Information Economy- Dr. Sara Madani

Divergent growth between two contexts

The advantages of the new economy:

§  This economy is characterized by an absence of inflation and full employment:

Inflation: is the general increase in prices and the loss of the currency’s purchasing power

Full employment: situation of a given area where unemployment is reduced to become frictional unemployment (also called transitional unemployment: short duration between the end of a work and the beginning of a new one). This situation occurs when the rate of unemployment below 5%. Others consider that full employment occurs when the rate of unemployment is marginal: less than 1%.

The absence of inflation and a full employment lead to economic growth that stabilizes the value of the currency and encourages investments.

§  Growth of GDP / capital:

GDP (gross domestic product) / capita: the value of all final goods and services produced within a country in a given year divided by the average (or mid-year) population for the same year. This indicator is sometimes used to measure the approximate domestic income
GDP per capita = GDP / Total population

Many factors lead to the increase in GDP / capita in the new economy. Economic growth is generated by:
• Investments
• Products with high added value (leaving a high margin of gain)
• Innovation that generates growth and enforces competition
• Higher productivity through technical progress: better allocation of resources
• A better division of labor
• Prices decelerate since the production costs less due to the technological progress (higher added value)
• Better quality: competition motivates the companies to gain greater market shares through improving their quality/price ratio.

§  Growth of research clusters that contribute to the emergence of modern, cultured and educated societies. The economic growth experienced by the Northern countries encourages them to increase their investments in new technologies, therefore in clusters. The arise of such societies incite them to value education, creativity and culture.
Similarly, competition on the labor market’s scale, motivates individuals to get a higher education in order to meet the market needs.

Disadvantages:

§  Substitution of human capital:
It is true that the growth of companies’ productivity in the new economy is the result of  the combination of human capital with new technologies. But the more the technology is advanced the higher is the substitution of human capital (substitution of human capital with machines).

The objective of the company = lower production costs through investing in machines that require less human capital (less salaries, benefits…)
Advantage = reduce repetitive and dangerous tasks.
Disadvantages =

1.     Rising unemployment, therefore lower purchasing power and decreasing sales.

2- Sophisticated machines that fail and require constant maintenance
3- When unexpected things happen humans adapt themselves better
4- The increased pace of work and affect the health of workers.
5- Investment in expensive machine does not justify systematically growth. In some cases it turns out to be useless

§  Widening the rift between countries
The South is faced with rapidly developing economies while its situation is stagnant or even declines.


Is the information economy a determinant of development? 

Indeed, the growth generated by the development of new technologies of information and communication facilitated the transmission of information and the improvement of production techniques which is an indicator of the level of development of a country. Similarly, there is no technologic progress in the lack of economic, social, educational and institutional solidity. The more the country invests in new technologies, research, the dissemination of information, innovation .... more it is considered developed.

§  Increases foreign investment
Along the emergence of new information technologies, growth  increases foreign direct investment (FDI). The production of these technologies requires abundant raw materials found in underdeveloped countries such as South Africa for example. Similarly and less expensive human capital that can be found in some countries like the Mediterranean countries, India ..). These advantages have prompted the North to exploit the South.