Is the New Economy really the answer?

I somewhat belatedly read the Jan/Feb issue of the Atlantic Monthly and its excellent survey on “The Real State of the Union,” put together in partnership with the New America Foundation to explore some of the biggest challenges that the U.S. is facing.  I was struck by the occasionally radical and consistently non-traditional thinking that marked all of the articles in the survey.  The New America Foundation is clearly a place to watch.

One piece that really caught my eye was David Friedman‘s “One-Dimensional Growth ,” which lays out the argument that in the euphoria for all things technological during the past few decades, much of the U.S. has become overly dependent on investment and incentives relating to the New Economy.  Friedman points out that productivity gains in the 1990s were not as great as originally thought, and that the dependence on New Economy sectors has implications for income inequality, housing prices and private debt.  In the interest of job creation, greater long term economic stability and economic diversification, Friedman argues that industrial policies need to be put in place that strengthen growth of traditional industries, and move away from the New Economy.

The implication for the developing countries is something that should give pause to a lot of “progressive” thinking in the developing world — that is, the desire of so many leaders in developing coutnries (and in the international development community as well) to create “knowledge industries” that will catapult their economies into the Information Age and create significant numbers of jobs.

Friedman’s arguments would suggest that such an emphasis is misplaced — that instead of focusing on call centers and IT-enabled services, that developing countries should use IT to improve their existing industries.  Perhaps textiles and light industry are not as sexy as offshore programming or financial services, but shoring up what they have may be a better strategy than trying to overcome all the hurdles needed to create a world-class knowledge industry from scratch.  A balanced approach that targets realistic adoption of IT into the particular situation of each country while identifying existing sources of competitive advantage makes sense.

And in the long term, if the evidence that Friedman presents is relevant, then countries that continue to rely upon a diversified economic base, rather than putting all their eggs in the IT basket, may find that their efforts to boost employment, a perennial development challenge, are more fortified.  The diversification argument, a basic tenet of good financial planning, resonates deeply. 

Rather than continuing to believe the lingering hype of how great IT was for the U.S. in the 1990s, and extolling the tremendous virtues of IT for everyone else as well, the development community should take a harder look at what the real experience has been in the U.S., and transmit those lessons in the form of responsible advice and projects in the developing world.  And leaders in the developing world should feel no need to adopt the very same snobbery towards traditional industry and blue collar work that Friedman so aptly identifies as one root cause of our one-dimensionality in the U.S.

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