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Monday, October 25, 2021

Striking the balance between old and new economies

Jeff Currie, global head of commodities research at Goldman Sachs, makes a very important point in urging caution with the pace at which the new economy is being embraced. Globally investors are preferring technology-based businesses and shunning the old economy businesses. This is reflected in the divergent stock market fortunes of the new and old economy businesses.

The recent natural gas and coal supply shortages are a direct consequence of this trend. 

Currie points to several important insights
In the old economy, price appreciation results when the volume of demand outstrips the volume of supply. Higher-income households may control the dollars, but lower-income households control the volume of commodity demand given their greater number and propensity to consume physical goods over services. As the volume of demand for commodities waned, so did the returns for old economy sectors. Lower returns led to less long-cycle old economy capital expenditure — which traditionally requires a five to 10-year horizon of sufficient demand — in favour of short-cycle “new economy” in investment in areas such as technology... the old economy was overbuilt, debt-laden and over-polluted. While the old economy only represents about 35 per cent of global gross domestic product, it generated at least 2 times the corporate losses, had about 90 per cent of the non-financial debt and created 80 per cent of the emissions. It is no wonder why investors preferred Big Tech to oil and copper.

Besides these, there are perhaps four basic reasons for the preference for the new over the old economy. The first is the natural human propensity to imagine progress in terms of scientific advances. Accordingly, advances in computing (hardware and software) and communications, data analytics, green infrastructure etc have come to be synonymous with progress. More important, continuing with the old economy activities are considered almost antonyms of progress. Second, there is an irresistible allure that these technologies can help leapfrog and address intractable problems that human beings and countries face. The persistence of low productivity and failures for long periods makes the possibility of breakouts, even if only in theory and sanitised pilots, very attractive. 

Then there is the aspirational dynamic associated with shedding the old and embracing the new. Phasing out fossil fuels, digitising or automating every activity, software as service etc have become universal (both geographies and sectors) buzz themes. It confers the imprimatur of having arrived. Finally, there is the blunt reality that opinion makers reside more in the new economy than the old, and therefore have a strong vested interest in its promotion. More likely their livelihoods and personal wealth are most often yoked to the emerging economy. 

This issue has strong relevance for developing countries like India. Opinion makers call for focusing attention on AI, biotech, Edtech, Medtech, Agtech, IoT and smart systems, 5G, renewables, electric cars and batteries, driverless vehicles, organic farming, metro rail and so on. Everybody are willy nilly being nudged into embracing these priorities.

These are all doubtless important areas of the future. But as Keyenes said, in the long run we're all dead, and it's therefore important to also focus (perhaps prioritise efforts) on the foreseeable future. For countries grappling with the reality of accessing basic health care and medication, acutely deficient learning outcomes and human capacity development, persistently low farm productivity, polluting industries, congested traffic, and very weak state capacity, the old economy (and its world) remains more important. For well into the foreseeable future, it's hard to imagine large parts of the new economy making significant inroads into the lives of ordinary people in developing countries. 

While all these goodies have to be pursued, the public policy priority of India's governments and profit maximising focus of its private sector as a whole should be on getting the plumbing right and ensuring supply of the basic requirements. Accordingly, Indian cities need to prioritise on basic infrastructure and governance and not IoT sensors and smart devices. Its schools and hospitals, both public and private, needs to prioritise delivery of good quality education and care, which generate acceptable outcomes. Instead of precision agriculture, its farmers should have access to good quality inputs and follow good agronomic practices. Its public systems needs to do simple data analysis to inform decision-making. 

Its private sector should focus on supporting the delivery of all these and good quality of consumer goods to meet domestic demand. For example, its telephone companies need to first deliver services without poor connectivity and recurrent call drops, before promising 5G. Or its Edtech companies need to demonstrate innovations to achieve real learning outcome improvements for the vast majority of Indians instead of providing marginal improvements to a market at the top of a massive pyramid.

Most important of all, the economy as a whole needs to generate broad-based growth that can create productive and high-paying jobs which can support the aggregate demand necessary to sustain reasonable volumes of the likes of electric and driverless vehicles. The new-old economy debates are costly distractions in this pursuit. 

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