by Carlo Maria Rossotto (1) Khalid Sekkat (2) Aristomene Varoudakis (1)
(1) The World Bank; Washington D.C., USA
(2) University of Brussels and European Commission, Belgium
Discussion papers are not formal publications of the World Bank. They represent preliminary and often unpolished results of country analysis and research. Circulation is intended to encourage discussion and comments; citation and the use of the paper should take account of its provisional character. The findings and conclusions of the paper are entirely those of the authors and should not be attributed to the World Bank, its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent.
The authors wish to thank Hamid Alavi, Mustapha Nabli, Kamal Shehadi; and Bjorn Wellenius for helpful comments on an early version of the paper. Comments may be directed to: firstname.lastname@example.org
Table of Contents
Summary 1. Introduction and Overview 1
2. The Process of International Fragmentation of Production and Services Trade Liberalization 3
3. Assessing Market Openness in Telecommunications 5
Market Openness and Performance in Telecommunications 8
5. Telecommunications Performance and Participation in the World of Economy 13
Conclusion and Policy Implications 16
Figures Figure 1: Performance in telecommunications 6
Figure 2: Privatization and competition in mobile networks per region 7
Figure 3: Progress in liberalization across countries 8
Figure 4: Potential impacts of further liberalization 12
Table 2: Telecommunications performance and integration in the World economy: empirical estimates 14
Table 3: Indicators of telecommunications availability in selected regions (1990/1999) 15
Annex Part A: Factors of Market Openness in Telecommunications 17
Part B: An Indicator of Market Openness in Telecommunications: Country Groups 19
Part C: MENA Country Ratings: Components of the Telecommunications Market Openness Indicator 20
Part D: MENA Country Liberalization Profiles in Telecommunications: A snapshot 21
تبحث هذه الدراسة الأثر المحتمل لفتح قطاع الاتصالات السلكية واللاسلكية في بلدان منطقة الشرق الأوسط وشمال أفريقيا أمام المنافسة على أداء هذا القطاع وعلى اشتراك المنطقة في الاقتصاد العالمي. ويقيّم هذا الأثر الأخير فيما يتعلق بالصادرات المصنّعة، والاشتراك في شبكات الإنتاج، وإمكانية جذب الاستثمار الأجنبي المباشر. وتدخل الدراسة أولا نموذجا يقيّم المنافع التي يمكن أن تتحقق من تحرير قطاع الاتصالات السلكية واللاسلكية على أداء القطاع. ويستند التقييم إلى ثلاثة عوامل رئيسية: (1) درجة المنافسة الفعلية في الشبكات الثابتة والمتحركة؛ (2) الانفتاح أمام الاستثمار الأجنبي؛ و (3) اللوائح التنظيمية المحبذة للمنافسة. وتؤكد النتائج أن تحرير القطاع وفتح الأسواق يساعدان على زيادة الكفاءة في قطاع الاتصالات السلكية واللاسلكية. وفيما يتعلق بدمج المنطقة في الاقتصاد العالمي، يؤكد التحليل أنه بعد أخذ تأثير العوامل الهيكلية الأخرى في الاعتبار، فإن تحسن أداء قطاع الاتصالات السلكية واللاسلكية يقوي أداء صادرات الصناعات التحويلية بما فيها صادرات المنتجات الوسيطة. وعلاوة على ذلك، وعن طريق تسهيل الروابط مع شبكات الإنتاج العابرة للحدود الوطنية وتخفيض تكاليف أداء العمل، وجد أن تحسن أداء قطاع الاتصالات السلكية واللاسلكية يعتبر عاملا محددا لتدفقات الاستثمار الأجنبي المباشر إلى البلدان النامية.
Le présent document examine l'impact potentiel de l'ouverture des télécommunications à la concurrence dans la région MENA sur la performance du secteur et sur la participation de la région à l'économie mondiale. Cette dernière est évaluée à travers les exportations de produits manufacturés, la participation aux réseaux de production et l’attrait de l'IDE. Le document introduit tout d'abord un modèle qui évalue les avantages de la libéralisation des télécommunications sur la performance sectorielle. La libéralisation des télécommunications est évaluée sur la base de trois facteurs : (i) le degré de concurrence dans les réseaux fixes et mobiles, (ii) l'ouverture à l'investissement extérieur, et (iii) la réglementation pro-concurrentielle. Les résultats confirment que la libéralisation et les marchés ouverts contribuent à accroître l'efficacité du secteur des télécommunications. En ce qui concerne l'intégration de la région à l'économie mondiale, l'analyse confirme qu’une meilleure performance des télécommunications renforce la vocation exportatrice du secteur manufacturier, y compris les exportations de produits intermédiaires. En outre, en facilitant les interactions aux réseaux de production transnationaux et en réduisant le coût lié à la marche des affaires, il ressort qu'une meilleure performance du secteur des télécommunications est un déterminant des entrées d'investissement direct étranger.
This paper investigates the potential impact of opening up telecommunications to competition in MENA on the sector’s performance and on the participation of the region in the World economy. The latter is assessed with respect to manufactured exports, participation in production networks and attractiveness to FDI. The paper first introduces a model to assess the benefits of telecommunications liberalization on sector performance. Telecommunication liberalization is evaluated on the basis of: (i) degree of effective competition in fixed and mobile networks ; (ii) openness to foreign investment; and (iii) pro-competitive regulation. The results confirm that liberalization and open markets promote efficiency in telecommunications. Regarding the integration of the region in the world economy, the analysis confirms that, better performance of telecommunications strengthens export performance in manufacturing, including exports of intermediate products. Moreover, by facilitating linkages with transnational production networks and reducing the cost of doing business, better telecommunications performance is found to be a determinant of foreign direct investment inflows.
1. Introduction and Overview A common pattern of integration in today’s global economy is the increasing fragmentation of production chains across borders (Arndt and Kierzkowski, 1999). This is reflected in far above average growth of global trade in components and partially assembled manufactured goods (Yeats, 2000). These transformations are having broad repercussions on developing countries. A number of developing countries have entered global production sharing chains without either the basis of a broad local market for the final products or strong initial technological capabilities. Export-oriented FDI has been the vehicle that reinforced existing competitive advantages (for example in low-cost labor for textile and clothing exports), or helped to reshape advantages by introducing technologies, skills, brand names and networks not available to local firms (UNCTAD, 2001).
A strong investment climate has been the main ingredient in every success story to date. But international experience suggests that good quality and low cost of backbone services (such as transport, ICT services, finance) and important production inputs (such as electricity), have also been key elements of success. Competitive backbone services reduce the cost of exporting and strengthen the linkages with global production networks. Regulatory reforms that inject more competition in markets for services and network industries are, in turn, instrumental in forcing operators to improve efficiency and pass on the lower production costs to users. But because in many developing countries domestic providers of services often operate below international efficiency standards, opening up markets to competition has to go in tandem with lowering trade barriers in services and making room for increased foreign entry in domestic markets.1
Telecommunications play a key role among backbone services because they affect efficiency and growth across a wide range of user industries. The quality and price of telecommunication services directly affects business costs, but also affects the capacity of firms to network and compete in foreign and domestic markets. Good quality and low cost of leased lines and backbone networks also facilitates internet penetration and the spread of IT applications in businesses that spur productive efficiency. Moreover, services are intertwined: Efficiency in transport and finance, key services that facilitate trade, depends on information technology, and thus on the performance of the ICT sector.
Reflecting the rapid pace of innovation in information and communications technologies (ICT), competitive market forces are becoming increasingly important in the provision of telecommunication and networking services, definitely moving the sector away of the “natural monopoly” market model. International evidence suggests that market openness in telecommunications services and the quality of the regulatory regime are drivers of ICT sector development (OECD, 2000b). In high-income countries there is 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 and Nicoletti, 2000).
MENA countries face the challenge of boosting growth, to create employment opportunities for a rapidly growing young population. Trade expansion can help MENA countries rise to this challenge, as in a number of countries that successfully integrated into global markets, where export-led growth eventually brought large employment dividends (Dasgupta et al., 2002). Services liberalization could greatly facilitate the integration of MENA into global trade by improving competitiveness and relaxing the “beyond-the-border constraints to trade”. But, contrary to steps taken elsewhere in developing countries, and despite recent initiatives, MENA still lags behind in regulatory reform to liberalize markets in services. However, the stakes of more ambitious liberalization in services are high for a number of reasons:
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 by reducing the “cost of doing business” and facilitating the integration of MENA countries to transnational production networks.
ICT growth would also enable businesses take advantage of technological developments, thus helping exporters move further up in the scale of technological specialization.
In addition to its benefits for trade, liberalization in services can create more investment opportunities for the domestic private sector, and help attract more non-debt creating foreign financing in the form of FDI and portfolio investment. Stepped up investment can offset the short-term adjustment costs stemming from lower protection of import-competing industries.
This study, first, 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. But, despite recent progress in a number of countries, market liberalization in telecom has been slower in MENA than elsewhere in the developing world. The study offers an assessment of unrealized potential in ICT sector development, and provides estimates of the likely impact of telecommunications liberalization on export performance and FDI inflows.
Section 2 briefly discuss the ongoing process of production fragmentation and highlights its connection with services liberalization. Section 3 benchmarks MENA countries with regard to liberalization in telecommunications, by developing an indicator of market openness that encompasses elements of competition, openness to FDI, and quality of the regulatory regime. Section 4 examines the empirical linkages between market openness and telecommunications sector performance. Then, based on econometric evidence, section 5 examines whether telecommunication services performance affects manufactured exports, intermediate good exports, and FDI inflows in developing countries and the MENA region. Section 6 concludes and draws the policy implications of the analysis.
2. The Process of International Fragmentation of Production and Services
Trade Liberalization The process of fragmentation is not new in the literature of international trade but took several forms and different names such as "disintegration” (Feenstra, 1998), “internationalization” (Grossman and Helpman, 1999), or “multistage production” (Dixit and Grossman, 1982). Others have used standard terms such as “subcontracting” and “outsourcing” (Feenstra and Hanson, 1996). Fragmentation allows countries to specialize in the components of production processes in which they have the greatest comparative advantages. Therefore, by locating these different parts of the production process in different countries and coordinating them internationally, the world economy can achieve significant gains in productive efficiency.
Sharp reductions in the cost of moving goods across borders 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 et al., 2001). Lower logistics costs have resulted from an accelerating “logistics revolution”—driven by the more widespread use of containers in trade; the adoption of “just-in-time” manufacturing techniques; enhanced supply-chain management; and the more wide-spread use of information technology and the internet in logistics. Lower levels of trade protection have also enabled the fragmentation of production across borders. The favorable trade environment that emerged after the Uruguay Round has spurred vertical trade especially in high-tech products—thanks to the largely duty-free trade in information technology products that came into force with the “Information Technology Agreement” (ITA).
The increased possibilities of ‘dividing up the value chain’ of production allowed the development of internationalization of the production process on unprecedented scale with deep implications for the global division of labor. The result of these developments is (Feenstra (1998)) integration of trade and disintegration of production in the global economy. In other words, the rising integration of world markets has brought with it a disintegration of the production process, in which manufacturing or services activities done abroad are combined with those performed at home. Companies are now finding it profitable to outsource increasing amounts of the production process, a process which can happen either domestically or abroad. This represents a breakdown in the vertically-integrated mode of production – the so-called “Fordist” production, exemplified by the automobile industry – on which American manufacturing was built.
Cross-country production sharing chains have especially spread at a regional level, particularly in East Asia, as evidenced by the fast growth in regional trade in parts and components. Over 1984-96, regional exports of components to other East Asian countries grew at an annual rate of 21 percent, twice as fast as the growth of total East Asian exports (Ng and Yeats, 2000). Within the region, high-income countries like Japan, Singapore and Taiwan increased their specialization in the manufacturing of components, while assembly operations have tended to migrate to the relatively low-wage countries, such as the Philippines, Indonesia, Thailand, and Malaysia.2 As industrial restructuring is increasingly stretching across national borders, the stages of production in a number of manufacturing industries have become “locationally footloose”. Semi-conductors, electronic tuners, valves, and other components are now commonly assembled for TNCs in Mexico, Malaysia, Thailand, or the Philippines.
The process of fragmentation of production allows the development of internationalization of the production process on unprecedented scale with deep implications for the global division of labor. By locating different parts of the production process in different countries and coordinating them internationally, firms can achieve significant gains in productive efficiency. For developing countries, fragmentation of production may bring other gains. In addition to managerial and technological expertise, another important advantage is that foreign participation—in form of either ‘outsourcing’ or direct investment—may offer direct access to global networks of a parent company. Becoming part of a production and distribution network of an MNC offers a ‘cheap way’ to market products. Firms do not incur marketing cost, which are usually quite significant for new comers (Roberts and Tybout 1998).
Given the increasing sophistication of the division of labor in the global economy, efficient trade-related services are becoming key in enabling producers at various stages of production chains better coordinate their activities with intermediate input suppliers located in other countries. Speed, flexibility, reliability, and low cost of transport and information logistics are particularly adding value to companies participating in production chains around the globe. Slow or unpredictable delivery delays the response to new market opportunities and rapidly changing demand patterns, force customers to hold costly buffer stocks, and make supply-chain management ineffective. Countries that have strengthened their positions in global production chains have improved their ICT capabilities; lowered the cost of transport; and created more competitive finance and insurance markets. Better service delivery has greatly contributed to reducing the cost of doing business, thus improving the attractiveness of these countries to both foreign and domestic investment.
Moreover, improvements in the quality of services are mutually reinforcing, because services are mutually complementary in facilitating trade. Transport logistics is intensive in information and, thus, depends heavily on the efficiency of telecommunications and information technology. Fast and reliable processing of information is a prerequisite for the efficient flow of goods, since transport is “perishable”—the spare capacity of a plane or ship cannot be sold once the trip has been made. Information flows in transportation are facilitated by a variety of ICT applications—such as inventory and warehouse management systems; route optimization; tracing and tracking software; and satellite-based fleet management systems.
MENA countries are still poorly integrated in global production sharing networks, as reflected by the small share of MENA countries in global FDI flows and trade. The share of components in manufactured exports remains far below that seen in other developing countries such as Singapore, Malaysia or Taiwan (Ng and Yeats, 2000). One exception is textile and clothing, especially reflecting Tunisia’s strong position in EU companies’ outsourcing chains. Trade liberalization, especially in the countries that have signed the Association Agreements with the EU (Tunisia, Egypt, Morocco, Jordan, and most recently Algeria), will help MENA producers improve their competitiveness by purchasing inputs at internationally competitive cost. Moreover, MENA countries could be attractive locations for assembly operations due to low labor costs and a good quality of human resources. The decrease in tariffs on imported intermediate inputs, scheduled in the first stages of the Association Agreements, has the potential to increase trade in components across the Mediterranean and facilitate the integration of MENA countries into EU production networks. However, MENA has yet to rise to this challenge. Domestic weaknesses, due to the weak investment climate and the poor quality of backbone services that facilitate trade, dilute the potential advantages of MENA countries.
3. Assessing Market Openness in Telecommunications Market openness in telecommunications is underpinned by three main factors:
degree of effective competition,
openness to FDI,
pro-competitive regulation and independence of the regulatory bodies.
The annex (Part A) presents a brief overview of the way these factors affect market outcomes. While it is difficult to quantify and assess the importance of these variables in an econometric model, an attempt is made to capture some of the benefits associated to regulatory reform and independence. 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.3
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:
Restricted market access: S 3
Limited degree of market openness: 3 S 5.5
Moderate market openness: 5.5 S 7.5
Full market openness. 7.5 S 10
Other indicators of liberalization in telecommunications include those developed by Mattoo et al. (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.
High-income countries 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 and Klimenko, 2000). Countries in Latin America have been ahead of others, closely followed by countries in South Asia and in East Asia and the Pacific. By contrast, regulatory reform in telecommunications has been slow in MENA, where markets remain less competitive than elsewhere in the developing world (Figure 1.a).
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 (Figure 1.b). 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 number of internet hosts—remains far below levels seen in regions with similar income levels—in particular, Eastern Europe and Central Asia; Latin America (Figure 1.c). Restrictive market access may be a factor, as internet penetration is particularly sensitive to access pricing and to the regulatory framework in internet service provision. Frequent content controls in some countries is another factor that impedes the spread of the internet, as measured by the number of hosts.
Figure 1. Performance in telecommunications.
Figure 1.a. Liberalization index per region
Figure 1.b. Number of phones per region
Figure 1.c. Number of Internet hosts per region
Figure 1.d. Number of phonesper country
Source: Authors’ calculations.
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 (Figure 1d).4 Market access is restricted in all other countries, due to various regulatory impediments to entry and competition. However, despite lack of competition, high-income MENA countries, such as Kuwait and Oman, outperform in terms of fixed and mobile line penetration.
Reflecting the slow opening up of markets to competition, telecommunications privatization in MENA has also been slower than in other developing regions, such as, especially, Latin America. For example, in mobile telephony, MENA countries have been much slower than Latin America in opening up markets to competition and moving forward in privatization, though both regions started at about the same level in the early 1990s (Figures 2.a and 2.b).
Figure 2. Privatization and competition in mobile networks per region
Figure 2.a. Competition
Figure 2.b. Privatization
Source: Authors’ calculations.
Over the last three years a number of MENA countries have stepped up the pace of telecommunications sector reforms. The annex (Part D) reviews recent steps in four examples of countries that are at a different stage in the process of liberalizing their telecommunications markets. Despite the acceleration in telecommunications sector reform during the past three years, compared with our reference point for international benchmarking (1998-99), progress has been uneven and there is still ample scope for liberalization. Only five countries have achieved conditions of moderate market openness in telecommunications, while full market openness prevails nowhere in the region (Figure 3). Opening up of the market to competition has been most ambitious in Algeria, while thanks to steady reforms, Morocco has now taken the region’s lead in market openness. But despite this progress, telecommunications markets in MENA still remain, on average, less competitive than elsewhere. MENA countries as a whole still fall short of the average ratings achieved by other regions (Figure 1.a), even disregarding reforms undertaken since 1998.