1 The contribution of ICT in achieving the new Lisbon Agenda Brian Williamson David Lewin Puntoit/Key4Biz Workshop 7th June 2005 +44 207 324 1800 .

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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

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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

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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.

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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.

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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.

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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?

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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

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“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

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2. Market context to 2010

Regulation is not keeping pace

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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

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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

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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

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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?

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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

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3. Allowing “creative destruction” torevitalise Europe

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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”

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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

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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

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4. Moving forward

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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’

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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

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“…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