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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 WorldRealising 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 commercewhich may be loosely defined as business transactions based on the electronic transmission of data over communications networks such as the Internetcan 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 ratesan expansion from a few billion dollars in 1997 to over $300bn in 2001still 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 medias 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 worlds 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 bordersthis area has seen considerable progressand 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:
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 OECDs major collaborators include:
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