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The contribution of ICT in achieving the new Lisbon Agenda
Brian WilliamsonDavid Lewin
Puntoit/Key4Biz Workshop 7th June 2005
+44 207 324 1800www.indepen.co.uk
2
Agenda
1. The challenge – a productivity problem in Europe
2. Market context to 2010 – regulation is not keeping pace
3. Allowing “creative destruction” to revitalise Europe
4. Moving forward
3
1. The Challenge
A productivity problem in Europe
4
Europe no longer catching up but falling behind
Source: Denis et al. February 2005.
Labour productivity growth per hour
5
ICT contribution to labour productivity growth per hour
Source: Denis et al. February 2005.
Two-thirds of productivity gains in the US come from the use, rather than production, of ICT
6
Breaking down the ICT contribution
Source: Indepen-Ovum, January 2005.
7
ICT investment in Europe has been low
ICT investment share
0
5
10
15
20
25
30
35
Japan United States EU15
(%)
199019952001
ICT investment/capita in Europe is at levels seen in the US 20 years ago
Source: Indepen-Ovum, January 2005.
8
Contribution of ICT investment to GDP growth
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Sw
eden
Un
ited S
tates
Den
mark
Belg
ium
Un
ited K
ing
do
m
Neth
erland
s
Au
stralia
Ireland
Can
ada
Greece
Fin
land
Japan
New
Zealan
d
Po
rtug
al
Sp
ain
Italy
Germ
any
Fran
ce
%
1990-95 1995-2002
Source: OECD. May 2005. Key ICT indicators.
9
Contribution of ICT-using services to value added
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Un
ited
States
Mexico
Au
stralia
Po
rtug
al
Ireland
Un
ited
Kin
gd
om
Can
ada
Den
mark
Sw
itzerland
Fin
land
Neth
erland
s
Sp
ain
No
rway
Au
stria
Ko
rea
New
Zealan
d
Japan
Sw
eden
Belg
ium
Italy
Germ
any
Fran
ce
Lu
xemb
ou
rg
%1990-95 1995-2002 (2)
Countries where productivity growth deterioratedCountries where productivity growth improved
Source: OECD. May 2005. Key ICT indicators.
10
Observations
US productivity acceleration coincided with
An explosion in networking of ICT during 1990s
The rate of decline in semiconductor prices in mid-1990s doubling
But everyone has similar access to ICT
Many ICT goods and services are traded internationally - no need to produce ICT to benefit (e.g. Australia)
Much of telecommunications is an exception – must get it right at home
US has invested more in use of ICT and gained greater productivity payoff per unit of investment
=> Why is ICT investment more profitable in the US?
11
Effective ICT use depends on “creative destruction”
“…ICT is less compatible with European incentive structures than investment in other types of capital.”
Professor Crafts, London School of Economics, 2004
[ICT] “provides a striking example of the need for policy makers to promote entrepreneurship and a healthy process of ‘creative destruction’”
EC Directorate-General for Economic and Financial Affairs, February 2005
“The European economic environment creates too little room for good firms to excel and for failing firms to exit the market so as to free up resources for the much-needed transition”
Bart van Ark, Groningen Growth and Development Centre, April 2005
12
“Creative destruction” provides a guide to policy
Simply promoting investment will not work due to diminishing returns
Underlying problem is that ICT investment in Europe is less profitable because
Levels and types of skills are less suitable – skills tend to be industry specific in Europe
Product market regulation limits opportunities (e.g. in retail)
Companies cannot exploit the full scale economies offered by ICT - Europe is a less integrated market than the US for services
There are greater impediments to making the required organisational changes
13
2. Market context to 2010
Regulation is not keeping pace
14
The supply of ICT is important
Traded goods and services can always be bought on a global market
But efficient supply of, and investment in, non-traded ICT goods and services (such as telecoms and some software services) is essential
There are also benefits from having a local ICT research and development capability
The benefits from networking computers will grow rapidly, pointing to the increasing importance of communications within ICT
But the EU lags the US on almost any measure of use of communications services
0 50 100 150 200 250
US mobile mins percapita (2)
US fixed minutes percapita (1)
US Internetpenetration
US networkinvestment per capita
EU = 100
(1) Outbound minutes(2) Outbound and inbound minutes
15
Industry transformations - NGN effects
SoftSwitch
and applications
servers
SoftSwitch
and applications
servers
SoftSwitch
and applications
servers
Access networks - fixed and mobile
IP transport
networks
Content
NGN roll out well underway by 2010 – and nearing completion in some member states
NGNs lead to separation of applications and services from transport and access
We see much stronger competition at this first level
This competition captures a high proportion of the economic benefits of infrastructure based competition
16
Industry transformations - other
Slow down in market growth (<1% pa in real terms) will push operators into value added and content based services
Growing cross platform competition: between fixed and mobile operators for voice calls fixed incumbent will compete vigorously with CATV operators for triple play
consumer spend in most EU countries
Substantial consolidation: carrier selection based AltNets will disappear (or become ISPs) altnets with directly connected customers will merge for greater economies of
scale corporate Altnets will reposition themselves or disappear
17
Industry transformation – the need for investment
A major change in regulation is needed if the industry is to invest at
the speed and level required
A major change in regulation is needed if the industry is to invest at
the speed and level required
1995 2000 2005 2010 2015
Mobileconnectivity
Fixedbroadbandconnectivity
Fixed andmobile NGNs
VA andcontentbased
services
A period of intense investmentby major ECNS players
Major investment required
The current prospects of greater network investment to exploit ICT fully are limited:
investment levels per capita now at 70% of US and Japanese levels
financial analysts predicting no increase in capex by EU ECNS suppliers likely with current regulation
Traditional voice revenues are declining – where will the investment funds come from?
18
Industry transformation and regulation
Current regulation is backward focussed – on declining fixed voice markets
Current regulation does not work well with new multi-service platforms: lots of uncertainty over which services will work on these platforms not enough information to apply the NRF big economies of scope between supply of services so… …bundles of services rather than individual services could form the new markets
eg triple play high risk investment but potential for major dynamic efficiency gains
New regulatory imperative – a need to
encourage investment and innovation
through the new multi service platforms
New regulatory imperative – a need to
encourage investment and innovation
through the new multi service platforms
19
3. Allowing “creative destruction” torevitalise Europe
20
Make ICT use more productive and profitable
Greater human capital and labour market flexibility
Greater product and service market flexibility and integration
Enable better use of ICT in the public sector Switch from targets to proper assessment of costs and benefits Benchmark against international best practice Target funding on e-policy projects that cross traditional boundaries Develop budgetary processes and policies that are ICT capital friendly
A new (and necessary?) means of achieving European “social model”
21
Rethink general policy approach
Take account of the spillover benefits from ICT – as is done with environmental impacts
Focus on the dynamic gains from market expansion - more weight on innovation and investment versus short term price objectives
Do not apply any sector specific taxes to ICT (e.g. sector funded universal service obligations, levies on devices etc)
Eliminate regulatory approaches that cannot keep pace with technological and market developments
Improve access to premium content and do not extend scope of content and advertising regulation to services offered over new platforms
Use European Communications Framework review to shift ex ante regulation of telecoms from one based on power in markets to one based on non replicable assets
22
A possible new regulatory framework
Now
Markets focus for both ex ante sector specific regulation and competition law
18 pre-defined markets for possible ex ante regulation
SMP assessment followed by imposition of obligations
Obligations lifted when SMP disappears
Post 2006?
Competition law focussed on markets and ex ante sector specific regulation focussed on non replicable assets
Market conduct left to competition law
Obligations imposed on supply of non replicable assets
Set market triggers in advance and lift obligations to supply non replicable assets when trigger is pulled
23
4. Moving forward
24
Challenges to reform
Re-branding the Lisbon Strategy as i2010 is not a substitute for reform
Five years after Lisbon the wording of i2010 is complacent and short on specifics relative to the challenge
“The European electronic communications framework, in force since 2003, is an example of best practice
“Businesses… still face… difficulties to reorganise and integrate ICT into the workplace”
French ‘Non’ and Dutch ‘Nee’
25
So, to move the debate forward…
Explain that the terms of the trade-off between productivity growth and ‘traditional’ social protection shifted abruptly in the mid-1990s
Be honest about major policy change required to allow “creative destruction” on ICT supply & demand side in Europe
Develop innovative policy approaches that allow “creative destruction” consistent with the European social model
26
“…implementation of the needed reforms will be the litmus test of whether the future will bring a substantial improvement in the EU’s productivity fortunes or will confirm the EU’s ongoing decline as a global economic power.”
EC Directorate-General for Economic and Financial Affairs, February 2005
27
Bibliography
David Lewin and Brian Williamson. May 2005. “Regulating emerging markets.” OPTA Economic Policy Note, no 5. http://www.opta.nl/download/EPN05_uk.pdf
OECD. May 2005. Key ICT Indicators. http://www.oecd.org/document/23/0,2340,en_2649_34223_33987543_1_1_1_1,00.html
Denis, McMorrow, Roger and Veugelers. February 2005. “The Lisbon strategy and the EU’s structural productivity problem.” Economic Papers 221. EC Directorate-General for Economic and Financial Affairs. http://europa.eu.int/comm/economy_finance/publications/economic_papers/economicpapers221_en.htm
Indepen and Ovum. January 2005. “Achieving the Lisbon Agenda: the contribution of ICT. A report for the Brussels Round Table. http://www.indepen.co.uk/panda/docs/achieving_the_lisbon_agenda-fullreport.pdf
Marcello M. Estevão. October 2004. “Why Is Productivity Growth in the Euro Area So Sluggish?” Working Paper No. 04/200. International Monetary Fund. http://www.imf.org/external/pubs/cat/longres.cfm?sk=17757.0