EVENTS

Date:	Thursday, May 5, 2005
Time:	10:15 AM -- 1:15 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

May 2005

The Effect of Wireless Telecommunications on Economic Development in Africa

Mobile telephones now account for 75 percent of all telephone connections in nineteen of the poorest African countries. The growth in the numbers of mobile telephone subscribers in developing countries is twice that in developed countries. Experts at a May 5 AEI conference examined recent empirical findings that mobile communication services have stimulated economic growth in developing countries, especially those in Africa, and the implications for national and international policies concerning the regulation of telecommunications and of foreign direct investment in developing countries.

Panel I: The Impact of Telecommunications on Economic Growth in Developing Countries

Leonard Waverman
London Business School

Telecom infrastructure is a form of social overhead capital. Entrepreneurship and private capital are coming together, and the digital divide is closing due to phones, not PC penetration. Mobile phones represent more of a stand-alone product, and mobile phone penetration in Africa is now at 9 percent.

In the 285-page World Development Report, the role of private capital takes up only nine pages. Health and education are important to development, but private infrastructure and telecoms are essential. We often take communications for granted, but just-in-time production, manufacturing, and the urbanization of business life would be impossible without modern telecommunications systems. Telecom companies lower transaction costs and widen buyer-supplier networks. Markets require information, and when information is made widely accessible, power seeps from the few to the many.

Better communications networks produce higher incomes, yet higher incomes also produce a higher demand for communications since communication is a luxury good. There is clearly a strong correlation between mobile phone ownership and wealth, but the direction of causality is uncertain. To disentangle these effects, we must model the demand and supply for main lines. In Africa, renting a bicycle for a year may cost 20 percent of one's annual income. Telecommunication promises a viable substitute for transportation, and people are able to use phones as a way to improve their welfare.

In 1970, telecom penetration by members of the Organisation for Economic Co-operation and Development (OECD) was minimal. Today, in developing countries, mobile phones are the backbone of communications systems. There is not so much need to roll out significant infrastructure, and there are also significant advantages of a pay-as-you-go system. For people that do not have an established credit history, pay-as-you-go mobile phones are a breakthrough.

In fixed-line penetration, China went from 7 percent in 1995 to 23 percent in 2003. For a country of this size and population, that represents incredible growth in only eight years. Yet, for some countries, such as Morocco, fixed-line penetration declined. However, while mobile phone usage was under 1 percent in 1995, eight years later, this had rocketed to 23 percent.

It is possible to construct an endogenous growth model to investigate whether telecommunications play the same role as human capital. We can ask whether increases in mobile and fixed-line per capita effects growth in the developing world, and whether this has similar effects to schooling. The growth dividend from mobile phones is twice as high in the developing world as in the developed world. Mobile phones do not just bring us ring tones, but change the ways in which people can do business. Mobile phones have the same effect in Africa as fixed-line takeup did in the OECD in the 1970s and 1980s.

It can be said that the importance of social overhead capital is too important to be left to governments. Entrepreneurship is moving the poorest continents forward. It is not the PC or fixed-line network but rather the mobile network that is closing the digital divide. We need the right institutional climate of regulation, transparency, and so on. Mobile phones are important, but this is not to say that they are the most important thing in development.

Scott Wallsten
AEI

Anyone who has traveled to developing countries knows how widespread the use of cellphones has become.

For economists, the main problem is to know what the real direction of causality is and how to deal with the problem of endogeneity. Another problem is that Africa is an especially data-poor environment. It is very hard to do this with the very limited data that exists. Also, if you are trying to model the impact of one variable on the entire economy, it is very hard to isolate it. How can you model what it means to businesses to have access to mobile telecommunications?

There are many changes in telecoms that are not accounted for in the model, for instance the privatization, liberalization, and deregulation of former state telecom monopolies. In Ghana, there had been a hypothetical official waiting list of around eighty years to get a fixed line installed (although you could of course bribe someone to get it quickly). The model must also account for new regulatory authorities and changes in the legislative environment. Regulatory authorities may have helped with interconnection issues between networks, or it could be the case that regulators were used to restrict competition.

The relatively low cost of mobile--compared to fixed-line--systems also reflects the inherent significantly reduced risk of expropriation, and investment has therefore been facilitated. Mobile telephony often succeeded in developing countries because state monopolies did not see them as a threat. And by the time that they were seen as a threat, the investment had been made, and the customer base had already been set up.

This does not imply that dumping cellphones on the developing world is a good idea, but you must focus on allowing people to satisfy existing demands. Many nations would prohibit the setting up of particular systems, moved by a variety of special interests, and such regulation must be discouraged.

Usually, you hear all bad things about Africa, such as expropriation, but when markets are allowed to thrive, change can happen fast--and this is a very promising success story.

Panel II: Mobile Telecommunications in Africa: Infrastructure, Foreign Direct Investment, and Socioeconomic Effects on Businesses and Communities

Diane Coyle
Enlightenment Economics

Those out of work are the people who benefit most from mobile phones, as it can turn an unemployed man into an entrepreneur--a painter, for instance.

Mobile phones have rapidly overtaken fixed-line telephony. Mobile phones are the only economic indicator in which there has been catch-up between Africa and the developed world. In nations where literacy rates are low and general infrastructure is scarce, mobile phone takeup has far exceeded that for the Internet.

It is clear to notice across the developing world that the lesser the presence of the state-owned operator, the greater the mobile penetration recorded. South Africa gets a fairly low share of Gross Domestic Product (GDP) from Foreign Direct Investment (FDI). The highest rates of FDI/GDP are found in nation's with large stocks of natural resources. The impact of FDI depends on the context (there is little benefit if that is one of natural resources), but it can provide assets and infrastructure that otherwise would not be there. Multinational corporations provide skills, training, and tax revenues and are therefore often welcomed by developing nations. Openness to trade and infrastructure are important, and fixed-line penetration is strongly linked to FDI levels. Linking fixed-line penetration to FDI is a proxy for what is generally going on in infrastructure generally.

Inward investment in telecoms depends on the business and regulatory environment. Telecom is usually one of the first sectors to deregulate and therefore signals that a nation is a hospitable place for new competitors.

In Tanzania, there is a lot of sharing of mobile phones as a household or community asset. Cellphone use spreads across all ages and both genders. Most people with cellphones have secondary education, but many also have primary education or less. The level of income was a poor predictor of whether people owned or used cellphones.

Lack of access to electricity has not proved to be the concrete barrier that one might have thought. People find innovative ways to charge up their cellphones. Some charge from car batteries, some sell access to their car batteries, and others get together to take their cellphones into town to recharge. So, the lesson is that even things that seem like absolute barriers may not always be.

The extent to which people are using phones and can be reached has important implications in terms of network effects. Two-way communication is much better than one-way communication. For example, if you are looking for work and can leave a number for someone to get back to you, it makes things a lot easier than if you need to keep checking back. Access to business information is very important and can save the journey into town to see if goods are in stock. This allows for huge savings in travel time and costs.

In South Africa, people spend 10 to 15 percent of their income on mobile phones, compared to 5 percent in the developed world, which indicates that the poor find mobile services particularly valuable. Whereas bus journeys cost 15 rand, cellphone calls cost only 5 rand and offer a substantial additional time saving. This also makes it much easier for people to spend time living and working away from their friends and family. More than a quarter of businesses in Egypt say that they would not have been able to start up without mobile phones. In the informal sector, around 90 percent of businesses use cellphones. Many say that cellphones increase profitability, despite calling costs.

Many people cite cellphones as the most important form of communication, and it is clear that people do not just access cellphones, but use them regularly. The accumulation of social capital allows the value of a group to be greater than the sum of its constituent individuals. There are positive externalities such as a structural element (through social networks of friends and family) and cognitive networks (with shared cognitive norms). Social capital provides useful strong links (where friends and family, may, for instance, bring support in cases of unemployment) and weak links (where broader contacts offer information and knowledge about where one might find a job). Face-to-face contact is still the most important form of communication, especially in rural areas that still lack sophisticated infrastructure. The use of mobile phones meets the demand for communications that otherwise would not be met.

Many people share their mobiles with others, such as neighbors, for free. According to polls, ownership of mobile phones is also prized for increasing the harmony of communities, and increasing the control that individuals have over their lives.

Neil Gough
Vodafone

The importance of sharing mobile phones is quite interesting. Access to others’ phones is also important. Mobile penetration figures based purely on numbers of phones might therefore be an underestimate if there are several people per phone. Also, one must remember that person-to-person calls have increased complexity. In rural areas, people “beep call” phones long enough so that the number registers, thereby signaling that the person with the phone can pass it to whomever needs to be contacted.

Cellphone mobility does not have the same implications in Africa as it does in the West. Mobility means that you can take service to the people who want to make the calls. There is also another step in the chain where women set themselves up to provide distribution.

Where communities are remote, and served by one base station, data on traffic flow types can provide useful insights. Inbound traffic outnumbers outbound short message service (SMS) traffic by eight times, and this has strong implications for incentives for cellphone networks to expand coverage.  In the United Kingdom, for every SMS, there are 0.6 voice calls. In South Africa, for every SMS there are three voice calls. In rural areas, for every SMS there are thirteen voice calls. This is partly due to the effects of literacy and language, but also due to privacy concerns where mobile phones are shared.

Claude E. Barfield
AEI

As mobile telecommunications drive economic growth across Africa, there is an increased incentive for its nations to participate in negotiations aimed at encouraging investment.  States can also use WTO rules to push for deregulation and facilitate domestic policy liberalization. African nations would do well to relax domestic monopolies by treating foreign competitors as equal.

AEI staff assistant Chris Pope prepared this summary.