Services In World Economic Growth

1988 Symposium Of The Kiel Institute

Herbert Giersch

• Publisher: Routledge
• Year: 2019
• Print ISBN: 9780367287092
• eBook ISBN: 9781000311273
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

This volwne is the outcome of the 19th Kiel Week Conference held at the Institute of World Economics, 22-24 June 1988. It contains the revised versions of the papers and comments submitted after discussion.

III. Sectoral Analysis

Telecommunications and the Scope of the Market in Services

Gerald R. Faulhaber*

1. Introduction

The promised liberalization within the European Economic Community in 1992 is likely to be the most significant economic event of the coming decade. Should this transformation actually occur, it will at last create a market, the world's largest, appropriate to the economic potential of the region. The free movement of goods, people, and information among 325 million consumers, workers, and stockholders promises to create enormous wealth for Europeans, and enormous opportunities for the rest of us. I would like to focus on the role of telecommunications services in this transformation, which I believe is far more vital than is generally' recognized. Note I use the word "services". Much has been written arid said about the market for telecommunications equipment, including the "threat" of the Japanese and American manufacturers. I am going to ignore completely the trade in telecommunications equipment problem; I view this market as mature, in which transactions are few in number but large in value, very highly politicized, and well-studied by others. What I find of far greater interest is the role of telecommunications services in defining the scope of the market of services, which after all is what 1992 is all about.

2. Market Scope in Services

The free movement of goods, people, services, and information has long been viewed as an important factor in creating wealth within a market. The US, the world's largest market, is also its richest. Workers within the market can seek employment anywhere he or she is in demand; highly specialized firms have a very large pool of consumers from which to draw; firms that depend upon scale economies have a market whose scale matches their needs. And all this without trade barriers, without barriers to the movement of people.

And also with the world's largest, most reliable, and most ubiquitous and diverse telecommunications system. For a manufacturing or agriculture-based economy, the benefits from access to a large market depend upon the ability to move one's product to market quickly, reliably, and cheaply. For a services-based economy, these benefits depend upon the ability to move information to market quickly, reliably, and cheaply.

Traditionally, economists and others have seen trade restrictions against the goods of foreigners as the chauvinistically short-sighted barrier to achieving the efficiencies of large markets. The fact that goods moving from New York to New Jersey pay no duty, and goods moving from Germany to France pay duty, if they are permitted to move at all, is argued to be an important contributor to the relatively greater per capita wealth of the US. Less well-recognized is the growing importance of moving people and information freely from New York to New Jersey. There has been some attention paid within the EEC to the free movement of people within the Community post-1992, so that British accountants can easily do business in France or Italy. However, there has been less attention paid to the problems and prospects of the unrestricted and inexpensive movement of information across borders.

Currently, European telecommunications remains in a traditional public monopoly mode; state-run or state-regulated, focused on its protected monopoly position, unresponsive to market needs. Even British Telecom, usually held up as a model to the rest of Europe, is still a regulated monopolist. How can this fragmented, insular industry hope to cope with the demands that service firms, anxious to expand into new markets, will place upon it for new, expanded service at low cost? Where are the competitors that will offer expanding service firms the diverse array of telecommunications they will need to capture new markets?

I would like to concentrate on two service industries which are apparently becoming more telecommunications-intensive at the same time as their geographic market scope has been increasing: financial services and retail trade. You will not be surprised to hear about the first, although I suspect you will be surprised to hear about the second. In each industry, I make three points: (i) the changing scope of the market; (ii) the importance of telecommunications as an enabling technology for this change; and (iii) the forces that have been or will be brought to bear from within and without the telecommunications industry to meet the needs of these industries.

The point of this exercise is to sketch how the market forces attendant to the liberalization within the EEC in 1992 may play out in the market for telecommunications during a period of long-run disequilibrium, both in the telecommunications market as well as in downstream markets.

3. Telecommunications and the Scope of Financial Services

The fundamental changes taking place in the financial services industry have been well-documented elsewhere. At base, these changes have been about increasing the geographic scope of the market, as well as a merging of markets; in fact, the term "financial service industry" is a very recent one, suggesting that the old industry distinctions of commercial banks, investment banks, insurance and brokerage are irrelevant today.

Prior to 1970, banking was almost exclusively a local industry; the local banker knew his credit risks as well as his deposit base and interactions with other banks and other parts of financial services was minimal. Apart from a few New York banks, so-called "money center" banks, US banking was nearly a cottage industry. This tendency was reinforced by Federal restrictions on interstate banking, rules which protected local banks from competition, but forced them to hold relatively undiversified portfolios of assets.

Today, US banking is at least multistate and more likely global, tightly linked with other financial service firms, and seeking to expand into related product and geographic markets. The scope of the market, therefore, has gone from local to global in under two decades.

What were the causes of this transformation?

• - This transformation could not have happened without fundamental changes in technology; the two key technologies involved are information processing and telecommunications. Money, after all, is an electrical phenomenon.
• - This transformation would not have happened unless profits were to be earned in doing so. In fact, the economic agents primarily responsible for forcing this transformation were not banks, but customers of banks and non-bank institutions.
• - Financial regulations, far from inhibiting these changes were in fact the cause of the changes. During the 1960s, banks' large customers learned to function in overseas capital markets on their own and earn higher returns than they could with their bankers' help. An important necessary condition was the ability to transfer information quickly and cheaply. During the 1970s, US banks learned that, although they were prohibited from investment banking in the US, they were not so constrained in other markets, so that much of their activity moved offshore. Again, an important necessary condition was the ability to maintain management control of global operations quickly and cheaply. Finally, in the 1980s, the London Exchange showed that deregulation and going totally electronic would attract business from around the world. Screen-based trading by brokers around the world 24 hours a day seems to be where this industry wants to go. Again, the information and telecommunications technology is the necessary condition. One might wonder why banks and other financial institutions were so anxious to go global. What was it about foreign markets that made them so attractive? Financial services went offshore principally to avoid home-country regulation; if commercial banks could not engage in investment banking at home, they could (and did) in London. If non financial firms were limited in their access to domestic markets by regulation, they would enter foreign markets to achieve higher returns. It was the new electronic technology which allowed this to happen [cf. Kane, 1981].

On the US domestic front, similar things were happening. States that passed stringent laws regarding consumer credit found that banks established their credit card centers in Delaware and other "safe haven" states with less stringent laws. One of the more striking trends in US banking has been the development of regional banking, the most profitable segment of the industry. Through aggressive acquisition strategies, these banks have brought together the knowledge of local bankers with a large bank's sophisticated products. However, this trend also depends upon the availability of high-speed data links to tie together local banks' processing needs into large computer centers. Nor is this need just for transactions processing; regional banks use this market information, such as customer financial profiles, to develop and market new products through their distribution networks.

The hypothesis, then, is that the scope...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Preface
• I. Services and the Changing Economic Structure
• II. International Aspects
• III. Sectoral Analysis
• IV. Services and International Division of Labour
• List of Contributors