The enormous productivity growth in telecommunications that Germany and France experienced during the late 1990s helped them outpace the United States by a wide margin (Exhibit 1). By 2000, German productivity had even edged past the US level, while France had closed the gap with the United States considerably. These dramatic advances resulted largely from the liberalization of fixed-line markets and from much faster productivity growth in mobile services. But the overall figures hide big variations within the sector.

Liberalization drives fixed-line advances

In fixed-line services, a liberalized market and the privatization of national incumbents in the 1990s increased competition and shareholder pressure. As a result, the incumbents shed excess labor and cut tariffs. Traffic increased and, with a smaller workforce, labor productivity rose. Germany outstripped France for two reasons: Deutsche Telekom cut more jobs in the fixed-line business than did France Télécom; and Integrated Services Digital Network (ISDN) services were adopted more quickly in Germany, thanks to a Deutsche Telekom marketing campaign, lower prices, and the greater availability of this technology there as compared with other European countries. The subsequent jump in the number of telephone lines required only marginal extra labor.

Germany and, to a lesser degree,...