The role of telecommunications in economic development



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The role of telecommunications
in economic development

Published in : Annales des Télécommunications, tome 50, N°2, p.315-324


Michel Gensollen

Antoine Laubie
France Telecom

The role of telecommunications
in economic development

Abstract
Telecommunications have developed steadily for more than twenty years. The diffusion of services has always been sensitive to economic circumstances, even though, in France, the catching up of telephone backwardness between 1975 and 1985 and the recent reduction in tariffs have always kept business volumes growing healthily. It is therefore no surprise that the 1993 recession has cut deep. Conversely, expenditure on telecommunications has a significant effect on economic growth without being inflationary or affecting the balance of trade. However, these investment expenditures have created significantly fewer jobs for the past ten years. From the point of view of endogenous growth, telecommunications taken as a whole can explain economic growth just as expenditure on education can. In the long term, telecommunications play an essential role in influencing major trends such as the growing unemployment, the mobility of capital, the re-apportionment of added value between capital and labour and the dematerialization of the economy. Regulation of networks may enable Governments to face the social challenges posed by current developments.
The role of telecommunications
in economic development

Telecommunications is now one of the most dynamic sectors of an otherwise economy in crisis. The article's main aim is to describe the growth in this sector which has been sustained for more than twenty years at an annual autonomous rate of approximately 5% (the effects of economic activity and tariffs are not included in this specific trend). This growth is sensitive to economic circumstances and the 1993 recession had a serious effect on France Telecom's business.


Secondly, the importance of the telecommunications sector will be approached based on an assess­ment of the effect that telecoms spending has on economic growth; this snapshot, short term approach should be supported by an "endogenous growth" model, since telecommunications are an asset that improves overall productivity but such an approach will be touched upon only briefly here.
Thirdly, an attempt will be made to indicate the role of telecommunications in accelerating or slowing long term economic trends: globalization and dematerialization of the economy, capital mobility, capital intensive growth and a reapportionment of added value between capital and labour. It seems clear that, because of rapid technical progress in the processing and transmission of information, telecommunica­tions are central to the current economic changes. The result of this is that deregula­tion of telecommuni­cations is having an effect not only on the manufacturing structure of the sector, but also on the long term growth path of developed economies.


1. Telecommunications since 1971: dynamic and sensitive


The vigorous growth of telecommunications and the speed of technical progress have sometimes given the illusion that telecommunications services were immune to fluctuations in the economy. The growth in this sector would then essentially follow supply-side factors; the supply of telephone connections in France finally satisfying demand between 1975 and 1980; the emergence of new products such as videotex and more recently fax and ISDN and, coming soon, the development of services associated with the widespread installation of fibre optics and multimedia.
France Telecom sales are becoming increasingly sensitive to swings in the economy. This is easily explained by the fact that the conventional telephone service, essentially voice communication, has now reached the whole population; it still accounts for more than 70% of France Telecom's total sales (and France Telecom still does almost all the business in the telecommunication services sector).

1.1. France Telecom revenues since 1971


Over the last twenty years, FT revenues, in current francs, have enjoyed steady growth (except in 1988 because of the introduction of VAT). In the past, this growth in sales value was considerable, close to 25% a year from 1973 to 1980. Then, at the beginning of the 1980s, it fell to around 10% before bouncing back in 1984. From 1986, the growth rate which has since remained below 10% continued a downward trend and, in 1993, was as low as 3.6%. Overall, growth rates have been significantly higher than the effective production (in value terms) of the economy as a whole. These figures reflect growth in volume of telecommunication services and big tariff changes. A price index for all telecommunications services has been built and from it a volume index for France Telecom activity.

(These sales figures differ from the valuations published in annual reports: they have been restated to obtain a homogeneous series on a consistent basis from year to year; in particular, they represent sales excluding tax from November 1987 and sales assuming no VAT prior to this).



Assuming constant tariffs, from 1971 to 1993, France Telecom's volume of production grew on average 10% a year, significantly higher than GDP at market prices, but over this period there were significant fluctuations.
At the beginning of the 1970s, business growth was around 10% a year; from 1975, it accelerated, reaching approximately 15% in 1978 thereafter gradually tailing off. From 1982, volume slowed sharply (+5% in 1984 and 1985) recovering from 1987 to 1990 when growth was again well over 10%. Since 1991 the sector has started to slow again.


1.2. Modelling the evolution of France Telecom revenues


A simple econometric analysis reveals the effects of three factors behind the activity in the telecom­mu­nications services sector and gives an idea of the associated elasticity. The factors are the general economic conditions, tariffs and the end of supply constraint for telephone connections (in particu­lar between 1975 and 1980).
A supply-side variable, the rate at which telephone lines are installed in households, can be used to measure the effect of the reconstruction policy adopted during the mid 1970s. The low rate of telephone penetration in France was explained not by macroeconomic reasons but inadequate supply (see analysis of telephone demand at this time in []). When the demand for telephone lines was satisfied, it was mainly households that benefited from easier access to telecommunication services.
In the model shown here, GDP in volume terms summarizes the economic situation.
A tariff variable, the relative price of telecommunication services, has been introduced. This is the overall index of telecommunication service prices as a ratio of implicit GDP price at the market prices available in the national accounts. It has been assumed that VAT, introduced in November 1987, was recovered on half of the demand for telecommunication services.
Finally, a specific trend is assumed to represent the growth of telecommunications within the econ­omy independently of tariff effects and fluctuations due to economic conditions.
Key:
Sales = sales in volume excluding tax (deflated by an overall index of FT prices, with a base of 100 in 1980)
GDP = gross domestic product at market prices in volume terms
RP = relative price of telecommunication services (overall index of FT prices as a ratio of the GDP price)
RT = telephone equipment rate for households
IND75 = dummy variable equal to 1 in 1975 and 0 otherwise
The following equation is obtained:
LOG(Sales) = 0.048 +0.545.LOG(GDP) -0.32.LOG(RP) +0.29.LOG(RT) +0.042.IND75

(8.9) (3.33) (-5.57) (6.64) (2.81)


R2=0.877 DW=2.01
period covered : 1971-1993, annual series
By estimating statistically significant elasticities over the period 1971-1993 the contribution of these different factors can be measured retrospectively.

TABLE 1

France Telecom revenues elasticities

(estimated over the period 1971 to 1993)




GDP elasticity

0.54

Price elasticity

-0.32

Elasticity with respect to telephone equipment rate for households

0.29

Autonomous growth trend

4.8%


1.3. Analysis of France Telecom activity : four contrasting periods


The model shown above reveals four strongly contrasting periods.
The first period from 1972 to 1982 is a catch-up period: the telephone equipment rate for households have a major impact on France Telecom sales growth. This process is accompanied at the beginning of the 1980s by falls in relative price.
During the second period from 1983 to 1985, the sharp drop in growth of demand in volume terms stems from the gradual weakening of the catch-up effect (saturation in terms of telephone lines) accentuated by the impact of "quasi-fiscal" tariff increases, which explains the relatively buoyant growth of sales in current francs.
During the boom period from 1986 to 1990, two combined factors explain the strong growth in activity. A particularly favourable economic situation: western economies were benefiting from the sharp fall in oil prices which was accentuating the cyclical recovery (growth in GDP at market prices close to 5% in France in 1988 and 1989). The impact of economic conditions were helped by tariff changes in 1986 which reduced the price of telecommunications (changes in charges per unit time for telephone traffic) ; and in November 1987, the introduction of VAT without a change in the market prices benefited business subscribers (who were able to recover the VAT).
Finally, in the fourth period from 1991 to 1993, growth in value and volume in the telecommunication services sector slowed right down. This spectacular fall is linked to the economic reversal of 1991 and accentuated by the recession of 1993. During this last period (from 1991 to the end of 1993) tariff changes remained marginal and were not a key contributory factor in the growth in revenues volume.

Finally, when the changes in France Telecom revenues volume over the last twenty years are analyzed, they show what influence economic conditions have had on the telecommunications sector. The economic situation has a significant impact on telecommunications services with an elasticity of approximately 0.5.
From 1974, reduced growth was compensated for by supply-side effects (increased number of residential telephones) but, by 1982, the contribution of this factor had become very weak. Subse­quently, in the absence of recovery due to tariff reductions, there was nothing to compensate for an economic downturn.
The current situation is different: slow growth in sales (growth in volume and value has not been so low since the beginning of the 1970s) can be explained mostly by the downturn of the economy in general.
Generally, the sector's vigorous growth should be highlighted: unlike most sectors of the economy, the growth rate in telecommunications services has always been positive. Even during recessions and when there has been no price reduction, sales have always grown, albeit very slightly, because of a specific trend of some 5%.
Such a trend cannot be projected over the long term (to around 2005, for example) without a deeper analysis of the determinants of a growth which is probably tied to the current expansion of the service sector in developed economies. It may nevertheless be thought that the development of conventional telephone services (essentially voice communication) is likely to wane as saturation level is reached. However, today's new services will contribute to the sector's growth: only qualitative studies can throw light on very long term trends (it is difficult to introduce variables relating to the development of new telecommunication products in the type of econometric model represented here).
Simply extending past trends measured by the above elasticity figures suggests that by 2005, tele­com­munication services will represent approximately 6% of total production, assuming average economic growth of around 2.5% over the period and a steady fall in relative price of 3% a year.


2. The role of telecommunications in economic growth


The impact on the global economy of the telecommunications sector and its development can be approached in two complementary ways.
Like any production business, the telecommunications services sector slots into the national economy through the financial flows it sets up with other economic players. From this point of view, the sector's macroeconomic role can be assessed by the demand it generates from the rest of the economy. In addition to the global effects of this demand for the goods and services needed for current operation and extension of the telecommunications network, there is the impact of the spending patterns of the economic players receiving the telecommunications service: in particular, the increases in purchasing power that everyone enjoys following tariff reductions.
From a different point of view, the existence of a powerful telecommunications network helps the development of the economy. "Endogenous growth" models try to take account of the positive externali­ties generated by the growth itself, for example through the accumulation of skills, the human capital, research or the improvement of public infrastructures. Telecommunications networks are then con­sidered to contribute to the efficiency and development of all productive activities in the same way as the education system or transport networks.


2.1. Impact of telecommunications spending on the economy


Financial flows between France Telecom and the rest of the economy essentially involve:
revenues represented by the sale of telecommunications services with gains (or losses) of cus­tomers' purchasing power following tariff changes;
purchases of the goods and services required to operate and develop the network.
Over a long period, the relative price of telecommunications services is tending to fall; only the high tariff increases of 1984 and 1985 (increase in telephone tariffs through the price of the unit charge) exceeded the rate of inflation. Since 1986, tariffs have been moving downwards in current francs. From 1985 to 1992, tariff changes exclusively for telephone calls enabled users to spend approxi­mately 33 billion francs a year, less than if tariffs had risen at the inflation rate. This consisted of 14 billion francs approximately for households and 19 billion for businesses (reduction in trunk and international calls, introduction of VAT). These amounts are analyzed as financial transfers from operator to customer and help to improve competitiveness for businesses and increase purchasing power for households.
France Telecom purchases from suppliers can be divided into:
goods bought to be incorporated directly into the production process: intermediate consumption (in the national accounting system point of view); the share of intermediate consumption in the national total is limited (0.3% in recent years);
investment (in buildings and equipment); because the telecommunications sector is capital intensive, the impact of telecommunications investment on the national economy is significant.
At the beginning of the 1970s, France Telecom's equipment expenditure was still quite moderate: telecommunications sector investment represented approximately 4% of capital investment by all businesses. From 1975, the catching up of telephone backwardness required heavy increases in capital expenditure: France Telecom's share in the national total exceeded 8%, gradually tailing off during the 1980s (see graph below). A similar investment policy was followed by all public utilities. The "Grandes Entreprises Nationales"1 (Large National Corporations) which include in particular France Telecom, the Post Office and other network operators such as the gas and electricity utilities and French Railways, heavily increased investment from 1974, while businesses in the competitive sector were compelled to reduce theirs. For each public firm, these capital expenditures represented specific projects at microeconomic level: development of nuclear power stations, construction of a high speed rail network and installation of a modern digital telephone network. But these measures were part of a voluntary macroeconomic policy to support business: public investment was having to substitute for the failure of private investment to limit the effects of the slowdown in growth following the oil crisis of 1974. Today, the "Large National Corporations" are preparing to open their networks to competition; their investments are aimed at preparing for productivity gains and the diversification needed to maintain their employment levels (see []).

Analyses were therefore conducted during the 1980s to assess the impact on the economy of the investment programmes of public utilities and France Telecom in particular. This type of analysis would once again be carried out for telecommunications, if the introduction of fibre optics required a further significant financial investment.
The impact of telecommunications were measured using macroeconomic models. Two types of effect were identified:
direct effects: France Telecom purchases good and services, intermediate consumption or invest­ment goods, from its suppliers; to produce these good and services, the immediate suppliers must themselves purchase intermediate goods and services from other businesses and, where appli­cable, adapt their production facilities, leading to a second wave of expenditure: this gives rise to a whole chain of transactions radiating outwards through the production system to satisfy the initial demand; similarly at each stage, a certain volume of work and imports is necessary to achieve the production level; measuring these direct strictly mechanical effects requires knowing the production system structure for each sector, the value and the source of the intermediate goods and services: this type of information is available in the input-output tables of the national accounting system; finally, for a given amount of additional expenditure by telecommunications it is possible to assess the total pro­duction required and related impact on employment.
indirect effects: a complete description of the economic effects of an initial additional expenditure involves taking account of the effects of keynesian sequences, in other words estimation of the sur­plus spending generated by the additional wages from additional employment (multiplier effect).
Works done in 1982-1983 attempted to measure the macroeconomic impact of the investment and spending of public utilities, and in particular of France Telecom. This involved using sector-based macroeconomic models (in use at the time at the INSEE and the Finance Ministry) to calculate the impact of a given amount of extra investment.
TABLE 2

Effect of an investment increase of 1 billion 1970 francs by France Telecom

from 1983 to 1986 in the COPAIN, METRIC, DMS and PROPAGE models


Average difference over 4 years

COPAIN

METRIC

DMS

PROPAGE

GDP in volume

+0.1

+0.07

+0.11

+0.12

employment (thousands)

4.2

5.9

11.0

12.5

inflation (%)

0.04

0.04

0.10

-0

balance of trade (millions of Francs)

-2.0

-0.7

-2.1

-1

government revenues (millions of Francs)

+1.6

+1.8

+1.7



The impact of an investment increase of one billion 1970 francs in telecommunications (representing in the 1980s an increase in volume of approximately 10%) was assessed by both models at +0.1% of GDP. However, the estimate of jobs created differs significantly from one model to another (on average over the four models +7000 jobs). The expansionist effect of investment in telecommunica­tions generated only a slight increase in inflation and a limited fall in the balance of trade because of the low content of imported capital goods for telecommunications.


A comparison with results derived from a later model, the DIVA-sector model, currently used for medium term simulations proves difficult. The DIVA-sector model is used essentially to calculate sector-based impacts, but does not incorporate the detailed Keynesian loop like the previous models. It is used to assess the production by sector caused by an external change in investment: thus by 1997, ten billion 1980 francs of additional investment each year in telecommunications would gener­ate total additional production of 13.7 billion 1980 francs a year through intermediate consumption (calculating direct effects). The total impact on employment, 13100 additional jobs a year for 10 billion 1980 francs initial expenditure, suggests that the employment content of France Telecom investment has fallen consider­ably since the beginning of the 1980s (assuming strict proportionality, for a billion 1970 francs, slightly under 3000 extra jobs compared with 4200 to 12000 according to the model used at the beginning of the 1980s).

2.2. Impact of telecommunications network on economic growth


As evaluated above, the impacts on global demand of a voluntary investment policy in telecommuni­ca­tions do not take into account the specific nature of network equipment. For the production system, telecommunications resources are a production factor that is growing in importance. Analysis of the macroeconomic impacts of telecommunications should therefore not be restricted to the effects of global demand: it should extend to an assessment of the production system's efficiency gains due to telecom­munications networks.
Processing and transporting information has become a key issue for modern economies: the search for new production techniques (incorporation of new processes, technical advances) and prospecting for customers (market research, targeting and knowledge of potential customers, changing needs and design of new products) require the acquisition and processing of a growing volume of information.
A universal telecommunications network is an effective tool for collecting information since it con­nects all the economic players together. Modernization of the network, current advances in switching (electronic exchanges, intelligent networks, digitization, etc) facilitate the search for the right informa­tion (development of the directory function, selecting sources, etc) and to a large extent reduce transaction costs. In this way, telecommunications networks contribute to fluidity of markets and quality of competi­tion.
In the same way as the education system or the public transport infrastructure, telecommunications are an important growth factor for the developed economies. This links back to the endogenous growth models which, to overcome the inadequacies of traditional methods, take into consideration production factors that are public assets available for the whole economy: quality of the nation's education, quality of road transport systems, etc.
From an empirical standpoint, the difficulty lies in separating econometrically the two causalities: the sensitivity of telecommunications to economic conditions and the economic growth caused by telecom­munications networks. On the one hand, the whole economy consumes telecommunications; activity in this sector adjusts to economic conditions: this explains the estimate of great elasticity in GDP into econometric work like the demand equation set out in the first part. On the other hand, in the context of an endogenous growth model, telecommunications become a factor in the productivity of the rest of the economy; investing in a telecommunications network helps to accelerate growth: the direction of cau­sality is reversed.
This double causality link is sometimes overlooked. For example, the paper by Dholakia et al (see []) uses American data to attempt to measure the impact of investment in telecommunications infrastructure and in other public assets such as education and communications infrastructure (roads, bridges, etc) on the economic development of each of the 50 American states. Econometric relations for 1990 show a clear statistical link between the level of development of the American states and their respective expenditure on telecommunications infrastructure, on education and roads. For telecommunications, the instantaneous effect (development reached in 1990 and expenditure incurred in the same year) is stronger than the impact of education expenditure. However, taking a five year view (level of develop­ment achieved in 1990 and expenditure in 1985), investment in education seems more efficient in terms of economic development. In both cases, the impact of road investment would be less significant. In this study, the authors consider that the correlation shows only the impact of public assets on the economy, while the effect of global demand on these invest­ments is not modelled.
In another study, Cronin et al. (see []) have shown a causality link (in the sense of the Granger and Sims causality statistical tests) of public and private investments in telecommunications on the pro­duc­tivity indicators of the American economy. They estimate that on average, over the period 1975-1991, a quarter of the productivity gains in the United States could be attributed to telecommunica­tions.
To measure the impact of telecommunications on growth in France, it would be necessary to isolate these reciprocal causality links between GDP and telecommunications. The equation proposed in the first part models the demand for telecommunication services; showing an "endogenous growth" effect would involve introducing one (or more) supply equations describing the contribution of the telecom­munications network to the production of goods and services (for example, a production function which, in addition to the traditional production factors, labour and capital, would include spending on telecommunications infrastructure).


3. Telecommunications networks and the long term economic development


Long term forecasts through various scenarios for development of the world economy underline major trends: less labor intensive growth, mobility of capital and jobs, a new apportionment of added value between capital and labour and finally, a growing dematerialization of the economy. Telecommunica­tions play an important role in all these dimensions, to the extent that technical and regulatory changes in the telecommunications sector have a significant impact on the type of growth the developed economies will experience. The opening up of networks should be accompanied by strict regulation to help countries meet the social challenges posed by certain aspects of current economic development.


3.1. Long term scenarios: the world in 2010


Economic forecasters offer a wide range of long term scenarios for 2010-2015. However, they share more or less the same view of the trends which will model the future of the world economy. Similarly, their scenarios, to a certain extent, all boil down to either free growth, in which the tensions will quickly become unsupportable, or retrenchment, relative stagnation and a return to some sort of economic planning and social control.
The Dutch Central Planning Bureau (see []) identifies four scenarios: global change, characterized by the dissemination of the North American model, with its strengths and weaknesses; European renais­sance, based on a harmonious accord between markets and regulation in Europe; global crisis, a simple extension of current tensions; and balanced growth, characterized by a new world economic order.
Futuribles has presented (see []) eight scenarios for 2010; some extend the current situation and lead either to a social explosion or to a France retreating into its shell; other voluntarist scenarios are charac­terized either by a more or less successful Keynesian reflation or by the development of a new social contract. All these scenarios are in a situation of high unemployment (the long term unem­ployment rate is above 10%) and a structural imbalance between the number of active employed and the number of unemployed and those receiving benefits (sundry benefits, pensioners, etc).
France's economic information and forecasting bureau BIPE describes three scenarios for the year 2015 (see []): a "World" scenario, characterized by the opening up of markets between the economi­cally developed countries, strong but cyclical growth (of the order of 3% a year) significant gains in productiv­ity, high unemployment and growth in social diversity with the creation of an underclass that will need to be controlled; a "Europe" scenario characterized by the polarization of the world economy into three blocks (America, Asia and Europe), the construction of the European Union around the franco-german axis, competition regulated at European level, moderate but relatively unimpeded growth and a gradual reduction in unemployment; finally, a "France" scenario, characterized by a decline in the French econ­omy, increasing protectionism jeopardising Europe as we know it, a low level of competition, a return to government patronage of French industry, moderate unemployment and relatively low economic growth (less than 2% a year).
Leaving aside undoubtedly major differences, these long term forecasts share the same analysis and put up two opposing lines of development, openness or withdrawal, neither being really satisfactory.
Openness is characterized by globalization of the economy, increased trade between developed coun­tries, an extended liberalism severely cutting back the role of the State in the economy, high growth but very unfairly divided between countries and between sectors of the population, a high rate of unemploy­ment and a return to social diversity with the mass of have nots (the unemployed, and those in insecure employment, etc) and a minority deriving its income from the ownership of capital (high real interest rates) or from specific capabilities (see Robert Reich []).
Conversely, decline at European or national level is characterized by fragmentation of the world econ­omy, return to central planning, huge social transfers, low but stable growth, lower unemployment and greater social uniformity. To some extent the unsupportable dynamism of openness is opposed to the return to the regulation that France has known in the past; this is typical of a crisis situation: neither continuation of recent trends nor a return to the past can help to define a really acceptable future.

3.2. Telecommunications and the trends of modern economies


The long term scenarios previously mentioned are based on analysis of current trends; telecommuni­ca­tions play a central role in explaining and, to an extent, influencing these changes which are all the more or less direct consequences of the progress achieved in the processing and transfer of informa­tion. The "information economy" makes it necessary to redefine the function of labour, short of allowing a level of unemployment that cannot be supported in social and economic terms.
To give a succinct overview of the role of telecommunications, four current trends will be discussed in turn: the change in the nature of growth, the mobility of capital and employment, reapportionment of added value between capital and labour and finally dematerialization of the economy. This choice certainly does not cover all the issues, but it can be seen that all the long term growth scenarios give them a major role. There is also general agreement on the reality of these changes, even if the short term forecasts and recommendations are different.
The fact that the economic growth is less labor intensive is perhaps the aspect of current develop­ment most discussed and most worrying. Growth of 1% in GDP in France represented a growth in the number of jobs of 0.3% between 1973 and 1988; today this figure is not quite 0.1%. A similar trend can be observed in Germany or the United States. The cause of such a difference between growth in production and growth of employment can be sought in two directions: firstly, the development of innovations which affect the production processes more than growth in final demand; secondly, productivity gains in the service sector. In both cases, telecommunications are part of the explanation for these changes.
Process innovations are regarded as determining factors in explaining the low growth in employment (see []); socio-organizational innovation replacing long hierarchies with flexible structures has been made possible by the growth in data processing and communication. The development of computers in the 1970s and 80s brought about only limited productivity gains (although significant in some areas, for example the banking system), because the organization of data processing was automated but not changed: computer systems, designed around mainframe computers were bound up with the centralized organization of businesses. The productivity gains of "information technology" forecast at the end of the 1970s (see []), are only today being felt with the installation of working organizations based on networked microcomputers (see []). Current and future developments (for example ATM) and the reduction in data communication costs are obviously a key factor in this area.
The economic shift towards the service sector has long delayed the reduction of jobs because of low labour productivity gains in this sector (between 1980 and 1985, annual labour productivity gains were only 1% for the service sector compared with 3.2% for manufacturing). Today, growth in the service sector is accompanied by productivity gains achieved due to the automation of information process­ing; in addition, there is a trend towards increased emphasis on services in the manufacturing sector (increased share of maintenance on direct labour; growing share of investment in intangible assets such as R&D and training, growing share of engineering, design, advertising and marketing expendi­ture in production costs). Since information processing (searching, classification, sorting and retrieval of relevant informa­tion) permits large economies of scale, the development of telecommunications networks offers a long term contribution to increased productivity gains in the service sector; in some cases, it can already be more effective for a French researcher to consult a North American database than a server in France.
The globalization of the economy and the opening up of borders through free trade agreements make for significant capital mobility and make migration of labour unnecessary. For industry, outsourcing of production was slowed down by the cost of transporting raw materials or the finished product; with in­formation, these costs are now very low; they will soon be negligible. This has led to a restructuring of the labour market: a doorstep market for services to individuals and a global market for workers in the quaternary sector (information services) and for information creators (see []).
Even if it is true that this last category of employee is relatively favoured (in Reich's view this is the upcoming class), a quaternary labour market is still to be organized at world level; thinking back to the difficulty of setting up national labour legislation in the 19th century and the current difficulties of social Europe, only anxiety can surround the task before us. The telecommunication networks that have made it possible to open up this market also offer the means for controlling it; although it is probable that charging systems will, at least for a time, be necessary between countries with widely different social legislation, State control of telecommunication networks would prove as necessary as border post controls when free trade in manufactured products was being set up.
The reapportionment of added value between capital and labour is obvious: the lasting hike in real in­terest rates, which had remained very low, or even negative, during the long post war boom, seemed to bring us back to an archaic social structure, even if North American economists (see [] and []) insist on a social class structure built around the autonomy of labour (information creators as opposed to routine workers). The increasing job insecurity (it is estimated that 80% of jobs currently created in the developed countries are "insecure": see []), which will assuredly increase the fluidity of the labour market, is not mitigated by an insurance system designed to support those who are between jobs and keep them in the working community. It is in this area that universal telecommunications networks have a role to play. Not only the telephone but data networks must be accessible to all because they provide a means of keeping people in the labour market. The social transfers required are the responsibility of the State; they are reflected in cross subsidies between users and between services which make it difficult and inefficient to open up competition in telecommunication networks.
Dematerialization of the economy will be approached from three angles: growing uncertainty of pro­duction, difficulties in pricing of information and dematerialization of the economy.
In the quaternary sector, uncertainty is an order of magnitude greater than in industry; initial fixed costs, for example to produce a film, a video game, a software product, are very high and the prob­ability of success low; true, a film producer must maintain tight management in the same way as an industrial entrepreneur, but above all he must guess what will be successful, since one success will fi­nance a dozen failures. The growth in real interest rates is to some extent a consequence of the more uncertain nature of investments in the production of content (film, software,...). The need to limit these initial sunk costs leads managers to seek productivity gains in content creation: technical progress in data proc­essing and, to a lesser extent, in the addressing and distribution of information, is crucial to the devel­opment of the quaternary sector. We are still a long way from automatic generation of content; however, in Japan, the cartoon industry is an example of how considerable savings can be achieved by successful mechanization.
Information goods do not obey the laws of the market: since the cost of duplication is negligible com­pared with that of production, the seller does not lose the good. To bring information into the market sphere requires copyright laws that are difficult to enforce or access controls which only telecommuni­ca­tion networks can provide reliably and inexpensively. The profitability of the quaternary sector therefore depends, in the final analysis, on the development of intelligent functions in broadband distribution networks. Recent movements, in the United States, in the cable, telecommunications and content production industries show clearly that these industries are being reconstructed around a new synergy: access control and telepayment.
The separation of real flows from financial flows is one aspect of dematerialization of the economy; for example, cross-border financial flows represent, it is estimated, forty times the real commercial flows (see []), which is also an argument against floating exchange rates since these reflect nothing but the players' short term forecast of fluctuations that they have themselves created. This aspect was already underlined in 1987 (see []), even before the October stockmarket crash; at this time, telecommunica­tions networks and automated transaction systems were held responsible for the instability of markets. The idea of taxing speculative financial flows had even been proposed. Here too, telecommunications networks emerge as a state resource for controlling, if not taxing, informa­tion flows.
Dematerialization of the economy also leads to a redefinition of the trade and non-trade spheres; assembly tasks where productivity gains are low are tending to move out of the trade sector (leading for example to the growth in sales of assembly kits), while intermediary services (consultancy, product or service research support, etc) are growing (see []). The cultural solvency of these new markets is not assured; consumers are reluctant to pay for services which they used to provide for themselves free of charge; this has created a need for complex payment methods and sophisticated funds transfer tools. Intelligent networks enable such payment methods to be set up. The first example was the "videotex kiosk" payment system.

3.3. Industrial evolution of the information sector


If, as has just been seen, long term economic trends have a direct effect on the telecommunications sector, it is also true that the industrial evolution of this sector will affect the way economies can respond to the social challenges posed by current developments. The telecommunications sector is, particularly in Europe, the focus of three changes: the change from public utilities to private firms on a competitive market; the development of international agreements between companies leading to new industrial balances; the convergence of the telecommunications and data processing sectors with the content generation sector (software, entertainment,...). How these shifts are politically reflected will be a signifi­cant factor in the way the developed economies grow in the long term.
The change from public utilities to private firms on a competitive market may appear paradoxical at a time when the state-oriented functions of telecommunications networks should be strengthened. It has already been underlined how and why governments should strengthen their control over networks in order to control the difficult transition to a global market economy. It is perhaps not governments, with divergent interests, but a regulator appointed by a free trade treaty, who could provide this market watchdog function during the installation phase. In such a scenario, telecommunications networks would avoid the principle of subsidiarity and would be directly regulated at European level while awaiting a wider commercial treaty. The implementation of such a scenario appears politically unlikely at least in the short term.
The creation of international agreements between telecommunications companies might seem contradic­tory when networks are being deregulated to encourage competition in a field which until re­cently was full of local monopolies. The regulators would however be wrong to oppose agreements and mergings which work both because they produce significant economies of scale and because they reduce uncertainty in a key area of market regulation. In general, it is likely that monopolies (or narrow oligopolies) will be con­sidered as a lesser evil on the world market insofar as no political power is at this level capable of reducing risks and providing the minimum predictability required for long term investment. With this perspective, the opening up of telecommunications networks entails principally the shifting of the level of organization from national monopolies to a world oligopoly. Countries and operators who have already taken this route are therefore at an advantage.
The convergence of the telecommunications sectors with the content producers (data processing, cinematography, video games, etc) has not yet really begun. The information creation industries are developing fast. Vertically integrated, they have their own distribution system; they use archaic methods to protect their rights on information; these methods, such as copyright legislation, are being challenged by the technical advances achieved in information processing. For their part, telecommu­nication com­panies have never been concerned about what their networks convey; today with intelligent functions, addressing, navigation between servers, information processing and access control, networks are becoming essential to the exploitation of information. At the same time, the distinction between point-to-point communications and broadcasting has become blurred: mass broadcasting seeks to reach each person individually and communications between two people will be increasingly media-oriented by dedicated software (filtering, messaging, groupware, etc). Telecom­munication companies can no longer ignore what their networks convey; their profitability depends on it. Relative failure of the french “Plan Câble” and France Telecom's low return on investment from the operation are due to the poor strategy pursued by the content suppliers and the public authorities in this extremely lively field. Network opera­tors have little competence in the area of content creation; if they do not want to be left with the sale of an intermediate product, they must seek alliances to achieve high level integration.
For the developed countries, the establishment of a narrow but regulated oligopoly in the quaternary field of creating, addressing and transporting data is perhaps part of a scenario for a successful transition from an economy based on goods and services to a global economy based on the informa­tion markets. The difficulty of transforming information into merchandise and the instability of the markets thereby created undoubtedly requires strong political will. This is the only way of simultane­ously opening up the networks and imposing regulatory control on information services.

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1The term "Grandes Entreprises Nationales" (Large National Corporations) used in the French national accounting system, consists of 14 public companies (EDF and GDF the Gas and Electricity utilities, Charbonnages de France (French Coal), SNCF (French Rail), RATP (the Paris transport authority), Air France, Air Inter, the Post Office and France Telecom) which are (or were) public monopolies.


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