The OECD Observer
October/November 1998, No. 214

 

Realising the potential of global electronic commerce
By John Dryden

 

The growth of electronic commerce marks a major structural change in the economies of the OECD. As one of the engines of globalisation it has much to offer. But the rapid expansion of electronic commerce has thrown up some serious questions and has pushed governments and the private sector together in an attempt to understand this important market and steer its development. (Electronic Commerce and the Information Society, OECD Publications, Paris, forthcoming 1998.)

Electronic commerce is nothing new in itself. In fact, for funds transfer and electronic data interchange it has existed for many years. What has changed is the speed at which it expands, and the extent to which it has captured the imaginations of business, consumers and governments alike, as well as the media. The OECD has been looking into the subject for some time and is already holding its second major ministerial conference, called ‘A Borderless World—Realising the Potential of Global Electronic Commerce’, in Ottawa on 7-9 October 1998. Is all the excitement justified?

Most probably yes. The development of electronic commerce—which may be loosely defined as business transactions based on the electronic transmission of data over communications networks such as the Internet—can be ascribed to a coincidence of innovations over the past two to three decades, starting with the Internet in the late 1960s and the subsequent lifting in the 1970s of restrictions on its commercial exploitation. The World Wide Web emerged in the 1980s, followed by the widespread diffusion of interface technology, such as browser programmes, in the 1990s. These developments were underpinned by the availability of affordable communications infrastructure, including normal telephone lines. Constant breakthroughs in hardware and network technologies and higher investment in communications after liberalisation of telecoms all helped to accelerate the process. It was hardly surprising therefore that enterprises, large and small, and their customers would quickly see in the Internet an opportunity for doing business.

 

Electronic commerce and the global economy

Forecasts are always tricky, and for electronic commerce some have been a little over optimistic. But even the most conservative private estimates predict ten-fold volume growth in electronic commerce by 2000, the Millennium Bug notwithstanding (box pp. 22-23). Forecasts based on current reported growth rates—an expansion from a few billion dollars in 1997 to over $300bn in 2001—still hint at the prospect of a $1trn electronic marketplace in the not too distant future.

A few barriers would have to be overcome to reach that kind of expansion. One problem is how to win public confidence in electronic transactions. In the United States, consumer shopping receives most of the media’s attention. Yet it is the value of business-to-business transactions which dominates, accounting for some 80% of electronic commerce. And, although both business and consumer transactions will undoubtedly rise, it seems unlikely that their share will change significantly in the short term. One reason is that, unlike in the traditional physical marketplace, where consumer protection and rights are cornerstones, in the digital marketplace consumers feel they have little or no protection, for example, against fraud or unsatisfactory products.

Another problem is access to the electronic marketplace. Communication costs and computer prices may be falling, but remain too high for many potential customers. And because technology is improving so fast, many would-be users, particularly families with limited budgets, hesitate to make a purchase for fear of buying equipment that will only too quickly be out of date. Equipping public services, such as libraries and schools, to fill the gaps raises budgetary issues for governments and local authorities to consider.

Computer ownership and Internet access in the OECD area are increasing, but the pattern nonetheless varies from country to country. There are many possible reasons for this. The existence of a thriving competitive market for telecommunications services is one. Public attitudes may be another; some countries, such as Finland and Sweden where some of the world’s leading telecommunications companies come from, have embraced communications technology with enthusiasm. In other countries the Internet has not had such a spring board and has taken longer to catch on. Local call charges are also a factor; they are effectively free to telephone subscribers in most parts of the United States and this has been a boon to Internet usage there. In fact, North America accounts for 80-90% of global electronic commerce, with most of the rest taking place in (western) Europe. In other parts of the world, including in Japan, the electronic commerce markets are only beginning to develop.

In France the Internet is taking hold fast, but it has had to face early competition from the long-established national screen-based information service, Minitel, run by France Telecom. It is technologically more limited than the Internet, but its reliable payments system has helped it to become a thriving marketplace for everything from train tickets to weekly shopping. An estimated $625m of transactions were conducted over the Minitel in 1996. That is nearly the same as the figure for total world business-to-consumer transactions on the Internet in the same year.

 

A global market with cross-border teething problems

The formidable growth potential of global electronic commerce has pushed it towards the top of the agenda in boardrooms and government offices throughout the world. A whole string of high level meetings, including the OECD council at ministerial level and summits of the G-8, have stressed the economic potential of electronic commerce. The main message from these meetings is that governments should work together with the private sector to take electronic commerce by the horns and steer its development.

The OECD began publishing on various aspects of the global information society over two decades ago and ever since has been working to develop an environment in which electronic commerce can flourish. And in the last three years electronic commerce has become an explicit priority in the activities of the Organisation. That shift reflects the recent upsurge of electronic commerce, and of course that it is a cross-border phenomenon with implications for governments and business everywhere.

Electronic commerce is set to be one of the driving forces behind the global economy. It is a potentially positive force, which can improve the ways people participate in society as citizens, consumers, workers and entrepreneurs. But its rapid development and transborder character has thrown up a number of difficult issues that have to be addressed. For example, the question of taxation, in particular whether products transacted should be taxed at the point of output or consumption, requires some agreement. There are many types of indirect taxation and levels in the OECD area. For a start, companies selling electronic products over the network, such as software, which can be downloaded across borders, will clearly want to pay their tax where the rate is lowest. Recipient governments in the lower taxed countries might not want to argue with them. But other governments will want to prevent any leakage in their tax revenue. In other words, with electronic commerce comes the risk of unhealthy tax competition between OECD countries, which without agreement could end up distorting the market in the years to come.

 

Finding agreement

The tax question underlines why giving direction and order to the expansion of electronic commerce is important. It also shows that international co-operation is crucial. The two major conferences organised by the OECD, in Turku, Finland, in 1997 and Ottawa in 1998, are two of the first building blocks for constructing that co-operation.

The Turku conference ‘Dismantling the Barriers to Global Electronic Commerce’ was hosted by the government of Finland in November 1997. It drew together over 400 policy-makers in government, business leaders and the key relevant international organisations. The main concerns at Turku were to debate how to build confidence in electronic commerce, to develop access and to establish regulatory frameworks. Some technical issues, such as customs clearance for commerce transacted across national borders—this area has seen considerable progress—and payment systems were also discussed. Some general policy principles and guidelines were laid down and the organisations capable of studying the problems affecting growth in electronic commerce and developing the right solutions were identified (see Focus below).

The holding of the Ottawa conference reflects a new sense of urgency about putting a broad, concerted policy framework in place. Bringing governments, international organisations, business leaders and representatives of labour and consumer groups together is an essential part of this, to discuss the issues and agree on ways forward. OECD work on electronic commerce, which may act as a guide, is structured around four main interdependent themes:

• Building trust for users and consumers: The frameworks and safeguards which provide confidence in the physical marketplace have to be adjusted to instil confidence in its digital counterpart. That means being able to guarantee the protection of personal data and privacy, and protecting the rights of consumers. It also means that buyers and sellers should be able to authenticate and verify on-line transactions. The OECD’s declarations on Privacy and Personal Data Protection and on Authentication for Electronic Commerce and work on Guidelines for Consumer Protection in the context of Electronic Commerce are important steps in this direction.

• Establishing ground rules for the digital marketplace: The objective here is to get broad agreement on the design and implementation of the ground rules for global electronic commerce. These rudiments would have to treat the type of taxation problem mentioned earlier. It would also have to deal with legal frameworks, trade policy, market access and protection of intellectual property rights. Framework conditions have been developed by the OECD in the area of taxation and preparatory work is well under way on some of the other issues. Other international bodies, such as the World Trade Organization and the World Intellectual Property Organization stand ready to continue developing the appropriate international conventions.

• Enhancing the information infrastructure for electronic commerce: For electronic commerce to develop, affordable access to the communications infrastructure will be needed. Internet governance and technical standards are other issues to be addressed. Competitive telecommunications markets and reform of regulatory practices can play an important role in helping to solve some of the problems of access, particularly by bringing down the cost of Internet service provision and the high prices for local calls which still prevail in some countries.

• Maximising the benefits: If electronic commerce is to be one of the keystones of the knowledge-based society, businesses, consumers and public institutions will have to be encouraged to use it more. Skills and general awareness may have to be improved, while more has to be done to encourage the spread of electronic commerce in non-OECD countries, particularly in the developing world. More work is needed to help understand the social and economic impact of electronic commerce and the OECD work is an important contribution in this field. International organisations can only do so much, and the responsibility for finding ways of driving electronic commerce forward and realising its full potential, as with most conventional markets, falls to both governments and business.

 

Focus: International organisations in e-commerce

The OECD co-operates with many other international organisations in a bid to understand electronic commerce and its impact on international trade, telecom services, commercial law and intellectual property. Some of the OECD’s major collaborators include:

• World Trade Organization (WTO) (http://www.wto.org/) for agreements on basic telecommunications, tariff reduction on information technology products and a ‘tariff-free zone’ for electronically delivered products, as well as possibly extending existing multilateral trade rules to electronic trade

• World Intellectual Property Organization (WIPO) (http://www.wipo.org/) for intellectual property rights (IPR) as well as IPR aspects of Internet governance issues

• United Nations Conference on International Trade Law (UNCITRAL) (http://www.un.or.at/uncitral/) for the revision of commercial law and for digital signature

• Bank for International Settlements (BIS) (http://www.bis.org/) for analysing the impacts of electronic financial transactions, including electronic banking and electronic payments

• International Organisation for Standardisation (ISO) (http://www.iso.ch/welcome.html) and the International Electrotechnical Commission (IEC) for setting standards in various areas of information technology

• The World Bank (http://www.worldbank.org/) for telecommunications infrastructure development, as well as policy advice to developing countries

• World Customs Organisation (WCO) (http://www.wcoomd.org/) for simplifying customs clearance procedures

• World Wide Web Consortium (W3C) (http://www.w3.org/) for Internet standards and technological protocols for self-regulatory mechanisms

• United Nations Conference on Trade and Development (UNCTAD) (http://www.unicc.org/unctad/), whose aim is to help developing countries join the global electronic marketplace

• Other international organisations include International Telecommunications Unions (ITU) (http://www.itu.org/), the Universal Postal Union (UPU) (http://www.unpi.com/upu.html), the United Nations Educational, Scientific and Cultural Organisation (UNESCO) (http://www.unesco.org/) and the regional United Nations Commissions, notably the UN Economic Commission for Europe (UN-ECE) (http://www.unece.org/) and the Council of Europe (http://www.coe.fr/).

• The European Commission (http://europa.eu.int/) is also working intensively on all aspects of electronic commerce. The commissioner for information and telecommunication technologies, Martin Bangemann, has proposed a global Internet charter to stress the importance of international co-operation on global information networks.

 

OECD Bibliography

Electronic Commerce and the Information Society, forthcoming 1998.

See also:

Y2K (article is publised in the Observer issue No. 214 (October/November 1998)

The promise of 21st century technology (article is publised in the Observer issue No. 214 (October/November 1998)

 

John Dryden: OECD Directorate for Science, Technology and Industry