TELECOM AND THE GLOBAL
ECONOMY:
THE COMING DECADE
IBM GLOBAL TELECOM EXECUTIVE FORUM
London, July 18, 2005
Joseph E. Stiglitz
Columbia University
New York
Telecom: The Driver Of Change
 Major changes in global economy have
been brought about by telecom
- Boom in 1990s led to over investment and
excess capacity
- Leading to low costs of connectivity
- So “distance” between India and china
and advanced industrial countries (Europe,
U.S.) greatly reduced
Other Drivers of the Global
Economy
 Demography
 Domestic economic policies and problems
in advanced industrialized countries,
especially in E.U. and the U.S.
 Drive for closing income, technology gap
in Asia
– High growth, young population, shift to
consumerism likely to make Asia most exciting
market
 Global rules of the game, including the
intellectual property rights (IPR) issues
Integration Of China And India
Into Global Economy
 The integration of China and India into
global economy is one of the major
economic events of history
- 2.5 billion people
- With markedly lower incomes
- Markedly different factor ratios,
contributing to markedly different factor
prices
Challenge and Opportunity
 Will affect both demand and supply
sides of the equation
 New markets
 Telecom revolution will facilitate
trade in services, not just in goods
 New sources of competition
 New sources of “inputs”
Requiring Responses At Every
Level
 Individual and firm
- Affecting even firms that operate mostly within
a country, in areas that were traditionally
considered “non-tradables”
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Market and industry level
National level
Regional (European)
Global
– As new technology lowers communication (and
transport) and transaction costs, what can be
done to overcome other barriers to trade,
especially man-made barriers?
Challenges for the U.S.
 Modern economy is based on technology
 But number of graduates in science and engineering now
dwarfed by those in Asia
– Of 2.8 million 1st degrees (university level) in science
and engineering
• 1.2 million in Asia
• 830,000 in Europe
• 400,000 in U.S.
– In engineering alone, Asia produces 8 times u.S.
– Since 1993, the number of American citizens in graduate
science programs has fallen from 55,000 to under
42,000 while the global supply of Ph.D. in science has
increased by 25%--mostly in Asia
– Just under half of all doctorate degrees in engineering
and computer science in the United States are earned by
foreign students
– Visa problems since 9/11 has seriously impeded flow of
foreign students into the U.S.
Challenges for the U.S.
 Problems start earlier in elementary and
secondary schools
– Evidenced by performance in
standardized tests in science and math
– For example, at 8th grade
•44% of Singapore performed at
highest level
•38% of Taiwan
•7% U.S.
Challenges for the U.S.
 Expenditures on research declining
– As percent of GDP, 37% decline in
federal funding since 1970
– Reflected, in part, in the number of new
patents approved
• Since 1980, Japan’s share world wide
increased from 12% to 21%, mostly at
expense of U.S. (which has declined 8
percentage points)
Challenges for Entire Western
World
 Europe faces many of the same
challenges in education, research
 Success of China in manufacturing
not just a matter of unskilled labor
– Combining skilled and unskilled
– Even in textiles and automobile
assembly
 Education, research issues may be of
even more relevance for competition
in IT, telecom, and related sectors
Challenges for the U.S.
 Competition from China and India are likely to
result in lowering wages of unskilled workers
 And even of others
 Enormous strains on society
 But neither U.S. nor Europe is in good position to
respond
– In U.S. huge fiscal deficits
– In Europe, Growth and Stability Pact, ECB focusing on
inflation, problem of earlier decades
 Fiscal problems in U.S. adversely affects Europe
– Contributes to global financial instability
– And strong Euro
Firm Level Response
 Competition will drive restructuring
and relocation of production (towards
Asia)
– To take advantage of new opportunities
– Complicated by high levels of exchange
rate instability
 Competition will also drive focus on
new market opportunities
Prospects For Global Economy
 These economic problems are likely to lead to a
long period of malaise:
– Not recession
– But not robust growth either
– Other factors contributing to poor economic performance
—oil, exchange rate instability, continuing fears of
terrorism
– No return to boom of 90s
 Explains lack of euphoria in spite of strong
growth in 2004
– 2005 will be weaker
– Strongest growth in China and India, not in advanced
industrial countries (Europe, Japan, U.S.)
New Market Opportunities
 Telecom sector at forefront of innovation
 New economy will no longer be new
– But new ideas have not yet been thoroughly
disseminated, absorbed and utilized
 New products will be taken up more by
young and more “innovation” minded,
technically sophisticated people
– Leading to shift in market towards Asia
– Evident in dissemination of picture phones
– But in all markets, there will be an increase in
sophistication
Global Rules Of The Game
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Especially important in telecom
Legacy of regulations
Importance of intellectual property
And industry standards
Global rules of the game have traditionally
been set largely by the U.S., together with
Europe, with others coerced and cajoled to
go along
Global Rules Of The Game
 But the developing countries are
beginning to resist
– Development round of trade
– Thrust for pro-development IPR
discussions at WIPO
 And there is increasing divisions
within the developed world about
what should be the rules of the game
Intellectual Property Rights
 Mantra had been: “the stronger the better”
– Major source of rents for the developed
countries
– Justified by importance of incentives
– Some hypocrisy—wanted to use patents of
others
 Economic theory and history challenge this stance
as the best way to promote innovation
– High costs (inefficiencies associated with
monopoly)
– With questionable benefits
– Innovation may even be slowed
• Patent thickets
– Globally, access to life saving medicines, biopiracy raise further questions
Intellectual Property Rights
 But now, even in the developed world, questions
being raised
- Monopoly power may impede innovation (Microsoft)
– Success of ‘open source’ systems
– Casts cost-benefit balance in question
– New paradigm
 Similar questions being raised about standards
– Current arrangements may force China and others
to establish their own standards, fragmenting
global economy
– Motivating Brazil, others to embrace open source
technology
Key Determinants of Success
 Success has always entailed trying to shape,
understand, and take advantage of “regulatory”
environment
– Will continue to be case in future
– But will be more complex, politically and
economically
– Huge risks and uncertainties about future
directions of global economy require diversified
approaches
– But among approaches that one will have to deal
with are those entailing more openness, less
protection , more competition
• Even in areas where market forces themselves
in the past have limited competition
Key Determinants of success
 More broadly, success has always
entailed combining “local” and
“global” knowledge
– In spite of globalization, there remain
large differences across markets,
especially in terms of taste and
preferences (both on demand and
supply sides)
Concluding Comments
 Telecom sector is a driver of change
 Telecom sector is driven by change
 There are likely to be huge changes in global
landscape
– Technology
– Integration of Asia into the global economy
 This talk has outlined some of the directions of
those changes and their consequences
 But even the best of crystal balls is cloudy
 Adaptability, nimbleness and combining local and
global knowledge will be required above all else