Regulatory reform and performance in telecommunications: unrealized potential in the MENA countries

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Telecommunications Policy 28 (2004) 59–78

Regulatory reform and performance in telecommunications: unrealized potential in the MENA countries$ Aristomene Varoudakisa, Carlo Maria Rossottob,* a

Development Prospect Group, The World Bank, 1818 H Street, MC2-200, Washington, DC 20433, USA b Global Information and Communications Technology, The World Bank, 1818 H Street, F 5K-220, Washington, DC 20433, USA Received 1 February 2002; received in revised form 1 May 2002; accepted 1 June 2003

Abstract Based on international evidence, this study confirms that telecommunications liberalization is conducive to higher efficiency, contributing to Information and Communications Technologies (ICT) growth. Assessment of liberalization benefits on sector performance is based on an indicator encompassing three key factors: (i) competition in fixed and mobile networks; (ii) openness to foreign ownership; and (iii) procompetitive regulation. Notwithstanding recent progress, Middle East and North Africa (MENA) telecommunications markets remain less open to competition than elsewhere in the developing world: competition is hindered, private participation is scarce and foreign ownership is most severely constrained, while regulatory regimes do not support fair competition. r 2004 Elsevier Ltd. All rights reserved. Keywords: Liberalisation; Middle-East; Africa; Regulation; Competition

1. Introduction and overview Telecommunications provide access and backbone services which affect efficiency and growth across a wide range of industries. The quality and price of such key services shape overall economic performance, as they affect the capacity of businesses to compete in foreign and domestic markets. Reflecting the rapid pace of innovation in information and communications technologies (ICT), competitive market forces are becoming increasingly important in the $

The authors wish to express their gratitude to Dr. Bjorn Wellenius and Dr. Dipak Dasgupta for the excellent exchanges of views on the paper. The authors retain full responsibility for any error in this paper. *Corresponding author. Tel.: +1-202-473-73-54; fax: +1-202-522-30-01. E-mail addresses: [email protected] (A. Varoudakis), [email protected] (C.M. Rossotto). 0308-5961/$ - see front matter r 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.telpol.2003.06.002

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provision of telecommunication and networking services, definitely moving the sector away from the ‘‘natural monopoly’’ market model (World Bank, 2002). International evidence suggests that market openness in telecommunications services and the quality of the regulatory regime are drivers of ICT sector development (OECD, 2000b). Although in some cases over-investment has actually lowered the price of ICT services, in high-income countries there is broad evidence that greater market openness encourages expansion of the network at lower cost, while improving the efficiency of incumbent operators and lowering the costs of services to ICT-using sectors (Boylaud & Nicoletti, 2000). But expenditure on telecommunications services also increases with economic development, thus boosting the size of the whole sector. And the quality and cost of telecommunications services improves along with the resources allocated to upgrade telecommunications infrastructure. This study empirically looks at the determinants of telecommunications sector performance, based on international evidence across a wide range of high-income and developing countries, and strongly confirms that market openness and pro-competitive regulation improve Telecom sector performance. In turn, improving the quality and lowering the cost of telecommunications services holds a key role in improving overall economic performance, especially in developing countries: *

*

*

*

Better and low-cost telecom services bolster internal efficiency, competitiveness and strengthen the links of developing economies with global markets. More competitive telecom markets improve the investment climate, and greatly enhance the attractiveness of liberalizing countries to FDI. A low access cost and high-quality telecommunications infrastructure also facilitates the diffusion of the internet and ICT applications. And the spread of the internet holds great promise in helping developing countries catch up more rapidly with the expanding pool of global knowledge (Bhatnagar, 1999; World Bank, 2000). Developing countries may also be able to successfully position themselves in the global ICT market by nurturing competitive advantage in specific niches—as suggested, for example, by the booming exports of ICT business services and software in countries like India, Israel and Malaysia.

Middle East and North Africa (MENA) countries face the medium term challenges of creating employment opportunities for a rapidly growing young population, serving local markets and exports needs. This requires development and growth, and thus integration in global markets. Growth spurred by fast-track opening up of markets in telecommunications services, holds a big promise of realizing this challenge (Hsiao-hui Wang, 1999; Jussawalla, 1999; Frempong & Atubra, 2001). But, despite recent progress in a number of countries, market liberalization in telecom has been slower in MENA than elsewhere in the developing world. On average, MENA countries lag behind all other developing regions in telecom services liberalization. Unrealized potential in telecommunications hampers ICT development and caps the potential for growth. The study offers an assessment of this unrealized potential, and reviews the scope for mediumterm telecom sector growth. It also offers some estimates of the likely impact of telecommunications liberalization on user sectors and on broader economic performance. Section 2 benchmarks MENA countries with regard to liberalization in telecommunications, by developing an indicator of market openness that encompasses elements of competition, openness

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to FDI, and quality of the regulatory regime. Section 3 examines the empirical linkages between market openness and telecommunications sector performance, and evaluates the unrealized telecommunications growth potential in a number of MENA countries under the existing regulatory regimes. Section 4 evaluates the benefits from injecting more competition into telecom markets. Section 5 concludes and draws the policy implications of the analysis.

2. Assessing market openness in telecommunications 2.1. Factors of market openness in telecommunications Three main factors affect market openness in telecommunications: degree of competition, openness to FDI and pro-competitive regulation. 2.1.1. Degree of competition The telecommunications market can be segmented in different ways. A first distinction is between services and networks. From the point of view of services, we can distinguish between voice (local, domestic long distance and international) and data services. If we consider the networks used to provide these services, we can distinguish between fixed and mobile infrastructure. The dynamics of competition in telecommunications has common features with those of other vertically integrated utilities. Competition can be introduced at a service provider level, having different competitors using the same network infrastructure. In other cases, competition is introduced both at a service provision level and at a network operator level, with different service providers and different network operators. The number of players in each market segment and the relative market share is an indication of the degree of competition. A competitive market is considered a market with low barriers to entry, prices towards marginal costs and absence of collusive behavior among market players. When competition is present both at service provision and at network operator level, and the players are allowed to operate in both segments, it is important that service providers have equal and not-discriminatory access to the infrastructure of network operators. In addition, when a network operator has a dominant position, other competing network operators must have fair and non-discriminatory access to parts of its network. Usually, countries in their process to open up the telecommunications sector to competition, do not open all segments of the market (services and infrastructure) at the same time. In opening up the sector to competition, for example, countries have decided to introduce competition in mobile services and infrastructure before voice services provided through fixed networks (e.g. Morocco). In other cases, international data services were opened up to competition before local and long distance services (Jordan). Even though it is hard to identify a ‘global best practice’ on the sequencing of sector reform, it has to be stated that during the last 20 years, there has been an evolution of reforms placing more priority on the objective of attaining greater competition per se. The reforms of the early ‘80s (Chile, United Kingdom), were inspired by the need to enhance the efficiency of a public enterprise. Competition was seen as an effective incentive tool (Vickers & Armstrong, 1994). Countries that have more recently embarked in sector reform (e.g. continental European countries, many emerging markets like Morocco or Sri Lanka) had more technological

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options, as well as policy tools (experience of already successful markets), to introduce competition from ‘‘day-one’’ (Samarajiva, 2000). The time and impact of sector reform has also been more dramatic in these latter cases (McCormick, 2001; Wellenius & Rossotto, 1999). Echoing this evolution, the indicator developed below measures the degree of competition in telecommunications markets, as opposed to other dimensions of reform linked to the privatization of state-owned incumbents. In building a set of indicators to measure the degree of competition, the following section considers the degree of competition existing in different market segments (fixed line local, long distance, international, leased line services and infrastructure; analogue and digital cellular services and infrastructure). 2.1.2. Openness to FDI A second factor characterizing the openness of the sector is the openness to Foreign Direct Investment. International companies develop their strategies on the capability to offer the same products in different international markets. An operator like France Telecom, for example, has numerous interests in telecommunications operators in Eastern Europe and Africa. Telefonica of Spain has a concentration of investments in Latin America and, recently, Morocco. Niche operators, like Millicom, emerged as holding companies with multiple participations in small cellular operators in Africa. This flow of investment is of crucial importance, as it allows them to develop and transfer best practice and technological knowledge. The WTO agreement has specific provisions in the area of FDI in telecommunications services. Over 70 countries presented an offer to the WTO within the terms of the Negotiating Group on Basic Communications, which completed negotiations on 15 February 1997, allowing foreign operators in specific segments of their markets. Of the countries of the MENA Region, only three (Israel, Morocco and Tunisia), presented an offer. This is a striking difference with other emerging regions of the world, such as Central and Latin America, where 15 countries presented an offer. A new round of negotiations for telecommunications services is under way. The benefits of liberalization and influx of FDI, following the WTO Agreement on Basic Telecommunications 1997, have been estimated to be considerable for the countries presenting an offer, especially in terms of higher sector efficiency, falling prices, better network and service quality, increased competitiveness (Petrazzini, 1996). In developing countries in particular, openness to FDI is essential to reap the benefits from greater competition, as incumbents and potential domestic competitors are likely to operate at standards below international best practice. 2.1.3. Pro-competitive regulation and independence of the regulatory body A third crucial factor of market openness in telecommunications is regulatory reform and separation between the operation and the regulation of the sector. Historically, the ministry in charge of telecommunications was policy-maker, regulator and operator in the sector. In the process of introducing competition to the incumbent operator, therefore, the independence of the regulatory function is a key requisite to ensure fair competition and to avoid discrimination. The quality of the regulatory framework is also measured by other variables, such as an adequate interconnection regime, equal access to spectrum frequencies, well defined universal access obligations and so on. The presence of minimal, clearly defined and pro-competitive regulations and legal provisions in these areas is often associated with the reduction of the

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so-called ‘‘regulatory risk’’ in the sector, that is the risk that competition in the sector is hindered by inadequate, uncertain or discriminatory regulation (Makhaya & Roberts, 2003). International telecommunications operators attribute a great weight to the quality of the regulatory framework and its capacity to reduce regulatory risk. These variables are often a major determinant in the price that investors are willing to pay for new cellular licenses, or in privatization transactions. In extreme cases, they constitute a ‘‘make-or-break’’ factor in the decision of investors to enter a particular market (Smith & Wellenius, 1999). While it is difficult to quantify and assess the importance of these variables in an econometric model, the next section tries to capture some of the benefits associated with regulatory reform and independence. In particular, it presents an indicator on the independence of the agency and an indicator which associates the power given to an independent regulator to handle interconnection disputes with higher transparency and reduced regulatory risk. 2.2. An indicator of telecommunications liberalization An indicator of telecommunications liberalization can be used as a benchmark of differences in market openness across countries and help assess the payoff of different regulatory reform options. The indicator covers 151 high-income and developing countries, with the regulatory status of the sector in 1998–99 serving as point of reference.1 The indicator combines four criteria of market openness and pro-competitive regulation. *

*

*

*

Average degree of competition in the different segments of the fixed telephony network and services (local; domestic long distance; international; leased lines). Competition indices in each segment range as follows: 1 for monopoly; 2 for partly competitive conditions; and 3 for full competition. Average degree of competition in the analogue and digital segments of the mobile telephony network and services. As for fixed telephony, competition indices in each segment range from 1 to 3, for monopoly, partly competitive, and competitive conditions. Openness to foreign direct investment in the fixed and mobile networks (1 if FDI is allowed in each case, 0 otherwise). Presence of an independent regulatory body (1 if yes), and extent of its powers in handling interconnection issues (1 if interconnection pricing is entrusted to the regulatory body, 0 otherwise).

The indicator of market openness is constructed by adding the country scores on each of those four criteria. It ranges from 2 (least open) to 10 (full market openness). Depending on individual country scores (S), four broader categories are considered: A. Restricted market access: Sp3 B. Limited degree of market openness: 3oSp5:5 1

The data source is a 1998 ITU survey on Telecommunications regulation (http://www.itu.int/ITU-D/treg/ index.html). The data presently available does not allow to refine the indicator assessing the distinction between competition at a service provision level only, and competition at both network operation and service provision. Developing a more refined indicator could be the object of future research.

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C. Moderate market openness: D. Full market openness:

5:5oSp7:5 7:5oSp10

Other indicators of liberalization in telecommunications include those developed by Mattoo, Rathindran, and Subramanian (2001) and Warren (2000). The present indicator is similar in spirit to those developed earlier, but incorporates two additional elements: First, it includes a separate assessment of market openness in the mobile and fixed segments of the market. Second, it includes as a separate factor the regulatory body’s effective power in handling interconnection pricing. Excessive market power of the incumbent operator in setting interconnection prices has often preempted competition in otherwise liberalized telecommunications markets. 2.3. Differences in telecommunications liberalization across countries High-income countries (HIC) have taken the lead in telecommunications liberalization. But opening up of telecommunications markets to competition has been ambitious in many developing countries as well (Cowhey & Klimenko, 2000). Countries in Latin America (LAC) have been ahead of others, closely followed by countries in South Asia (SA) and in East Asia and the Pacific (EAP). By contrast, regulatory reform in telecommunications has been slower in Eastern Europe and Central Asia (ECA), Sub-Saharan Africa (SSA) and MENA countries, where markets remain less competitive than elsewhere in the developing world (Fig. 1a). For example, in mobile telephony, MENA countries have been much slower than Latin America in opening up markets to competition, though both regions started at about the same level in the early 1990s (Fig. 2a). And reflecting the slow opening up of markets to competition, telecommunications privatization in MENA has also been slower than in Latin America (Fig. 2b). Service provision in telecommunications—as measured by fixed and mobile phone penetration—is higher in middle-income developing countries, especially in Eastern Europe and Central Asia; Latin America, and MENA (Fig. 1b). Since per capita income is a main driver of demand for telecommunications services, MENA countries compare favorably with other regions despite the low level of competition in telecommunications markets. By contrast, internet penetration in MENA—as measured by the relative number of internet hosts—remains far below levels seen in regions with similar income levels—in particular, Eastern Europe and Central Asia, Latin America (Fig. 1c). Restrictive market access may be a factor, as internet penetration is particularly sensitive to access pricing and to the regulatory framework for internet service provision. Across MENA countries, telecommunications markets are more competitive in Israel and Morocco, while Bahrain, Egypt, Jordan, and Lebanon fall into the upper range of countries that ensure a limited degree of market openness (Fig. 1d).2 Market access is restricted in all other countries, due to various regulatory impediments to entry and competition. Overall, MENA countries have stepped-up the pace of telecommunications sector reform during the past three years, compared with our reference point for international benchmarking (1998–99). However, progress has been uneven, with only five countries having achieved conditions of moderate market openness in telecommunications, while full market openness

2

The detailed ratings for the MENA countries can be found in annex, part B.

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Per 100 inhabitants (Main lines, 1999; Mobile, 2000)

9

60

9 8 50

8

Liberalisation index (right axis)

7

7 6

40

6 5

5

30 4

4

Main lines

20

3 2

3 Mobile subscribers

10

2 1

1 0

0 HIC

LAC

SA

EAP

ECA

SSA

…while internet penetration remains low…

(a)

0 HIC

MENA

LAC

SA

EAP

ECA

SSA

MENA

…and liberalization across countries is uneven

(b)

Internet hosts per 10,000 people (average for each country group, 1999)

Per 100 inhabitants (Fixed, 1999; Mobile, 2000)

60

7

465

50

6

50

45 40

Liberalisation index 1998-99 (right axis)

5

40

Mobile subscribers

35 30

30

3

Fixed lines

25

20

2

20 15 10

0 HIC

ECA

LAC

EAP

MENA

SSA

10

1

0

0

Isr a Mo el ro cc o Le ba no n Ba hr ain Jo rd an Eg yp t Ku wa it Tu nis ia Ye me Sa ud n iA ra bia Ira n Lib ya Sy ria Om an Al ge ria

5

4

SA

(c)

(d)

Fig. 1. (a) Telecommunications markets remain less competitive in MENA (b) but the size of fixed and mobile telephone networks is significant (c) while internet penetration remains low (d) and liberalization across countries is uneven. Source: Authors’ calculations on the basis of the model in Section 3.1.

In 1990 No competition in cellular Competition in cellular

In 2000

In 1990

(a)

No privatization

In 1990

In 2000

Privatized

In 2000

In 1990 In 2000

(b)

Fig. 2. (a) Competition in mobile networks has advanced only slowly in MENA (b) and privatization has also been hesitant. Source: Authors’ calculations.

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Full openness

Moderate openness Limited openness Restricted access

Ira n Li by a O m an Sa Qa ta ud iA r ra bi a Sy ria

1998

Is ra e M or l oc Le co ba no Ba n hr ai n Eg yp Jo t rd an Ku w a Tu it ni si a Ye m en Al ge ria

10 9 8 7 6 5 4 3 2 1 0

Fig. 3. Recent liberalization steps have been uneven. Source: Authors’ calculations; based on Appendix A, part B.

prevails nowhere in the region (Fig. 3). Opening-up the market to competition has been most ambitious in Algeria, and in part, Morocco. But despite this progress, telecommunications markets in MENA still remains, on average, less competitive than elsewhere. MENA countries as a whole still fall short of the average ratings achieved by other regions (Fig. 1a), even disregarding reforms undertaken since 1998.

3. Market openness and performance in telecommunications: Empirical links Across countries, the performance of the ICT sector—as measured by the size of the fixed and the mobile networks; revenue as a share of GDP; internet penetration; quality of service (waiting list)—also improves with greater market openness (Table 1). Telecommunications liberalization and improved ICT sector performance also seem to be associated with greater shares of high-tech exports. However, better performance in the telecommunications sector is partly driven by economic development. Income growth bolsters demand for telecommunications and networking services, both from businesses and households, and at the same time provides the financial resources for investment necessary to expand the telecommunications infrastructure. And in higher-income countries services markets are generally more competitive, so that the association presented in Table 1 is ambiguous. Econometric estimations have been carried out on a cross section of countries, to disentangle the impact of market liberalization from that of economic development and other factors. The results in the table refer to developing and developed countries. 3.1. Determinants of telecommunications performance: International evidence Cross-country estimates of the determinants of telecommunications sector performance, covering five core indicators and a varying sample of between 109 and 129 countries, are presented in Table 2. The regressions account for a large part of cross-country variation in performance— ranging between 80% and over 90% for fixed line, mobile phone, and internet penetration. Structural determinants include the level of per capita income, the size and density of population and controls for small economies, economies in transition and oil exporters (Appendix A; Part C). The impact of market openness in telecommunications is captured by the liberalization indicator,

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Table 1 Market openness in telecommunications: Summary of performance indicators Full market openness Telecom sizea Mainline penetrationb Mobile penetrationb Internet hostsc High-tech exportsd Size of waiting liste Per capita GDP

Moderate market openness

2.9 32.1 28.2 260.7 14.9 7.6

Limited market openness

2.5 19.2 17.5 68.4 13.4 17.3

Restricted market access

3.2 15.1 7.7 12.8 4.8 21.0

2.1 8.8 6.6 1.2 2.6 47.7

13510

7290

5061

3990

38

41

42

30

Number of countries

Source: Authors’ calculations. a Telecom revenues as a share of GDP. b Per cent of population. c Per 10,000 people. d As a share of manufactured goods exports. e Per 100 mainlines.

Table 2 Cross-country differences in telecommunications performance: empirical estimates. (Estimation period: 1999)

Equation # Dependent variable Independent variable Intercept Ln (GDPPC) Ln (POP) Ln (POPDN) Ln (HEDC) STEPLIB Ln (MOB) TRANS OPEC SMALL Adjusted R2 D–W Observations

Fixed line penetration

Mobile phone penetration

Internet penetration

Share of telecom revenues in GDP

Productivity of labor in telecom (I)

Productivity of labor in telecom (II)

(1) Ln (MAIN)

(2) Ln (MOB)

(3) Ln (HOST)

(4) Ln (TELSIZE)

(5) Ln (PRLAB)

(6) Ln (PRLAB2)

4.78 (5.7) 0.80 (7.5) 0.07 (2.1)

10.8 (9.3) 1.58 (19.6) 0.17 (2.8) 0.12 (2.0)

15.8 (8.1) 2.42 (17.8) 0.32 (3.5)

0.66 (1.0) 0.09 (1.7) 0.07 (2.4) 0.05 (1.7)

5.03 (10.7) 0.66 (11.1)

0.69 (2.1) 0.55 (13.7)

0.35 (3.4)

0.70 (3.4)

0.12 (2.1)

0.15 (2.5)

0.05 (1.6)

0.41 (4.7) 0.14 (2.9) 0.75 (4.8)

0.914 2.07 129

0.68 (1.7) 1.64 (3.0) 0.824 1.68 123

0.859 1.84 109

0.47 (3.0) 0.77 (2.3) 0.243 1.96 120

0.12 (2.8)

1.64 (7.8) 0.62 (4.3) 0.702 2.02 129

0.30 (2.1) 0.689 1.86 133

Note: Method of estimation: Ordinary Least Squares, with White Heteroskedasticity-Consistent Standard Errors and Covariances; Student’ t-statistics in parentheses; Definition of variables in Annex, Part 2. Source: Authors’ calculations.

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transformed in a stepwise manner (STEPLIB). Countries are grouped in the four clusters outlined above, with the market openness indicator increasing in four steps, from 1 for the countries with ‘‘restricted market access’’, to 4 for the group of ‘‘full liberalizers’’. Per capita income is a main driver of telecommunications services demand, determining the size of the ICT networks. The estimated income elasticity of demand is less than 1 for the fixed line network, but significantly higher than 1 for the mobile network and internet penetration. And though influenced by per capita income, the level of higher education enrolment seems to be a separate driver of fixed line penetration as well. Other factors that affect the provision of telecommunications services include the population size and density. Rates of fixed, mobile, and internet penetration invariably turn out to be smaller in countries with large populations. Large populations tend to be more dispersed, and thus harder to cover by ICT networks. Increased market competition boosts demand for fixed and mobile telephone services by lowering prices to users. This is more evident in the case of the mobile sector, whose size increases in step with market openness—after accounting for other country-specific structural characteristics. And though there is no evidence of a direct impact of liberalization on fixed line penetration, the increase in the size of the mobile network is associated with a greater size of the fixed network (Eq. (1); Table 2). This could reflect positive network externalities, as cheaper mobile communications and broader network coverage are also likely to create incentives for incumbent fixed-line operators to lower prices, introduce new services, and improve efficiency (Rossotto, Kerf, & Rohlfs, 1999). Policies that inject more competition in areas such as leased lines and backbone networks, along with appropriate pricing policies designed to stimulate demand, are key in supporting internet penetration and broader ICT sector development (OECD, 2000a). After accounting for other structural factors, the spread of the internet—as measured by the relative number of internet hosts—turns out to be greater in countries with greater market openness in telecommunications (Eq. (3); Table 2). Greater market openness also stimulates expenditure on telecommunications, by lowering prices to consumers and thus bolstering demand, and also by expanding the size of the networks and the array of services offered to users. International evidence seems to confirm that increased market openness is indeed associated with a greater size of the telecommunications sector—as measured by the share of Telecommunications revenues in GDP (Eq. (4); Table 2). Injecting greater competition in telecommunication services can also increase the efficiency by which labor and capital are employed in telecommunications. The estimates suggest that greater competition is associated with increased productivity of labor in telecommunications—as measured by revenues per employee (Eq. (5); Table 2). Market openness turns out to significantly affect productivity in telecommunications after controlling for other enabling factors that vary across countries, as captured by differences in per capita GDP. This positive impact is robust to alternative ‘‘physical measures’’ of productivity of labor in telecommunications—as, for example, the number of main lines per employee. Physical productivity is also found to increase along with greater market openness, after controlling for other structural determinants captured by differences in per capita GDP (Eq. (6); Table 2). Higher productivity in turn reduces costs and creates room for lowering the prices of telecommunication services, while competition forces declining margins, with operators passing

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much of the cost savings to the users. Potential gains could be sizeable: Moving from ‘‘restricted market access’’ to ‘‘full market openness’’ could boost labor productivity in the telecommunications sector (according to the measure in Eq. (5)) by as much as 60 per cent. Assuming a similar increase in capital productivity, and taking as benchmark calculations made for developed countries, the increase in efficiency could lower telecommunications costs by as much as 50 per cent.3 3.2. Telecommunications growth in MENA: Assessing unrealized potential As MENA countries rank low in the scale of telecommunications liberalization, opening up markets to competition would generate significant benefits in terms of ICT sector development and overall economic growth. These benefits are reviewed in the following section. But there is also room for growth by exploiting the unrealized potential under the current status of regulatory regimes, as in a number of countries, telecommunications development seems to fall short of potential. That potential can be measured as the difference between the actual size of telecommunications networks and the predicted size, (in line with the expansion occurred in countries of a similar income in other regions of the world), as captured by the empirical estimates above. Regarding the size of the fixed line network, performance is unbalanced between the highincome and the middle or low-income MENA countries. While the high-income countries (Bahrain, Kuwait, Saudi Arabia) underperform, elsewhere fixed line penetration surpasses the estimated potential—the more so in Lebanon, Iran, and Egypt (Fig. 4a). Thus, in low and middleincome MENA countries, investments by incumbent operators to expand the fixed line network seem to have been in line with international experience—given the limitations in financial resources and the room for growth provided by the existing regulatory regimes. This is in an area in which Government investment priorities do play an important role, and should be considered as a relevant variable. However, it falls outside the scope of this paper. In MENA countries where telecommunications markets are relatively more competitive (Lebanon, Bahrain, Jordan, Egypt, Morocco), the size of the mobile network has increased considerably, outpacing rates of penetration comparable with international experience (Fig. 4b). In high-income countries, such as Kuwait and Saudi Arabia, mobile penetration has boomed as well. Instead, where markets remain closed to competition (Tunisia, Iran, Syria, Lybia), mobile penetration remains stifled, way below (a limited) potential. The picture is more acute regarding internet penetration, with Lebanon and Israel the only countries where the relative number of hosts outstrips potential (Fig. 4c). In Saudi Arabia, Jordan, and Egypt penetration is close to potential, but elsewhere there is considerable room for internet diffusion, even under the existing status of competition. In a number of countries, additional regulatory obstacles not accounted for by the liberalization indicator—such as, for example, content control—are likely to impede the diffusion of the internet. These additional regulatory items include the licensing of websites and Internet Service Providers, and the limits to Web access through restricted gateways (Roycroft & Anantho, 2003). 3

Estimations of the potential impact of regulatory reform in telecommunications for eight industrial economies are reported in OECD (1997), Chap. 1, and also in Blondal and Pilat (1997). In the case, for example, of France, the estimated impact of a 40 per cent increase in labor productivity is a 30 per cent drop in telecommunications costs, while in Spain, a 35 per cent increase in productivity is associated with a 22 per cent decrease in costs.

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Predicted

40 35 30 25

Actual

20 15 10 5 0

in

(a)

hra

Ba

ia

n it rab no iA ba ud Le a S

wa

Ku

n

Ira

ia

nis

Tu

Eg

yp

t

ro Mo

o

cc

a

eri

Alg

n

me

Ye

Mobile subscribers per 100 inhabitants (2000) 40

Actual

35

Predicted

30 25 20 15 10 5 0

t a in on abia cco dan gyp isi r r hra an E Tun ro Jo Ba Leb di A Mo u Sa

it

wa

Ku

(b)

n a a me lgeri Syri A

n

Ira

Ye

Internet hosts per 10,000 people (1999) 25

51

20 15 Actual 10 Predicted 5 0

(c)

it on abia dan gypt ia co r wa eban r roc Tunis E iA Jo L Mo ud a S

Ku

n

Ira

n ia yria me Alger S

Ye

Fig. 4. (a) Main line penetration falls short of potential in the high-income MENA countries (b) and where markets are more competitive mobile penetration has boomed (c) while internet penetration almost everywhere underperforms. Source: Authors’ calculations based on the results of the model presented in Section 3.1.

4. The impact of telecommunications liberalization in MENA The benefits for MENA countries from opening up telecommunications markets to competition can be evaluated by looking at the potential for growth, possible spillovers to sectors making intensive use of telecommunications services, and a possible impact on high-tech exports. International evidence provides insights as to the growth potential of specific segments of the ICT

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sector (Section 4.1). And cross-country evidence illustrates the potential for improved export performance in high-tech products (Section 4.3). 4.1. Telecommunications liberalization as an enabler of ICT sector growth The economic impact of greater competition in telecommunications services, networking, and data transmission would be mainly felt through the expansion of the size of the ICT sector, embracing (a) software and software services; (b) IT-enabled services (such as call-centres and back-office services); (c) network services (network installation, maintenance, security, integration) and d) electronic commerce. Buoyant demand for fixed and mobile phone services would be the main driver of expenditure growth, thanks to lower telephony prices to users, while an expanding array of services provided to users in both the telecommunications and the IT segments would also stimulate demand. Despite the already adequate rates of mobile penetration in MENA (Fig. 1b), there is still considerable scope for a more competitive environment to further boost the size of the mobile phone networks. Based on international evidence, ‘‘full market openness’’ could—all else equal— boost mobile penetration by about 2 percentage points on average across MENA countries (Fig. 5a). The actual impact, as shown by the tremendous growth in countries like Morocco, might be much higher, which would reveal a non-linear discontinuity which is not captured by the model. Improvement of living standards would further foster mobile penetration. Because of the high income elasticity of demand (Eq. (2); Table 2), a baseline trend of 2 per cent annual real per capita income growth over a 5-year period could boost mobile penetration by a further 2 percentage points. Thus in a relatively short period of time mobile penetration could increase on average by as much as 50 per cent across MENA. The expansion of the mobile network could further boost expenditure in the fixed-line segment, through positive externalities between the two networks (Eq. (1); Table 2). Thus, even though fixed line penetration seems broadly adequate across MENA countries (Figs. 1b and 3a), there is much room for growth due to the currently restrictive competitive environment. This would further spur revenue in the telecommunications sector as a whole. In MENA, after accounting for other structural determinants, the share of telecommunications revenues in GDP appears to fall short even of the average share seen in countries with the least competitive markets (Fig. 5b). Injecting greater competition (up to the ‘‘full market openness mark’’) could increase the average size of telecommunications revenues as a share of GDP by as much as 0.8 percentage points. Because greater market openness in telecommunications can lower the cost of access to the internet while encouraging the expansion of backbone infrastructure, it may also have a significant impact on internet penetration. And in MENA there is much room for improvement, as internet penetration falls short of levels seen in countries with the least open telecommunications markets (Fig. 5c). Based on international evidence, ‘‘full market openness’’ would boost internet penetration dramatically, by up to 18 hosts per 10,000 people on average, from about only 2 hosts currently. Baseline per capita real income growth of 2 per cent per year over a 5-year period could further raise that ratio to about 23 hosts per 10,000 people. This would bring internet penetration close to levels now seen in higher-income countries (Fig. 1c). The demand-driven expansion in the size of the various segments of the ICT sector would be, on its own, a major stimulus to growth. But it would also generate multiplier effects on the

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A. Varoudakis, C.M. Rossotto / Telecommunications Policy 28 (2004) 59–78 Predicted mobile subscribers per 100 inhabitants (average for each country group) 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 MENA

(a)

Restricted Limited market Moderate market access openness market openness

Full market openness

Predicted telecommunications revenues in % of GDP (average for each country group) 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 MENA

(b)

Restricted Limited market Moderate market Full market market access openness openness openness

Predicted internet hosts per 10,000 people (average for each country group) 20 18 16 14 12 10 8 6 4 2 0 MENA

(c)

Restricted Limited market Moderate market Full market market access openness openness openness

Fig. 5. (a) Liberalization will boost mobile phone penetration, (b) spur expenditures on telecommunications and (c) foster the spread of the internet. Note: Predicted rates of mobile phone and internet penetration, and expenditures shares shown in Fig. 4(a)–(c) are calculated after controlling for differences in structural determinants across countries other than telecommunications market openness. Estimates are based on regressions 2, 3, and 4; Table 2. Average for each group of countries. Source: Authors’ calculations.

economy, as the increase in ICT output would stimulate ICT sector investment, funneling demand for the output of other industries as well. For example, in the case of Tunisia, it has been estimated that broad-based ICT sector development, spurred by domestic demand and exports, could boost annual GDP growth by about 1.7 per cent over a 5-year period, following opening up

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of the sector to competition (World Bank, 2001). Cross-country estimates also confirm that telecommunications liberalization is associated with higher growth rates in the long run (Mattoo et al., 2001). 4.2. A boost to high-tech exports? International evidence suggests that to successfully compete in high-tech exports, countries need to overcome bottlenecks related to the availability of skilled human resources, while they also need to secure good access to the rapidly expanding global pool of knowledge. Mobilizing sufficient resources for R&D (or to assimilate existing technologies in less developed countries) is also critical. But this may require a large market size. Investment in R&D is both a high-cost and a high-risk endeavor. The larger the market, the better fixed costs of R&D can be amortized. And the risk associated with R&D can be spread more efficiently in large markets, as small markets usually suffer from a high concentration of risks. Large markets are, thus, likely to boost R&D profitability, and to generate more financial resources to pay for the fixed R&D costs. And though market size depends on the size of the domestic economy and its per capita income, it can also increase dramatically in export-oriented economies that successfully integrate global markets (World Bank, 2001). These considerations are captured—though in a rough manner—in a regression accounting for differences across countries in the share of high-tech exports in manufactured exports in the late 1990s.4 That share is found to increase with the outward orientation of the economy—measured by the ratio of total exports to GDP—as well as with the overall size of the economy’s GDP. There is also a weak positive correlation with the availability of highly skilled workers—as measured by the enrolment rate in higher education. A good level of internet connectivity (measured by internet hosts penetration) also appears to be strongly related to the size of hightech shares in manufactured goods exports (Table 3 and Fig. 6a).5 Appendix A, Part B describes the variables indicated in Table 3. Internet connectivity facilitates faster diffusion of codified knowledge; allows to link up technological developments more closely to businesses; and thus facilitates international technology transfers (OECD, 2000a). This has the potential of speeding up innovation in hightech industries, helping high-tech exporters better position themselves in the global market place. Similarly, in developing countries, better internet connectivity facilitates assimilation of existing technologies and enables producers to move up in the scale of technological specialization (World Bank, 2000, chap. 4).6 At the same time, sharp reductions in the cost of moving goods across borders—reflecting lower levels of protection, lower transport costs, and ICT 4 High-tech exports are products with high R&D intensity. They include high-tech products in aerospace, computers, pharmaceuticals, scientific instruments, and electrical machinery. The data are from ‘‘World Development Report 2000/ 2001’’, World Bank. 5 Surprisingly, per capita GDP appears to be inversely related to high-tech exports. However, this is only a partial impact, since per capita income affects internet penetration (Eq. (3); Table 2) and presumably also higher education. The negative impact captured in the regression also reflects the high-tech heavy exports of developing countries in East Asia and the Pacific (see Fig. 6b), which surpass the levels seen in high-income countries. 6 Madden and Savage (2000), estimate that R&D spillovers from developed countries to developing economies in East Asia are correlated with trade in ICT products.

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Table 3 Determinants of high-tech exports’ share in manufactured exports Dependent variable: Ln (HIGHTECH) Estimation period: 1998–99 Independent variables Intercept Ln (EXPGDP) Ln (GDP) Ln (GDPPC) Ln (HEDUC) Ln (HOST) Adjusted R2 Durbin–Watson Observations #

t-Statistic

Coefficient 1.55 0.73 0.36 1.11 0.38 0.29

(0.6) (3.6) (4.6) (3.0) (1.5) (3.5)

0.479 1.96 68

Share of high-tech exports in manufactured good exports (in per cent)

Note: Method of estimation: Ordinary Least Squares, with White Heteroskedasticity-Consistent Standard Errors and Covariances; Definition of variables in Annex, Part 2. Source: Authors’ calculations.

(a)

20 18 16 14 12 10 8 6 4 2 0 -2

High-tech exports in % of manufactured exports (1999) 30 25 20 15 10 5 -1 0 1 2 3 Internet hosts per 10,000 people (log scale)

4

0 EAP

HIC

ECA LCA MENA+ SSA Israel

SA MENA

(b)

Fig. 6. (a) High-tech exports increase with internet connectivity, (b) manufactured exports in MENA have a still light technology content. Note: High-tech shares in (a) are calculated after controlling for structural determinants other than internet hosts, based on the regression in Table 3. In (b), South Africa is included in Sub-Saharan Africa. Source: Authors’ calculations.

improvements—have enabled firms to better co-ordinate production in different locations, and have facilitated exporters’ linkages with vertical production chains that stretch increasingly across borders (Hummels, Ishii, & Yi, 2001). The favorable trade environment that emerged after the Uruguay Round has spurred vertical trade in high-tech products—especially thanks to the largely duty-free trade in information technology products that came into force with the ‘‘Information Technology Agreement’’ (ITA). A number of developing countries have taken advantage of specialization opportunities in high-tech exports created by those global production links. And in the late 1990s, manufactured exports from countries in East Asia and the Pacific were more tech-heavy than high-income countries’ exports (Fig. 6b). Instead, the high-tech content of MENA countries’

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manufactured exports remains low—the lowest, on average, among developing regions, when Israel is excluded. Injecting more competition in MENA telecommunications markets would secure an efficient and low access cost internet infrastructure, thus fostering internet penetration and enabling hightech exports. To be sure, policy should also aim at export diversification. Recent experience suggests that ICT industries are as cyclical as other sectors, so that excessive concentration in high-tech exports may increase the vulnerability to global economic swings. East Asia’s increasing export concentration in high-tech exports could thus be seen as a ‘‘mixed blessing’’. It facilitated the recovery from the 1997–98 crisis, as global ICT investment remained buoyant up until mid 2000. But with the dramatic increase in the import content of US capital spending (up to an estimated 36 per cent), East Asian countries bore the brunt of the adjustment to the more recent slump in ICT investment in the US. However, as productivity grows fast in high-tech industries, creating export opportunities for high-tech products holds the potential of stimulating growth of the economy in the long term. ICT investments in major markets like the United States, Europe and Japan will remain an important factor.

5. Conclusion and policy implications Greater market openness, coupled with pro-competitive regulation, is a strong driver of telecommunications sector growth. But in MENA countries telecommunications markets remain less open to competition than elsewhere in the developing world. With the right regulatory and business environment in place, telecommunications liberalization in MENA holds considerable potential for improving overall economic performance through several channels: *

*

*

*

Market openness in telecommunications services would be a driver of broader ICT sector growth by stimulating demand for ICT services. The increase in the size of the ICT sector would be, on its own, a major short-term impulse to economic growth. In addition to being a high growth sector per se, ICT growth would have positive spillovers on other sectors of the economy as well, spurring supply driven growth. Falling costs of key networking technologies would benefit communications intensive industries that provide key ‘‘backbone services’’ to the economy, such as transport, distribution and finance. This would improve competitiveness of exporting industries; reduce the ‘‘cost of doing business’’; and improve the investment climate. ICT growth would also enable businesses take advantage of technological developments, thus helping exporters move further up in the scale of technological specialization. Looking further forward, more competitive telecommunications markets would also encourage investments in Information Technology by domestic industries. This would reduce transaction costs, thus increasing the effectiveness of production and marketing and fostering long-term productivity growth.

Sustained commitment to more competitive telecommunications markets, and strengthening of the regulatory framework to make competition effectively work, holds the key to benefit from ICT sector development. Measures that secure the independence of regulatory bodies; guarantee a competitive interconnection regime in a multi-operator environment; and improve the

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transparency of licensing procedures, would ensure efficient provision of telecommunications services and reduce the ‘‘regulatory risk’’ perceived by investors. This paper shows also that, in the debate on reform sequencing, countries embarking in sector liberalization should have introduction of competition as the major objective. The presence of strong, well established competition to the core-business of the incumbent operator might be a key determinant that accelerates the needed to introduce privatization in the incumbent operator (this is the case of Morocco). In these cases where competition has been introduced ‘‘at-the-margin’’ of the core business of the incumbent operator (Lebanon, Egypt), the country certainly enjoyed some degree of progress in their sector performance, but the bottlenecks related to the inefficiency and resistance to change in the incumbent operator, remained. In addition, although more competitive telecommunications markets is key, complementary policies in other areas would be called for to enable broader ICT sector development. In a more broad-based strategy, policy initiatives in three areas would hold an important role: *

*

*

Promoting connectivity by developing an efficient, low-cost, telecommunications and Internet infrastructure, as this is a prerequisite for growth of information-intensive services (such as software; ICT-enabled services; E-commerce). Developing skilled human resources, to facilitate the adoption and diffusion of ICT across industries and create export opportunities in high-tech products. Removing bottlenecks in the provision of venture capital—as ICT sector start-ups typically have limited access to finance—by creating appropriate tax incentives and enhancing the ability of the financial system to mobilize resources and assess risky projects.

Appendix A Part A: MENA country ratings: Components of the telecommunications market openness indicator (see Table 4). Part B: Definition of variables: TELSIZE POP POPDN GDPPC SMALL OPEC STEPLIB MOBPEN HOSTS TRANS PRLAB PRLAB2

telecom revenue in per cent of GDP total population population density GDP per capita (in purchasing power parity) dummy variable for small economies (population less than 1 million) dummy variable for OPEC countries (Algeria excluded) market openness indicator for the four country groups (ranging from 1 to 4) mobile phones in per cent of population internet hosts per 10,000 people dummy variable for transition economies (except East European countries now OECD Members) telecommunications revenues per telecom employee fixed lines per telecom employee

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Table 4 MANA country ratings Market structure

Regulator

Fixed network

Total rating

Mobile network

Local Dom long Intenational Leased Analog distance lines

Digital

Separate Interconection FDI FDI fixed mobile

Reference Algeria Bahrain Egypt Iran Israel Jordan Kuwait Lebanon Libya Morocco Oman Qatar S. Arabia Syria Tunisia Yemen

period: 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

1999 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

1 1 1 1 2 1 1 1 1 1 1 1 1 1 1 1

1 1 1 1 2 1 1 2 1 1 1 1 1 1 1 1

1 1 2 1 3 1 1 2 1 1 1 1 1 1 1 1

1 1 2 1 3 1 1 2 1 1 1 1 1 1 1 1

0 1 1 0 0 1 0 0 0 1 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0

0 1 0 0 1 1 1 1 0 1 0 0 0 0 0 0

0 1 1 0 1 1 0 1 0 1 0 0 0 0 1 1

2 5 5 2 6.5 5 3 5.25 2 6 2 2 2 2 3 3

Reference Algeria Bahrain Egypt Iran Israel Jordan Kuwait Lebanon Libya Morocco Oman Qatar S. Arabia Syria Tunisia Yemen

period: 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

2001 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

1 1 1 1 2 1 1 1 1 1 1 1 1 1 1 1

1 1 2 1 2 2 1 2 1 2 1 1 1 1 1 1

2 2 2 1 3 2 1 1 1 2 1 1 1 1 1 2

2 2 2 1 3 2 1 1 1 2 1 1 1 1 1 2

1 1 1 0 0 1 0 0 0 1 0 0 0 0 1 0

1 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0

0 1 0 0 1 1 1 1 0 1 0 0 0 0 0 0

1 1 1 0 1 1 0 1 0 1 0 0 0 0 1 1

6 6 5.25 2 6.5 6.25 3 4.25 2 7.25 2 2 2 2 4 4

HIGHTECH EXPGDP GDP HEDC

high-tech exports in per cent of manufactured goods exports total exports in per cent of GDP GDP in US$ enrolment ratio in higher education

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