Role of Telecommunications in Economic Integration

Role of Telecommunications in Economic Integration

Date: Thu, 18 Nov 1993 10:09:53 -0800 From: Arthur R. McGee Subject: [ASCII Lang: E Bytes: 17960 Updated: 93-10-27 ITU-6054]


1res Journes Nationales des Tlcommunications Organized by La CI-TELCOM

Paper prepared by Mr. Jean Jipguep, Deputy Secretary-General, ITU Abidjan, 17 June 1993


It is an honour for me to address this conference on the subject of the role of telecommunications in the economic integration of Africa. When one views the grand sweep of African history - from empires, to colonies to a myriad of independent states - and when one views the current resurgence of tribal nationalism in many African states, it seems more appropriate to talk of economic disintegration than the longed-for hope of African economic integration. Even ifthis phenomenon is seen in Europe and elsewhere, it is worth mentioning if only to deplore it. Nevertheless, if Africa's history teaches us anything it is this: that Africa has more to gain from establishing trading links between neighbours on the basis of an equal partnership, than from establishing links with far-away economic giants where the relationship would inevitably be one of dependency. For Africa, inter-dependence is the true route to economic independence. In taking an economic rather than a technical approach, I wish to explain why investment in telecommunications offers a viable and urgent step towards achieving economic integration, and why priority should be given to developing a modern network infrastructure.

The driving forces of economic integration

In the late twentieth century, there are three driving forces of economic integration - transport, television and telecommunications. Together they provide the foundation for the growth of trade, which is the true measure and the substance of economic integration. So where does a wise government invest?

*Investment in transport networks is always an important step towards realizing the goal of economic integration, for without adequate and reliable transport networks, trade in goods would be impossible. It is relatively easy to cost-justify investment in a new multi-lane highway or to expand an international airport. But investment in transport networks, inevitably leads to centralization and the continued expansion of capital cities and urban areas at the expense of the country as a whole. In Africa, the unbridled expansion of urban sprawl - for instance in Lagos, Cairo or Nairobi - has brought its own problems of unbalanced development, and urban decay. Investment in transport networks is therefore a two-edged sword that tends to hinder rather than promote the process of economic integration because it engenders two- speed economic growth to the detriment of rural areas.

*The decision to invest in television is largely a private decision (e.g. to buy a TV set) rather than a public infrastructural investment. Partly because of this reason, television has advanced further in Africa than most other commodities and services. Television promotes economic integration because it supports brand awareness of a small number of (usually imported) goods and services. Television also tends to promote a culturally homogenized lifestyle in which (externally imposed) values are transmitted with little adaptation to local norms. Thus television tends to diminish the significance of local individual initiative in favour of multinational enterprise. As with transport, the form of economic integration which television brings is tinged with undesirable consequences which a society would not necessarily choose for itself;

*That leaves investment in telecommunications networks which not only facilitates economic trade in goods, by bringing together buyers and sellers, but more importantly, also promotes trade in services upon which modern economies are built. Because a telephone conversation is between individuals, telecommunications investment does not encourage over- centralization and because telecommunicated information is based on private expression, it does not impose a received set of cultural values. Of the three forces driving economic integration listed above, only telecommunications investment can guarantee development which is both geographically and culturally balanced. Furthermore, because telecommunication is based on the passage of information from individual to individual, it is one of the cornerstones of a market democracy. It is no coincidence that dictatorships and totalitarian systems have only ever existed in societies where the penetration of telephone sets is low and where access to information is restricted to a ruling elite.

As the Deputy Secretary-General of the International Telecommunication Union, it is not necessary for me to make any excuse for this biased presentation of the advantages of telecommunications investment over alternative infrastructures. However, it is necessary to provide some justification of the claim that African governments should give a higher priority to telecommunications.

Telecommunications in Africa

An ITU study to be published this month (African Telecommunication Indicators, June 1993) shows that the 660 million inhabitants of the continent have access to just under 10 million mainlines. Furthermore, in sub-Saharan Africa, which is home to around an eighth of the world's population, there are less than two million mainlines or just a third or one percent of the global total. Expressed a different way, sub-Saharan Africa has around 0.4 mainlines per 100 population, which is just ten percent of the telephone density of Asia and less than one percent of the telephone density of the rich industrialized nations that comprise the Organization for Economic Co-operation and Development.

It is fashionable to blame Africa's predicament on its poverty but, for telecommunications at least, this argument does not stand up to examination. Those subscribers in Africa who are lucky enough to have access to a telephone line spend, on average, some US $900 per year on telecommunications services which is 50 per cent higher than western Europe and is not much lower than that of the USA. Furthermore, it is not possible to argue that telecommunications in Africa are not well managed. On the contrary the nominal level of pre-tax profits are around 30 percent of sales in sub-Saharan Africa and all but three of Africa's forty countries make a pre-tax profit from operating telecommunications services.

In order to understand the problem of telecommunications underdevelopment, it is necessary to look elsewhere. As the analysis presented above shows, what is really lacking in African telecommunications is not revenues or even management abilities but rather the basic network infrastructure upon which telecommunications services can be developed. Africa's Public Telecommunications Operators (PTOs) are dominantly state-owned and those profits made on telecommunications services are rarely re-invested but are diverted to other loss-making sectors of the economy. Telecommunications users are being effectively taxed twice to pay for the government's ambitions in other sectors. It is no surprise that those countries in which telecommunications produces the highest profits for the state (Uganda, Guinea-Bissau, Rwanda and Chad all generate profits worth more than two-thirds of turnover), also have the least developed telecommunications networks with penetration rates among the lowest on the continent.

While the problems that confront Africa are great, nevertheless it is better to dwell upon a few success stories:

*Those countries, particularly island states and foreign dependencies, which have a well developed tourism sector generally have a higher penetration of telephones and generate substantial revenues. In the Seychelles, Cape Verde and Gambia, for instance, telecommunications provide more than 3 per cent of Gross Domestic Product (GDP) which is twice the regional average (1.5 per cent);

*A few countries, notably Egypt, Botswana and Lesotho, have achieved network growth rates of more than fifteen percent per year over the last decade;

*While the overall waiting list for telephone connection in Africa has grown from 1.7 million to 3.6 million and the average wait in sub- Saharan Africa has lengthened to almost nine years, nevertheless several countries, including Burkina Faso, Congo, Djibouti, Ghana and South Africa, have succeeded in reducing their waiting lists over the last decade.

Telecommunication policy and economic integration

What role can telecommunications play in enhancing economic integration?

Telecommunications services provide a platform for economic growth. Few companies today can survive without a telephone and most rely on fax, telex and other electronic forms of communications too. Telecommunications brings buyers and sellers together; an indispensable function in a thriving market. Telecommunications also facilitates the flow of information which is essential in making a market-based system work. It acts as a feedback cycle between suppliers and their customers. This system of information flow becomes all the more important for international trade where suppliers and customers are geographically removed. It is evident from available data that flows of international telephone traffic mirror almost exactly patterns of international trade. Indeed, the relationship is so close that variations in telephone traffic can be used as a leading indicator of national economic performance.

What steps can policy-makers take to enhance the role of telecommunications policy in economic integration?

Policy-makers have an important role to play in ensuring that the objectives of national telecommunications policy are consistent with, and reinforce, the objectives of national economic policy. In particular, there are five steps that policy-makers need to make in order to ensure that the benefits of closer economic integration through telecommunications are realised.

*Perhaps, the most significant step is to give priority to network development. While other policy issues -- such as liberalization, privatization, deregulation -- are undoubtedly important, there is a danger that they might distract from the need to channel more resources into network growth. The costs of infrastructure development in Africa tend to be much higher than elsewhere: average investment per new main line added is around US$2 900 in Africa compared with US$ 1,500 in the OECD nations. Nevertheless, revenues raised per line also tend to be higher so this is not an insurmountable problem.

*Closely related to this is the need to encourage tariff re- balancing especially with regard to the ratio between the cost of international calls and national calls. Technological change has altered the cost structure of telecommunications operations. Most of the costs of the network operator lie in the operation of the local loop, the local exchange and in direct customer service (maintenance, billing, inquiries etc.) where productivity gains have been only modest. By contrast, technological change has been much more rapid in the operation of long-distance and international services, particularly where digital switches have been introduced. As a rule of thumb therefore, under a cost-based tariff methodology, the ratio between the cheapest (local) and most expensive (long distance) call should be no greater than 3 to 1. Furthermore, the ratio between the most expensive national call and the cheapest international call should be no more than 2 to 1. In practice, both ratios are much higher than this in Africa, particularly where tariff structures are not reviewed on a regular basis. Tariff re-balancing is an essential first step if telecommunications is truly intended to act as an agent for economic integration.

By way of illustration, here is how Mr. Karel Van Miert, the European Commissioner responsible for competition, justified Europe's absolute need to reduce communication costs. He said that an Italian car manufacturer considered that he would have saved 24% of his telephone costs if he had paid charges like those in the United Kingdom, and 43% if he had paid charges similar to those in force in the United States. Even if telecommunications accounted for only 4 or 5 % of a business's costs, the difference paid was none the less a serious competitive handicap. Communication costs between the Member countries were particularly inappropriate and created an obstacle to the integration of the internal market.

*Closely related to this is the need for reform of accounting rates particularly between African neighbours. Most African countries run a surplus on their accounting rates providing a useful source of hard currency revenues for their governments (though rarely their telecommunications operators). This promotes the myth that it is in the interest of the state not to change anything. Nothing could be more wrong. Accounting rates which are too high are a drag on the national economy as a whole because they deter traffic and therefore trade opportunities, particularly for exports, are lost. It is much healthier for the economy as a whole to have a growing export market than a modest accounting rate surplus in telecommunications. A commitment to progressive reduction of accounting rates, starting first with inter- African relations, would make a valuable contribution to the promotion of economic integration.

*Fourthly, governments can no longer afford to maintain policies that hinder or deter foreign investment. Africa is in competition with other regions of the world, notably Eastern Europe, south-east Asia and Latin America, for the attraction of foreign capital investment in telecommunications. Policies that deter investment -- such as monopoly market structures, exclusive distribution rights or non-transparent procurement procedures -- will frighten away foreign investors and will do little to promote local industry. Equally, protectionist trade policies tend to do more harm than good in that they prevent local companies from keeping up with the rapid pace of technological change in the industry. A commitment to market liberalization and the progressive introduction of competition will enable local industry and the national operator to participate in the global telecommunications market rather than, being consigned to a slow death through protectionism.

*Finally, policy-makers should grasp or look for opportunities for regional co-operation. One example of this is the RASCOM project to provide satellite services, but there is a growing need for co-operation in other areas. For instance, an early agreement on a common standard for mobile communications in Africa would do more to promote investment in this high growth sector than continuing fragmentation and home-grown policies. Similarly, establishment of a truly operational pan- African network cables within Africa will avoid the revenue cream- off that is inevitable if traffic is routed outside the continent. Already, as much as 15% of intra-Africa traffic is switched or routed outside the continent and this percentage will grow if African policy- makers do not co-operate on a regional basis. The threat of mobile satellite by-pass in the next century should encourage African policy- makers to work together to prepare for the likely competition this will bring which in itself constitutes a major challenge.

As a response to the challenge mentioned, the RASCOM project is also an epitome of regional cooperation which provides significant opportunities for the development of telecommunications in Africa. Its conception as well as the feasibility study have demonstrated the wide ranging benefits of regional cooperation. The framework established for the operational stage of RASCOM which is indeed unique and unprecedented in Africa, provides immediate economic and financial advantages for African countries in the procurement of their short- and long-term space resource capacities. It is only wise for African countries in large numbers to take maximum advantage of the RASCOM framework, which no doubt will serve as one of the essential tools for the establishment of the African Economic Community.


In conclusion, telecommunications can play an essential role in promoting African regional integration. Compared to alternatives, such as transport and television, telecommunications investment promotes balanced economic development without exacerbating regional problems in urban areas and without the implication of economic dependency on a rich trading partner. There are five preliminary steps which policy-makers can make to encourage telecommunications investment: giving priority to network development, tariff re- balancing, accounting rate reform, market liberalization and regional co-operation. However, it is entrepreneurial spirit which is the catalyst; it is the essential ingredient to make the "growth recipe" work. Policy-makers cannot create entrepreneurial spirit (though they can sometimes kill it off). This is a job for entrepreneurs. Fortunately, in Africa we are blessed with immense human resources and that is the chief reason why I am optimistic about the future economic integration of our continent. _______________

Editor: Ali B. Ali-Dinar
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