Wednesday, 5 June 2019

Solving EU’s Amazon Paradox

Here's a question for you. 

I recently attended a seminar about Europe’s digital future where I was asked: “How come we have the Amazon Paradox in Europe?”. To explain, the Amazon Paradox involves the package delivery time between EU member states that is excessively long compared to the US. In short, if I want to send a package from Brussels to say Sofia, it travels for up to 8 days, whereas in case I would send it to the US, it only takes 2 days.

How is this possible? That was the question. To give context, the seminar itself was about Europe 4.0. It discussed the way in which Europe can be made more competitive through the use of new digital technologies. The automatic response to the question was that many European countries still uphold digital trade restrictions. Given that Amazon is an online platform, it must be that digital trade restrictions such as strict intermediate liability regimes or data policies are the culprit. Right?

After all, our own research showed that several restrictions regarding e-commerce platforms are still relatively high for some EU member states. Of the 64 countries analysed worldwide, European countries such as France, Germany and Italy show a level of restrictiveness that is placed above average. So, the problem of delayed package delivery in Europe must surely have something to do with these restrictions.

As a matter of fact, I don’t think so. Yes, Amazon is a digital platform and it may encounter some digital barriers, perhaps even in some digital services such as digital finance, but my assessment is that the bulk of the package delivery problem lies somewhere else, namely in Europe’s network services.

Accessing Amazon’s website and order something does not seem to me any problem. What’s more problematic are all the services that lie behind the internet transaction. The package needs to travel from one destination to another. It is most likely to use postal delivery services or any other transport and storage services. That’s exactly where the bottle neck seems to appear. In many European countries, these network markets are still largely uncompetitive.

A simple snapshot of some OECD numbers is telling. The picture below gives a screenshot of the OECD’s Product Market Database that records the level of non-digital regulatory restrictiveness in network services. The message from these numbers is quite interesting. For instance, although the market for postal service is entirely free for new firms to enter, which gives the impression that competition is optimal, the yellow column indicates that public ownership restrictions are still rampant.

Restrictions on public ownership includes the extent to which State-Owned Enterprises (SOEs) are still present in the postal market, how much governments are generally involved with the operations of the postal incumbent firm, or whether they have a direct control over the postal services company. Restrictions in this field also relate to how these SOEs are governed. For instance, whether the state or provincial governments have special voting rights (e.g. golden shares) in at least one firm.

The scoring of this restrictiveness index ranges between 0-6, with increasing levels indicating higher levels of regulatory barriers. Looking at the yellow column, it becomes clear that many European countries have a level of restrictive regulations in the postal market that stands at 5. True, numbers are from 2013 (latest year available), but nothing suggest that all these countries have quickly reformed their markets over the last couple of years. Similar conclusions are true for rail transport services.

The European Commission is also very aware of the issue. As stated in a recent report that was commissioned by its in-house staff: “One of the core objectives of the EU’s Digital Agenda is to promote cross-border e-commerce…” The report continues: “The Commission identified expensive and unreliable cross-border delivery as one key challenge in the future development of e-commerce”. Auch!

Another report commissioned by the European Commission states the problem in clear numbers. It looked at the price differences between what it would cost to send a package within and across EU members states. And guess what, this differential price in package delivery is equal to a factor of 3.71. This comes down to an average price difference of 471 percent for packages sent to another country in the EU compared to sending domestically. 

In short, these numbers point out that the international postal market delivery services are still largely uncompetitive. I think that this is the main driving force behind Europe’s Amazon Paradox. With price differences so high, it reflects that the market suffers from a lack of competitive forces from which indeed e-commerce companies like Amazon encounter a paradox: although the distance to the US is larger, package delivery is faster. 

Friday, 18 January 2019

Online Platform Restrictions and Small Firm Exports

Stricter rules on online platforms restrain potential trade, especially for smaller businesses. This is because online platforms facilitate export and import by lowering transaction and information costs. Ultimately, restrictions on online platforms limit the capacity of the ICT sector more generally to contribute to the overall economy.

A recent study by McDaniel and Parks (2019) shows that, among those businesses that export, the share of firms using Facebook can be high for some countries. For instance, in Czech Republic, Portugal, Turkey, and South Korea more than 15 percent of businesses that export are also on Facebook. This share is even higher for small and medium sized firms (SMEs). Therefore, it seems that the use of online platforms such as Facebook creates a stronger propensity to export compared to other firms.

Once a firm finds itself on a digital platform such as Facebook, its presence can help to create visibility and to capitalize on the platform’s online network, eventually reducing information and search costs for companies and consumers. According to the study, some developing countries profit the most from being present on Facebook. In Bangladesh and Pakistan, for instance, 20 and 18 percent of businesses that export are also present on this social app.

However, to make use of online platforms is not always an easy task. Certain policies inhibit companies from accessing online platforms, especially foreign ones. These policies often create unnecessary costs for businesses, particularly for smaller firms as they make it difficult to intensify exporting abroad. Moreover, and perhaps even more importantly, the presence of online platforms themselves is not a given in some countries reducing the ability of small firms to promote their businesses online in the first place.

This phenomenon is a problem if we consider an increasingly strict regulatory environment for online platforms. In a recent study by me and my co-author Martina Ferracane, we show that this is actually true for quite a number of countries.

The study maps the regulatory environment for online platforms in terms of trade restrictiveness for 64 countries. More precisely, we measure the online platform trade restrictiveness using the information available in the Digital Trade Estimates database, from which we have already developed the Digital Trade Restrictiveness Index (DTRI). By selecting only those policy measures that affect online platforms and by finetuning the methodology, we have created the Digital Platform Restrictiveness Index (DPRI).

Thursday, 13 December 2018

Productive services with the help of internet technologies.

See here my new piece for the Asian Development Bank Institute's blog: Productive services with the help of internet technologies:

It's about how new digital technologies can "cure" the long-standing concern of services suffering from low productivity growth. That's not longer a necessary development.

Yet, to let new digital technologies do what's best to make services more productive, policies need to be set right. Read the blog for why and how that can be done. 

Monday, 12 November 2018

Global Value Chains and Digital Trade Restrictions Part II

Last month, I wrote about how digital trade restrictiveness of countries is associated with how much countries participate in Global Value Chains (GVCs). This follow-up column explains how digital trade restrictions are also strongly associated with where countries participate in GVCs.

In another blog post, I made clear that the use of ICT in GVCs is unrelated with the complexity of value chains. Instead, ICT-intensity of GVCs relates better with the relative position of industries in value chains. That is, where industries are most active in GVCs. In fact, industries closer to consumers are often industries that are also relatively more ICT-intense. They are placed more downstream. Vice versa, industries that are more upstream often appear less ICT-intense.  

Now, this pattern is also reflected with regards to countries’ digital trade policy framework: countries that are less restricted across the whole range of digital trade policies are more active in supply chains that are closer to the final consumer, i.e. more downstream. On the other hand, countries that are more restricted with digital trade policies are often trading more in upstream value chains, being further away from final consumers.

This can be seen in the figure below. The vertical axis plots a measure of the relative position of countries in their supply chains. Higher values on this indicator means higher GVC “upstreamness” of countries, trading more in GVS that are more upstream. The horizontal axis plots ECIPE’s Digital Trade Restrictiveness Index (DTRI) with higher values reflecting greater digital trade restrictiveness. 

The graph shows that countries such as Indonesia, India, Brazil and Turkey are more restricted regarding digital trade policies whilst also trading more upstream in GVCs. Contrary, countries which are less restricted in digital trade policies are trading more downstream in their supply chains. They are closer to the final destination of the good (or service), i.e. the consumer.


Thursday, 18 October 2018

Global Value Chains and Digital Trade Restrictions Part I

Today, I gave a talk at Bruegel’s Asia Europe Economic Forum (AEEF) on Global Value Chains (GVCs) and restrictions on the use of digital technologies across borders. It was part of a panel session that was dedicated to GVCs and the 4th Industrial Revolution. It was a great opportunity to connect our Digital Trade Restrictiveness Index (DTRI) with that of GVCs.

The underlying question of my presentation was: How much of an important factor are digital trade restrictions for GVCs? As it turns out, a lot!

When talking about the 4th industrial revolution, we often talk about many different concepts such as Artificial Intelligence (AI), Internet of Things (IoT), big data and cloud computing. One commonality these technologies have is the use of data over the internet. The figure below shows which sectors in the economy use a lot of data, and are therefore intense in the use of digital technologies.

Interestingly, besides many services that are data-intense, some advanced GVCs are in fact also very data-intense (something I referred to in February this year in another blog post). Computer electronics, Machinery, Chemicals and Motor vehicles are sectors that thrive on GVC networks and the figure shows that these sectors are also very data-intense by using lot of digital technologies. 

Now, how do digital trade restrictions come into the story? The answer is simple: as these GVC sectors use a lot of digital technologies, digital trade must surely be a factor of importance of how competitive such sectors can be. After all, open markets provide firms with the best available technologies through competitive goods and services, and thus also competitive digital goods and services.

That’s indeed the case. That becomes visible in the following figure. In there, the DTRI is plotted on the horizontal axis, measuring the restrictiveness in digital trade for a host of countries; whilst the vertical axis plots a measure of GVC participation, which is nothing else than an advanced indicator that measures the extent to which countries show more or less trade in GVCS.

As we slide along the horizontal axis from left to right, we see that countries which are more restricted are also showing a lower participation in GVC sectors. Conversely, if we move along the horizontal axis from right to left, we see that countries with lower levels of digital trade restrictions precisely have a higher level of GVC participation. Therefore, digital trade restrictions really seem to matter for participating and being competitive in GVCs. 

There was more in my presentation that warrants another blog post. But one thing I would like to tell is that besides how much a country participates in GVCs, digital trade restrictions also appear to matter a lot for where countries are active in GVCs. So not only do digital trade restrictions matter how much a country capitalizes on GVCs, but also where in the supply chain they are active.

As it turns out, they are precisely active where services come in. But that’s for a second blog post later on. 

Tuesday, 4 September 2018

Inclusive Growth and Policy Reform

Recently, the first joint conference between the IMF, OECD and World Bank was held which discussed topics related to structural reforms.

At this conference, recent research on the linkages between product market regulations and inclusive growth were presented. The conference brought together policymakers and practitioners, international institutions, and leading academics to discuss key policy issues in the area of product market competition and regulation and growth.

One of the research papers was joint work I did with Mariana Iootty (World Bank) and Janez Kren (Leuven University). See below for slides. In there, we analyze how services regulations have had a positive impact on productivity developments in the EU. Interesting fact is that a lot of behind-the-border regulations on how firms operate, as opposed to pure entry barriers, have a particularly strong effect on productivity. 

This is an important finding. Of course, entry barriers still matter for letting services firms enter a closed market so as to bring in more competition resulting in lower prices for those industries that use a lot of services, mainly as inputs. This ultimately translates into greater bang for the buck, which in economic terms is called stronger a productivity level and and eventually growth. 

However, as said, not only entry barriers matter. Once a company has entered the market, it still faces a hurdle of additional regulations which can actually frustrate firms to grow bigger. This growth of firms is an important supplementary force for greater productivity. Markets free from burdensome regulations allow firms to reach greater scale, that in turn forms an extra knock-on effect on productivity.

Many EU countries have over the years come to decrease their entry barriers, but in some cases barriers on the operations (or conduct) of the firm are still there. In other instances countries have in recent years actually increased their regulatory burdens for firms, which precisely are found in these behind-the-border barriers on operations. 

Time to be alert, therefore!

Thursday, 7 June 2018

What Digital Policy Restrictions to Focus on?

Now that the DTRI is out, I have received the same question various times from different policy officers in the field: what digital policy restrictions should we focus on?

The DTRI covers a wide spectrum of policy categories ranging from tariffs in ICT goods to regulations in services and investment to cross-border data flows restrictions. The obvious answer to a trade economist like me would therefore be: well it depends. That’s a cliché, but since economics is about scarcity, decisions need to be made about trade-offs.

Personally, I am more interested in the future of trade, namely (digital) services, data and ideas and other intangibles. I think that’s where world trade is heading to and where new large productivity gains will have to come from. That’s not to disregard trade in ICT goods or e-commerce. Precisely if a choice needs to be made, I would argue for these flows to focus on in future policy negotiations.

Now, to focus which policies then: the OECD recently released an interesting report in which services trade by modes of supply are estimated. 

This is a huge step since before we only had a rough idea whether services trade took place through foreign affiliates after FDI was established (i.e. Mode 3), or through the internet (i.e. cross-border called Mode 1). The figure below shows both items in the form of a ratio: Mode 3 over Mode 1 in two points in time, namely 2000 (white dots) and 2014 (blue bars).

The figure tells me that the higher the blue bar, the more trade through establishments were important in 2010. When the blue bar falls below the white dot, trade over the internet has become more important over the years to 2014 – and vice versa.  

Source: Andrenelli et al. (2018), page 21; Analytical AMNE database Note: Exports of foreign affiliates have been removed from cross-border exports.

When looking at this figure, some extremely interesting conclusions become visible. One, for some services such as Distribution, Publishing activities, Computer and information services, and Financial and Insurance services, and possibly for Professional and Scientific services, this ratio decreased over time. 

This means that the internet as a vehicle for trade in these sectors has become more important. In other words, more trade of these sectors has been traded over the internet rather than through foreign establishments.

Other sectors such as Construction, Postal services, Warehousing and Transport support, Administrative services or even Telecom, trade through a foreign establishment has become more important over time as the blue bar falls above the white dots (though Telecom already had a high internet-trade ratio).

This pattern is very relevant to decide to focus on in terms of policy in services. The services sectors that have seen an increase of internet-based trade are also the ones that Ferracane et al. (2018) have assessed as very data-intensive. These are sectors that use a lot of software and data. These are also the sectors that are mostly affected by data-related policies such as data localization.

That’s visible in the figure below. The sectors which are colored in green are the ones which are most data-intensive; the sectors in red are least data-intensive. If a country has comparative advantage in data-intensive sectors, the policy restrictions covered by Cluster C in the DTRI are most relevant: data localization, data retention, intermediate liability and policies related to content access. 

Source: Author; Note: Data & Software intensities based on US Census data.

Conversely, if your country has comparative advantage in say Postal services, Transport, Health or Construction, then it makes sense for policy makers to focus on policies covered under Cluster B of Establishment restrictions. 

Sure, some trade in these sectors are still traded over the internet, but since complementarities exists between the two Modes of trade, prioritizing establishment restrictions will nonetheless have a knock-on effect on trade in these services over the internet.

Ultimately, therefore, choices on what policy to focus on will have to be based on your country’s comparative advantage: where is your country good at in exporting – and how it is traded.  

Ferracane, M., J. Kren and E. van der Marel (2018) “Do Data Policy Restrictions Impact the Productivity Performance of Firms?”, DTE ECIPE Working Paper Series No. 1, ECIPE, Brussels, forthcoming.