The persistence of the dirigiste model: wireless spectrum allocation in Europe, a la francaise.

• Author: Carlberg, Russell

1. INTRODUCTION

   The process of allocating radio spectrum for Third Generation ("3G") wireless communications (1) in the European Union ("EU" or "the Union") illustrates the convergence of serious economic and political challenges facing the Union and its member states in the near term. The European Commission's ("EC") telecommunications policy focuses in part on quickly establishing the groundwork for a 3G wireless market throughout the EU. (2) The EC's objective is, in essence, to create the structure of the 3G market before the demand for one actually exists. (3) In so doing, the EC hopes to create a large 3G market in Europe where European firms will have a very high market penetration. It is hoped that the European 3G market will, when fully developed, provide revenues and economies of scale that will allow European firms to compete effectively for 3G markets in Eastern Europe, Russia, Africa, Asia, and elsewhere. (4) The EC is wagering that 3G will be the network by which the world will maintain person-to-person voice contact and interface with the Internet. It is also wagering that the telecommunications sector, via 3G, will create a multiplier effect throughout the European economy, thereby rescuing Europe from the structural economic crisis that has plagued it for decades. (5)

   This is a colossal wager. If the EC is right, then Europe may well be poised to make its broader Trans-European Networks (6) ("TEN") policy a reality. A successful TEN based on 3G would allow the EU to enter the twenty-first century with real economic growth and a European currency, the Euro, (7) that performs well against the dollar. If the EC has bet incorrectly, however, the prestige of the EU will be seriously damaged. This Note argues that signs exist which suggest that the failure of Europe's 3G policy is likely. (8) In Europe, 3G is much more than an EC economic policy initiative or a drama for telecom firms (and their investors) competing for market share. Third Generation technology is also a political initiative that the EC itself considers crucial in Europe's prosperity and for the survival of European integration, which is the cornerstone of the Maastrict and Amsterdam treaties. (9) The stakes are quite high.

   This Note examines spectrum allocation for 3G mobile wireless networks in Europe in light of larger EC telecommunications and competition policies. The European Commission has allowed each member state to allocate spectrum to firms in two ways: (1) by the free market auction; and (2) by the "beauty pageant" method by which firms submit detailed proposals to the government, and government bureaucrats make the final selections. (10) This Note focuses on France as the prime example of the beauty pageant method. This Note argues that, despite the "excesses" of the prices of spectrum on the free market auctions, the beauty pageant method has even more disturbing drawbacks.

   Clearly, each method of spectrum allocation has its dangers and its rewards. This Note posits that the EC committed itself to a schizophrenic policy when it allowed member states to devise their own methods of allocating frequency spectrum. The EC's general policy in the realm of telecommunications has been to liberalize markets. (11) Despite the bureaucratic overtones of the EC's 3G policy, deregulation and free market competition have been vital to the EC's telecommunications policy. (12) Yet, as allocation approaches go, the beauty pageant method of spectrum allocation is inherently very suspicious of the market. Again, this Note argues that France's activities show that national telecommunications authorities are capable of operating on nonmarket assumptions in much of their management of this emerging market. Essentially, French authorities have reverted to dirigiste traditions in the near term. Such a reversion, at a time when the EC is reassessing its role in European affairs, does not bode well for the EU.

2. THE FRENCH PARADOX

   1. The Dirigiste Tradition in France

      The French word "dirigiste" is an adjective derived from the noun "dirigisme." To any educated French person, and to students of French history, the word is very familiar. In its broadest sense, dirigisme comprises the entire centralizing tradition in French historical development, from the long reign of Louis XIV, punctuated by the rule of Napoleon, to the present day. In its narrower sense, used today, dirigisme (13) refers to the central government's role in "directing" the French economy.

      One must be careful, however, when talking about the dirigiste model of governance. It is important to remember that for all of the initiative the central government might make in shaping markets and setting priorities, the French system has never approached the extremes of central planning that were witnessed in Eastern Europe and Russia under the communist regimes. (14) There was a four-year plan in France after the Second World War, but that was rather extraordinary and was a function of Marshall Plan aid as much as it was the result of the devastation of the war. (15) Of course, French industry during the First World War, like American industry in the Second World War, was subordinated to the war effort, which entailed some central planning. The centralization of industry under the Vichy regime from 1940-1944 is more difficult to account for, however. (16) These unique periods aside, French industry has never been fully "coordinated" from the center and used for the purposes of the government, as was the case in Nazi Germany. (17) That said, in comparison to the English-speaking countries, or as the French would say, the "Anglo-Saxon" countries, the French have throughout their history shown a persistent aversion to "liberalism," by which they mean free markets and limited government. (18)

      It is fair to say that the French have maintained, in significant measure, the medieval period's hostility to commerce (19)--all the while excelling at commerce in many regards, especially in the realm of high quality agricultural items. (20) Scholars have noted that even French business people and industry leaders take a "smaller is better" approach and at times consciously avoid expansion and market dominance. (21) They prefer old methods and to maintain family control over businesses, rather than to rush into initial public offerings on the stock exchange or into large financing arrangements with banks in order to expand production or to modernize. (22) In France today, one can easily imagine a communist union leader and a businessperson agreeing that there are evils in free market competition, that globalization is a threat to French identity, and that hefty sales taxes (up to thirty percent on some items) should not be cut. (23) Both may fear the EU.

      Of course, city communists and landed aristocrats do not run the French Government. Elected politicians, and more importantly, an educated technocratic elite do--with students from a handful of elite schools staffing practically every important position in the French bureaucracy. (24) The result is naturally that the elite speaks in its own language and shares many common assumptions about what French society and economy should aspire to be. (25) Were this scenario to exist in American society, it would be as though all or most officials in the U.S. government, as well as the people running the major television networks, had all graduated exclusively from the business, law, and graduate schools of Harvard and, say, Stanford. (26) The French elite believes in the French government's competence to shape markets, and to direct both the economy and even society as a whole, in broad terms. (27) The French invention of the Minitel, a computer terminal connected to the telephone that was widely available in French homes in the 1980s, is a prime example of the dirigiste tradition at work.

      Installed, the Minitel system was a dry run at an internet before the Internet was invented. When the French government introduced it as part of France Telecom's phone services, the Minitel was revolutionary. (28) With a black and white screen and a primitive terminal attached to phone lines, one could, beginning in 1982, search phone numbers nationwide online in France. (29) Soon after, services expanded to include the ability to book train, plane, and theater tickets; to check the weather; to read the news; and to send and receive text messages. (30) By 1995, the Minitel offered more than 26,000 online services. (31) Despite some technological improvements, however, the Minitel today remains essentially what would be considered as a "text-only" online system.

      For many years France was regarded as one of the most technologically advanced countries because of its Minitel system, and as late as 1995 some observers wondered which system--Minitel or the Internet--would prevail over the other. (32) Unlike the Internet, with its decentralized development, the centralized Minitel in France had economic incentives for upgrades only, rather than a wholesale rethinking of the system. This situation was caused at least in part by the enormous resources that France Telecom, the government-owned phone company, had sunk into the Minitel. (33) When first the personal computer revolution and then the Internet came along, France resisted, believing that the Minitel was sufficient. In sum, the French Government clung for far too long to the Minitel. And, as a result, France is woefully behind the United States in computer technology today. (34)

      One virtue of the dirigiste tradition is that it can deliver, relatively quickly and with a nationwide commitment, innovations like the Minitel or the Train a Grande Vitesse ("TGV") bullet train for which France is justly famous. (35) Among the tradition's shortcomings is the way in which it encourages stagnation once a new item is introduced. (36)

      Examined from a neoclassical economic perspective, the dirigiste tradition sinks large sums...