Robert Horwitz Issue: Latin America III 1998
Article no.: 14
Topic: Deregulation as a Political Process
Author: Robert Horwitz
Title: Department of Communication
Organisation: University of California,, San Diego, USA
PDF size: 40KB

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Article abstract

The deregulation movement started in the US has shown that while technology and economics are important material conditions, there is also the context of politics to fully understand the regulatlon question. Together, these forces have made many PTTs to open up even in the less developed nations. Though technical, the transformation of telecoms should not be a technocratic process. It should be an open political process. Only then will new social alliances emerge that can produce new social benefits.

Full Article

Deregulation is a shorthand term for reforms that include not just the loosening or withdrawal of government regulatory controls over business behaviour, but the liberalisation of market entry and, in most nations, the privatisation of state assets as well. Deregulation is one of the major political-economic phenomena of recent decades, and it is both a manifestation of, and a basis for, the so-called globalisation of the economy. The deregulation of telecommunications is particularly important in globalisation. This is because it facilitates ‘the integration of communications infrastructures across nations, thus helping to expand the scope of the international finance system to encompass the world in real time. It permits the spatial and functional dispersal of the business enterprise into flexible networks of firms, which seize the opportunity of the most advantageous conditions for profit-making everywhere. Local Political Explanations But if the deregulation of telecommunications has global economic consequences it usually has more local political explanations. This may be especially true of the US, the place where the deregulation movement began. It is important to see deregulation in the US as a general political phenomenon, not confined to communications and not the particular consequence of either the technological revolution in communications, or some abstract notion of economic necessity. Deregulation in the US affected particular kinds of industries under particular kinds of regulatory controls: infrastructure industries, such as airlines, telecommunications, broadcasting, banking, natural gas, and electricity. These had all been under what we call price-and-entry regulation, where government determined the number of firms to provide service and set the prices the regulated firms could charge consumers for the services rendered. Political Coalition The price-and-entry regulatory regime brought many infrastructure industries under regulatory controls during the Great Depression, when too much competition was believed to undermine these industries. Regulation secured stability and infrastructure growth. It typically created a system of cross-subsidies that supported the expansion of service to otherwise unremunerative areas and customers. In telecommunications, the system facilitated universal service. A central feature of regulated monopolies is that they came to function as a kind of social democratic industrial policy. The regulatory regime created a series of quid pro quos: the government awarded a company an exclusive franchise and guaranteed a fair rate of return or profit. In exchange, the company took on an obligation to serve all who requested service and generally to keep basic tariffs low. In practice the arrangement also meant the broad unionisation of labour in those industries. Price-and-entry regulation thus represented an often unrecognised political coalition between monopoly providers, small users, organised labour, and the state, to spread fixed costs across many participants. But, of course, there are problems with any political-economic regime. The telephone example is typical. Under rate-of-return regulation, there is no clear relation between costs and prices. Prices are set according to general goals in a process of quasi-political accommodation between service providers and regulators. Costs for any particular service within the regulated system are largely irrelevant, because they are internal to what was an integrated system. Keeping Up with Demand Another problem that beset regulated telephony was that, notwithstanding exceptional performance generally, AT &T could not keep up with demand, particularly the demand from large business users who wanted private lines for their geographically dispersed factories and offices in the period of economic growth following the Second World War. AT&T’s lack of capacity persuaded the Federal Communications Commission (FCC) to permit limited and provisional entry to providers of specialised services and certain customer premises equipment. These limited liberalisation moves were not done in support of competition per se; they were undertaken because of AT&T’s temporary incapacity. But however small and limited these new entrants were, including MCI among them, they had secured a niche at the fringes of the Bell monopoly. And with technology, a big legal effort, and a quiet alliance with some large users, they began to try to move from the fringes toward the Bell core. Drawbacks of Regulation The success of price-and-entry regulation was subsequently the reason for its downfall. Regulation helped expand infrastructure networks universally. But once the infrastructure network was constructed and in place, the conditions and rationales supporting the monopoly became less salient. Competition over the network was possible, but it was generally thwarted by the monopolist and the regulator who, together, argued that the system would suffer technically and economically if new entrants were permitted. The cross-subsidy burden, which tended to fall more heavily on large users, was perceived as increasingly onerous – especially when service options to large users were limited and those users were usually prevented from taking advantage of options outside the regulated system. Politically, the guaranteed fair rate of return looked dubious – especially during periods of inflation when the regulated monopolist asked for one rate hike after the other. Indeed, the relation between the regulator and the main regulated parties appeared too close and too co-operative. The argument is that while technology and economics are important material conditions, one must look at the broader contexts of US politics to fully understand the regulation question. On one side, the tight regulated system which has just been described became subject to criticism in the 1960s by liberals and a thriving public interest movement as evidence of the ‘capture’ of regulatory agencies by the industries under regulation. Regulators and large regulated industries were thought to be in bed with each other. The participatory politics of the 1960s affected regulation in important ways. It led to the creation of new, ‘social’ regulatory agencies, such as the Environmental Protection Agency (EPA), the Occupational Safety and Health Administration (OSHA), and the Equal Employment Opportunity Commission (EEOC), with jurisdiction over new, trans-industry issues such as the environmental protection, worker safety, civil rights. It also opened up the old price-and-entry agencies to participation by parties that had been left out of the original arrangement. The liberalisation of the legal doctrine of ‘standing’, that is, who was permitted to bring actions in court and who could argue before regulatory agencies, was a crucial factor in the expansion of participation. In this respect there was a kind of alliance between the courts and the public interest movement in the 1960s. This democratisation of regulation served in general to make the regulatory process, always political, a much more open and messy one. All parties used the regulatory and legal processes to impose costs on their opponents, including the cost of the time it would take to reach a final regulatory decision on any particular issue, known as the ‘regulatory lag’. When combined with the inflationary spiral of the mid 1970s, the uncertainty and regulatory lag began to impose costs on industries under regulatory controls. In response to this, business engaged in a counterattack against regulation. Early Regulatory Experiments On another side were academic economists who had been criticising the efficiency of regulated industries for several years. As early as the early 1960s some academic economists had conducted empirical studies of regulation in specific industries. They concluded that regulation was sometimes irrational, that monopolies thought to be ‘natural’ were in fact maintained only through regulation, that regulation stifled innovation, and that regulation often was used as a means of cartel management. Finding special instances where the prices for the same service provided by regulated and unregulated providers could be compared, the studies found significant price differences. Free markets, these scholars concluded, were more efficient than regulated ones. Organisations under rate-of-return regulation were particularly prone to ‘goldplating’, where they inflate their rate base by overbuilding their plants or by increasing equipment stocks and fixed capital more than would be the case under the normal cost-minimising pressures of the market. These economists had been criticising regulation for years, but by the mid to late 1970s they found an audience in business, now suffering under the regulatory consequences of 1960s politics. Academic studies became part of a business strategy to transform the political agenda on government regulation. Foundations were established and corporate largesse funded a large number of scholarly projects that were critical of regulation and that blamed it for high inflation and poor sectoral and national economic performance. More ideologically, regulation was said to compromise basic freedoms. This was the clarion call to “get the government off the backs of the people.” A central irony is that, while most of the corporate antagonism and rhetoric was directed against the new ‘social’ regulatory agencies such as EPA, OSHA, and EEOC, it was in fact the traditional price-and-entry regulation of infrastructure industries that came to be deregulated. This was because these agencies and these regulated industries had earned the wrath of both liberals and conservatives. Each wing of a curious, heterodox political alliance of liberals and conservatives, of public interest movement leftists and free market ideologues, operating wholly within their own internal ideological vision of participatory democracy and free market economics respectively, believed that the reform of price-and-entry regulation was in the public interest. But the alliance did not extend to the reform of the social regulatory agencies. And while the key firms and unions in the regulated industries fought against reform, deregulation was pushed strongly by the powerful large users of such services. As Congress began holding hearings and threatening to pass deregulation legislation, some regulatory agencies began experimenting with reform on their own. These early deregulatory experiments began with the opening of access to networks. Under this approach, the physical infrastructures of the networks (such as airports, cables and pipes) remained regulated natural monopolies. Access to these networks was opened so that the remaining elements could be submitted to competition such as airline traffic, value-added telecommunication services, gas and electricity production. Telecommunications experienced its share of limited entry liberalisation early on. When those specialised service entrants attempted to gain access to the public service telephone network, they were rebuffed by AT&T. AT&T’s use of the network as a bottleneck to competition was the factor that led to the Justice Department’s lawsuit against AT&T in 1974. But legislation was stymied. The issues in telecommunications were so complex, the stakes so high, and AT&T’s lobbying power so sufficient, that, unlike deregulation in other areas, legislation to deregulate telecommunications could not get through Congress. Until the Telecommunications Act of 1996, communications deregulation was achieved less through legislation than through reform directed by the FCC and, especially, by the 1982 Consent Decree that compelled the divestiture of AT&T. End of Regulation? Across all the affected industries, deregulation instigated a flood of new entries. This disrupted business-as-usual and set off price-wars, business failures and consolidations, along with significant labour retrenchment. On a political level, deregulation broke up the old Keynesian-inspired coalition of monopoly providers, small users, organised labour, and the state. More than just the liberalisation of entry for service suppliers, the new deregulated arrangement represented the liberalisation of exit of (primarily large) users from a sharing coalition that had become confining. The effect of this can be seen on labour and small users. Competition created new start-up companies, almost all non-union. It also induced existing companies to reduce their work forces and reduce wages; unionised providers moved to establish non-union subsidiary companies or dual-labour contracts – all very much in keeping with the emerging pattern of flexible capitalist organisation described by many theorists as ‘post-Fordist’. While competition offered consumers an increased variety of price/quality options, prices for individual services were realigned more closely with marginal costs, resulting in substantial price reductions in high-traffic areas or routes, and equally substantial price hikes in low-traffic ones. In telephony for example, tariffs for long-distance fell by about 40%; tariffs for local service rose about 50%. But this was not the end of regulation, by any means. Indeed, facilitating a transition from a regulated order to a competitive one requires perhaps more regulatory attention than ever. Making sure the incumbent provider does not use its market power to crush nascent competitors means that the new regime is not really market competition, rather it is a form of regulated, even ‘contrived’, competition. And even this is not satisfactory. A key problem is that once the network is opened, you have the problem of the network provider being both a monopolist and a competitor. Policing that increasingly uncertain boundary proves so difficult that this problem alone becomes an impetus to increase the scope of competition. The old regulatory separations between content and conduit providers, between telephony and cable television, between local and long-distance telecommunications, between computers and telecommunications, finally seemed outmoded. Regulating these separations, especially as technology was effacing them, was increasingly difficult. And policy-makers within the Clinton administration saw national and international economic opportunities if the roadblocks in communications policy were removed – this was the logic behind the. rhetoric of the National Information Infrastructure: (the Information Superhighway) initiative. More to the political point, perhaps, were the negotiations between major industry players. What would it take for the various big industry players to relinquish existing policy protections and face competition in their own turfs in order to expand into someone else’s territory and invest in new areas? The shared assumption was that constructing competitive .communications networks would be a high-risk, capital intensive project. It would require “the resources of large and flexible organisations (whose needs and failures would also spur small businesses and entrepreneurs in budding and niche markets). Thus the compromises between major industry players which constituted the Telecommunications Act of 1996 redrew the policy map. Shift in Policy and Regulation The Act articulated a bold shift in the goals and mechanisms of policy and regulation. The broad change was that the public interest would be secured not by regulation but by competition. A key concept is regulatory ‘forbearance’: regulation will be deployed only to the degree that it encourages a competitive telecommunications marketplace. The Act eliminates the legal basis for protected monopoly in telecommunications and encourages mergers and vertical integration as ways of facilitating what is termed ‘cross-platform’ competition, that is, competition between previously separated industries to provide the same service. The Act thus creates unprecedented conditions for competition and for the concentration of ownership. While the weight of negotiations was between the major corporate players, theirs were not the only voices. This was a public process, and the non-profit organisations, the librarians, the computer societies, and the consumer groups had a real, if limited, impact in the debate. Their public interventions made the question of what constituted the public good, something that the corporate players had to address. Larger Context of the 1980s Debt Crisis The original claim that deregulation has just local political explanations demands further qualification. The reason for this is that the sea of change in US (and UK) telecommunications policy set in motion a powerful dynamic of asymmetric deregulation that created exogenous pressures on all other PTT systems to open up – even in the less developed nations. This pressure was due to several factors but in short, once one key player opted out of the national monopoly model and its telecommunications system became governed by market-oriented principles, the inherent flexibility of the technology permitted the liberalised system’s now entrepreneurial companies to siphon off business traffic from regulated systems. And because business and international traffic brings in the revenue that cross-subsidises other services, their loss threatened to undermine the entire traditional edifice. Traditional telecommunications enterprises found themselves in a situation of either adapting or losing crucial revenues. In Latin America, the deregulation of telecommunications took place within the larger context of the debt crisis of the 1980s. With their economies in financial bankruptcy, major Latin American countries were confronted with a choice: either sever their damaged ties with the global economy and be cut off from new loans and investment, or else accept a profound restructuring of their economies, strictly following the policies designed for each country by the International Monetary Fund (IMF) on behalf of the creditors. The IMF strategy essentially consisted of two main features: first, the control of inflation by sharply reducing government spending and imposing fiscal austerity; and second privatisation of as much as possible of the public sector, particularly its most profitable companies, offering them up to foreign capital bidding. Because the privatisation of public sector companies – including telecommunications – disrupted all kinds of time-honoured political alliances and distributive claims, it tended to be accomplished outside the public political process. Reform was secured by executive ‘diktat’, acts that scholars of democracy have called typical of ‘delegative’, or ‘not quite’ democracies. Technocratic vs Political Process The Latin American experience can be contrasted with South Africa’s. Post-apartheid South Africa faced a telecommunications structure that delivered reliable and sophisticated services to whites and to business only. The incumbent monopoly operator was deeply in debt, overstaffed, its management largely tied to the old apartheid order and culture, and was now expected to expand the network rapidly to the black majority. In contrast to the insulated processes of telecommunications reform in many countries, reform in South Africa was conducted within a democratising context and was itself a democratic process of a unique participatory and deliberative kind. Over a period of less than two years, an extremely open and consultative stakeholder policy-making process resulted in a set of reasonable technical and political compromises and became legislation. Here was an instance of negotiations within civil society, and between civil society and the state, over the shape of a new political economy, where consensus building would have normative force for the participants. Conclusion The lessons of the South African experience are these. To be part of the global economy a country must accommodate open circuits and open markets. This is not the result of a simple ‘imperial’ urge; it is a complex historical process shaped by economic structures and political struggle. Transforming old telecommunications systems has become essential.