[spectre] Fw: UPI Leapfrogging Transition - Technology and Development in Post-Communist Europe

[Zoran Petrovski]

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From: Sam Vaknin, Ph.D. <palma@unet.com.mk>
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Sent: Friday, March 15, 2002 8:19 PM
Subject: UPI Leapfrogging Transition - Technology and Development in
Post-Communist Europe


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>
> Leapfrogging Transition
>
> Technology and Development in Post-Communist Europe
>
> Sam Vaknin
>
> UPI Senior Business Correspondent
>
> Skopje, Macedonia
>
>
> In many countries in transition cellular phones are more ubiquitous than
> the fixed-line kind. Teledensity is vanishingly low throughout swathes
> of Central and Eastern Europe (CEE). Broadband and e-commerce are
> distant rumors (ISDN is available in theory but not so in practice - DSL
> and ADSL are not available at all). Rare phone lines - especially in
> urban centers - are still being multiplexed and shared by 4-8
> subscribers, greatly reducing both quality and usability. Terrestrial
> television competes ferociously with satellite TV, though cable
> penetration is low. Internet access is prohibitively expensive and
> intermittent. Many technologies rely on network effects (i.e., a
> critical mass of users). CEE is far from reaching this elusive point.
>
> When communism imploded in 1989, pundits were quick to spot the silver
> lining. The countries in transition, they said, could now leapfrog whole
> stages of development by adopting novel technologies and through them
> the expensive Western research they embody. The East can learn from the
> West's mistakes and, by avoiding them, achieve a competitive edge.
>
> In his seminal book, "Leapfrogging Development - The Political Economy
> of Telecommunications Restructuring", J.P. Singh, examined the
> acceleration of development through the adoption of ready-made, off the
> shelf, technologies. His melancholy conclusion was that development
> preferences are the outcomes of an intricate inter-play between sectoral
> pressure groups and coalitions of interest groups - and not the result
> of progress ex machina. He distinguished three types of states -
> catalytic, near-catalytic, and dysfunctional. Though he deals
> exclusively with Asia and Latin America, his typology is applicable to
> post-Communist Europe.
>
> I. An Overview
>
> The Central and East European market will double itself (to $17 billion)
> by 2003, says IDC. Pyramid Research predicts a $60 billion
> communications market by 2005. "Information Society", ICT (Information
> and Communication Technologies), "leapfrogging", and "better online than
> in line" are buzzwords and slogans oft-used throughout the region. A
> horde of NGO's - local and international - collaborate with domestic
> government and local authorities, with foreign governments,
> multinationals, and international organizations to make the dream of a
> digital Europe come true.
>
> Russia pledged to attract $33 billion in investments in its
> telecommunications infrastructure and services by the year 2010 (the
> "Electronic Russia" initiative). The US Commercial Service, in the
> American Embassy in Moscow, predicts an annual growth rate of the
> Russian ICT sector of 15-20 percent through 2003. Conferences abound (an
> important one regarding municipal collaboration in constructing an
> information highway is to be held in the Czech Republic on March 26-27).
>
> Even devastated Armenia succeeded to export $20 million worth of IT
> goods in 2001 (its IT sector has grown by 30% last year). It hosts
> branches of Silicon
> Valley household names such as Credence, HPL, and Virage Logic. More
> than 4000 professionals are employed in 200 companies. Of 60 software
> development outfits - 26 were founded with American capital. LEDA, a
> prominent local IT firm, finances IT programs at the Armenian State
> Engineering University.
>
> All EU candidates strive to get incorporated in existing European
> networks (such as ELANET, Telecities, IDA, and ERISA) and new,
> candidate-only, initiatives (such as eEurope+). The EU has applied its
> "universal (i.e., also affordable) service" rule to Internet access. EU
> members adopted a variety of measures to increase Internet awareness and
> usage. Portugal, for instance, granted individuals with tax incentives
> coupled with free e-mail accounts and Web hosting services to encourage
> them to purchase PC's. The Dutch established public computer literacy
> centers for the disenfranchised (e.g., the unemployed) and provided them
> with discounted and subsidized hardware and connection time.
>
> In one of its more grandiose moments, the heads of governments of the EU
> countries have decided in Lisbon (2000) that "each citizen should have
> access to the Internet and the whole European Union should become
> computer-literate", in the words of the Czech conference organizers.
>
> This is an ambitious undertaking not only because Europe in general is
> behind the USA where Internet matters (with the exception of wireless
> Internet) are concerned - but because the countries which used to be
> behind the Iron Curtain, now lurch in the Digital Divide.
>
> According to Vasile Baltac from the Information Technology and
> Communications Association of Romania ("The Balkan and Eastern Europe -
> Digital Divide or Digital Opportunity"), Romania has invested $25 per
> capita in ICT in 1999 (compared to Greece's $567 and the EU's average of
> $1215). There were only 2.5 Internet users per 1000 inhabitants in
> Romania and Bulgaria - compared to 56.4 in Westward-looking Slovenia.
>
> New technologies are used mostly by the elites in CEE (as pointed out by
> Zassourski and Vartanova in "Transformation in the Context of
> Transition") - and perhaps advertently so. Still, Baltac fingers the
> managerial class as the main obstacle to leapfrogging (i.e., the rapid
> dissemination and assimilation of advanced technologies). They pay lip
> service to modernization but feel threatened and repelled by it. On the
> positive side, Baltac notes the annual yield of qualified professionals
> (who mostly find work in the West) and the emergence of telework and
> e-commerce. The technological vacuum makes the CEE countries receptive
> to state of the art technologies. GSM penetration in Romania surpassed
> the level of fixed line coverage in 1989. The number of cable TV
> subscribers in the region is projected to double (to 20 million) by
> 2005.
>
> But the true picture is often obscured by anecdotal evidence, wishful
> thinking, phobias (e.g., the West European fear of mass migration from
> East Europe), lack of reliable statistics, and absence of qualified
> analysts and investment bankers. Factors like hostile terrain and
> climate, cross-subsidies, lack of real competition, corruption, red
> tape, moribund financial systems, archaic legal ones, dearth of credit
> card holders, urban-rural gaps, and English language illiteracy - rarely
> appear in neat, colorful, presentations.
>
> Pyramid Research is bearish on broadband. "Internet access is and will
> remain for the foreseeable future a predominantly narrowband, dial-up
> affair, even in the most advanced countries (in Central Europe)". This
> despite plans by regional operators to offer DSL, FWA (Fixed Wireless
> Access), cable TV and leased-line broadband access (already offered in
> the Czech Republic by cable networks) and despite a regulatory welcome
> in all three CE candidates (Hungary, Poland, and the Czech Republic).
>
> Luckily, mobile telephony - the other pillar of the leapfrogging
> theory - is getting increasingly concentrated in the hands of fewer
> operators (though at least 3 per every major market). Pyramid projects
> that by 2006, 94 percent of Russia's cellular phone market will be in
> the hands of the five leading providers (compared to 85 percent at the
> end of 2001). Mobile penetration will increase (to c. 10 percent) and
> prepaid customers will account for the vast majority of users.
>
> Revenues from cellular networks exceed revenues from fixed line networks
> in certain markets. SMS is booming. Second and third mobile operator
> licenses are tendered by all cash strapped governments in the region
> (though a Polish attempt to sell an UMTS license ended in a fiasco).
> Poland introduced a wireless local loop service. Macedonia just handed a
> second mobile operator license to the Greek OTE.
>
> "By the end of 2005, the total number of mobile subscribers in CEE will
> exceed 50 million (compared to 30 million by end-2001) and mobile
> Internet accounts will constitute approximately 21 percent of total
> mobile accounts", projects Pyramid. The Czech Republic will have 78
> mobile users per 100 population - and Hungary 66. In a second tier of
> countries - the likes of Bulgaria, Romania, Ukraine, and Russia - a
> mobile phone will remain a luxury and a status symbol.
>
> Hitherto domestic operators - from the Greek OTE to the Russian MTS -
> are becoming regional. Multinationals, such as the British Vodafone and
> the French Orange - have entered the regional fray. Some CEE markets are
> as saturated (and customers as savvy and demanding) as many advanced
> Western European ones.  A host of value added services (VAS) is thrust
> upon the - sometimes reluctant - users, leading naturally to WAP
> (recently introduced throughout much of CEE), 2.5G, and 3G (wi-fi or
> wireless Internet) services.
>
> Moreover, Pyramid sees an intriguing opportunity in VoIP (Voice over IP)
> telephony. It says:
>
> "As the incumbents in the CEE markets continue to dominate long-distance
> circuit-switched telephony, VoIP offers a unique opportunity for new
> operators to gain a foothold in this traditional monopolistic
> stronghold."
>
> Internet Telephony Service Providers (ITSP's) have sprung up all over
> the region (an Israeli firm is now planning to offer VoIP services in
> Macedonia, Kosovo, and Albania). Even incumbents have been offering
> VoIP - as early as 1998 in the Czech Republic. In his keynote address to
> The Economist CEE Telecommunications Conference, in December 2001, Ofer
> Gneezy, President and CEO of iBasis (a global ITSP), cited industry
> analysts projecting VoIP average annual growth rates in CEE of 80
> percent through 2006.
>
> This, coupled with a growing number of Internet users and access
> providers (spurred on by telecoms liberalization and growing incomes),
> may revolutionize the landscape in the next 5-10 years. Pyramid expects
> annual Internet adoption growth rates of 40 percent through 2005 (that's
> 30,000 new users a day!). Internet related revenues will reach $10
> billion by 2005 (five times today's $1.8 billion - but only one seventh
> the Internet market in Western Europe).
> Internet penetration in Central Europe will reach 15 percent in 2005
> (from 4 percent today and 3 percent in Russia) - and 40 percent in
> Western Europe (compared to 18 percent today). Mobile Internet accounts
> will constitute one third of the total in CEE - c. 20 million users.
> Harald Gruber of the European Investment Bank is even more optimistic,
> saying ("Competition and Innovation: The Diffusion of Telecommunications
> in CEE", March 2000): "About 20 percent of the population will adopt
> mobile telecommunications".
>
> II. The Future
>
> Leapfrogging is not a linear function of the ubiquity of hardware and
> software. Though not a homogeneous lot, some lessons common to all
> countries in transition are already evident.
>
> Technology is a social phenomenon with social implications. It fosters
> entrepreneurship and social mobility. By allowing the countries in
> transition to skip massive investments in outdated technologies - the
> cellular phone, the Internet, cable TV, and the satellite came to be
> perceived as shortcuts to prosperity, the generators of the dual ethoses
> of "rags to riches", and "creative destruction" (dizzying, constant, and
> disruptive innovation). They are the future, a youthful promise, and a
> landscape of opportunities.
>
> Software developers in CEE countries tried to establish local versions
> of "Silicon Valley", or the flourishing software industry in India.
> Russian entrepreneurs developed anti virus software, Yugoslavs offered
> web design services, electronic media flourished in the Czech Republic
> and so on. But, as hard reality set in, most of these talents left for
> Western Europe, the USA, Canada, and Australia - where technology firms
> snatched them eagerly. Central and Eastern Europe is a major net
> exporter of engineers, programmers, systems analysts, Web designers, and
> concepts analysts.
>
> Internet penetration in these countries  - even in the most wired - is
> still very low by European standards, let alone American ones. The
> trauma of communism left them with decrepit and rarefied infrastructure,
> a prohibitive, extortionist, and skewed cost structure, computer
> illiteracy, inefficient competition, insufficient investment capital,
> and entrenched luddism (e.g., computer phobia). Foreign operators often
> exacerbate the situation. ArmenTel, the Greek owned monopoly in Armenia,
> keeps Internet access costs prohibitively high, ignoring court actions
> by the government and loud complaints by disgruntled customers.
>
> The Center for Democracy and Technology (in its report "Bridging the
> Digital Divide: Internet Access in Central and Eastern Europe") says
> that, as contrasted with India (or Malaysia), the countries of the CEE
> did not invest in computerizing their schools, public libraries, and
> higher education institutions, or in subsidizing private
> computer-training colleges.
>
> More crucially and less reversibly, decades of central (mis-)planning
> rendered the societies of Central and Eastern Europe inert and
> dependent, apart from their traditional conservatism. Many - especially
> older mid- and high-level managers and engineers - feel threatened by
> technology. Technology makes people redundant.
> To a few open minded (i.e., foreign owned) firms, computer networking
> stands for decentralized channels of distribution and marketing as well
> as potential global penetration. But even there, only a minuscule number
> of businesses took advantage of e-commerce (though the countries of
> Central Europe and the Baltic may be the global pioneers of m-commerce
> due to their wireless networks).
>
> E-commerce is leapfrogging's litmus test because it represents the
> culmination and confluence of hardware, software, and process
> engineering. To have e-commerce, a country needs rich computer
> infrastructure, a functioning telecommunications network, and cheap
> access to the Internet. Its citizens need to be reasonably computer
> literate, possess both a consumerist mentality (e.g., inability to
> postpone gratification), and a modicum of trust between the players in
> the economy - and hold credit cards.
>
> Alas, the countries in transition lack all of the above to varying
> degrees. The Economist Intelligence Unit ranked Russia 42nd (out of 60
> countries) in its year 2000 "e-readiness survey". Other CEE countries
> fared little better.
>
> Penetration and coverage rates (the number of computers and phone lines
> per household), network reliability, and the absolute number of Internet
> users - are all dismally low. Access fees are prohibitively high.
> Budding Internet enterprises in the countries in transition are happy
> exceptions that prove the depressing rule. They usually respond to
> erratic local demand. Few have expanded internationally. Even fewer
> engage in research and development.
>
> Technology was supposed to be the great equalizer (with the rich,
> developed countries). It did not deliver on this promise. Unable to
> catch up with Western affluence and prosperity, the denizens of CEE are
> frustrated. They feel inferior, neglected, looked down upon, dictated
> to, and, in general, put down. New, ever-cheaper, technologies, thought
> the locals, would surely restore the rightful balance between
> impoverished East and filthy rich West. But the Internet - and even
> technologies such as cellular telephony - belong to those who can
> effectively deploy them (i.e., consumers in developed,
> infrastructure-rich, countries).
> The news get worse.
>
> The Internet is gradually permeated by commercial interests and going
> wireless. This convergence of content and business interests - means
> less access to the underprivileged.  The digital divide is growing by
> the day.  New technologies have done little to bridge this gap - on the
> contrary: they enhanced the productivity and economic growth (this is
> known as "The New Economy") of rich countries (mainly the United States)
> and left the have-nots in the dust.
>
> The countries in transition also lack the proper legislative and law
> enforcement infrastructure (backed by the right cultural background).
> Property rights, contracts, intellectual property - are all new, often
> indigestible, concepts, emblems of Western hegemony and monopolistic
> practices. Widespread copyright violation, software piracy, and hacking
> are both status symbols and political declarations of sorts. Admittedly,
> the dissemination of illicit intellectual products may have served to
> level the playing field. But now it is hindering entrepreneurship and
> holding back development.
>
> After Asia, the countries in transition are the second largest centre of
> piracy. Software, films, even books - are copied and distributed quite
> freely and openly. There are street vendors who deal in the counterfeit
> products - but most of it is sold through stores and OEMs. This despite
> massive efforts (e.g., in Russia, Bulgaria, Ukraine, and, lately, in
> Macedonia) by software developers, licensed film libraries, and
> distributors - to fight these phenomena.
>
> Intellectual property may go the way the pharmaceutical industry has.
> Content owners and distributors may team up with sponsors (multilateral
> institutions, private charities and donors). The latter will subsidize
> intellectual property and, thus, make it affordable to the denizens of
> poor countries. This is already happening in scholarly publishing.
>
> This is very promising. But it far from leapfrogging development. In
> hindsight, leapfrogging may have been nothing but another of those
> intellectual fads whose time has gone before it ever came.
>
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