Disconnected: Taxing Mobile Phones in the Developing World

Article excerpt

It has been hailed as the development tool of the century. It has revolutionized business in Africa and Asia and has allowed the poor to cross countless institutional hurdles. And despite a paucity of electricity, infrastructure, and support services, the people of the developing world have embraced it with open arms. It is the cell phone, and it is changing the reality of economic opportunity. With cell phone technology it is possible for health-care workers in rural Africa to summon ambulances to remote clinics. It is possible for one woman on the Congo River, completely illiterate and lacking electricity, to operate a successful food distribution business that connects with restaurants in distant cities and towns. It is possible for migrant workers without a reliable postal service to send messages in a matter of minutes.

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Even more promising, there is increasing evidence that cell phones really do make developing nations better off by boosting overall economic performance. According to the Financial Times, studies show that a 1 percent increase in mobile diffusion "increases GDP per capita from US$124 to US$164 in the developing world." Moreover, the size and cost of mobile equipment has decreased in recent years, such that the adoption barrier has declined dramatically and mobile technology has become easier to integrate. However, despite the recognized benefits of cell phone diffusion, only a small number of people in the developing world--indeed, only 5 percent of the population in India and sub-Saharan Africa--own cell phones. Why has the developing world failed to adopt the technology more widely?

The greatest barrier to mobile integration is excessive regulation and taxation. A cross-country analysis of the developing world conducted in 2005 by the Global System for Mobile Communications Association (GSMA) shows that, even after controlling for GDP per capita, a 10 percent decrease in the average annual cost of mobile services (taxes included) would increase mobile diffusion by 5 percent. In other words, in developing countries where mobile services are heavily regulated, and therefore more costly, cell phones are significantly less accessible to the population. Excessive taxation and costly regulation not only cause inefficiencies that distort the market for mobile services but also halt the spread of cell phones to the people whom the technology would benefit most.

Undermining Growth

Why is the mobile telecommunications industry so heavily regulated? Due to the economic promise and positive social externalities of cell phones, many governments in the developing world have begun to conceive of cell phone networks as a public utility with social benefits--much like water, electricity, or fixed landlines. Many of these governments have instituted regulatory safeguards--just as they would for public utilities--to prevent private firms from gaining unfair advantages and benefiting from frenzied demand for the new technology. Because many mobile providers in the developing world are foreign firms or are backed by foreign interests, governments fear that their countries will not benefit from the immediate financial gains of new mobile technology and that the money will flow right back to developed nations. Moreover, as economist Howard Gruber has reasoned, mobile technology in some countries has faced stringent regulation because of the competition it brings against fixed landlines, most of which are owned by the government itself.

Of course, some degree of government regulation is necessary to manage competitive resources in the mobile telecommunications industry. As per international law, governments maintain full control over radio frequencies and reserve the right to assign and price frequency license fees. Such regulatory control is beneficial for two primary reasons. First, as radio waves become increasingly congested, a central authority is needed to allot and oversee frequency usage. …