Do High International Telecom Rates Buy Telecom Sector Growth?

An Empirical Investigation of the Sender-Pays Rule
Eli Dourado | Nov 30, 2012

Abstract

The possible extension of the telephone system’s “sender-pays” rule to the Internet is a contentious international political issue under consideration at the World Conference on International Telecommunication (WCIT). This paper examines whether higher international telephone rates support or impede telecom sector growth in the receiving country. It uses data on international telephone rates from the US from 1992-2010 to explain growth in foreign telecom sectors during the same period. I find that higher international calling rates are correlated with slower growth in the telecom sector, which suggests that countries are not primarily using higher charges to finance additional expansion. These findings cast doubt on proposals that would extend sender-pays to the Internet sector.

Introduction

The pricing of international telecommunication services provides a fascinating lens through which to examine and understand institutional economics. International service is provided via two or more telecommunication companies, often state-owned or politically connected monopolies, each of which must make expenditures to develop its network in order to be able to send or receive international data, such as phone calls or Internet traffic. Users on each side of the transmission typically pay a fee for basic service, plus fees for data transmission.

This paper empirically examines the effect of differing international fee structures on telecommunications sector growth. Superficially, putting the quality of institutions to the side, one might conclude that the fee structure should not matter.[1] However, the apportionment of fees between senders and receivers is a contentious international political issue. A number of governments and telecom firms support sender-pays rules on the grounds that they are capital-constrained and that the revenue can be used to build out the telecommunications network and support economic growth in poorer countries. The fact that governments are capital-constrained means that the transfer is unlikely to be offset through fee structure changes. It may represent additional net revenue, which may be used, as these governments claim, to build out the network. Or it may simply be kept by the government or the telecom company and not be used for additional investment in telecommunications infrastructure.

Although sender-pays is the default rule in the international telephone system, it is not the rule for international Internet transmissions. At the core of the Internet, most exchange of traffic is unpriced, a process known as peering.[2] Some governments and telecom firms are unsatisfied with this arrangement and want to extend sender-pays rules to the exchange of Internet traffic. Most recently, European telecommunications firms— through their industry association, the European Telecommunication Network Operators’ Association (ETNO)—have made a formal proposal that would extend sender-pays rules to the Internet. The proposal is to be considered at the World Conference on International Telecommunication (WCIT), which is a UN meeting being held in December 2012 to revise the International Telecommunication Regulations (ITRs).[3] This proposal, though not supported by European governments, has found some support among developing country governments, presumably because it could mean more revenue for them. Even if the ENTO proposal fails at the WCIT, this issue is likely to come up again in the future.

While it is desirable for developing countries to improve their telecommunication infrastructures, and while such improvement requires revenues, simple claims that additional revenues generate development should be viewed skeptically. The development literature provides numerous counterexamples. For example, Sachs and Warner (2001) find that resource-rich countries grow more slowly than other countries even though natural resources provide ample revenue to governments. Foreign aid is another example of a revenue source that has not led to growth. Easterly (2003) argues that government-to-government aid is not effective in producing economic growth, and Djankov et al. (2008) find that foreign aid causes a deterioration of political institutions. A cynical interpretation of these findings is that lump sums of guaranteed revenue make the residual claimants of these revenues more concerned with maintaining their positions than with developing other sources of revenue, such as growing the tax base through economic development. They expend relatively more resources and energy holding onto power than growing the economy. Revenues that are not closely linked with service provision tend to create what Acemoglu and Robinson (2012) call “extractive” institutions.

This paper examines whether higher international telecommunication charges impair growth as natural resource and foreign aid revenue do, or whether they support growth as proponents of sender-pays rules claim. It uses data on international telephone rates in the United States from 1992 through 2010 to explain growth in foreign telecom sectors during the same period. I find that higher international calling rates are correlated with slower growth in the telecom sector, which suggests that countries are not primarily using higher charges to finance additional expansion. These findings cast doubt on proposals, like the ETNO proposal, that would in some way extend sender-pays rules to the Internet sector. If higher sender per-minute charges in the telephone sector are correlated with lower telecom growth in receiving countries, then absent other evidence, we should expect that higher sending-party data charges in the Internet sector will also lead to lower overall telecom growth in the very countries these proposals seek to help.

Continue Reading

' '