Friday, September 21, 2007

Middle ground missing in Middle East?

by Clara Marina O'Donnell

Over the last few weeks,Tony Blair, Javier Solana and Bernard Kouchner have been there; this week Condoleezza Rice has done so – as, for that matter, has Madonna. If you like motorcades, Israel is the place to go. Ever since the US said it would sponsor a peace conference in November, the Middle East has been a hive of activity.

But is all the high-level diplomacy having any impact on the ground? Certainly the comings and goings of the great and the good keep the up-market hotels in business. But the reality at grass-roots level, as judged by this writer’s recent visit, seems far removed from the glitzy political meetings.

Settlements in the West Bank continue to grow (and new ones are created) at a rapid rate - so much so that the growth rate of the Israeli population in the West Bank is higher than in the rest of Israel. Construction work continues on the ‘wall’, eating into territory beyond the Green Line, the internationally recognised border, sometimes going far into the West Bank and separating Arab farmers from their lands. Roadblocks remain firmly in place, despite a promise by Ehud Olmert, the Israeli Prime Minister, to Mahmoud Abbas, the Palestinian president, to reduce them. The official explanation for the delay is implementation difficulties. Yet an Israeli government plan has existed for a year on how to safely reduce internal checkpoints, so far to no effect.

Gaza remains completely isolated. The private sector has collapsed, the public sector is barely ticking over, and unemployment is soaring, as this week's UK government report (The Economic Aspects of peace in the Middle East) confirms. Hamas is still firmly in control and Quassam rockets are being fired into Israel virtually every day. The plight of Gaza’s 1.4 million inhabitants is widely ignored – including by the Palestinian Authority in Ramallah. During this author’s stay, the only real attention paid to Gaza was an Israeli cabinet debate on stopping Israeli supplies of water and electricity to Gaza as collective punishment for the firing of Quassam rockets. The likelihood of such a move has increased since then, with Israel having declared Gaza an “enemy entity”.

The measured, almost friendly banter between Israeli and Ramallah-based Palestinian leaders (Olmert and Abbas were shown smoking cigarettes together during one of their latest rounds of talks) says nothing about the mood in the streets. In private, there are people on both sides who take a blunt and uncompromising view of the conflict, shrouded in religious, ethnic and existential terms. The memory of the terror of the second intifada is still vivid in many Israelis’ minds. Palestinian schoolbooks incite hatred towards Israel. And some Israelis step over the line between legitimate security concerns and xenophobia: during a conference in Tel Aviv the Israeli ambassador to the UN argued that all of Islam had its hands covered in blood.

The complexity of the Middle East can never be over-estimated. But the all-too-evident disconnects between political rhetoric and practical action, between public discourse and private sentiment, and between leaders and led, suggests that some of the challenges may currently be under-estimated. And it might explain why nearly no one this writer spoke to had any hopes in the November conference.

Clara Marina O'Donnell is a research fellow at the Centre for European Reform.

Thursday, September 13, 2007

The Microsoft appeal: The Commission was right

by Simon Tilford

On September 17th the European Union’s Court of First Appeal will rule on Microsoft’s long-awaited appeal against the record fine imposed on the company by the Commission in 2004 for abusing its dominant position in computer operating systems. The decision to fine Microsoft has prompted unprecedented criticism of EU competition policy and even accusations of anti-US bias. If the court upholds the Commission’s decision, demands for it to be stripped of its competence over competition law will no doubt intensify. The criticism of the Commission is without merit.

Indeed, the Microsoft case is a poor choice for critics of the Commission to champion. Attempts to portray its ruling as anti-competitive and as a threat to innovation do not really stack up. This case is not, as Microsoft and its supporters contend, about punishing a company for being successful by compromising its intellectual property. The market for IT is not so different from other markets that the suspension of antitrust law is justified. Rather, the case is about making it possible to compete with Microsoft in its core areas of business.

Supporters of Microsoft tend to conflate various issues. First, they accuse the Commission of undermining competition and hence innovation by placing constraints on dominant firms in the IT sector. According to this argument, dominant companies will only make big investments if they are confident they will face no significant competitors. Second, they argue that the Commission should focus on the impact on the consumer and not on the level of market dominance; that is, it doesn’t matter how much of a market a company (in this sense, Microsoft) controls, if its dominance benefits the consumer.

There are obvious weaknesses to these arguments. If it were the case that companies only innovate when they are confident that they will be allowed a monopoly, no company operating in a competitive market would invest in product development. But of course they do. They have to do so in order to ensure that their product or service is better than that of the competition. Only then can they hope to win a profitable share of the market. It is this need to be better than the opposition that drives innovation and productivity growth.

Similarly, it is not clear how Microsoft’s dominance benefits consumers. Is it because the company’s size (and hence ability to leverage huge economies of scale) allow it to offer products at low prices? If so, this would be an argument for abolishing competition policy. Or is it because consumers benefit from the ubiquity of Microsoft products? This ubiquity almost certainly does provide short-term benefits to consumers. But it is hard to see how allowing such dominance could serve consumers in the long-term if it precludes innovative companies challenging Microsoft.

Just because Microsoft won the race does not mean it should be permitted to dominate huge markets indefinitely. This would not be tolerated in any other market, including other high-tech markets. The IT market is a fast-moving one, but this is hardly a unique characteristic.

EU competition policy is already under attack from member-states that would like to provide their companies with more support and who want to promote national champions to positions of market dominance. A ruling by the Court of First Appeal in favour of Microsoft could not come at a worse time. It would play into the hands of those like France’s President Sarkozy that want to dilute EU competition policy, and who question what competition has done for the EU.

Simon Tilford is chief economist at the Centre for European Reform.