A new form of economic organization - let's call it "the Web Economy" - is transforming the nature of global development. This occurred with telephones and electricity, but this time the transformation is happening with astonishing speed, scope and mobility. Already, under the pressure of competition, the Web Economy is transforming itself at an exponential rate, amounting to over US$ 300 billion in the United States alone.(1)
The Web Economy is based on the use of telecommunications networks, the Internet, and computers for high-speed processing and exchange of information. This system is referred to collectively as Information Technology (IT). Industrialized countries account for only 15% of the world's population, but for 88% of all Internet users, 56% of which are in the United States and Canada.(2) In this take-off phase, it is clear that if a country does not participate in the Web Economy early, it runs the risk of being left behind forever. Non-participation will seriously threaten the fundamentals of any economy, because the inherent mobility of the Web Economy means that economic activities can shift at will to any location.(3)
In the region, Lebanon, Jordan, Tunisia, Morocco, and Israel are in the process of designing and implementing strategies to give their economies a chance to participate in the Web Economy. The West Bank and Gaza (WBG) could have a special advantage in this process, since its human and financial resources are spread all over the world. The Palestinian Web Economy could be the means of pooling these resources to focus them on developing the Palestinian economy, no matter where the resources are located. But, urgent action is required to take advantage of the opportunities for WBG.
There are physical and institutional keys to success. The physical key is a high-quality telecommunications infrastructure capable of moving high volumes of data at fast speed and low cost to provide all customers with the connective links to the global Web Economy. The institutional key is a legal and regulatory framework that encourages and supports entrepreneurs to make long-term investments. New investments will generate new products, services, exports, and thereby, employment. Lack of investment will increase the income and development gaps between those who participate in the Web Economy and those who do not. Sadly, WBG does not yet have these keys. Specific action is required immediately.

Competition in the Web World

High-quality, low-cost telecommunications infrastructure results from the forces of competition, but competition itself brings about many other advantages, not the least of which is innovation - a defining characteristic of the Web Economy. Monopolies bring stagnation, and in the Web Economy, stagnation results, very quickly, in decline and, finally, exclusion.
The Palestine Telecommunications Company (PalTel) has performed well in the construction of a modern, high-performance infrastructure with approximately 250,000 customer connections, shrinking waiting lists, and extending coverage to almost universal access. These achievements are even more impressive given the difficult circumstances in which PalTel has to operate. Private investors have managed this vital expansion and they deserve a fair return on their money.
Though PalTel's tariffs are attractive today in comparison to nearby Arab states (but not in comparison to Israel), they are far from best in class - and they need to be best in class for a global market. This is particularly the case for leased lines (4) - an essential facility for the Internet. The Web Economy demands high-quality, low-cost telecommunications infrastructure. This is found only where the major supplier faces the forces of competition. The same goes for all of the various services that make up the Web Economy.
The leaders of the Web Economy all face competition, and nowhere is it possible to find a single supplier of all services - this is beyond the reach of even Microsoft, AT&T, Nokia, France Telecom, or Bezeq. In Lebanon, three operators (two of them cellular) compete for the market. Jordan plans to issue additional cellular licenses to encourage "broad band" businesses. There is also competition in payphones, paging, and data communications. In Egypt, there is competition in international services, and there may be a third cellular license in the near future. In Israel, Bezeq faces intense competition in international services and will soon have to compete in all of its fixed services. Israeli telecommunications charges are among the most competitive in the world.
In the United Kingdom, more than 600 licensed public telecommunications operators compete for business - something that has helped the United Kingdom maintain its position as a leading global financial services provider. Based on competition, language skills, and the efficiency of the IT sector, Ireland has become a major Web Economy. It is now an exporter of services, whereas once it was better known as an exporter of people. Successes in the Web Economy can be found, among others, in India, Malaysia, and Sri Lanka. Experience everywhere shows that the forces of competition will provide more and better quality telecommunications and IT services, create more jobs, more products, more innovation, more exports, more tax contributions, and will lower costs dramatically. If it admits competition, WBG could be a player or a niche leader in the Web Economy. If it does not, the gates of the Web Economy will not open to it.

The Essential Legal and Regulatory Framework

Opening to the Web Economy and making the transition from monopoly to competition will provide opportunities for additional investments in WBG. There is capital and entrepreneurial ability available, but investors will risk their money only when the "rules of the game" are transparent, certain, and fair. The rules of the Web Economy are established in sector-specific regulations and general competition law. These are the institutional foundations of success. International best practice (5) is to construct a regulatory regime with the following essential elements:
* an independent regulatory authority;
* transparency in making and enforcing rules;
* competitive safeguards put into a competition law;
* objective, non-discriminatory, and transparent allocation of scarce resources (e.g., frequencies, numbers, rights of way);
* public availability of licensing criteria - no secret concessions; and
* an equitable interconnection regime that is fair to all competitors and facilitates market entry.
All of the above are necessary for the development of a vibrant Web Economy and IT sector. None of the above operates in WBG. The Palestinian Authority (PA) has the responsibility of building the economic foundations of a new state. This is the perfect time to participate in the Web Economy. Because there is no certain and transparent legal and regulatory framework in WBG, the development of a dynamic IT sector will be severely handicapped. Unfortunately, investors cannot put their money securely into Palestinian Web businesses. First, there is no certainty as to the scope of the exclusive rights of PalTel. This means that there are limited opportunities for investment. Yet, it is not reasonable to expect or to burden PalTel on its own, to develop the Palestinian Web Economy.
Even where there are opportunities for investors, the legal and regulatory framework is not adequate to ensure fair play. As long as there is no independent, reliable regulator in WBG, there will be a suspicion of favoritism (or worse) among investors. Whatever investment may come is likely to be based on relationships, not competitiveness. This type of investment will not be able to compete outside WBG and so it will not participate in the global Web Economy.

An Agenda for Urgent Action

The World Bank recommends a three-step plan of action to establish a legal regulatory framework that will maximize the potential for the growth of the telecommunications and IT sectors in WBG:
* a clear, pro-competitive policy statement designed to maximize the commercial participation of WBG in the Web Economy;
* the establishment of a National Regulatory Authority (NRA)(6) independent of operators and the Ministry of Post and Telecommunications (on a day-to-day basis) whose function is to implement the sector policy; and
* the enactment of a competition law to give the necessary powers to the NRA.
The first key issue is to define clearly and openly the exact scope and duration of a monopoly over any particular segment of the market. All over the globe, exclusive rights are being terminated. Where they exist, they are usually limited to basic voice services and the network necessary to supply this particular service. All other services and the supply of the relevant networks are then open to competition.
Exclusive rights are also limited in time. Many decision-makers have come to realize that it is impossible for a government to deliver exclusive rights in the medium term in the Web Economy, because technological advances continually provide new methods of getting around monopolies and around any enforcement agency. Once this is accepted, it is preferable to manage the process of liberalization by an appropriate policy rather than allowing activities to develop in a haphazard way.
Much of the uncertainty surrounding investment in the IT and telecommunications sectors results from the controversy about appropriateness and the interpretation of the exclusivity clause in PalTel's license. That license apparently provides for PA regulation of tariffs charged by PalTel (according to a price-cap formula) and is supposed to ensure a fair basis for the interconnection of present and future service providers to PalTel's network. While it is essential to respect in full the rights of PalTel, and to ensure that it receives fair regulatory treatment, it is perfectly possible that PalTel and the PA can reach a mutually satisfactory agreement to define clearly the scope and duration of PalTel's exclusive rights. Such negotiations should be aimed at increasing the possibilities for additional investors to participate in the sector. Once there has been a clear public clarification of the exclusive rights of PalTel, investors and entrepreneurs may be expected to pick up quickly.
A second key shortcoming is the absence of an effective and independent regulator. At a practical level, this is retarding the IT sector in many ways. For example, without a transparent licensing regime, investors are unable to consider entering the market to provide services. Also, if a numbering plan is not developed, investors cannot provide simple but profitable "free phone" or "premium" services. Perhaps, most importantly, the absence of an effective regulator means WBG cannot negotiate effectively with other regulators.
The regulator has the duty to control tariffs in those services where there are exclusive rights. In performing this function, the NRA must establish a tariff regime that provides a reasonable return to PalTel and encourage commercial development of Web Businesses. Otherwise, WBG will not participate in the new form of economic organization. Where PalTel faces effective competition, there is no need for these regulatory controls.
A second regulatory function is the establishment of an equitable, cost-based and non-discriminatory interconnection regime that would encourage investors to use the digital highway of PalTel during any period of monopoly. If the tolls for this highway are set too high in relation to costs, entrepreneurs developing Web-based services will invest elsewhere and Web businesses will not take off. Alternatively, investors will find ways of bypassing the network. In both instances PalTel will lose business. If the charges are set below cost, then inefficient, unsustainable investment will take place.
A third regulatory function is to develop, publish, and implement licensing criteria so that investors can apply for licenses in a transparent manner. The World Bank suggests two broad categories of licenses. The first is a "Class" License, normally for liberalized services like Internet service provision or any value added service. The Class License is issued to all applicants meeting pre-determined, non-restrictive criteria. The second is an "Individual" License granted to major suppliers of fixed or mobile services to the public. The Individual License specifies the obligations and rights of the operator, which must be available to the public, so that the terms of the license can be enforced in a transparent manner. Also, the regulator must provide clear and publicly available selection criteria for the Individual License so that investors can evaluate opportunities.
Finally, there are certain key national resources, such as radio spectrum and numbering plans that must be managed and allocated for the benefit of all. In the special circumstances of WBG, such management requires engagement with outside regulators.
Although the PA (through the Ministry of Post and Telecommunications) has intervened on several occasions to deal with tariff issues, it has not dealt effectively so far with interconnection and licensing issues or the allocation of key national resources. It needs to play a more proactive role in all regulatory matters, in order to find ways to encourage competition and establish a level playing field for all in the market.
The regulatory reforms described above need to be established on a solid legal foundation. This is the third component of the recommended reform agenda. A new telecommunications law would help achieve WBG's goals of having a competitive and information-based economy. The existing law (Law No. 3 of 1996) came into effect on April 23, 1996. This law was then superseded by the issuance of PalTel's License Agreement in November 1996. The new law should establish clear, effective and transparent regulations for the sector and help clarify the terms of PalTel's license, especially with respect to the scope and period of exclusivity.
The process of competition focuses on giving customers what they want, and has two aspects: competition among firms for customers, and cooperation between firms working together with other suppliers in order to compete. However, too little competition in the form of monopoly or too much cooperation, especially in the form of cartels, can severely disadvantage customers and the development of the IT sector. Consequently, legal protection is needed to guard against too much cooperation where there are no clear-cut benefits to customers.
In other instances, the financial might and market position of one firm may enable it to crush a smaller rival by, for example, a deadly price war. In the Web Economy, a big operator may refuse to cooperate, deny access, or impose harsh terms on a smaller competitor for some essential material or facility. Without reasonable access, the small firm will collapse, customer choice will be restricted, and innovation, investment, employment, and exports will all be strangled.
A competition law can provide the safeguards required of an effective regulatory regime to prevent these types of actions and the unconstrained exercise of market power. A competition law, if enforced equitably, is an important essential requirement of any modern economy, because it provides a degree of security against anti-competitive behavior. The absence of such a law in WBG can be a serious obstacle to participation in international transactions and may be a serious obstacle to investment.
Legal and regulatory reform will provide a virtuous circle and will encourage investment in the Web Economy. This will bring new business to PalTel, whose existing network will carry Web traffic. In turn, the Palestinian Web Economy will provide new jobs, more exports, more tax revenues, and the link between Palestinian skills and resources will spread throughout the globe. Equally, this reform agenda will prepare WBG for participation in the international community, because it will implement the principles demanded for membership in international bodies such as the World Trade Organizations, as well as those required of a modern democracy.
An agenda of ad hoc reaction and inaction will leave the Palestinians in the wilderness, outside the Web Economy, watching others pass it by.

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(1) A recent study by the University of Texas estimated that the "Web Economy" generated more than US$300 billion in revenue and created more than 1.2 million jobs in the United States in 1998. The authors of the report stated the findings "seem to exceed all prior estimates" astounding."
(2) In Israel there are approximately 1 million Internet users and well over 200,000 customers.
(3) In Scotland there are 37,000 new jobs in call centers, more than the total employed in the more traditional industries of oil, gas, and fishing. In other cases, the manufacture of hardware components, software, and the provision of IT services form the basis of growth economies, especially in places where physical resources are limited and human resources are of high quality.
(4) For example, the "wholesale price" of major international telecommunications carriers is as low as US$2.50 per year for a transatlantic voice path. The Europeans recently recommended an upper tariff limit of about US$350 per month for a leased 2Mbits line of up to 5 kilometers in length.
(5) These elements are found in the WTO Regulatory Reference Paper, which has been agreed to by more than 70 countries, including 42 developing countries.
(6) The competition law would apply to all sectors of the economy.