The contribution of ICT in achieving the new Lisbon by inthefire

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									                    The contribution of ICT in achieving the
                    new Lisbon Agenda
                    Puntoit/Key4Biz Workshop
                    7th June 2005



                       Brian Williamson
                       David Lewin



+44 207 324 1800
www.indepen.co.uk
                                                          1
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




                                                               2
      1. The Challenge

A productivity problem in Europe




                                   3
Europe no longer catching up but falling behind

     Labour productivity growth per hour




     Source: Denis et al. February 2005.

                                                  4
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                                  5
Breaking down the ICT contribution




     Source: Indepen-Ovum, January 2005.

                                           6
  ICT investment in Europe has been low

                                ICT investment share

                35     1990
                30     1995
                       2001
                25
                20
              (%)




                15
                10
                 5
                 0
                         Japan         United States   EU15

                Source: Indepen-Ovum, January 2005.




ICT investment/capita in Europe is at levels seen in the US 20 years ago




                                                                     7
                                                                                                                                            8




                                                                                                                         France
                                                                                                                         Germany
Contribution of ICT investment to GDP growth




                                                             1995-2002




                                                                                                                         Italy
                                                                                                                         Spain
                                                                                                                         Portugal
                                                             1990-95




                                                                                                                         New Zealand
                                                                                                                         Japan
                                                                                                                         Finland
                                                                                                                         Greece
                                                                                                                         Canada
                                                                                                                         Ireland
                                                                                                                         Australia




                                                                                                                                          Source: OECD. May 2005. Key ICT indicators.
                                                                                                                         Netherlands
                                                                                                                         United Kingdom
                                                                                                                         Belgium
                                                                                                                         Denmark
                                                                                                                         United States
                                                                                                                         Sweden



                                               1.0 %
                                                       0.9
                                                             0.8
                                                                         0.7
                                                                               0.6
                                                                                     0.5
                                                                                           0.4
                                                                                                 0.3
                                                                                                       0.2
                                                                                                             0.1
                                                                                                                   0.0
 Contribution of ICT-using services to value added
                                                                                                             1990-95                        1995-2002 (2)
       %
1.4
                        Countries where productivity growth improved                                                                                  Countries where productivity growth deteriorated
1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
       United States
                       Mexico
                                Australia
                                            Portugal
                                                       Ireland
                                                                 United Kingdom
                                                                                  Canada
                                                                                           Denmark
                                                                                                     Switzerland
                                                                                                                   Finland
                                                                                                                             Netherlands
                                                                                                                                           Spain
                                                                                                                                                   Norway
                                                                                                                                                            Austria
                                                                                                                                                                      Korea
                                                                                                                                                                              New Zealand
                                                                                                                                                                                            Japan
                                                                                                                                                                                                    Sweden
                                                                                                                                                                                                             Belgium
                                                                                                                                                                                                                       Italy
                                                                                                                                                                                                                               Germany
                                                                                                                                                                                                                                         France
                                                                                                                                                                                                                                                  Luxembourg
 Source: OECD. May 2005. Key ICT indicators.
                                                                                                                                                                                                                                                               9
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?



                                                                                                  10
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




                                                                                 11
“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




                                                                                                 12
 2.   Market context to 2010

Regulation is not keeping pace




                                 13
    The supply of ICT is important


   Traded goods and services can                                        But the EU lags the US on almost any
    always be bought on a global market                                   measure of use of communications
                                                                          services
   But efficient supply of, and investment
    in, non-traded ICT goods and services
    (such as telecoms and some software                       EU = 100

    services) is essential
                                                    US network
                                               investment per capita
   There are also benefits from having a
    local ICT research and development                     US Internet
    capability                                             penetration


                                                US fixed minutes per
   The benefits from networking                      capita (1)

    computers will grow rapidly, pointing to
                                                 US mobile mins per
    the increasing importance of                     capita (2)
    communications within ICT
                                                                            0      50   100    150    200        250
                                                (1) Outbound minutes
                                                (2) Outbound and inbound minutes




                                                                                                            14
Industry transformations - NGN effects


   NGN roll out well underway by
                                                                Content
    2010 – and nearing completion in
    some member states
                                            SoftSwitch         SoftSwitch         SoftSwitch
                                          and applications   and applications   and applications
   NGNs lead to separation of                servers            servers            servers
    applications and services from
    transport and access

                                                              IP transport
   We see much stronger competition
    at this first level                                         networks



   This competition captures a high
    proportion of the economic benefits           Access networks - fixed and mobile
    of infrastructure based competition


                                                                                          15
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




                                                                                       16
Industry transformation – the need for investment



                                             Fixed and
                                                                          Major investment required
                                            mobile NGNs
                            Fixed
      Mobile              broadband                         VA and
    connectivity          connectivity                      content       The current prospects of
                                                             based
                                                            services       greater network investment to
                                                                           exploit ICT fully are limited:
                                                                               investment levels per capita
                                                                                now at 70% of US and
                                                                                Japanese levels
    1995           2000          2005        2010           2015               financial analysts predicting
                                                                                no increase in capex by EU
                           A period of intense investment
                              by major ECNS players                             ECNS suppliers likely with
                                                                                current regulation


                                                                          Traditional voice revenues are
                                                                           declining – where will the
     A major change in regulation is
                                                                           investment funds come from?
    needed if the industry is to invest at
       the speed and level required
                                                                                                                17
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
                                                                                      18
3.   Allowing “creative destruction” to
          revitalise Europe




                                          19
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”

                                                                                20
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


                                                                                          21
A possible new regulatory framework


Now                                           Post 2006?

   Markets focus for both ex ante sector        Competition law focussed on markets
    specific regulation and competition law       and ex ante sector specific regulation
                                                  focussed on non replicable assets

   18 pre-defined markets for possible ex       Market conduct left to competition law
    ante regulation

   SMP assessment followed by                   Obligations imposed on supply of non
    imposition of obligations                     replicable assets

   Obligations lifted when SMP                  Set market triggers in advance and lift
    disappears                                    obligations to supply non replicable
                                                  assets when trigger is pulled


                                                                                        22
4.   Moving forward




                      23
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‟



                                                                                 24
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




                                                                            25
“…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




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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




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