The New Model It's Now About People

Economic development used to be about industry, infrastructure and material resources. In the global Information Age, it's about attracting the human kind of resources.

by / November 30, 1998
The process of globalization, increasingly driven by new information technologies, is dramatically changing what economic development means for state and local government. Today, the economic health of any region hinges on competitiveness, not just with neighboring regions, but with communities that may be located halfway around the globe.

"Four years ago, when I became director general of the World Trade Organization, it was almost universally accepted that regionalism would be the new shape of world trade," Renato Ruggiero told senior elected officials from the 29 nations of the Organization for Economic Cooperation and Development (OECD). "Today the reverse is true. In a digital world -- where Singapore is as close
to Toronto as Chicago -- the idea of regional preference and integration begins to lose its logic. Regional arrangements still have an important role to play, but increasingly as catalysts for the global system, not as alternatives."

Already a quarter of the global output is exported, Ruggiero said, up from just 7 percent in 1950. Developing countries' share is even higher -- almost 40 percent.

If this trend continues, soon well over 50 percent of all economic production in most areas is likely to be for export. Moreover, these exports will include not just goods, but also an increasing number of services that will be ordered and often delivered digitally over the Internet. So the whole emphasis of economic development at the state and local levels will shift. What is important will be not what can be brought or pulled into a region to make it economically attractive and robust, but rather what one can push out from it to other economic centers around the world.

"[Regions] are obligated to turn outward, not inward," Ruggiero said.

Economic development in the future will be increasingly tied to electronic commerce, or what Lou Gerstner Jr., chairman and chief executive of IBM, prefers to call e-business.

"Last year we started using the term e-business to describe all the ways individuals and institutions will derive value from the Net," he said. "We coined this term because what's going on here transcends just e-commerce. E-business includes transactions among employees inside an enterprise; among trading partners in a supply chain; and it includes the way governments deliver services to citizens, educators teach students, and physicians treat patients.

"The real revolution isn't about the end-user experience, and it's not even about the technology.
The real revolution is about banks, universities, government agencies and commercial enterprises making fundamental change in the way they currently do things."


Gerstner argues that the existing models simply do not apply. "Not only is e-commerce screaming ahead, moving much faster that any bureaucracy, committee or legislating process ever could," he said, "it's a grave error to think the Internet will develop under the kind of regulation we could apply to, say, the phone system back in the days when coal and steel were determinants of a nation's greatness, and many markets were underdeveloped."

Governments around the world now regard e-commerce as the engine of economic growth in the decades ahead. "It is a new age in which the accumulation and distribution of information will form the basis of a new society," said Sanzo Hosaka, Japan's secretary for International Trade and Industry, at the recent OECD Ministerial Conference. "Electronic commerce will be at the core of all this. Electronic commerce has an enormous potential to revolutionize the very roots of our societies and economies."

U.S. Secretary of Commerce William Daley said, "I am the last American commerce secretary of
this century -- assuming I do my job right. I don't know of another commerce secretary this century who saw, as I am seeing, a technology totally change the way commerce is done. Here is a technology that could give every business, regardless of size, the ability to sell products to every corner of the planet like a Fortune 100 company does. This is an era of truly sweeping changes."

"In some ways the Internet has come to symbolize [a] powerful, yet uncertain world," Ruggiero said. "For we are not just talking about a new service or a new communications network. We are talking about technologies that are shaping a new kind of global economy -- the closest thing yet to a single, borderless world market. This development has many implications, but the most important is that it is greatly accelerating the process of globalization -- and making it even more irreversible than it is already."

Market Cooperation

This electronic marketplace is redefining our notions of interdependence economically and socially. "In a certain sense, we find ourselves between two worlds -- between an economic system that is increasingly global, and institutions and structures which have not caught up with this complex world," Ruggiero said. "The challenge we face is to bring these two worlds together by reshaping the global rules and policies needed to support our globalizing economy."

The formation of new global rules to provide a framework for electronic commerce is precisely why an OECD Ministerial Conference was held in October in Ottawa, where senior representatives from the 29 OECD member nations agreed on a number of broad principles concerning such issues as taxation, privacy and consumer protection.

It was agreed, for instance, that taxation should be neutral and equitable, and that "taxpayers in similar situations carrying out similar transactions should be subject to similar levels of taxation."

If this general principle is pushed through into real tax policies, it would mean, for example, that no regional area could offer tax incen-tives to encourage regional business. Moreover, it was agreed generally that consumption or sales taxes would be levied at the point of consumption of the product.

So, in a sense, economic development in the future, certainly insofar as this being important to state
and local government revenues, has as much to do with what is being consumed in any region as it does what is being produced there -- perhaps even more. The more consumption, the more tax money local and state governments will collect to finance important services to citizens. People in any region may be buying goods and services from many countries around the world.

This has far-reaching implications on economic development strategies. "Governments are finding they have similar opportunities to create competitive advantage, increase service and build productivity," IBM's Gerstner said. "In fact, I believe that governments that in the past competed for industrial investment or jobs based on incentives like tax structures or access to skilled labor will compete in the future in large measure on their electronic readiness and capability."

How does any government gauge its preparedness? How do officials think through what steps to take? "Industry has to help you make this assessment, and we're building tools to do just that," Gerstner said.

He argued that realizing the full potential for e-commerce ultimately depends not on technology but on government policy. "Governments hold the reins here and can give this new economic opportunity its head or bring it to its knees," he said. "And if governments refuse to cooperate on this one, the latter is destined to happen -- because unilateral or uncoordinated tax policies will cause confusion and stifle growth."

Job Creation

An OECD report prepared for member countries, entitled "The Economic and Social Impact of Electronic Commerce," makes the point that e-commerce "has the potential to radically alter economic activities and the social environment.

"The overall effect of electronic commerce on employment will be the balance of direct new jobs, indirect jobs created by increased demand and productivity, and job losses (due to workers, e.g., retailers and other intermediaries, being replaced by electronic commerce)," the report continues. "Gains and losses may differ by industry, by geographical area, by skill group."

Calculating the likely impact of e-commerce on jobs in any area is proving to be a complex task. "To assess the impact of electronic commerce, it is essential to understand for which industries it is generating or will generate new demand and growth, which types of jobs will be destroyed and which created, and what the overall needs are in terms of skills," the OECD report says.

Such assessment is further complicated by the decline of geographical importance in many production activities. "The 'death of distance' that is intrinsic to information networking is probably the single most important economic force shaping society at the dawn of the 21st century," the report states. "Both for individual citizens and for businesses, affordable access to the information infrastructure has become a necessity for effective participation in a knowledge-based economy and society."

However, other factors will also play a significant role in the economic prosperity of any region. Two of the more important are the skills and digital literacy of the workforce, and the confidence and trust people around the world have in the companies and governments in any region.

"While both conventional and electronic markets rely on high levels of mutual trust, electronic transactions create specific challenges for both businesses and individuals," the OECD report observes. "Because they are remote, these exchanges make mechanisms that reduce or eliminate risk especially important."

In industrial societies, economic development had much to do with building infrastructure that would attract new businesses to a region. However, if electronic commerce takes off as most experts now expect, the emphasis will shift to electronic infrastructure.

This, Ruggiero said, involves making computer and telecommunications networks available and compatible worldwide.

"The Internet revolution has not developed in a vacuum," he said. "It stands on the shoulder of an equally profound revolution in global telecommunications. Here again, the trading system is playing an important part. In February [1997], 69 countries, representing 95 percent of the global market, concluded a massive agreement to free telecommunications services, opening many markets which had up till then been dominated by state-owned monopolies. Two months later, 40 countries, accounting for over 90 percent of the world trade in IT products, agreed to the elimination of tariffs on computer and telecommunications products by the start of the year 2000."

Improve the Social Fabric

These and other developments mean there really will be very little difference between the electronic infrastructure available to businesses from one area to another. Economic development in the future really will depend to a large extent not on infrastructure, but rather on social issues. In many ways, education and measures to strengthen a satisfactory sense of community are important ingredients in emerging models of economic development.

Electronic trade abolishes distances and frontiers. "But without investments in the human infrastructure -- skills, training, know-how -- no amount of investment in physical infrastructure will help," Ruggiero said.

Increasingly, economic development means investing in people and the things that attract people to a region, not because business is there, but rather because they want to live there. It means social policies that help to create communities where people feel safe and satisfied and where they have the support needed to effectively develop their skills and knowledge to continue to be personally competitive in the world market.

So the way it's starting to shape up, the new economic development model is really about people and community development.
December Table of Contents

Blake Harris Editor
Platforms & Programs