An assessment of telecommunications reform in developing countries

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Abstract

This paper analyzes the impact of policy reform in basic telecommunications on sectoral performance using a new panel data set for 86 developing countries across Africa, Asia, the Middle East, Latin America and the Caribbean over the period 1985 to 1999. We address three questions. First, what impact do specific policy changes—relating to ownership and competition—have on sectoral performance? Second, how is the impact of change in any one policy affected by the implementation of the other, and by the overall regulatory framework? Third, does the sequence in which reforms are implemented affect performance? We find that both privatization and competition lead to significant improvements in performance. But a comprehensive reform program, involving both policies and the support of an independent regulator, produced the largest gains: an 8 percent higher level of mainlines and a 21 percent higher level of labor productivity compared to years of partial and no reform. Interestingly, the sequence of reform matters: mainline penetration is lower if competition is introduced after privatization, rather than at the same time.

Introduction

The dynamism of global telecommunications markets is widely attributed to rapid technological development and an increasingly liberal policy environment. Over the past decade, a large number of developing economies have embarked on reform paths, and witnessed significant expansion of their telecommunications networks and striking improvements in productivity. Between 1985 and 1999, both mainline penetration (or teledensity) and labor productivity in developing countries more than tripled. But neither performance nor policy was uniform within or across regions. For example, while mainline penetration in Sri Lanka increased more than five-fold, Malawi saw a more modest 40% increase. It is not obvious where the improved performance is because of specific policy choices rather than in spite of them, and where more could have been achieved had policy been different.

Telecommunications liberalization is a complex and relatively new process for developing countries. Choices have to be made regarding the privatization of state-owned telecommunications operators, the introduction of competition, the opening of markets to foreign investment and the establishment of pro-competitive regulations. While there is growing consensus that each of these elements is desirable, it is a rare country that has immediately gone all the way on all fronts. In general, governments have differed in their willingness to concede control to the market, and most have a penchant for gradualism. Competition has been introduced, but the number of firms has been fixed by policy; privatization is often partial and there are limits on foreign participation; ‘autonomous’ regulators have been created but are rarely fully independent.1

This paper introduces a new data set on telecommunications policy in 86 developing countries and analyzes the impact of telecom policy on performance. We address three questions. First, what impact do specific policy changes—relating to ownership, competition and regulation—have on sectoral performance? Second, how is the impact of any one policy change affected by the implementation of complementary reforms? Third, does the sequence in which reforms are implemented affect performance?

There are several recent cross-country econometric studies examining the effect of telecommunications reform on sector performance.2 Wallsten (2001), Ros (1999), and Li and Xu (2000) explore the effects of reforms such as privatization, competition and regulation on several performance indicators, using panel data. While the results broadly indicate that liberalization of the sector improves performance, different country samples and estimation techniques lead to differing conclusions about the effects of specific policies.

Our empirical investigation improves upon existing studies in several ways. First, we explore not only individual and interactive effects of policy choices, but also whether the sequencing of privatization and competition affects performance. This latter dimension of telecommunications reform has not been analyzed before. Second, the paper quantifies the relative importance of autonomous and policy-induced improvements in sector performance. Third, we use more comprehensive data on policy and regulation than previous studies. Our panel spans the years 1985–1999 and thus captures a large number of reform initiatives in developing countries that occurred in the second half of the 1990s. Fourth, our competition variable directly reflects competition in the local fixed-line segment, which we believe is the most relevant influence on teledensity and telecommunications productivity. Furthermore, we are also able to control for the endogenous effect of the competing mobile network while explaining sectoral performance. Finally, our estimates control for the problems of serial correlation and panel-level heteroscedasticity, which were not addressed by previous studies.

The rest of the paper is organized as follows. Section 2 presents a conceptual framework to analyze the impact of reforms on performance, building upon the existing literature on the subject. The estimation methodology and results are presented in Section 3. Section 4 concludes.

Section snippets

Conceptual framework

Our objective is to find a relationship, if any, between the diverse patterns of policy and performance. Three dimensions of policy are relevant: a change of ownership, introduction of competition, and strengthened regulation. Performance itself is generally seen as having two dimensions: internal efficiency within firms and allocative efficiency in the market. In order to generate testable hypotheses, we link the conceptual discussion in this section to two proxy variables. Our proxy for

Econometric investigation

In this section, we summarize some of the existing empirical literature on telecommunications reforms, describe our new database, and proceed to test econometrically the hypotheses in Section 2. A limitation of our analysis is that available measures of policy do not capture the multiple dimensions of a complex reform process. For example, the mere issuing of additional licenses in a particular service segment is an imperfect indicator of effective competition—let alone the contestability of

Conclusion

This paper has analyzed the impact of policy reform in basic telecommunications on sectoral performance in 86 developing countries in Africa, Asia, the Middle East, Latin America, and the Caribbean over the period 1985 to 1999. While most countries experienced substantial increases in teledensity and labor productivity—in part driven by fast technological progress in telecommunications—the approach to policy reform has differed markedly across regions and countries. Most governments have been

Acknowledgements

The authors are especially grateful to Simon Evenett for valuable advice and to the participants at the international trade seminar series at the World Bank for helpful comments. Thanks are also due to Christine Zhen-Wei Qiang and Colin Xu for providing access to some of the data used. The United Kingdom’s Department for International Development provided financial support for the services trade database used in this paper. All errors and omissions are our own.

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