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Berlin, 23 october 1997

Services in a Borderless Economy

Address to the 2nd DEBIS (Daimler-Benz Interservices AG) Services Conference "Services for the Working World in the 21st Century", Berlin, Germany 

It is exhilarating to be in this city. Berlin is undergoing a process of historical transformation which is propelling it towards the political and cultural centre of Germany - a united Germany within a united Europe. The skyline is dominated by scaffolding and cranes, physical manifestations of the birth of a new capital and a new century. So this is an exciting place and an exciting time, and I am very grateful for the invitation to join you here.

This transformation of Germany is of course occurring against the backdrop of a much wider transformation in the world economy. Today I want to talk about how this economic transformation is being driven by the increasingly borderless flow of services - and the knowledge, information and ideas embodied in these services. How technology is making this borderless economy possible - even inevitable. And how new international economic institutions, rule-based like the WTO, are becoming central to managing a world where economic systems, cultures and peoples have never been more interconnected and interdependent.

What we are witnessing today is the realization of Marshall McLuhan's prediction in the 1960s that "electronic interdependence would create the world in the image of a global village". Thousands of miles of fibre optic cables now join oceans and continents together, as do the millions of sound waves and electromagnetic signals that crisscross the atmosphere above our planet. Twenty-four hours-a-day this global network carries the world's business contracts, currency transactions, medical information, and educational resources, instantaneously across time zones, borders and cultures.

This interconnected economy is influencing more than productivity growth. It is making knowledge a more important production factor than labour, raw materials, or capital. It is shaping a new and more equitable relationship between the developed and the developing world. And perhaps most dramatically, it is creating the closest thing yet to a single, borderless global economy - an economy which will have profound implications for the way national systems operate in the future.

Already we see the trend towards freer global trade in traditional goods sectors - with almost sixty per cent of world trade scheduled to be tariff free early in the next century. But is in the services sector where the potential for global free trade is by far the greatest. Rapid advances in digital and communications technologies are creating the possibility of borderless electronic trade in key services sectors - erasing many of the limitations of time and space. Just down the road - within a few years - we can see the prospect of telecommunications, even across the Atlantic, becoming almost a free commodity. The cost of computing power has fallen dramatically since 1960, bringing it within the reach of millions of ordinary people. 50 million personal computers were sold in 1995, as compared with 35 million cars. The Internet is the most powerful symbol of these developments: it has been steadily doubling in size every year since it was invented a quarter of a century ago and will clearly become a global market in its own right.

Just as the globalization of trade and investment has changed the way goods and raw materials are produced throughout the world, the advent of a borderless, electronic economy promises to transform the services sector - a sector which now accounts for more than 70 per cent of GDP in many OECD countries and 50 per cent in some developing countries. It was once thought that most services were difficult - or even impossible - to trade because "exporting" required a presence in foreign markets. Now, thanks to the micro-chip and fibre optics, any service which can be digitized and transmitted electronically can be produced and delivered almost anywhere in the world in a matter of seconds.

Let me take a moment to underline four broad characteristics of this emerging borderless services economy:

- the first is its increasing indifference to geography, distance and time. Transaction costs for consumers and businesses will fall rapidly as many steps that intervene between buyer and seller - distribution, sales, retailing - are compressed. Perhaps the most significant result of the development of electronic commerce will be the falling barriers and costs to market entry. Starting a new business will be much easier - allowing a far greater number of suppliers to enter a market. Small and medium-sized enterprises - as well as large multinational corporations - will now be full participants in the global marketplace. Businesses in developing countries can now overcome many of the obstacles of infrastructure, capital, and transportation which limited their economic potential in the past. And in the end, consumers all over the world will benefit from this growing global competition.

- second, services industries - especially financial services, telecommunications and transport - are creating the reality of a global infrastructure for the world economy; an infrastructure which is greatly facilitating the adjustment of old industries and the development of new ones. A good example is the emergence of a truly global financial system - the result of technological advances and market liberalization - which will allow many developing countries to continue their growth trajectory, and to further narrow the gap with the developed world.

- third, and perhaps most important, the global services economy will be a knowledge-based economy  -and its most precious resource will be information and ideas. Unlike the classical factors of production - land, labour and capital - information and knowledge are not bound to any region or country but are almost infinitely mobile and infinitely capable of expansion. This knowledge-driven economy is not replacing other economic activities - factories and farming are not going to disappear, software is not going to substitute for the food we eat or the cars we drive. But technology is changing the way we produce things - sometimes in quite dramatic ways. Take the example of the German automobile industry which has almost completely reinvented itself over the last several years by introducing advanced information technologies, robotics or computer-aided design into the production process - to the point where automobile production often seems closer to a services or "ideas-based" industry than traditional manufacturing.

- these changes lead to a fourth characteristic: the borderless technology's potential to equalize relations between countries and regions, because of its capacity to open the way to free and equal access to information and knowledge for every country, every region in the world. The gap between the richest and the poorest countries is still unacceptably wide, but the economic and technological means to close the gap are already in place - and I believe that many developing countries will be able to leap-frog phases of industrial development which in the North have taken decades to accomplish.

This free market of information and knowledge will have social and political ramifications that go far beyond economics. Doctors are utilizing tele-medicine to administer off-site diagnoses to patients in need. Students across the world are discovering vast stores of information via the World Wide Web.

In the WTO we are also building electronic bridges to a wider world - using the Internet and our new Information Technologies For Development Project to deliver, with the collaboration of the World Bank, technical assistance, trade data, training, and interactive policy support to the least-developed countries which most need to be integrated into the global economy.

These are not predictions for some far-off future - such changes are already underway now, today. Already we are witnessing a significant shift in economic power towards the South - a shift that will have as dramatic an impact on world politics as the collapse of the Berlin Wall. And this shift will be beneficial to developed and developing countries alike. The World Bank projects that developing countries will grow by 5 to 6 per cent a year between now and 2020. This means that the developing countries will almost double their share of world output, from around 16 per cent in 1992, to 30 per cent in 2020. What these numbers demonstrate, among other things, is the accelerating pace of development. The first industrialized country, the U.K., took 58 years to double its per capita living standards; the U.S. took 47 years; Germany, 43 years; and Japan 34 years. But from 1966, Korea took just 11 years; Chile 10 years; and China 9. And these distances continue to shrink. Ten developing countries, accounting for almost a third of the world's population - or over 1.5 billion people - more than doubled their average per capita income levels between 1980 and 1995.

The r´┐Żle of the WTO is essential to the increasingly borderless, interconnected world. What the WTO - like the GATT before it - provides is a force for increased liberalization within a framework of international law, based on consensus, with an enforcement capacity, so that these economic and technological changes can unfold in a balanced, equitable and constructive way. From this perspective, one of most important contributions of the Uruguay Round to the current economic order - and one of the most significant changes to world trade rules since the inception of GATT in 1948 - was to bring services trade liberalization within the multilateral system.

There have been three major negotiations since the end of the Uruguay Round in what we call the infrastructural services - financial services, telecommunications and transport. Let me take a moment to outline the state of play in financial services - the key priority for the WTO in the coming weeks.

The objective of the financial services negotiations is to achieve real improvements in access to markets. Essentially, this means the right for foreign investors to operate on equal competitive terms with national companies in national markets. It also means the removal of unnecessary restrictions on the cross-border supply of financial services - restrictions which will, in any event, become increasingly anomalous in a world of borderless, electronic commerce. And it means protecting equity rights already achieved in these markets.

Negotiations on this subject under the General Agreement on Trade and Services (GATS) have a chequered history. Both in 1993, and at the end of resumed negotiations in the Summer of 1995, the level of commitments negotiated was thought by the United States insufficient to justify opening their own huge market to all WTO Members on an most-favoured-nation basis.

Fortunately, I believe that an agreement is now at hand. Ninety-five countries have already made provisional market access commitments on financial services in the two previous negotiations, and in the negotiations which are due to end on 12 December we shall see improvements or new commitments made by something like 40 countries. The number and the quality of the commitments negotiated are essential for a positive outcome. But it is equally essential that we firmly anchor the financial services sector in general in the multilateral system of rules and procedures. We cannot afford continuing doubt about the commitment of the major powers to multilateralism in this fundamental services sectors.

Many ask about the possible effects of the recent turbulence in financial markets in Asia on the WTO negotiations to liberalize financial services. Partly these reports spring from confusion about the distinction between liberalization of market access - which is our aim - and deregulation - which is not. They are quite different, and the GATS explicitly recognizes not only the right of all governments to regulate financial markets but their absolute freedom to take whatever prudential measures that are necessary to safeguard the integrity of those markets. Macro economic policy and monetary controls are not being negotiated under the umbrella of the WTO. I am greatly encouraged by the insistence of all participants in the negotiations that recent events in the markets have not shaken either their belief in liberalization or the commitment to this negotiation.

I am also greatly encouraged because of the important successes which the WTO has already achieved this year. We have demonstrated that we can negotiate and successfully conclude a path-breaking agreement to free global telecommunications services - a subject which had been thought politically unripe and technically too demanding to be negotiated effectively in the Uruguay Round. On 15 February of this year 69 countries, accounting for over 90 per cent of global telecommunications revenue, committing themselves to competition in markets which had until recently been regarded as natural monopolies - where it made no sense to envisage competition, let alone foreign competition.

In this same year we have also reached an agreement to eliminate tariffs on information technology products. Together with basic telecommunications, this adds up to a volume of trade equivalent to that in agriculture, cars and textiles combined. These agreements symbolize the rapid advance of the information-based economy, which is blurring the distinction between services and manufacturing sectors.

One last word on a final element of the global infrastructure I referred to above - transport services. I mention them as a reason for looking forward, not because these are triumphs to report. Negotiations on maritime transport which ended in the Summer of 1995 were unsuccessful; indeed neither the European Union nor the United States have accepted any market access commitments in this sector. The air transport industry is also something of an exception, because most aviation services were excluded from the coverage of the agreement - which may help to account for the fact that it can cost more to fly from Berlin to Geneva than from Berlin to New York.

No doubt we are living through a deep and rapid transition towards a very different world. No doubt there are serious short-term and structural problems affecting the current world economy: such problems must be dealt with decisively and with a spirit of cooperation by national governments and by international institutions. There are so many signs of uncertainty and apprehension in both advanced and developing countries revolving around unemployment.

However, the world in which we live is not static, but highly dynamic in the extent and pace of change. We are all of us aboard a fast-moving train - yet there is a worrying tendency in many countries to look back nostalgically on the old economy we are leaving behind, with its many problems of adjustment and transition, while ignoring the new economic landscape we are rapidly entering into.

This is a mistake. It is a mistake to ignore that fact that world trade - such a powerful engine of economic growth - is on track to doubling within one decade. That world output and resources are projected to double within twenty years. And that the rate of growth of developing countries will likely be double of that of developed countries well into the next century. Moreover, as these developing countries rise economically, their demand for advanced country products is also rising - a demand which will become more and more a stimulus to growth and job creation in the industrialized world as well.

As a matter of fact, the employment situation is not the same in every advanced country. In the United States, for instance, the advent of new technologies is creating more jobs - and more highly paid jobs - than it is destroying; in other words, behind the downsizing there is an even more powerful process of upsizing taking place.

It is also fascinating to see that the political faultline that ran through two centuries of world politics is suddenly disappearing. Today, the real debate is not between Right and Left politics, but right and wrong policies - a point eloquently made by British Prime Minister Tony Blair when he observed that ours is "a generation that claims education, skills and technology as the instruments of economic prosperity and personal fulfilment, not old battles between state and market".

We cannot underestimate the reality of our interdependence and the inevitability of globalization. Trade will continue to grow as a share of national GDP as our economies become increasingly intertwined - from an average of 7 per cent in 1950, to 22 per cent today, to an estimated 50 per cent by 2020.

There is an artificial, even surreal, quality to the current debate over globalization - a yearning for a past which cannot be recreated and a stubborn refusal to embrace a future which offers so many people so much hope for a better life. The truth is that today - because of the enormous advances of new technologies and trade liberalization - we have the chance of offering to every nation, including least-developed countries, the possibility of equal access to education and information, thus creating the conditions for a society based on equality of opportunity. Never before have we had such opportunities, in a context where the market, in all its different forms, dominates the evolution of the global economy. Never before has a generation had so many economic and technological opportunities to create a better world. If we live up to this challenge we will enjoy a full share of these unprecedented opportunities.

This is why we need to develop a new message of confidence for our publics: a message about the extraordinary opportunities - and not just the risks - which our present age of global transformation offers. Is these any rational alternative to this ongoing process of global change? Should we stop technological progress - somehow halt the development of faster airplanes and computers, or arrest the worldwide spread of televisions, faxes, and cellular telephones? Should we consider closing our borders to exports from developing countries while keeping their borders open for our exports? Should we seek to slow down or even stop the industrialization of billions of people, and at the same time maintain our own growth and security unaltered? Even if we stop their products, can we also stop their migration towards our countries?

The only rational answer is no.

We do not want to conjure up a divided world, which would not be characterized by rules-based international cooperation, but by power-based anarchy. Protectionism would be the result, and we know that protectionism - even if it were possible in our ever-more interconnected world - leads to economic and political nationalism. Instead of inventing the future, where liberalization of services and their progress will have a crucial r´┐Żle, we would risk a return to the past, with its conflicts and its tragedies. What we need is just wisdom and courage.