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Creating a Framework for Global Electronic Commerce

by Ira C. Magaziner

Future Insight
Release 6.1 n July 1999

In 1995, President Clinton asked me to take the lead in developing a strategy for continuing the high growth economy into the next century. As I began working on the project, it became more and more apparent that the centerpiece of such a strategy needed to be a framework for global electronic commerce. Accordingly, our work evolved into an effort to develop such a framework, which we ultimately released in 1997. Now, nearly two years later, it makes sense to take stock and see how we are dong in implementing that plan.

Let me begin by suggesting that humility is an important quality for anyone working to develop policies for the Internet and electronic commerce, because no one really understands where we are headed. We are sailing at high speed into uncharted waters.

Certainly, we in the Administration do not know exactly what forms electronic commerce will take in the decades to come, and I would view with great suspicion anyone who claims such knowledge. There is nothing in human experience to fully prepare us for the Digital Age. Even in the absence of perfect information, though, we have a responsibility to formulate policies under which e-commerce will develop, and that is what we have been attempting to do, with some success.

The Internet: A Force for Progress

The Internet, the coming-together of advances in telecommunications and computing, is ushering in the new age. It is having, and will continue to have, a significant impact on the economy. The Department of Commerce’s April 1998 report, The Emerging Digital Economy, forecasts the economic potential of electronic commerce at well over $300 billion by the year 2002. This is a conservative estimate. I believe that this new Internet economy will be the primary driver of the broader economy for the next couple of decades.

The Internet is also a force for the promotion of democracy, because dictatorship depends upon the control of the flow of information. The Internet makes this control much more difficult in the short run and impossible in the long run. Over the years to come, as Internet access moves toward universality, average people in countries around the world will have increasing access to the information they need to participate fully in the democratic process. This process will push governments toward democracy, though in some cases they will move slowly and reluctantly.

In addition, the Internet will promote better understanding among nations. Around the world, most people do not travel very far from their homes during their lives. Even in developed countries such as the United States, geography imposes significant limitations on the scope of people’s lives. Through the Internet, communities can form across international boundaries. Children and adults alike are able to converse with people around the world, forming relationships based on values and interests. Though this type of community should not and will not replace the traditional geographical communities – neighborhoods and towns and cities – the Internet will bring all the peoples of the world closer together.

The Internet also will be a tremendous force for improving education. It will enhance remote access to education and it will promote new forms of teaching, new ways of learning. It is a common experience among parents, the realization that our children understand the Internet better than we do. The kids are growing up with it. To us it is learned; to them it is instinctual; and we will never be as comfortable with it as our children are.

So children are using the Internet as a research tool in ways that we could never imagine. To an amazing degree, they are using the Internet to educate themselves. Information that would have taken us days or weeks to look up in libraries, kids can sit at home and look up in hours or minutes, and they can find a wider range of information on whatever subjects they are studying.

In these ways and many more, the Internet is changing our economy and our society itself. We are living through a transformation that I believe is at least as great as that experienced during the Industrial Revolution. Yet, even the revolutions that benefit mankind the most have some negative consequences, and even as we appreciate the benefits we must deal with the negative side effects.

The Industrial Revolution brought new freedoms to people, including the freedom to move around with much greater ease and the freedom that comes with a rising economic standard of living. But there was a price to be paid. The Industrial Revolution brought pollution and congestion in industrial areas, child labor problems and unsafe working conditions, and other problems.

Like the Industrial Revolution, the Digital Revolution will have some negative side effects. The question with which we in the Administration have been wrestling is: How do you deal with those side effects – how do you lessen their impact – while allowing mankind to reap the benefits of the Internet and related technologies?

Policy Principles for Electronic Commerce

Several principles have guided the Administration’s efforts to develop a sound policy framework.

The first principle, is that in general, the Internet is a medium that has tremendous potential for promoting individual freedom and individual empowerment. Therefore, where possible, the individual should be left in control of the way in which he or she uses this medium. We should maximize the opportunity for human freedom.

In the sphere of economics, that means reliance on markets. Markets have imperfections that must be dealt with, but, in principle, markets maximize individual freedom and individual choice, and competition maximizes the choices that people have. So competition and individual choice should be the watchwords of the new digital economy.

Likewise, in the social sphere of the Internet, we maximize freedom by wherever possible, allowing individuals to operate on the Internet as they choose. That means allowing communities to form and set their own rules, as they will, and allowing individuals to move in and out of communities as they wish. This is one of the great advantages the Internet can provide: Different communities can form and make their own sets of rules and ways of working. Some communities may be to our liking, and some may not be. But the important thing is freedom of choice. People who like the way a given community operates can join it. If they do not like it, they can withdraw from it.

Still, some rules must be established in order to deal with the potential negative side effects. The principle that guides us here is that, where possible, the rules should be set by private, nonprofit, stakeholder-based groups. The Internet grew up that way. Groups such as the Internet Engineering Task Force and the Internet Architecture Board developed that way, and they have worked pretty well. This kind of rulemaking was much easier, however, when the population of cyberspace was small, when the people on the Internet were mostly researchers in universities and government agencies.

Rulemaking becomes much harder as the Internet becomes a bigger medium and more a commercial medium. The problems get more complex when you must account for commercial interests and various kinds of consumer interests. It is much more difficult for these stakeholder-based groups to form and have legitimacy among the broad set of constituencies that now have an interest in the Internet. Nevertheless, we believe that the principle, where possible, is still the right one: that private, nonprofit, stakeholder-based groups should set the rules. Part of the reason for this is because it is a democratic way, which respects the nature of a medium in which a teenager on a computer in the garage can potentially reach as many people as the editor of The New York Times.

There is another factor arguing against a traditional regulatory role for government. The Internet moves rapidly, mutating as technology changes. Governments inherently move slowly, bureaucratically – slower than is necessary for the Internet to flourish.

Stakeholder-based groups can be more flexible; they can change as markets and technologies change. They can be more directly responsive to stakeholders, and they can move more quickly. Therefore, where possible, we think those kinds of organizations are most effective in helping set rules.

Of course, private, nonprofit, stakeholder-based groups are not a perfect solution in every case. One of their shortcomings, for example, is that they don’t have an easy answer for the question, "Who elected you?" That is, they do not have the legitimacy democratic governments can claim from the electoral process. That is one of the reasons why government action is sometimes necessary.

Even when government action is necessary, however, we should not rush to enact omnibus legislation claiming to address the latest change and to figure out all the ways to regulate it. Government action should occur only in precise ways, in transparent ways, and through the development of a consensus of the need for such action.

For example, in issues related to privacy, we have favored the formation of industry or private sector self-regulation. But there may be certain cases where, as a backup, government action will be needed. Those cases, however, should be defined in very precise ways to address the voids left by self-regulation. So we should not start with a government action, but we may have to develop government action, action that is as precise as possible. That should be what we do: develop government action only when it is needed, when it is clear that it is needed, and a consensus develops.

Another principle that we think is important is a respect for the inherently decentralized nature of the medium. Even if it were desirable to centrally control the Internet in some way, it is impossible, and life is too short to spend too much time doing things that are impossible. By the same token, we need to respect the nature of the medium in the sense that technology moves very quickly, and any policy that is tied to a given technology is going to be outmoded before it is enacted. Therefore, policies have to be technology neutral.

One final principle is that the Internet is being born as a global medium from its outset. In economic terms, it is really the first marketplace to be born global. Thus, the traditional model where industries form markets within nations, and then governments negotiate together about how to cooperate in those markets, does not really work. An international framework to form a seamless global marketplace is necessary from the beginning.

From Principles to Policy

From the very beginning of the Digital Revolution, we have needed a framework, a predictable legal and political environment for a communications system that is global in nature. That is why we have pursued global discussions on these principles.

On July 1, 1997, the President issued a document outlining our strategy on electronic commerce and the Internet. That strategy embodied the principles discussed above, and it made recommendations in several areas. I will give you some indication of the approach we have been taking and also the progress we have made on those issues.

The Process: The process of releasing the electronic commerce framework report was the culmination of well over a year’s work. A broad interagency group within the government, making up 18 different agencies of government, came together and agreed upon a common strategy, after broad consultation with interested parties who gave their input.

We did something which was quite unusual for policymaking but which worked quite well. We put a first draft of our report on the Internet for comment, and then we went through 18 drafts, treating it as a virtual document, taking in comments and revising. In the process, we heard from a lot of people who you normally would not hear from in Washington who had good suggestions to make, and it was a very successful process. Most of the comments were very constructive ones with good ideas, and about 50 or 60 of them that came across the Internet were embodied in the final draft and contributed significantly to it.

When we first started this project, I went to see officials in other governments and told them I would like to talk to them about what they were doing with the Internet and electronic commerce. I got three responses almost every place I went. This first was "What are you talking about? What is electronic commerce? The second response was "Why would a president be interested in that? And the third response was "Well, that must be something our telecommunications ministry is regulating. Go see them."

As a result of the release of the electronic commerce strategy in 1997 and the process leading up to it, issues of the Internet and electronic commerce are now top items on government agendas -- "on the front burner" -- everywhere round the world. Counterparts to my role in the White House and to others’ roles on Internet policy have been formed around the world among governments and industry associations.

When government officials first looked at the Internet, the general approach that was being taken both in the United States and in many other countries was one in which people at different agencies were examining this new phenomenon and wondering what they needed to do to regulate or control it.

As a result, we had bills like the Communications Decency Act and its counterparts in many other countries – attempts to censor the Internet. There were 12 different countries contemplating customs duties on Internet transactions. We had a number of states and local governments in the United States considering and enacting taxes on Internet access. Telecommunications authorities were considering regulations on Internet services. There was a very active discussion in Europe about putting a bit tax on every bit of transmission on the Internet. A variety of countries were looking at omnibus laws to regulate the Internet.

Our goal in releasing the framework was to identify the areas in which policy was being made, or needed to be made, and then, in each area, get things headed in a direction consistent with our basic principles. Some of the main areas we identified were Tariffs and Taxation; Privacy; Content Restrictions; Digital Signatures and Authentication; Copyright, Internet Management; Encryption; and, Telecommunications Deregulation. Let me report briefly on how we have done in each of these areas.

Tariffs and Taxation: With respect to tariffs and taxation, it is fair to say that, by putting forth our strategy for the Internet and advocating its approach around the world, we at least changed the momentum in these areas. That is not to say that the urge to regulate or to control is not still there, even within our own government.

We have now established agreements whereby the Japanese government has agreed to a private- and market-oriented approach of the sort I have described. The European Union, on most issues has been moving more in this direction, and the same is true of other governments around the world. At least the language people are using is the language of private sector leadership and market leadership as a way for electronic commerce to grow.

That is not to say that the private- and market-oriented approach is going to predominate around the world, but the rush to regulate has been slowed. There is no more talk of a bit tax in Europe, and the EU has officially come out against it. The Internet Tax Freedom Act, which declared a moratorium on such taxation in the U.S., is also a step in the right direction. Additionally, we are having discussions in the Organization for Economic Cooperation and Development ("OECD") on a set of principles that would rule out discriminatory taxation (taxation that applies to Internet transactions but not to similar transactions offline).

We have also succeeded in getting an agreement within the World Trade Organization that no customs duties will be put on electronic transmissions for the next year and a half until the next ministerial meeting. We will work to make that moratorium permanent.

It is our hope -- our goal -- that (a) there will be no customs duties at all, and (b) with respect to taxes, that there will be no discriminatory taxation, no bit taxes, no Internet access taxes, no Internet telephony taxes.

Privacy: The second issue has to do with the protection of privacy. One of our fundamental values is that people should have the ability to protect their own privacy. And we believe that the use of the Internet as a medium will reach its full potential only if people feel comfortable online, only if they believe that their privacy is protected.

However, we do not favor the European approach of trying to protect privacy by setting up government privacy boards and very elaborate regulations. Instead, we favor an approach where industry and consumer advocacy groups take the lead in forming codes of conduct to protect privacy.

Our main concerns about the European-style approach are that government regulations and government privacy boards will create a more bureaucratic and inflexible solution than is necessary, and that such a system will be unpredictable. Privacy legislation and regulations must be tied to specific technologies with specific definitions, and technologies and markets may move fairly quickly in ways that make those specifications obsolete. Governmental processes to change those definitions move much more slowly than the pace of technology.

Additionally, the existence of privacy boards would lead to a situation where companies operating in Europe, for example, would face such a board in each country. They would be required to go before each country’s privacy board, explain their operations in detail, and seek approval or negotiate a deal. But after an agreement is reached, there may be a new election, resulting in a new privacy board and a different set of policies, and the process starts all over again. It would create a much less certain environment.

Finally, a government-centered approach to privacy protection will not work. A country might impose a thousand pages of privacy protections, and be unable to enforce them. No government entity is going to be able to monitor the ten thousand Web sites that are forming every week, to ensure compliance with that government’s privacy regulations.

In a sense, governments enacting privacy regulations and establishing privacy boards are making false promises to their citizens. They are essentially saying, "Don’t worry, we passed a law, our privacy is protected," when, in fact, the government cannot enforce it.

The approach that we believe will work better -- what is now beginning to emerge in the U.S. -- is that the electronic commerce sector comes together and develops codes of conduct.

The key elements of privacy codes are broadly agreed upon internationally, and they are based upon OECD principles that were developed in the early ‘80s for privacy protection.

  • That sellers and others operating Web sites notify visitors of any information they are going to collect and explain how they are going to use it.
  • That a person visiting a Web site has the opportunity to opt out, to say, "No, I do not want to do that, I do not want you to collect that information, " or "Yes, you can collect it and use it for this purpose, but not for that purpose."
  • That the visitor has the ability to look up the information on himself/herself and ensure that it is accurate.
  • That a mechanism exists to enforce the privacy code.

We agree with the European Union that privacy protection is important and should be based on OECD principles. Codes of conduct based on these widely accepted principles would empower individuals to protect their own privacy, or voluntarily to give personal information in exchange for a benefit of some kind.

These codes of conduct are being developed now. The Online Privacy Alliance, the Better Business Bureau, and Truste have formed enforcement mechanisms that we think can provide the desired level of privacy. These groups include companies that represent the vast majority of traffic on the Internet.

Here’s how the system would work: A company would adopt these principles and enforce them. The company would join one of these organizations backing a privacy code, and earn the privilege of displaying a seal on its Web site that is emblematic of its guarantee that it is conforming to the privacy principles.

The organization, whether it be the Better Business Bureau, Online or some other organization, would then enforce the privacy principles in three ways. One, they would do periodic audits of those who are displaying the seal to make sure they are doing what they said they were going to do. Two, they would have a system for consumers to file grievances simply by clicking on the seal and providing information on the alleged violation. Three, they would remove the seal from the Web site of a violating company.

Once this system of privacy protection was in place, the President, other government officials, industry groups, and consumer groups would launch a campaign to educate consumers about the Internet. They would explain that the Internet is a free place, that you can go wherever you want to go, but that you must be careful. If you go someplace that does not display a privacy symbol, your privacy may not be protected.

Some consumers may not care, and that should be their right. Those who care about privacy can, if they so chose, restrict themselves to sites that display the seal.

This would allow a market mechanism to work -- a market incentive for Web sites to follow a privacy code and earn the seal. Otherwise they are going to limit their market and the number of people that visit them. Although, in most cases, it would be advantageous for a site to display the seal, there would be no requirement that they do so. Thus, the process creates an environment that remains free, but which also protects the privacy of people who care about having their privacy protected.

As a backup for this system, we have the Federal Trade Commission (FTC) and the anti-fraud laws it enforces. If someone fraudulently displays a seal or otherwise knowingly deceives consumers, the FTC could take action against the person or organization committing the fraud. In fact, industry self-regulated organizations will probably refer bad actors to the FTC because it is in their interest to do so to promote the integrity of the seal-based system.

Now that U.S. industry is organizing to protect online privacy, the next step is the globalization of the process.

A number of industry groups around the world -- the Keidanren in Japan, the European members of the Transatlantic Business Dialogue, and the Australian Business Association -- are interested in coming together with U.S. companies to create an international system in which the seals would be identical.

The codes of conduct, in terms of what the seals mean, would be the same, but the enforcement would be done by organizations in those countries. So a Truste or BBB might do it here, but it may be the Keidanren or some other entity in Japan. If we can create an international model that can work for the Internet as an international medium, we can avoid some of the tougher jurisdictional questions that come up when there are laws in 50 different countries, each with a different legal system.

Since none of us knows for sure what is going to work, we think it would be wise to let us try this approach. If other countries want to try a different approach for a period of time, however, our position is to tell them to go ahead and do that, and let us see what works best. We will trade information. But we will also state that they should not be trying to impose their methods of enforcement on us as the European Directive threatens to do. We have considered their arguments, and we just do not think their approach is going to work.

There was a big step forward in mid-1998 when the EU issued a paper accepting the idea that self-regulation could meet EU guidelines. And we are waiting anxiously for industry to finish work on a privacy code. We are not pushing industry to do this to satisfy the EU; the EU does not set policy for the United States. We are pushing industry to do this because it is important to the future of electronic commerce, because it will be good for the industry, and because it will meet Americans’ concern about the protection of privacy.

Still, we are hopeful that we will soon have an agreement whereby the European Union will recognize our self-regulatory system and at least give it a try.

Content: A related topic is the issue of content. Here again, I think the initial impulse to try to censor or control was a mistaken one. Censorship and content control are not only undesirable, but effectively impossible.

We do not deny that objectionable content is a problem. As the parent of young children who understand the Internet better than I do, I think I am in a situation similar to that of most parents in the country; we worry about what our children are accessing on the Internet.

Parents like to have some control over how their children are brought up, and what values they are exposed to in our society, and most parents would like to exercise that control on their children’s exposure to the Internet. But the solution to this is not some attempt by government to censor. Rather, there should be technologies provided to people to empower them to protect their own households.

Here’s how we envision this system: When a parent signs up with an Internet service provider, he or she is given a set of choices -- say, a set of boxes to check on a questionnaire -- in order to select a filtering system that restricts a child’s Internet access in accordance with that family’s value system.

For example, a software company might work with people of a certain religious faith who have specific concerns associated with that faith, and a parent could choose to check a certain box and trigger a filtering package that deals with those concerns. Or the Children’s Television Network, or any number of groups, might have filtering packages, and a parent could check the box to select one based on his or her values.

The key thing here is that there should be a number of choices, and that it should be left to the individual to make the choice.

In order for this to work in the long run, the filtering systems and the rating systems that support them need to get better, and they are getting better. They will never be perfect, of course, but parents have never been able to exercise perfect control over the materials to which their children are exposed. For example, how many people in my generation have a memory of smuggling a Playboy magazine into the house when they were children? But with the right system of filtering and ratings, we can make the Internet at least as kid-friendly as the pre-Internet world in which we grew up.

Digital Signatures and Authentication: We have also been working on authentication, digital signatures, and other issues related to the use of the Internet as a business medium. Again, we prefer a market-driven approach, but obviously legislation is necessary to adapt contract law to cyberspace.

We support adoption of the UNCITRAL (United Nations Commission on International Trade Law) model law that was developed a few years ago, although we favor some proposed improvements that have been widely discussed. This law establishes a basis for forming and recognizing electronic contracts. Beyond that, we do not think that the government should get into the business of licensing authentication authorities because, in effect, the government would be choosing technologies. Instead, we should allow the development of a market in which a buyer and a seller can choose the kind of authentication they want. In such a market, different companies -- insurance companies, banks, accounting firms, notaries, and others -- will provide authentication services using any number of technologies.

People will want to use different levels of authentication in different situations. For a $100 transaction with someone with whom they regularly do business, people will want one level of authentication. For a million-dollar transaction with a relative stranger, a higher level of authentication will be required. A buyer and a seller should have the flexibility to determine what type of authentication is appropriate, and the free market should be allowed to develop different types of authentication services.

If the government tries to intervene and do it through licensure or some similar mechanism, the government will be imposing certain technologies, and it may choose the wrong ones. We have a similar view of electronic payment systems. Nobody knows what kind of electronic payment systems the market is going to want, or who is going to develop them. It may be banks; it may be software companies, it may be types of companies that do not even exist today. It would be a mistake for the government to attempt to regulate who can develop them or how they should operate.

Copyright: We in the Administration favor strong protection of intellectual property in electronic commerce. The buying and selling of intellectual property will make up an increasing share of e-commerce in the decades to come. It would be a mistake, however, to try to protect intellectual property using concepts that were developed to protect physical property. As Professor Lawrence Lessig has commented, intellectual property needs to be protected so as to create market incentives for the production of copyrighted materials, but it should not be protected forever. To that end, we have been working to ratify the treaties that were negotiated in the World Intellectual Property Organization.

The WIPO ratifying legislation enacted in 1998 meets a number of legitimate concerns about limiting liability for telecommunications carriers and Internet service providers. It also addresses important questions about fair use, and questions about copyright-defeating devices and how they are dealt with. I believe the compromises that have been worked out are good starts on dealing with these issues. It is important that the concept of fair use be preserved, and the question of caching and reading into computer memory and how that relates to fair use is a complicated one. We are trying to protect copyrighted materials but still allow the same kind of fair use that we have today. I am not sure we have the formula exactly right, and if we do not, we need to be ready to adjust it.

Internet Management: There is one other area in which we have had significant progress: Internet management. The question of technical management of the Internet -- the management of the domain name system, the root server system, and the numbering allocation system. In the past, these have been managed by the Internet Assigned Numbers Authority (IANA), the University of Southern California, and a Virginia company named Network Solutions, Inc., on behalf of the U.S. Government.

As the Internet grows up and becomes more international, these technical management functions should be privatized, and there should be a stakeholder-based, private international organization set up for that technical management. In the allocation of domain names, we should, where it is possible, create a competitive marketplace to replace the monopoly that now exists.

Groups of stakeholders met on this issue throughout the summer and fall of 1998, in Washington, Brussels, Geneva, Singapore, and Buenos Aires. In November 1998, the U.S. Government recognized a stakeholder group. Based largely on our work, they have been building a consensus on the structure of a new organization, its bylaws and board of directors and so on. There is now general agreement about how to proceed with privatization, and it is well on its way.

The principle we are following regarding technical management is a familiar one, that no one organization should govern the Internet. Technical management certainly should not be controlled by an intergovernmental organization or international telecommunications union. As I noted, individual governments move too slowly to manage the Internet, and intergovernmental organizations move even more slowly.

When rule-setting is necessary -- and only when it is necessary -- regarding aspects of the Internet, rules should be made by individual groups that are private, nonprofit, stakeholder-based groups formed to address those specific areas of coordination. There could be a number of different groups addressing various issues. There eventually may be some kind of international group dealing with the privacy issue. The Internet Engineering Task Force will continue to deal with the setting of protocols. Other groups may form. By relying on groups that are democratic, stakeholder-based organizations, and that form for specific purposes that require coordination, we can avoid creating one big bureaucracy trying to run the whole Internet

In those areas that I have discussed -- privacy, content, taxation and the Internet Tax Freedom Act, tariffs, authentication, digital signature, and copyright protections -- we have made great progress this past year.

Encryption: There have been a couple of areas, however, in which we have not yet succeeded. The first is encryption. Despite our very hard work, we have not found a solution to the encryption problem, an encryption policy that satisfies policymakers in the Administration. There are substantial disagreements within the Administration, and within the government as a whole, about how to proceed on this issue.

There are some who believe that it is inevitable and desirable that unlimited encryption be made available. There are others who believe that, because of law enforcement concerns, there must be controls on encryption technologies. The debate among policymakers has lasted for years, and I cannot pretend that we are close to resolving this conflict.

I do not agree with the policy that we have. Although I believe that the concerns of law enforcement are legitimate and sincerely held, the way in which law enforcement is trying to deal with encryption will not really work and will do a lot of harm. That is my own personal view. I think strong encryption is necessary for the Internet to flourish commercially and to ensure personal privacy, freedom and security. I believe that law enforcement authorities need to find other ways to do their important work.

We have been searching for some compromise solutions that will meet the concerns of law enforcement but still allow high-level encryption to be used to give the Internet the security and privacy it needs. I do not want to leave the impression that this debate is a cynical or political one. I think it is a real disagreement. And I, like any number in the Administration, voice my opinions. I think my opinions are taken seriously on the issues I am involved in, but I do not always prevail. And this is one where I have not prevailed.

Telecommunications Deregulation: An area in which we have made progress but have had less than complete success is in telecommunications deregulation. In this area, I believe we need to recommit ourselves to the principle of free enterprise, a principle The Progress & Freedom Foundation has been very influential in helping to promote.

Over the next few years, as telecommunications of all types, including broadcasting and the Internet, converge, there are two models to which we could look.

The first model is the traditional telecom and broadcast model. In virtually every country in the world, telecommunications is government-owned or government-regulated. The other model is one in which buyers and sellers can come together and do business free of government interference. In this model, the government role is not in regulating, but rather in setting the terms for a predictable legal environment for contracts to form. In this model, the rules are clear, and if a buyer and seller wish to have the protection of law, they can enter into a contract that gives them that protection.

The history of free enterprise economies teaches us that, in most cases, a buyer and seller will wish to have some kind of contract for any significant transaction. Thus, the role of government is to help provide the basis upon which those contracts can be recognized.

Now, we have argued that this new converged environment should operate according to that second model - a market-driven model, not a regulated model. What that means is that as the convergence takes place, we need to go through a deregulation of telecom and broadcast rather than a regulation of the Internet, which would be the natural inclination.

As I stated earlier, most countries responded to my initial inquiries on this topic by immediately declaring the Internet to be like telecommunications and, therefore, something they regulate through their counterparts to the FCC. We believe that, in this new converged medium, the packet switched networks and the Internet in general should not be regulated in the way we have regulated telecom and broadcast.

The reasons we regulated telecom and broadcast no longer exist in this new environment. The primary reason we regulated telecom is related to the enormous size of investment that was necessary, relative to the size of the companies at the time the networks were being built. In most countries, monopolies were licensed to build out the networks, and they were regulated because they were monopolies. We regulated broadcast mainly because there was a limited spectrum to allocate so, in the public interest, the government became involved in allocating that spectrum. With the Internet, however, we will have almost unlimited bandwidth available. Therefore, the argument for government to intercede to allocate spectrum no longer exists.

With the Internet and this new environment of convergence, we are going to have the greatest amount of competition the world has ever seen. We are going to have telecom companies, computer companies, software companies, satellite companies, wireless companies, consumer electronics companies, and electric utilities all competing to build out this infrastructure, and the best thing we could do is let that competition take place and not try to regulate it or interfere with it. This will get the most efficient result. I believe competition among these providers will be very healthy. Different technologies will naturally and most appropriately take different parts of the market.

If we were to allow competition to flourish like this – without the distortion caused by regulation – I think the market would work itself out, and we would have very rapid growth. My general view of the world is that where markets can work, they are the most efficient way to allocate resources. There are some cases – and I would argue health care is one – where there are market imperfections that require some government involvement. Bu the Internet is as close to a pure market as you can find, and in this case, I think you must let the market work.

Now, this is easier said than done. If you take the existing circuit-switched telephone networks with all of their regulations and cross-subsidies and try to untangle that, your head will spin as you realize the web that has been woven. There may have been reasons for such a complex system, but to extend such a system to this new medium would cripple it. That kind of regulation is not necessary in the world of the Internet as it may have been in the circuit switch world.

If I could wave a magic wand, I would say we should go through a complete deregulation here, and let the market go. But there is such a tangled mess of cross-subsidies and interest groups in this area that that is not possible. What we have put forward as, admittedly, a second-best approach is that we draw a line in the sand. We accept that what exists with the voice circuits cannot be untangled, and we do the best we can to prevent the new markets and new technologies from being dragged over that line into a regulated environment.

The "New World" of digital communication is growing much faster than the "Old World," so it will naturally make up a larger and larger part of the whole. If we are successful in preventing the existing tangle of regulation from spreading to the New World, regulation will become less and less important.

It is very difficult to move from the current morass of regulations to a more deregulated system. The FCC has been trying to move in the direction that we have suggested, but it’s no easy task. Managing the transition from the Old World to the New is very difficult, and I cannot say that we have had complete success up to this point. We have thus far sustained the principle that there should be no regulation of high bandwidth packet on switched networks, but the battle to keep this arena unregulated is still being waged.

I think The Progress & Freedom Foundation has done a great deal to advance thinking in this area, but it is something that we will all have to continue to work on.

Other Forms of Regulation: In addition to telecommunications regulation, there is a series of other areas in which we have regulations for historic reasons that should not apply to this new Internet world, at least not without revisions. Consider the online auction, for example. This is one of the best commercial uses of the Internet, one that allows people to buy and sell things very efficiently. However, there are laws on the books in a lot of states and at the federal level that date back to the agricultural days and require the licensure of auctioneers. These laws have raised liability questions for many of the companies that conduct online auctions or are seeking to do so. One of the things we have been trying to do is to get rid of these laws, to allow free conduct of these auctions. And there are about a dozen other similar examples of outdated regulations. We have not ignored existing regulations; we have been looking through them and targeting those that no longer make sense in this new environment.

When we announced the Framework in July 1997, the President created an interagency group to implement the principles. Part of the charge to that group was to look at existing regulations that might be incompatible with the principles underlying our strategy, and to work to revise them so that they will be compatible. We have encouraged people in the private sector to let us know if they are aware of any existing regulations that are inhibiting their ability to develop commerce on the Internet, so we can try to do something about it.

Implications of the Framework for Medicine and Education

As information technology applications are developed, all these policy matters come into play. For example, telemedicine is going to be one of the most important uses of the Internet, one of the uses that is most beneficial to society. Sometime in the near future rural health clinics, along with clinics in poor nations around the world, will be hooked up through the Internet to specialists at some of the best medical centers in the world. This will promote better access to health care for people at all income levels, along with savings in health care spending by increased efficiency.

Of course, there are privacy concerns regarding medical records, and we believe this is a problem that can be addressed through legislation. In 1998 we proposed a bill to do that. I should note that this problem existed before there was an Internet as we know it today. Before I came to government I did a pro bono study in my home state of Rhode Island on the health care system. Part of what we found is that the average medical record will pass through almost 50 different hands in a given year; it will be seen by all these people without the patient's knowledge. Records are taken from one place to another by messengers. Records are left out on desks in hospitals, and along the way opened in various ways that would make patients uncomfortable, if only they knew.

A startling fact the study revealed was that in two percent of the cases where operations were scheduled, the doctor was there, the patient was there, but the medical record did not show up because it was being carried around, and the operation had to be canceled. We also found that, when an elderly person had a seizure or collapse and was taken to the emergency room, often the attending physician did not know anything about the patient’s medical history and might be unable to reach the person’s doctor. In a high percentage of cases, problems arose from the interaction of a newly prescribed medicine to a medicine the person was already taking.

Electronic access to these records will help prevent that sort of thing from happening. And with the use of encryption, people will be able to carry around a smart card containing their medical history, a list of drugs they are taking, and so on. The ability to electronically store, use, and transmit this kind of information, assuming the proper protections are in place, will be invaluable.

In the case of medical records – because it is a domestic industry with a limited number of players such as hospitals, doctors, insurers, and so on – we think a legislative approach could work to protect this particularly sensitive information. So we have advocated that approach, which is supported by a broad consensus among those who have studied the issue.

Another use of information technology of which the Administration is particularly supportive is in education. Connecting all of the schools and libraries in the country, including those in remote areas and in poor areas, is an important goal. Providing sufficient training for the teachers and librarians, so they are able to use the Internet and train the children, is also important. I believe the funding mechanism that has been chosen can work and, although other funding mechanisms could have been chosen, it is the one I believe we should use.

One of the aspects of the Internet’s role in education that is of great interest to me personally, and I think also to the Administration, is the fact that the Internet offers us the opportunity to close income gaps in the country. In some of our poor inner-city schools, the science textbooks are 20 years old. With the Internet, there can be access to the most modern teaching materials in the poorest schools. There can be access to those materials even in remote areas in ways where access would be impossible otherwise.

Internet access in schools and libraries will help fulfill our ideal of equal opportunity for all in this society.

Consider the alternative. If the Internet is just a phenomenon of the rich and upper middle class in this country, it will widen income gaps and create great social tension.

In the next decade or two, we are likely to face a situation where tens of millions of jobs are lost and tens of millions of jobs are created. The good news, from the data we see, is that because it is going to produce growth, there will be more jobs created than lost. And the jobs that are created will be higher-skilled, higher-paying jobs than the jobs that are lost.

The bad news will come if our people are not sufficiently educated to take those jobs, those jobs will move elsewhere. So, I believe, education and training should be at the top of our agenda. I should mention that I do not believe we in this country are addressing this issue adequately. We must keep in mind that, in this new information society, it is going to be the best educated societies that flourish.

With respect to the 30 percent of our people who go to four-year colleges and graduate, we have the best education system in the world. We cannot say the same with respect to the 70 percent who do not graduate from four-year colleges, however. Our education system is not succeeding with many of those people. In addition, we do not have sufficient retraining in midlife for career people who get laid off. Those are issues that we have to address, and the Internet can play a big role in helping us deal with those problems.

Where We Go From Here

We are fortunate to live in an era in which we have an opportunity to help craft great changes which can bring great benefit. That opportunity does not come along with every generation. It is both an opportunity and a responsibility. It is daunting because we do not really understand all of this and where it is headed.

I am concerned that among the public at large there is not a sufficient awareness of how important all of these issues are.

Most people are not aware of how much the good economy we are having depends upon what is happening in this new arena. They are happy we have a good economy. And depending upon your political persuasion, you either give the President credit for that good economy, or not. But it is a good economy.

The actions that the President and the Congress have taken in the direction of greater fiscal responsibility, reducing the deficit and keeping interest rates low, have made a major contribution to the strength of the economy. I do not think anybody can deny that. But it is also true that the development of the Internet and information technology has played a major role in driving economic growth, and that that effect will probably increase over the next decade or so.

Consequently, the public at large needs to become more versed in these issues People need to know more about the potential barriers to the use of information technology that might derail this good economy. We need to learn what can be done to expand the use of this technology, because the economic prosperity we are enjoying will increasingly depend upon it.

Those of us who live and breathe these issues have a responsibility not only to bring the issues to the attention of the broader public but to listen to what the public says on these topics. I also believe that we have a responsibility to look beyond our parochial interests – those of our company, or of the Administration, or of any political party – to the broader interest.

One of the things of which I am proudest, regarding our work over the past two years, is that we have had a truly bipartisan approach. In 1998, we passed four major pieces of legislation, all with broad bipartisan sponsorship and support. Whether it was the Cox-Wyden bill, the copyright bill, or proposals dealing with the domain name question – Republicans and Democrats have worked together. This is not to say everybody agrees, but the work has been done without regard to party. Neither the President nor the Vice President nor members of Congress have tried to claim credit just for themselves or just for one party. That is something that I hope will continue, regardless of what else may be occurring that is of a partisan nature.

Our approach has been international as well as bipartisan. We have not treated our discussions with other countries as trade negotiations. We have recognized that this is not a zero-sum game.

We are not even going to try to force other countries to change their ways. If a country wants to close its market, require that everything on the Internet be translated into its language, or require a certain percentage of content to be produced in that country, we will respond simply by stating that we believe they are making a mistake, and that they will be left behind.

Rather than spend our energy trying to force countries to change, we are joining with other nations who take an approach compatible with ours; to work together as equals to build the best kind of system we can. Rather than engage in a zero-sum trade negotiation or the like, we work toward the creation of a common architecture for the Internet and electronic commerce with those nations that want to embrace this future.

That involves governments agreeing to do something that is very difficult for governments to do, which is to agree not to act. Agreeing not to act helps create a more predictable environment for business, and in the long run will make the Internet available sooner, to more people, not just in the United States or the developed world, but to people around the world.

As our framework for global electronic commerce continues to evolve, as it inevitably will, I hope the principles we have outlined -- of reliance first and foremost on the marketplace and on self-regulation, of limited and highly targeted government involvement based on consensus, of non-partisan debate and international cooperation -- will continue to guide us. Most importantly of all, however, I hope we will retain a sense of humility and to acknowledge that none of us can, on these issues at least, claim to have all the answers.

Ira C. Magaziner is President of SJS, Incorporated, a Rhode Island based strategic consulting firm. Until December 1998, he served as Senior Advisor to the President, where he chaired the Administration Working Group on Electronic Commerce. This paper is adapted from a speech delivered August 24, 1998 in Aspen, Colorado, at The Progress & Freedom Foundation’s annual summit on "Cyberspace and the American Dream."



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