A statement prepared for the OECD Ministerial Meeting in Paris - Is the new economy here to stay?

Geir H. Haarde
Minister of Finance

The sharp turnaround of the stockmarket in the last twelve months and the dramatic fall in share prices, especially in the ICT-sector, have caused some people to call the new economy effects into question.

I disagree with these sentiments. Therefore, let me make a few comments on whether the new economy effects are felt in Iceland. An honest answer is "yes"; we have definitely felt the effects of the new economy in Iceland. The new economy sectors like the IT, the High-Tech, Bio-Tech and the Telecommunication sectors have, indeed, been moving fast.

This is clearly demonstrated by the fact that Iceland is currently at the top of the list of countries with the most widespread Internet and mobile phone use, even ahead of the United States and Finland.

Has the new economy made an impact on the Icelandic economy?
Therefore, we can safely say that the new economy has made an impact on the Icelandic economy. Not only because of a rapid development in the so-called new economy sectors and their contribution to export growth, but also because of the catalytic effect on the development of the old economy sectors. I believe that the latter is the major contribution of the new economy in Iceland and that these second-round effects will be even more important for the future development, not only of the Icelandic economy but also in other countries.

In this context, let me also say that I agree with most of the policy recommendations made by the OECD in the growth report. Here, I would specifically emphasise the need to getting the fundamentals right. Stable macroeconomic policies, fiscal discipline and low inflation have a critical role to play in fostering economic growth and improve living standards in our countries. Openness to trade and capital flows is also of vital importance.

But we need more than this. The structure of the economy must also be right. Thus, I would like to underline the importance of a flexible labour market and a highly skilled and educated labour force. In this era of ever increasing globalisation and increased competition these factors will be of growing importance.

What is the role of the Government in this process?
I think the Government has an important role to play in this process. Let me mention one issue where I feel the OECD is somewhat vague and even ambigous in its policy recommendations. This concerns the role of the Government in fostering innovation. I do not think there is a general need for greater public funding of R&D activities.

The Government should, however, support and promote such activities by providing an overall framework that enables entrepreneurship to flourish; by providing a competitive environment, removing tax distortions and by making sure that the regulatory framework does not hamper further development in this area. This is where the Government has an active role to play.

A greater use of ICT can also improve public sector efficiency. In Iceland, tax collection online has been rapidly increasing and more than half of all income tax returns are now filed online.

The new economy does not solve all problems
Let me conclude by saying that the new economy does not replace the old economy. The old problems have not gone away. We still have to worry about inflation, domestic demand and unemployment. The business cycle is not dead. Far from it, as recent developments in the US have shown.

We should look at the old and the new economies as two sides of the same coin. The task is to get the most out of both sides without losing sight of the overall framework of the economy. But most importantly, we must get the fundamentals right. That is the key to everything.