For use of information media - Not an official record

Geneva, Switzerland, 20 November 2001

Current economic pessimism notwithstanding, the Internet and information technology will continue to power world growth, says the E-commerce and Development Report 2001(1), released today by the United Nations Conference on Trade and Development (UNCTAD).

The Report, which reviews trends and discusses the impact of e-commerce on the global economy and such economic sectors as tourism and finance, also warns of the negative consequences should developing countries fall further technologically behind the industrialized world. It considers legal and regulatory issues arising from the advent of the electronic age and is intended largely as a guide for developing countries in putting the digital revolution to work for them.

The "new economic paradigm", according to which new information and communication technologies (ICT) would deliver ever-higher rates of inflation-free growth, seemed to be "among the first victims of the dotcom crash", the Report says. But even after the crash, e-commerce has continued to grow. And so while the Nasdaq crash and the collapse of many Internet start-ups have exposed some myths about the "new economy", they are not relevant as far as the long-term effect of ICT on the economy is concerned.

Economic impact of e-commerce

While e-commerce clearly has a positive impact on the business sector, doubts have been raised about its impact on macroeconomic growth, and productivity growth in particular. In previous technological revolutions, productivity gains have in the long run helped to improve living standards - one of the main goals of development.

The US, which leads the world in IT and e-commerce, has had an impressive economic performance, particularly in terms of productivity growth, since 1995. According to the Report, much of the acceleration in productivity growth "is structural and attributable to changes induced by ICT and the Internet, through improvements in all aspects of corporate organization, production, finance, marketing and logistics".

"ICT will continue to support rapid productivity growth", UNCTAD predicts, citing several reasons: the cost of computing power is expected to keep falling steeply for several years; most enterprises are still learning how to reorganize themselves in order to benefit fully from the Internet; and "even if productivity growth does not maintain its recent phenomenal pace in the United States, the rest of the world has a lot of catching up to do in the application of ICT to business".

But there will be no productivity growth for many developing countries if they fail to catch up technologically with the industrialized world, as the Report shows. To assess the broader economic impact of e-commerce and the ramifications of developing countries´ catching up or not, UNCTAD has conducted a quantitative analysis based on two scenarios: one in which developing countries fall behind technologically, and one in which they catch up with developed countries. The analysis is centred on cost savings and assumes that e-commerce can reduce costs of services, particularly in retail and wholesale trade, transport, and financial and business services. Cost savings in services are simulated through a productivity growth scenario, which allows for the analysis of such macroeconomic variables as GDP, welfare, wages and terms of trade. The analysis is a unique application of a computable general equilibrium (CGE) model to e-commerce at the global level.

As discussed in the Report, under the first scenario developed countries would have welfare gains of $117 billion, while the developing world (excluding Asia) would lose welfare of $726 million. The Asian region, on the other hand, would gain $802 million, largely attributable to the transport services sector. Besides welfare and GDP losses, developing countries would also experience a reduction in wages and deteriorating terms of trade. E-commerce could therefore end up actually widening, and not narrowing, the gap between developed and developing countries.

A look at the list of the fallen and the survivors of the dotcom crisis shows that the value of ICT for development lies not so much in the share of the global economy that this sector may come to represent (undoubtedly a sizeable one), but in the changes that ICT will introduce in the functioning of enterprises across the economies that assimilate them.

Under the second scenario, however, if developing countries were to catch up with developed countries in productivity, they would increase output, wages and welfare. A 1% productivity growth in the services sector in Asia, for example, would result in welfare gains of $12 billion, GDP growth of 0.4%, a wage increase of 0.4% and a 2-to-3% growth in services exports (see tables 1 and 2).. By reducing costs, increasing efficiency, reducing time and distances, e-commerce could thus become an important tool for development.

Disputes in cyberspace

"If the Internet is only a ´space´ - cyberspace - it is a space without borders in which private international law has no meaning, since the rules of private international law are made in order to deal with different legal systems and borders", the Report says. Among the thorny issues raised by the advent of the Internet and e-commerce: Which law applies to the e-transaction? Which authority has jurisdiction over the dispute? Which forum is competent to hear the dispute? Is the decision enforceable?

Privacy and consumer protection are also problematic, given the lack of international agreements and of transborder or dispute settlement mechanisms designed specifically for electronic transactions.

This creates confusion in such diverse areas as taxation and customs duties, the legal status of e-signatures and the distinction between products and services. Who should be taxed, where, and on what basis? E-commerce currently operates in a tax- and duty-free environment, in an unclear legal and regulatory framework - a situation calling for urgent intergovernmental cooperation to clarify the situation.

Income taxation largely depends on whether a business has "permanent establishment" (PE) in a country or not. OECD countries have agreed that a website by itself cannot constitute PE, while a web server can, if it is owned by a business that carries on business through the server. However, "proposals by OECD countries have given scant consideration to developing countries´ concerns in the field of e-commerce taxation", according to the Report, which also notes the "major differences" between EU and US approaches to international taxation rules on e-commerce. As to consumption taxes, such as VAT or sales tax, there is a growing tendency to apply taxation in the place of consumption. This would actually work in favour of developing countries, as most of them rely heavily on such taxes for their government budgets and will be net importers of e-commerce in the medium term.

Although no customs duties are currently imposed on electronic transmissions, this is much discussed at the WTO, with a number of countries advocating a tariff-free environment for e-commerce and others expressing concern about possible revenue losses if products previously subject to customs duties are imported duty-free. Potential fiscal losses on border tariffs and other duties imposed on digital imports could total $8 billion worldwide. While on average this is less than 1% of total government revenue, tariff losses would be much greater in developing countries.

B2B e-markets, e-finance flourishing

Business-to-business (B2B) e-markets, which have already outstripped business-to-consumer (B2C) e-commerce in volume, are expected to play an even more pivotal role in future, becoming the single largest component of B2B by 2004. Online B2B sales in the US are forecast to reach $3 trillion by 2004, of which an estimated $1.5 trillion will be via B2B e-markets. (These estimates would, however, decline in the face of an economic slowdown, the Report notes.) The highest growth in B2B e-markets will likely be in such sectors as computing and electronics, utilities, motor vehicles, petrochemicals and paper, office products and food and agriculture. These markets will also undergo consolidation, the formation of strategic alliances and greater focus on the provision of differentiated and specialized products and services.

Online financial operations - which make it possible to handle huge financial operations and related payments traffic both nationally and cross-border at a fraction of the former costs and time - are also experiencing explosive growth, according to the Report. Current forecasts suggest double-digit growth rates for e-finance over the next few years. The Internet banking segment is slated to expand 25% annually, as compared to 3% for the overall banking industry. In developed countries, half of all banking and 80% of all brokerage activities are expected to go online. For emerging economies, the figures range from 30% for e-banking to 40% for e-brokerage.

But financial service providers, especially from developing and transition economies, will have to address the high initial costs and technological complexity of establishing online payments before they can hope for "e-finance preparedness", warns the UNCTAD e-commerce report. The technology still cannot cope with the needs of high-value and micro-payments in B2B and B2C alike. Online payments and e-financing technologies are at an early stage of standardization, with the industry still choosing between competing models and solutions. Promises of "Net-only" banking and payment solutions becoming a "killer application" are proving highly exaggerated, but banks and other traditional financial services providers are under pressure to adopt aggressive Internet strategies and rapidly increase their online services. The Report looks at possible solutions that could extend to other e-commerce sectors as well.

Murky measurement

No economic sector has been subject to more far-fetched growth forecasts or sweeping statements about a bright future than e-commerce. Venture capitalists, financial analysts and the public in general have blindly used these inflated numbers to take decisions on investments in start-up companies and the stock market - often with disastrous results.

E-commerce data are largely provided by private sector companies, which regularly publish reports on the latest developments in e-commerce, including short- to medium-term growth estimates. Unfortunately, the numbers differ considerably, depending on which methodologies, definitions and indicators are used. Estimates of global B2B e-commerce last year, for example, range from $200 billion (Morgan Stanley) to $604 billion (Forrester Research). The UNCTAD report reviews this situation and makes suggestions as to what governments can do to enhance the availability of reliable statistical data on e-commerce.

UNCTAD´s E-Commerce and Development Report 2001 will serve as a reference tool for policy makers and practitioners in developing countries and for the ICT Task Force of the United Nations, which has been created under the authority of the Secretary-General to find new, creative and quick-acting means to spread the benefits of the digital revolution and avert the prospect of a divided world between "information rich" and "information poor". The Task Force, whose members represent the public and private sectors, civil society and the scientific community, as well as leaders of the developing and transition economies and of the most technologically advanced, holds its first meeting on 20 November 2001, at UN Headquarters in New York.