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What Dot-Bust?

The dip in the Internet economy produced lurid tales of millionaires gone bust, stories of wild stock speculation, even Web sites like http://www.f–kedcompany.com, where disgruntled employees chronicled the industry’s demise. But after more than a year of gloom, it looks like the dot-com flameouts actually concealed steadily climbing productivity, according to "Digital Economy 2002," a ...

The dip in the Internet economy produced lurid tales of millionaires gone bust, stories of wild stock speculation, even Web sites like http://www.f–kedcompany.com, where disgruntled employees chronicled the industry’s demise.

But after more than a year of gloom, it looks like the dot-com flameouts actually concealed steadily climbing productivity, according to "Digital Economy 2002," a recent report by the U.S. Commerce Department available at www.esa.doc.gov. The U.S. information technology (IT) sector has not only not collapsed, it has continued growing. The implications for global businesses could be huge, especially for those working to close the IT gap between developed and developing countries.

Industry gloom obscured the continuing strength of the it sector, which represented almost a third of U.S. real economic growth between 1996 and 2000. Growth in IT investments was strong in 2000, but declined 3 percent in real terms in 2001. This decline was accompanied across the U.S. economy by a rapid, visible reaction in the form of layoffs. But at the same time, productivity actually increased slightly, along with employment in sectors like telecommunications and computer software, indicating the supposed collapse was mostly cosmetic. Brookings Institution scholars Robert Litan and Alice Rivlin make similar, optimistic conclusions in a paper titled "The Economy and the Internet" (see www.brookings.edu).

"This is a new sort of economy," but not the end of the business cycle, says Lee Price, the Commerce Department report’s lead author. Who’s most likely to benefit from the new "new economy"? Another recent paper by the U.N. Conference on Trade and Development, "E-Commerce and Development Report 2001" (www.unctad.org), provides an answer: scions of the "old economy." "The laws of economics have proved rather resilient," it concludes. "It will not be Internet pure-players but brick-and-mortar firms that integrate the Internet into operations who will profit most."

Moreover, experts say productivity gains aren’t likely to transfer outside the United States. "European countries were hoping the economic slowdown would be followed by European growth overtaking American growth," says Luc Soete, a University of Maastricht international economics professor. "That hasn’t occurred." And the impact on developing economies remains unclear. Why? Because no one has figured out how to transplant U.S. productivity gains abroad. "That’s the real puzzle," says Price. "All this stuff is available anywhere in the world, and the rest of the world hasn’t seen the productivity growth."

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