The Impact Of Telecoms

The Impact of Telecoms Regulatory Reform on National Economic Growth

17th Biennial ConferenceMontreal, Canada

June 24th-27th, 2008

International Telecommunications Society (ITS)

Dr. Amit K. MaitraWeatherhead School of Management

Case Western Reserve University

Managing DirectorSATLINK COMMUNICATIONS

Chief Technology OfficerLockheed Martin Corporation IS&GS Enterprise Solutions

25 June 2008 Dr. Amit K. Maitra, ITS 2008 Montreal, Canada

2

Agenda

• Context

• Target Policy Mix

• And the Experts Say

• The Grand Experiments

• Statistically Speaking

• Findings and Recommendations

• National Economic Growth Revealed


3

Context


4

Target Policy Mix• The Issues

– In the early 1950s and 1960s, most countries were confronted with three challenges:

• Rapid technological change;• Abysmal performance of

state-owned telecom providers[1];

• Lack of adequate financial resources to deploy and integrate new technologies that could offer better and expanded services to the customers.

[1] By the 1980s, it was evident that nationalized monopoly telecommunications firms in developing countries could not provide telecom services. Potential customers faced long waiting periods before getting connected to the network. A 1992 study by The World Bank indicated that many large firms bypassed the monopoly provider by building their own networks. Refer to Wellenius et al.., “Telecommunications: World Bank Experience and Strategy,” World Bank Discussion Paper 192.

• The Policy Choices– Privatization of the monopoly service provider;– Introduction of competition;[2]– Creation of independent regulatory agencies

[3] The experts promoted competition to create the right incentives for superior economic performance.

[2] The experts promoted competition to create the right incentives for superior economic performance.[3] They also suggested the creation of independent regulatory authorities that “supervise” deregulation

by simulating the effects of competition in a way that generates the right level of market competition.


5

And the Experts Say

• The experts from the World Bank and other international lending institutions promoted establishment of independent regulatory authorities that could oversee competition to create the right incentives for superior economic performance. They wanted the reforms to proceed in the following order:

1. Create independent regulatory agencies

2. Introduce competition

3. Privatize the state-owned monopoly provider.


6

The Grand Experiment• It was up to each national administration to implement the various components in as many different

ways and as extensively as they could.[1] Thus, initially, government often retained partial ownership of the incumbent.[2] In a few instances, government also allowed the newly privatized firm a temporary monopoly by barring competition to entice investors.[3] Regulation also took many forms, with its details impacting the sector performance and the incumbent’s ability to exercise market power. In the context of building a conceptual model that has a moderate degree of generality, it is important to study as many countries as possible that made different responses to telecoms restructuring, including

– Countries that have emphasized minimizing unemployment;– Countries that have responded to international organizational pressures;– Countries that were primarily seeking outside capital.

• For pragmatic reasons, however, this research project will review and analyze only a select few countries, which, until recently, preferred monopolies involving authoritarian and centralized decision making procedures, but then suddenly caught a glimpse of the potential for rapid gain through telecommunications privatization and liberalization efforts and began making plans for entry into market based economy. [1] The reform idea seemed attractive to governments, as they viewed privatization as a unique opportunity to increase revenues.

• [2] State control did not quickly disappear through privatization, particularly when the State retained partial ownership and golden shares. Michael Whincop et. al. underscore a problem, that is, many governments interested in privatization may have smaller short-term incentives to liberalize. These governments act under the pretense that an entity to be privatized could be sold for a higher value if it retains all or some of its monopoly power, permitting higher prices to be charged and then higher profits to be achieved. See Whincop, Michael and Rowland, Stuart, “Plus Ca change …”. (The effect of markets and corporate law on the governance of privatized companies). Chapter 3 of Moazzen, H. et al.

• [3] Examples will be supplied later.

Statistically Speaking

• Explored the effects of privatization, competition, and independent regulatory structure on telecoms performance in 237 countries

• Used comprehensive country-level panel data • Covered the period from 1990-2004• Estimated a simultaneous model for telecoms

investment and economic growth, controlling for various sector characteristics and macroeconomic indicators

• Adjusted the model for endogeneity between telecoms sector performance and national economic development


7

The Models


8

yit = β1(MONit) + β2 (FULLit) + β3 (FULLit) * (COMPit) + β4 (FULLit) * (REGit) + β5 (FULLit) * (COMPit) * (REGit) + β6 (T) + β7 (Xit) + Φ + Ξit … …. … … (1)

where yit, is the natural logarithm of the performance indicator for each of the following cases: •The number of fixed-lines per capita (FIXDENSITY[3]) •The number of mobile phones per capita (CELLDENSITY) •The cost of a three-minute local fixed-line call (LOCCALLCOST) •The cost of a three-minute local cellular call (CELLCALLCOST) •Telecoms Investment as a percentage of total investment (TELCOMINVEST)

[3] Teledensity or the penetration rate, i.e., the number of lines per capita, is our proxy for the stock of telecommunications infrastructure, which is

needed (rather than telecommunications investment) since consumers demand telecommunications infrastructure not telecommunications investment

per se. A measure of telecommunications demand is required in order to model both the demand for and supply of telecommunications, itself.

zit = α2 zit-1 + γ1 ŷit + γ2 ŷit-1 + γ3Xit + γ4t + φi + υit …………………………………….. (2)

where zit is the natural logarithm of the national economic development outcomes (e.g., % changes in LOGGDP).

Findings and Recommendations


9

•Rural areas experienced the largest growth in cell phones

•The effect of having full privatization and regulation: •4.3% increase in telecom investment •$ 0.306 decrease in cellcallcost •The effect of having full privatization and competition: •4.8 percent decrease in cell density •Between $0.19 and $0.30 increase in cellcallcost •Each passing year leads to a 0.6% increase in fixedesnity (4,5,6), and approximate 2% increase in cell density (7,8,9), and between a $0.023 and $0.038 increases in cellcallcost (13,14) •Competition and regulation leads to a: •13% increase in cell density •31 cent decrease in callcallcost •The total effect of full competition is obtained by adding the estimates on full, full*com, and full*reg. Full competition leads to a: •1.1 percent increase in fixeddensity, • 20 cent increase in cellcallcost

National Economic Growth Revealed


10

The dependent variable is log GDP.

The instrumented variable is CELLDENSITY.

Instruments are MON, FULL, COMP, REG, and the interaction terms.

A one point rise in CELLDENSITY increase GDP by 0.9%

A one percent increase in lagged CELLDENSITY combined with current CELLDENSITY increase GDP by 1.7% (.055-.038) Each year, average GDP growth is between 2 and 3 %. (the coefficient on “time”)

Thank You

Documents

The Impact Of Telecoms