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4 Factors determining real convergence

4.7 The knowledge economy

Information and communication technology (ICT) is at the base of the knowledge economy. This makes it possible to store, process and circulate a growing amount of data rapidly and inexpensively and is an increasingly important source of productivity gains.

The transition towards the information society, however, is not just about technology. The change involved is potentially the most far-reaching since the Industrial Revolution and deeply affects the organisation of both the economy and society. Managing this change is one of the main challenges facing the Union today.

To this end, the European Commission's 'eEurope - An Information Society for all' Initiative, endorsed by the European Council in Lisbon in March 2000, is aimed at increasing the rate of uptake of digital technologies and at ensuring that everyone has the necessary skills to use them.

On average, EU countries spend an estimated 6% of GDP on ICT (see Graph A.23 Value of ICT markets to GDP, in annex). 'Information and communication industries are growing more than 5 percentage points faster than other sectors, in real terms, effectively driving economic growth in the EU.''1 ICT industries accounted for around 4% of employment in the EU in 1997,2 and it is estimated that one in every four new jobs is created in ICT or related sectors.3 If the attention is widened to encompass the so-called 'knowledge-based sectors', these account for around a quarter of employment and for most of the growth in jobs in recent years.4

Liberalisation of the market combined with increasingly rapid technological innovation is favouring competition in telecommunications provision, bringing down costs, and enhancing the choice and quality of services in most parts of the EU. The price of accessing Internet has dropped sharply in the recent past, though high price remains a barrier to more widespread use in some countries.

The potential is enormous.

Electronic commerce (e-commerce) is expanding rapidly, forcing firms to rethink their business processes and creating at the same time new forms of organisation, including new types of market and different kinds of business relationship. Internet-based business to business (B2B) e-commerce, the main component (estimated at 80% of the total now and 90% by 2003) is developing fast and it is estimated that it will increase by over 90% a year over the period 1999-2003. 5

The use of e-commerce technologies in B2B relationships can increase efficiency through reducing and rationalising business processes. The effects are already apparent in product design (shortening the design process and increasing customisation possibilities and the standardisation of parts), and production and logistics (lower inventory costs, faster production, lower supply costs). The spread of B2B relationships in the US is estimated to have the potential for reducing business costs by between 13% and 23%.6 While the e-commerce market is less developed in the EU, a reduction in operating costs averaging 18% and one of 15% in the costs of sales is expected. (See Graph A.24 : Expected costs savings from e-commerce, in annex)

How regions adopt and master ICTs is key to their economic performance

ICT penetration, defined as the value of ICT expenditure7 as a share of GDP, is an important measure of a country's transition towards the Information Society as well as of its innovative capacity and competitiveness. The difference in terms of this measure between cohesion countries and other EU Member States is small and tending to narrow - the highest rate of growth in expenditure over the period 1991 to 1999 occurred in Greece, together with Italy. In absolute terms, however, given their low level of GDP, cohesion countries will have to invest relatively large amounts in ICT in the future in order to catch up.

Though improvements in the standard of information and telecommunication infrastructure is a key determinant of the capacity to participate in the Information Society, other factors play an equally, and increasingly, important role, such as public awareness, the level of educational attainment, the role played by the public sector in promoting the Information Society, and the organisational and investment capacity of firms.

The telecommunications infrastructure gap is closing

Over the past 20 years, differences in access to a fixed-line telephone have narrowed significantly between Member States (see Graph 14 : Total number of lines per 100 inhabitants). In most countries, the proportion of households with a telephone line is around the EU average of 92% but is still as low as 69% in Portugal as against 97% in Sweden.8 While the figure in Finland is only 78 %, this is compensated to a significant extent by the large proportion of households with a mobile telephone and no fixed line phone (18% almost five times the EU average). The same phenomenon is also evident, though to a lesser extent, in Portugal (12%) and Ireland (where only 84 % of households have a fixed line phone), but a fifth of Portuguese households and a tenth of Irish households do not have access to telephone services at home at all as against an EU average of just 4%. Nevertheless, there are marked differences - of over 15 percentage points - in the proportion of households with fixed lines in Germany, France and Italy between regions.

In the candidate countries, the total number of telephone lines per 100 inhabitants is less than half the EU average, though in both Slovenia and, to a lesser extent, Estonia, the number is higher.9

Mobile phones and cable may provide alternative access to Internet …

Though variations exist in the penetration of mobile telephones across the EU, differences do not reflect relative levels of prosperity. All the Nordic countries have a relatively high rate of penetration as does Italy, but in Greece, Spain, and Portugal, the rate is also around the EU average or above. Most countries, however, including the cohesion countries, which have a relatively low ownership of PCs and/or limited Internet access have high levels of telephone use, which opens up the possibility of using mobile phones to access the Internet in the future.

It is evident that the high use of mobile phones in the Nordic countries is partly a consequence of their geographical features and the dispersion of population over large areas. In the southern Member States, by contrast, the rapid growth in use reflects the low quality, or lack, of fixed lines (See Graph A.25 : Growth of mobile phone penetration, in annex)

Perhaps unexpectedly, the use of mobile phones is somewhat lower in rural areas (39% of households) than in urban areas (45%).

The rate of penetration of mobile phones in the candidate countries at the end of the 1990s was only around a quarter of the EU average, though increasing rapidly (at 108% a year between 1996 and 1999).

Technology in this area is developing fast, offering new means of access to the Internet - through third generation mobile services with greater band-width - as well as ISDN, xDSL, cable and digital TV connections. Since in the future, the level of broadband access is likely to become much more important for business and household Internet use, the availability of this will be a key issue.

… but access to the Information Society remains uneven

There are significant differences across the Union in the use of PCs at home and in access to the Internet (see Graph 15 : PC equipment and internet connection). France apart, there seems to be a clear North-South divide in the rate of internet connection. In Greece, Spain, Portugal and Italy as well as Ireland, the rate is half the EU average of 12%, while in the Nordic countries, it is well over 20% (in Sweden, 51%). In Greece, Portugal and Ireland, PC ownership is also low.

In the candidate countries, the number of PCs per 100 people has increased steadily. Three groups of countries can be distinguished: Slovenia, with a rate similar to the EU average; Poland and the Czech Republic among others, with rates similar to the cohesion countries; and Romania and Bulgaria , with rates of between 10% and 25% of the EU average.

In the EU, there is also clear evidence of a social divide, with high income households being six times more likely to be connected to the Internet than low income ones. In addition, a higher proportion of households in urban areas (13-15%) is connected to Internet than in rural areas (8%). These differences, however, seem to arise more from lack of awareness about the possibilities offered by the Internet than from the cost (45% of EU households without access report not being interested and 9% not to know about the Internet at all, as against 11% citing cost as a reason for non-connection).

Business use of the Internet is relatively high in a number of Member States, especially in the Nordic countries, though marked variations remain across the EU. For example, 76% of SMEs in Sweden are connected to the Internet but only 16% in Portugal.10 While SMEs surveyed recently, reported that they were moderately well informed about the potential of the Internet, a third did not to have access. In cohesion countries, the number without access is higher than elsewhere in the EU, which is in line with the Commission analysis that low awareness of the potential benefits and opportunities and a scarcity of ICT skills, along with the often weak content of software at present, are the main barriers to the development of the Information Society.

The focus of structural policy in this area should, therefore, be on strengthening the demand side, and in particular, the capacity of firms, institutions and individuals to use ICT effectively.

  1. "Job opportunities in the Information Society", CEC 1998, p. 4
  2. 'Measuring the ICT Sector', OECD (2000). The ICT sector is defined on the basis of 11 ISIC classes. For manufacturing the products of an ICT industry must 'be intended to fulfil the function of information processing and communication including transmission and display or must use electronic processing to detect, measure and/or record physical phenomena or to control a physical process.' For services the industry 'must be intended to enable the function of information processing and communication by electronic means.'
  3. Information Society industries include content industries (e.g. publishing, audio-visual, advertising) and ICT-related industries (e.g. computer and software, computer related services, telecom equipment and services).
  4. See Employment in Europe, 2000, Chapter 3.
  5. Based on International Data Corporation (IDC) data, Internet Commerce Market Model, 1999.
  6. Goldman Sachs US (1999), "B2B: 2B or not 2B, e-commerce/internet" Goldman Sachs Investment Research.
  7. ICT expenditure includes IT hardware, software and services, telecommunications equipment and telecommunications services, at market value.
  8. Gallup Residential Survey (2000)
  9. European Survey of Information Society (ESIS) in central and eastern European countries, CEC 1999.
  10. The Gallup Survey of Small- and Medium-sized Enterprises (SMEs) (2000)

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