The Internet-based economy has decades of huge growth ahead, despite the bursting of the stock market bubble, Nobel prize-winning economist Michael Spence said Tuesday.
"The growth potential is staggering if your time horizon is 10 to 20 years, and it may take longer than that," he told an audience at University of Toronto. "I believe it will occur over several decades at an accelerating pace."
The growth of network-based information technology "will make the idea of the global economy real" as the basic infrastructure is built in different parts of the world, he said in a presentation at the Rotman School of Management.
Mr. Spence, who was raised in Canada - mainly in Winnipeg and Toronto - and now teaches at Stanford University in California, cited the eBay Web site, where goods are auctioned, as a prime example of how the Internet can reduce what economists call transaction costs.
"Previously, when I wanted to sell a 35-year-old Hasselblad camera sitting in my closet," he said, he had to rely on classified ads or a local flea market to find potential customers. "Now, I can find the young woman in western Australia who really wants it."
Where high transaction costs once prevented this market from operating, "eBay collapses time and distance to zero," Mr. Spence said.
Mr. Spence shared the 2001 Nobel prize in economics with Joseph Stiglitz, a former chief economist at the World Bank who is now at New York's Columbia University, and George Akerlof of the University of California at Berkeley.
All made key contributions to economists' thinking on asymetrical information, cases in which markets work improperly - or not at all - because buyers and sellers do not share the same knowledge. Insurance is one example because the customer knows more about the risks he faces than the insurer who is asked to insure him. Another example is the market for used cars, where the seller knows whether the vehicle is a lemon, but the buyer doesn't.
The potential of the Internet is especially important for underdeveloped countries, where workers were confined to local markets, but can now use information technology networks to take advantage of a global market through outsourcing, Mr. Spence said.
Companies today can concentrate entirely on what they do best - design computer chips, for example - and hire others to do their payrolls, finances, manufacturing and marketing, outsourcing those tasks to companies in poorer countries, he said.
A quarter century ago, South Korea manufactured goods on an outsource basis and is now two-thirds of the way toward having a fully developed economy, he said. Today, an apparel manufacturer in Vietnam can respond instantly to the sale of clothing at The Gap because the two can be tied together in a network, so the factory does not have to wait for monthly batch orders.
"In the long term, this will produce dramatic changes in the world economy. This is a partial untrapping of human resources."
However, Mr. Spence warned that free markets alone will not solve the problems of underdevelopment: "It is a harmful idea, to say that only markets are needed."
Countries need broader investments in education, infrastructure and technology, as well as a legal and regulatory structure that will encourage development, all of which can only be delivered by governments.
The Internet stock bubble was built on hype, Mr. Spence argued, but the Internet itself will not go away. Its early years are typical of new technologies throughout history, when "the mistake is to think that people will change their behaviour overnight in response to a new idea."
When the electric motor was invented, factories were designed to link many machines to a single steam engine with belts and pulleys, he said. "It took 50 years to figure out how to configure plants around the new freedom" offered by electric motors.
"What we have just observed and lived through is quite common," he said.