The old-new economy paradox

But first, how will the Internet really affect our lives? The biggest impact, of course, will be in what it will do to costs, and therefore the economy’s efficiency. While the head of ICICI, K.V. Kamath, estimates that an average banking transaction on the internet costs an eighth that in a traditional bricks-and-mortar (Internet jargon for an office building) set-up, in a recent article, The Economist quotes Lehman Brothers as saying that a transfer of funds between bank accounts costs $1.27 if done by a bank teller, 27 cents via an automatic teller machine (ATM), and only one cent over the Internet!

The Economist quotes a Goldman Sachs estimate to say that increased buying and selling of goods through the Internet or electronic commerce between firms (B2B commerce, in jargon) could lead to a 5 percent increase in output of the rich ec-onomies (the leaders in e-commerce) over the next dec-ade. To put this in perspective, The Economist points out that in the late 19th century, a similar increase in productivity was witnessed through the carriage of goods by railways which reduced costs and boosted efficiency so much, it added around 10 percent overall to the US output.

How does e-commerce make things cheaper? Simple. I, as a user, just need to log on to the Internet, and go to an on-line books store, like Amazon.com. Since my market is now the entire world, instead of just my nearest book store, I can now order my book from the cheapest store, after taking into account transport costs and other duties/taxes. Retailers, similarly, can afford to sell much cheaper, since they now no longer need to set up huge stores across the world they can simply service orders from across the world through different storage points, using a web of courier services. And, yes, manufacturers can also service customers directly Dell computers is a good example of this largely cutting out retail margins.

So, how can India miss this bus, and what’s the old economy’ got to do with this? For one, look at the International Data Corporation’s latest glo-bal survey. It puts India as 54th of 55 countries, on infotech parameters like computers per person, access to the Internet, cost of telephone calls (the Internet mainly operates through telephone lines), and so on. (If it makes you feel better, the 55th country is Pakistan!)

So, with the access to the Internet limited, the ability to take advantage of the revolution’ will also be limited. There’s more. At the end of the day, anything you buy or sell over the Internet has to be delivered to someone, by road or rail, through air, or sea. But with India’s non-infotech infrastructure in such poor shape, we all know the kind of delays that take place and how this adds up to costs. So, getting an Internet order to supply roses to the US from your Gurgaon farm is great, but you’ll lose out with your cargo piling up for a fortnight at India’s leading airports, before it finally gets to the buyers, completely destroyed.

And there’s no way that you can hope to get huge orders on the Internet for supplying, say, garments to the US, if your factory closes 8 hours a day due to power breakdowns, if your cost of power is three times that of competing countries like Bangladesh or Mexico, or if your real interest rates are double those of other nations. Similarly, if you can’t liquidate your business as soon as it becomes unprofitable, and switch to a new one, like you can in countries like the US, you don’t stand a chance all this adds to the cost of doing business, and thanks to the Internet, high cost producers have even less of a chance now to remain in business.

In a world whose borders are rapidly shrinking, what the Internet is doing, is to shrink them even faster. With the Internet offering complete information, as it were, of costs all over the world, buyers will now order from the cheapest source. In other words, in order to survive, you now have to be as efficient as the rest of the world to survive. Becoming that, unfortunately, is still dependent upon fixing what’s called the old economy’, not just on the new one. The lovely butterfly, you see, does still evolve from the caterpillar.