Telecommunication reforms in developing countries.

Major innovations have pushed telecommunication costs down and demand up since the mid-1980s. The new segments of the mobile and the internet markets are hence suitable for oligopolistic competition. Reforms of the former public monopoly have been necessary to accommodate the entry of new operators. It is important to disentangle the effect of market liberalization that occurred in response to technological change and demand growth from the effects of privatizations resulting from structural adjustment programs. In line with popular opinion, privatization per se did not benefit consumers much. The biggest improvements for consumers have been driven by competition from mobile telecommunication firms. Governments should concentrate on liberalizing the mobile and internet segments. For the incumbent telecom operator, allocative inefficiency combined with the critical budgetary conditions found in most developing countries favour public ownership. This is an effective way of combining the regulation of the firm with a maximum level of taxation.

The percentage of countries that allowed private shareholders to own stakes in their incumbent telecommunication operator rose from 2% in 1980 to 56% in 2001 (International Telecommunication Union, ITU 2002). Simultaneously, markets worldwide have opened up to new entrants in the mobile and the internet segments. In the mobile market 78% of the 201 countries included in the ITU database had adopted some degree of competition by 2001; while this figure was 86% in the internet market. The massive trend towards privatization and liberalization should not mask the fact that almost half of the countries in the world still have a public incumbent operator and that roughly 20%, mainly developing countries, have no private operator in their telecommunication industry at all. Similarly poor countries have limited their liberalization reforms to the mobile and internet segments. In the fixed telephony market over 60% of the world's countries have a monopoly.
The differences between telecommunication industrial policies from country to country raise the issue of how optimal reforms have been. Are poor countries lagging inefficiently behind, as is sometimes argued by the advocates of privatization, or is there a rationale for keeping the incumbent telecommunication operator public and monopolistic? The answer to this question is not clear. Assessment of reforms varies widely depending on the assessor. Since they have led to improvements in the financial and operating performances of divested firms, and in many cases also to network expansion, specialists tend to think that the reforms have been successful. This positive appraisal contrasts sharply with the popular view among consumers in developing countries, where there is a widespread perception that the reforms have hurt the poor, notably through increases in prices and unemployment, while benefiting the powerful and wealthy. In a 2001 survey of 17 Latin American countries 63% of participants disagreed or strongly disagreed with the statement: "The privatization of state companies has been beneficial" (The Economist, July 28th-August 3rd 2001, p. 38). Similarly in Africa, reforms have been qualified as "re-colonization" due to the participation of foreign investors in many cases. It seems hard to reconcile consumer dissatisfaction with specialists' contentment. On the other hand, the unpopularity of the reforms cannot be disregarded by those who promote decentralization and democracy. This paper thus aims to clarify this issue. It analyses the advantages and drawbacks of telecommunication privatization and market liberalization in developing countries.