Digital dreams vs. real business

Scott Wallsten, Resident Scholar, American Enterprise Institute, Project Syndicate

A few years ago, a local Internet entrepreneur was arrested in Ghana, her employees jailed and her computer equipment confiscated. Her crime? Providing consumers with a way to make low-cost telephone calls over the Internet.

That businesswoman's brush with the law typifies the main reason-aside from low incomes-that bridging the so-called "digital divide" between rich and poor countries is so difficult. It's not a lack of equipment or of local knowledge. No, a large part of the divide is a direct result of domestic policies that suppress Internet and technology use.

While we shouldn't exaggerate the Internet's benefits, it can reduce business costs, increase access to information, and create opportunities. As a result, developing countries face a stark choice: Take advantage of new technologies to stimulate economic growth and enhance productivity or fall even further behind as businesses and consumers in rich countries increasingly embrace digital advances.

The threats and opportunities presented by new technologies for developing countries are widely discussed. But the ways governments in developing countries exacerbate the divide through their own regulatory policies are much less well understood.

Some governments are afraid to allow their citizens easy access to information. Other governments want to protect the profits of favored companies. Either way, the result can be an environment hostile to people and businesses wishing to use new technologies. Without technology-friendly regulations and public policies, no amount of donations or technical training will make much of a difference.

Consider the telecommunications industry in developing countries more generally. Through the 1980s, massive loans, grants, and "technical assistance" to state-owned monopoly telecom providers did almost nothing to increase the number of people with telephones in poor countries.

For example, nearly US$200 million provided by the World Bank and other donors to Ghana for telecommunications development in a 1988 development project had almost no measurable impact. According to the International Telecommunications Union, when the project began less than 0.3 percent of Ghana's population had a telephone. Four years later, that figure had not budged.

In 1996, however, the government opened the market to competition. By last year, the share of Ghana's population with telephones had increased almost six times.

The same story is true in poor countries around the world: telephone penetration remained stubbornly stagnant in developing nations until they allowed competitive entry-primarily in the form of mobile telephony-in the 1990s. Telephone use has soared in poor countries as a result.

Regulatory policies have often been unfriendly to digital development and innovation, even where traditional telecommunications have been liberalized. In addition to capricious laws such as those criminalizing Internet telephony, many poor countries strictly control the number of Internet Service Providers (ISPs) that can operate.

A recent survey of telecommunications regulatory agencies conducted by The World Bank found that 23 of the 38 poor countries that responded require ISPs to obtain formal regulatory approval before they are allowed to operate. Others regulate the prices ISPs charge customers.

Countries that regulate entry by new ISPs in this way have fewer Internet users per capita, regardless of national income and general development of the telecommunications network. Likewise, consumers in poor countries that regulate ISP prices pay more for Internet access than consumers in countries that don't.

Regulation, per se, is not the problem. Indeed, creating a regulatory agency is often a crucial component of successful telecommunications reforms, which typically start by privatizing the state-owned monopoly telecom company.

The biggest improvements for consumers, though, come not from privatization, but from competition. A sound regulatory framework and effective enforcement are frequently necessary for introducing competition, as well as to protect investors and consumers in the presence of a newly-privatized firm that might otherwise be able to use its substantial market power to stifle and prevent competition.

But governments in developing countries are often accustomed to controlling all aspects of their economies and tend not to want regulators to promote competition. Thus, even when regulatory agencies are crucial to encouraging competition in telecommunications, regulators are often given control over areas where there is no particular reason for government oversight.

It is irrelevant whether Internet regulations that fail to promote competition and protect consumers are passed by governments afraid of freely flowing information or, as in the case of the jailed entrepreneur, in order to protect established companies. The result is the same: Worse access to new technology, higher prices for consumers, and a chilling effect on innovation and local entrepreneurship.

The bottom line is that regulatory policies in developing countries, particularly countries in Africa, often bear much of the responsibility for low Internet penetration and slow adoption of technology. Institutions matter at least as much as equipment if developing countries hope to join the global digital economy in any meaningful way. A regulatory framework friendly to entry by ISPs and other companies relevant to the technological infrastructure will do a lot more to bring developing countries into the 21st century than donations ever will.