LETTERS TO THE EDITOR: Look to consumption, not production, for          
         key to growth                                                            
         Financial Times; Jan 5, 2001                                             
         By DANNY QUAH                                                            
                                                                                  
                                                                                  
         From Prof Danny Quah.                                                    
                                                                                  
         Sir, Prof Stephen Cecchetti instructs Europe to make computers           
         so that Europe too can grow like the US ("Contagion and the new          
         economy", January 3). This advice sounds authoritative and               
         powerful - as Joseph Stalin's exhortation must have sounded to           
         the 1950s Soviet Union to build steel factories, to match the            
         capitalist west. Like Stalin's programme for growth, Prof                
         Cecchetti's directive panders to the most base, me-too,                  
         nationalistic instincts. It is also misguided and wrong.                 
                                                                                  
         Whatever may be driving high US productivity growth, it is not a         
         US-made computer. First, it is not countries that make                   
         computers: industries do. There is no such thing as a US-made            
         computer. Open up any computer and marvel at the processor chips         
         made in Penang, the soundcards made in Singapore, the unexciting         
         but essential hard-wired joining code cut in Bangalore. True,            
         productivity growth is high in information and communications            
         technology (ICT) hardware and in computer software - a lot of            
         which is based in the US. But neither the hardware nor the               
         software knows whether the user at the keyboard is in New York           
         City, London, Paris or Rome. So, unless you're a hardware                
         engineer or a software designer, you are toast, whether you work         
         in the US or in Europe.                                                  
                                                                                  
         Second, US investment in computer hardware has been high since           
         the 1970s but US productivity growth minuscule all the way               
         through the mid-1990s. Productivity skyrocketed only when two            
         things happened: when more users became adept at the technology          
         and when internet dissemination brought online hundreds of               
         millions of users - ie, when ICT consumers grew to sufficient            
         strength.                                                                
                                                                                  
         It is not the production side that is crucial: it is the                 
         consumption side. Finland has GDP growing at 6 per cent a year           
         but makes exactly zero powerful computers. It has morphed from a         
         pulp-and-paper-based, basket-case economy after trade with the           
         Soviets collapsed to one where Finnish consumers use mobile              
         telecommunications for finance and commerce in ways that make            
         Silicon Valley look positively third world. Internet hosts per           
         capita and internet usage exceed the US's.                               
                                                                                  
         Finland has got two things right: its educated and sophisticated         
         consumers are accepting of frontier-level technologies; and its          
         industries specialise in what they do best and import what               
         others do better.                                                        
                                                                                  
         Similarly the US. Most of that high-octane economy does not make         
         computers and could not code software if lives depended on               
         it. But, as in Finland, US consumers are educated, demanding and         
         appreciative of new technologies; US industry "imports" IT to            
         use, productively, in whatever it does.                                  
                                                                                  
         Prof Cecchetti's new economy growth rule: make what the most             
         successful economy makes. This is so old economy it pre-dates            
         Adam Smith. And it is very, very bad policy advice.                      
                                                                                  
         Danny Quah, Professor of Economics, London School of Economics,          
         Houghton Street, London WC2A 2AE                                         
                                                                                  
         Copyright: The Financial Times Limited