning of the New Economy elsewhere.

In the 1970s and 1980s, a triangular polar structure developed after European countries and Japan had caught up with the United States by using technologies transferred from the latter. Since then emerging markets in East Asia, including South Korea, began to catch up as well.

During this period, world economic growth accelerated dramatically. New technologies had found a home in overseas markets after their growth potential had been exhausted in the United States.

In the context of the New Economy, it is very likely that the new productivity gap is expected to be bridged and eliminated in keeping with the process of IT influences spreading to the rest of the world.

It is indeed important to note that the environment today is different to that of the 1970s when industrial strategic transfers were booming. The high tech industry, by definition is highly technology and capital-intensive, and its shift from core to peripheral countries is no longer only for the purpose of seeking cheaper labor markets.

For the new IT industry, capital sufficiency and market scale are more important than cheap labor -- an area in which Europe appears more capable than Asian countries.

Europe is holding a safe lead over Asia in fundamental science research and technology development. Europe has already achieved powerful global positions in industries such as wireless communication and business software, not to mention its world- class scientific and technical infrastructure.

Government initiatives have also been taken in place to create a benign regulatory environment and a favorable tax climate, in order to inspire innovation and entrepreneurial performance.

In pursuing the ultimate goal of the EU -- a single, integrated European market -- two decades of economic and financial reform, particularly in capital markets, investment and financial restructuring activity, have been surprisingly effective.

With the launch of the euro, the outlines of the single financial market are beginning to take shape, and it is becoming one of the most attractive and hotly contested markets in the world. In addition, the declining prospects in Asia and many emerging markets during 1997 and 1998 caused a shift in focus to Europe.

The growing financial markets and venture capital provide a mechanism to discount the future revenues of high technology to its present value, by which the new technologies can finance their development relatively easily.

When Europe's high capacity, liquid single market replaces its fragmented national markets, and national trading and investment restrictions are scrapped, the massive European home market will realize the economies of scale equivalent to the home market advantage of U.S. producers of goods and services.

In contrast with the unprecedented integration progress achieved in Europe, cooperation between Asian countries pales by comparison. Asian countries, still the world's most dynamic markets with huge development potential, are not keeping pace with Europe's market integration, political and economic co- operation.

The writer, a professor of economics at Renmin University in Beijing, is currently staying in Seoul as a research fellow at Kyung Hee University.

-- The Korea Herald/Asia News Network