Ira Magaziner: A Framework for Global Electronic Commerce

Ira Magaziner is senior advisor to the president for policy development, where he chairs a joint National Economic Council/ National Security Council initiative that is working to increase U.S. exports. He recently supervised the administration's development of "The Framework for Global Electronic Commerce," which outlines the U.S. government strategy for promoting global electronic commerce on the Internet. He now co-chairs the task force charged with implementing this strategy worldwide. Editor at Large Blake Harris spoke with Magaziner about his role as "point man" of the digital commercial revolution.

by / September 30, 1997 0
GT: "The Framework for Global Electronic Commerce" report surprised many people. One former critic of yours called it the clearest statement of global Internet freedom to date from any government source. Can you summarize what led you to conclude that the Internet should remain "a market-driven arena, not one that operates as a regulated industry?"


Magaziner: In general, markets are the most efficient allocators of capital, I think. It is only when markets can't function well, or there are market imperfections, that I think you need government to play a role in economic development. In the case of the Internet, or intranets in general, you have as close to an optimum market as I think we have seen. Consumers have almost infinite choices of venders and sellers to choose from. There is a very intensive and widespread competition, which will take place globally in most areas. So it lends itself to market-based solutions. And some of the reasons why we have traditionally regulated telecommunications or broadcast no longer exist with the Internet. In broadcast you had limited bandwidth, so you had to allocate that bandwidth. Therefore, we were essentially setting up an oligopoly, and so it was natural to regulate it.

With the Internet you have almost unlimited bandwidth. With telecommunications, there were natural monopolies set up because the infrastructure investment necessary, relative to the size of companies, was so great that they became natural monopolies. Again, that's not true of the Internet. You have significant size companies in telecommunications, computers, consumer electronics, software, publishing, broadcasting and so on all competing with each other globally. So it is a very significant competitive arena. Therefore, the reasons why you regulated telecommunications and broadcasting in the past don't hold for the Internet. For all those reasons, we think it is an environment which should function as a market-based environment.

One other aspect of this is that the technology and the market are moving very rapidly. Nobody really knows for sure where things are headed. On the other hand, government, by its nature, moves somewhat slowly and is somewhat inflexible when it does move. That may not be appropriate for the pace of the Internet and for the changeability of the Internet.

GT: As technologies converge -- telephone, broadcast, Internet, etc. -- the distinction between different sectors that were regulated and controlled in the past starts to blur. Questions arise: What is telephone? What is broadcast media? "The Framework for Global Electronic Commerce" report seems to signal a very different way of thinking about what the government's role should be in all these different sectors. Is there a fundamental shift here?

Magaziner: Well, I think there is the beginning of a fundamental shift. My personal opinion is that this shift ought to take place progressively over the next couple of years. I think that as convergence takes place, in telephony, broadcast and the Internet -- which it will -- I think that what we want to see is that they all become market-based industries rather than regulated industries. That is a fairly significant change from the past. But for the reasons I've mentioned -- the infinite bandwidth, the competitive nature of the market, the number of companies competing and so on -- I think it is appropriate that they all become market-based.

The difficulty we will have is in how you get from here to there, how you deregulate and make telecommunications and broadcasting market-based along with the Internet. There are a lot of complexities to that and there will be a lot of bumps in the road, I think, over the next couple of years in how you make that transition. You just can't decree it and say tomorrow it starts this way. That would be unfair to a lot of the companies. It would be unfair to a lot of the people who have relied on subsidies traditionally.

So we need to work that transition over the next couple of years. But in my view, that is definitely where we should be headed, and we need to get there very soon because the convergence is occurring relatively quickly.

Government, by its nature, moves somewhat slowly and is somewhat inflexible when it does move. That may not be appropriate for the pace of the Internet and for the changeability of the Internet.


GT: The international nature of the Internet raises issues of jurisdiction and may even change how we think of sovereignty, particularly when you are talking about electronic commerce. It is probably easiest to see here. The reality is that a small business connects to the Internet, has a Web page and an e-mail address, and is, in effect, operating in 150 countries. The subtext of the report seemed to embrace a very realistic attempt to come to terms with this new reality. It seemed to take a practical approach to the Internet rather than seeking to embrace any theoretical or political doctrine.

Magaziner: That is what we hoped. It is a pragmatic approach. Electronic commerce is the first marketplace that is being born globally. Therefore, the traditional model -- where industries grow up within nations in different sets of rules, then nations negotiate their different sets of rules and the whole process takes decades -- is not appropriate for electronic commerce. We need to establish a global framework from the very beginning so there can be a seamless global marketplace. That is why our report places great emphasis on achieving a set of international agreements in a relatively short time frame so that we can have a unified approach to electronic commerce. We feel if we do that, it will benefit all the nations' peoples and that electronic commerce can really be an engine of growth for all our countries for the next quarter century. So there is a lot of incentive, we think, for all countries to participate in creating this agreement. And, as often as not, what we are calling for is an agreement among nations not to act, because that helps to set a predictable environment for industry to know that they are not going to be over taxed or over regulated or whatever.

But in certain cases, governments do need to act and make agreements. On the not-acting front, what we are looking for, for example, is for governments to agree that there will be no new discriminatory taxation on the Internet -- no bit taxes, no Internet access taxes, no telephony taxes. We are looking for them to agree that it will be a tariff-free zone with no custom duties on digital products and services. On the front of what governments need to positively agree on, this includes things like a Uniform Commercial Code so that a digital signature can mean the same thing in 150 countries instead of 150 different things; or some agreements on protection of intellectual property, since a lot of it will be sold on the Internet as intellectual property. So we have laid out a series of areas where we want to pursue negotiations globally, somewhere business is in the lead and somewhere government needs to take the lead -- for example, on taxation. And the president has designated certain cabinet secretaries to be responsible for different pieces of the negotiation; and he has established a White House coordinating group, which I'll be involved with. He has identified six issues he would like to have resolved in the next 12 months and then he would like to have the whole framework -- all the issues resolved -- by January 1, 2000, so we can move into the next millennium with this framework in place.

GT: So the next task becomes selling this as a basis of a global approach.

Magaziner: Yes, and actually negotiating the agreements. There will be a series of agreements. So the next task is actually implementing this. The president released our strategy in the afternoon of July 1 at the White House; and by the night of July 1, I was on a plane headed to nine countries to meet with and begin discussions with government and business leaders from these countries, along with a team from the Commerce Department, U.S. Trade representatives, FCC and so on.

GT: In comments you have made previously, you seemed to be indicating a new role for government. You talked about citizens bringing their concerns to the government, and then the government taking these concerns to industry or business to address rather than attempting to solve problems with legislation. In other words, the government operating more as a middleman between citizens and various interests in society.

Magaziner: The context here is that we believe that the digital age is going to be profoundly different than the industrial age in ways that we don't yet understand fully. With the coming of the industrial age from the agrarian age, you had changes in commercial and political philosophy, legal frameworks, economic paradigms. And something similar is happening today. My sense is -- and this is just a personal feeling -- that, philosophically, part of what this will involve is a different role for government.

To be clear, I'm one who believes that government has important roles to play in society. I believe, for example, that the government should guarantee all citizens access to affordable health care, something that a lot of people probably disagree with. But with respect to the digital marketplace -- because I think government legislation and regulation is to slow moving, too inflexible and too centralized to match the digital age -- I think a model of industry self-regulation and of industry codes of conduct and decentralized governance fits better for the Internet age.

On the other hand, the government is a representative of the people in many ways. It is elected. Politicians are more responsive to people sometimes than corporations can be because they are out there, having to talk to people. And often people bring grievances to government as their representatives. So I think an important role that government will have to play in this new age is to bring concerns to industry self-regulatory bodies and say 'we hear that people are very concerned about privacy,' for example. They are worried about what is being done to protect their privacy, therefore we think it would be a wise thing to develop some good codes on privacy that can give people assurances. Otherwise, there will be tremendous pressure on us to legislate.

I think that kind of role will complement the industry self-regulatory role because we will be bringing public reaction. Of course, government won't be the only group doing this. There will be consumer groups and interest groups representing different aspects of the public. But I think it is a role that government could play.

Whenever you go through a major economic transformation -- and you can look at the Industrial Revolution -- there are significant displacements that take place; but there are also significant opportunities.



GT: Have you thought personally how the Internet might change the actual processes of government?

Magaziner: Yes. I think we saw an example of that with our paper in that we broke some new ground by essentially making the creation of our Internet strategy a virtual document which was publicly posted at every stage on the Internet. At first there was a lot of trepidation among people at the White House about doing that. People were nervous and were saying that this way it won't be new news when it comes out and you will get all sorts of attacks prematurely and things of this sort. My view was that if we are talking about a new Internet age, if we are talking about openness in that age, we have to talk about an Internet strategy this way and develop the strategy this way. And actually, it worked out very well. We went through 18 drafts. So it did operate as a virtual document that got constantly amended. Of course, when we put it up on the Net in draft form for comment, a couple of the comments we got were, "The best thing you can do is die," and so forth -- the kind of things you might expect; but the vast majority of the comments we got were extremely constructive and there were a lot of people you just wouldn't reach in the Washington context -- small businesses people, Internet users from around the world who sent in their ideas, some of which were extremely good ideas -- the kind you said, "Gee, we should have thought of that."

We incorporated 50, 60 or 70 of those kind of changes in the redrafting process. So it turned out to be a very good process. And now everything we are doing is being put up that way.

GT: So drafting this report has been a real lesson for all levels of government.

Magaziner: I think so. And also the other thing I think will be useful is that we are setting a limited access Internet which basically will incorporate all people in government working on the implementation of the strategy. We have 18 different agencies plus dozens of our embassies. Instead of having meetings all the time, we are basically going to have a secretariat that communicates by posting things and notifying people. We will still have some meetings, of course, but we are going to try to operate as a virtual body as much as possible.

One other thing that was in the presidential directive, which we attach a great deal of importance to, is that the GSA [General Services Administration] has been charged to put all 4 million items, that the government purchases, to Internet purchasing within 12 months. They have a program now to do that. So we will be moving very heavily in that direction ourselves.

GT: Back again, for a moment, to the changing role of government. Internationally, there is an emerging view that governments, NGOs (nongovernmental organizations) and the business community will have to work together in new kinds of collaboration and that this will be part and parcel of doing business as a government. New roles for NGOs and industry will be required if we are to effectively meet the challenges of such things as international crime cartels and environmental problems. Do you see this as inevitable?

Magaziner: Yes. I see it both as desirable and inevitable. There are certain issues, like intellectual property protection or certainly taxation, where governments still need to play the leading role, although they should do it with private-sector input. But there are other issues -- like the privacy issue, the filtering content issues, questions of Internet governance, domain name allocation and standards setting -- where we believe the private sector should be leading and that organizations that are constituted with private-sector leadership should be in the forefront. Government certainly should be a participant. We are users too. But it should not be government leadership per se. That is part of the new model that we think will govern in the digital age.

GT: One concern that has been brought up in relation to the impact that electronic commerce will have on society is what has been described as the Wal-Mart effect -- the idea that you only need to divert a small percentage of the revenue stream from established small businesses to a new business coming into an area, resulting in the demise of established businesses.

Magaziner: I guess I would phrase it differently. One of the challenges that government does have is that whenever you go through a major economic transformation -- and you can look at the Industrial Revolution -- there are significant displacements that take place; but there are also significant opportunities created. One of the first things I did when I got into this was to read some histories of the Industrial Revolution; and some of the transformations that took place were very brutal there, things like the Highland clearances. Farmers who had farmed land were forced off their farms so sheep could be raised to feed the textile mills. There was tremendous poverty and starvation that resulted, and also, some of the early factories operated in ways that were exploitive of child labor and so on. One of the things I hope we will learn from that, and that we will do better this time, is some of these transformation issues.

I don't anticipate the brutality of the Industrial Revolution will occur in any event, but there can be significant insecurities that have to be planned for and hopefully minimized. For example, one of the things I feel very strongly about, and we are now constituting a study in the government, we are going to try to lead to a major series of efforts to study the economic transformation -- the impact, what it means for jobs created, jobs lost, where the jobs created and lost will be, what kind of growth we can expect, what the effect of overall GNP growth will be, what sectors, and so on.

I anticipate what will happen is that there will be a significant number of new jobs created and a significant number of new jobs lost. The jobs created will, by and large, be a much higher wage rate and much higher productivity jobs. So they will offer the opportunity for standard of living increases. While I don't have hard data for this, my instinct tells me that overall, the number of jobs created will be greater than the jobs lost. The key to making the transformation work is to have good education, training and retraining policies and a well-functioning labor market in terms of peoples' ability to find new jobs and get information about new jobs.

So if you ask me my biggest concern related to this new age, it is will we have, in the United States, sufficient resources devoted effectively to education and training to allow the transformation to take place in ways that will be healthy for all our citizens, rather than just the few entrepreneurs at the top. But to come back to your original question, will there be some jobs lost? Absolutely. But will there be jobs created? Absolutely, and those jobs will be potentially very high-paying, very high-productivity jobs.

GT: Another concern that is sometimes raised about leaving or putting market forces in the driver's seat of Internet innovation and leadership is what some people describe as the "loss of public space," something that is perhaps more a European concept than one found here.

Magaziner: I guess I don't think that has to be inevitable. First of all, if you look in terms of a purely democratic sense, as somebody who has participated in local political campaigns, the most public spaces at local levels and in local towns is often privately owned spaces -- local diners, local beauty parlors, other places where people gather and talk.

As a local political candidate, you want to go to those places and pass out your leaflets. So there is no inconsistency that they are privately owned spaces that are yet public gathering places. ... I certainly am not saying, and we as an administration are not saying, there is no public role vis-
Blake Harris Editor