The high cost of interference

13 Nov 2006

The decision to award the Nobel Peace Prize to Muhammad Yunus for his micro-credit scheme was an inspired one.

Yunus' small-scale loan programs, which began in Bangladesh and have since been implemented around the developing world, have helped millions lift themselves out of extreme poverty.

The concept is simple, namely to make loans of a few hundred dollars to give rural villagers the chance to invest in a small business, like a sewing machine or a village phone.

The two outstanding - and related - features of micro-credit are that virtually all the loan recipients are women and the bad debt rate is 2%.

But the powerful lesson here, once more, is that markets, not governments, deliver the most effective solutions for poverty reduction.

Why‾ Because markets are voluntary and thus inherently empowering. Government approaches are almost by definition top-down and heavy-handed, written according to a political or bureaucratic agenda. Which is not to say there aren't market failures - there are lots - or that governments don't have a role - they do in the macro areas of education, health and regulation.

Costly interference
In telecoms, the best thing a regulator can do often is to get out of the way. That's especially true in the emerging markets. A survey commissioned by the GSMA early this year estimated erratic regulation and import duties were taking $900 million a year off sub-Sarahan Africa's GDP.

An increasingly popular tool these days for governments wishing to address the digital divide is a universal service fund (USF).

It has the appearance of being fair and practical, and capable of delivering with a minimum of pain.

Some 57 countries, mostly in the developing world, have set up or plan to set up USFs, which usually involve a levee on all service providers in a market. The proceeds are then directed to subsidizing the cost of uneconomic services or infrastructure.

That's the theory. But research group Intelecon has made the remarkable discovery that most of the USF monies collected in the past decade remain unspent. And of that which has been dispersed, the overwhelming majority has gone to wireline.

The figures break down like this. Governments have collected $6.2 billion, of which only 27% has been distributed. Mobile operators have contributed one-third, or $2.1 billion, and their proportion continues to rise.

Of the total which has been allocated, 81% has gone to fixed-line incumbents, just under 12% has been awarded to competitive carriers bidding for business and a pathetic 4.6% is allocated to mobile operators.

I should acknowledge that 78% of the USF total has been collected in just two countries - Brazil and India.

There may be a reason for this strange reluctance to acknowledge mobile, but Unwired can't think of one, other than it has escaped the attention of USF officials that mobile phones are now affordable for all but the completely impoverished.

The disappointing thing is that there's a massive market opportunity here.

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