Misc,
The impact of telecoms on economic growth in developing countries
USAid report, (2003)
Abstract
There is a long tradition of economic research on the impact of infrastructure
investments and social overhead capital on economic growth. Studies have
successfully measured the growth dividend of investment in telecommunications
infrastructure in developed economies.2 But few have assessed the impact of
telecommunications rollout in developing countries. Given the importance of
telecommunications to participation in the modern world economy, we seek to fill the
void in existing research.
Investment in telecoms generates a growth dividend because the spread of
telecommunications reduces costs of interaction, expands market boundaries, and
enormously expands information flows. Modern revolutions in management such as
‘just-in-time’ production rely completely on efficient ubiquitous communications
networks. These networks are recent developments. The work by Roeller and
Waverman (2001) suggests that in the OECD, the spread of modern fixed-line
telecoms networks alone was responsible for one third of output growth between
1970 and 1990.
Developing countries, however, experience a low telecoms trap – the lack of
networks and access in many villages increases costs, and reduces opportunities
because information is difficult to gather. In turn, the resulting low incomes restrict the
ability to pay for infrastructure rollout.
In the OECD economies, modern fixed-line networks took a long time to
develop. Access to homes and firms requires physical lines to be built – a slow and
expensive process. France, which had 8 fixed line telephones per 100 population
(the ‘penetration rate’) in 1970, doubled this by 1976, and reached 30 main lines per
100 population in 1980. Mobile phones are lower cost and far quicker to rollout than
fixed lines. In 1995, Morocco had 4 fixed lines per 100 inhabitants after many years
of slow investment, and zero mobile phones per 100 inhabitants. In 2003, only eight
years later, the mobile phone penetration rate in Morocco was 24, while fixed line
penetration had stagnated at its 1995 level.
We find that mobile phones in less developed economies are playing the
same crucial role that fixed telephony played in the richer economies in the 1970s
and 1980s. Mobile phones substitute for fixed lines in poor countries, but complement fixed lines in rich countries, implying that they have a stronger growth
impact in poor countries. Many countries with under-developed fixed-line networks
have achieved rapid mobile telephony growth with much less investment than fixed-
line networks would have needed.
We subjected the impact of telecoms rollout on economic growth in poorer
nations to a thorough empirical scrutiny. We employed two different approaches– the
Annual Production Function (APF) approach following the work of Roeller and
Waverman (2001) and the Endogenous Technical Change (ETC) approach similar to
the work of Robert Barro (1991). The latter provided us with the most robust and
sensible estimates of the impact of mobile telephony on economic growth. We used
data on 92 countries, high income and low income, from 1980 to 2003, and tested
whether the introduction and rollout of mobile phone networks added to growth.
We find that mobile telephony has a positive and significant impact on
economic growth, and this impact may be twice as large in developing countries
compared to developed countries. This result concurs with intuition. Developed
economies by and large had fully articulated fixed-line networks in 1996. Even so, the
addition of mobile networks had significant value-added in the developed world: the
value-added of mobility and the inclusion of disenfranchised consumers through pay-
as-you-go plans unavailable for fixed lines. In developing countries, we find that the
growth dividend is far larger because here mobile phones provide, by and large, the
main communications networks; hence they supplant the information-gathering role
of fixed-line systems.
The growth dividend of increasing mobile phone penetration in developing
countries is therefore substantial. All else equal, the Philippines (a penetration rate
of 27 percent in 2003) might enjoy annual average per capita income growth of as
much as 1 percent higher than Indonesia (a penetration rate of 8.7 percent in 2003)
owing solely to the greater diffusion of mobile telephones, were this gap in mobile
penetration to be sustained for some time.
A developing country that had an average of 10 more mobile phones per 100
population between 1996 and 2003 would have enjoyed per capita GDP growth that
was 0.59 percent higher than an otherwise identical country.
For high-income countries, mobile telephones also provide a significant
growth dividend during the same time period. Sweden, for example, had an average
mobile penetration rate of 64 per 100 inhabitants during the 1996 to 2003 period, the
highest penetration of mobiles observed. In that same period, Canada had a 26 per
100 average mobile penetration rate. All else equal, we estimate that Canada would
have enjoyed an average GDP per capita growth rate nearly 1 percent higher than it
actually was, had the mobile penetration rate in Canada been more-than-doubled.
Our research also provides new estimates of demand elasticities in
developing countries – we find both the own–price and income elasticities of mobile
phone demand to be significantly above 1. That is, demand increases much more
than in proportion to either increases in income or reductions in price. We also find
that mobile phones are substitutes for fixed-line phones.
