Home Latin America I 1997 Liberalising Telecommunications:Making Economic Sense or Cents?

Liberalising Telecommunications:Making Economic Sense or Cents?

by david.nunes
Dr. Macario SchettinoIssue:Latin America I 1997
Article no.:8
Topic:Liberalising Telecommunications:Making Economic Sense or Cents?
Author:Dr. Macario Schettino
Organisation:Analisis Prospectiva Economica S.C.
PDF size:16KB

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Article abstract

The liberalisation of telecommunications is a young phenomenon. Here, Dr. Macario Schettino reaffirms one of the major benefits of liberalisation: competition. He argues that deriving from the benefits of liberalisation is more than just economics. The development of the internal markets within the region is also fundamental.

Full Article

Economic theory argues, that competition allows for lower process, more commercial activity, and better allocation of resources, which brings well-being for consumers. This is the reason why the elimination of monopoly practices has such a great importance. Nevertheless, beyond theory, other aspects must be considered. One of them is technology, which on many occasions has played against competition. In the 19th century, there was no real competition in the railroad industry, and if we go further back, the whole transportation industry was a very concentrated market. The results were, as theory would have predicted, a small market with inefficient production and high costs. Furthermore, there was a cascade effect towards the economy as a whole, because transportation affected almost all commercial activities. In the first half of this century, the same happened in another sector of the economy: finance. Once again, concentrated markets resulted in negative consequences for practically every economic activity. In the third quarter of this century, at the core of the discussion, the communication industry appeared. Although technical progress motivated a considerable growth in telecommunication capability, the required market share to avoid bankruptcy remained very high until fairly recently. Even today, for local wire telephony to represent an attractive business, 8% of the world market share is required. Like railroads, or finance, telecommunications are those kind of rare species found in economic textbooks exemplifying the concept of natural monopolies. Nothing is natural about them, it is simply a matter of initial investment and market share, but their bias towards concentration is an irrefutable fact. Under these conditions, when Latin America, and Mexico in particular, began its process of communication, its internal market was so small that it did not permit a considerable number of firms to participate. Mexico, for instance, had two different companies (Mexicana and Ericsson) offering a telephony service, and four television channels in the early years after World War II. By 1960, there was only one telephony firm and two television firms. For the last twenty years Mexico has only had one public telecommunications company, and as far as television is concerned, only two companies: one private and one public. The process of concentration had materialised, with the additional circumstance of government intervention. In fact, a different outcome would have been very difficult to come by, because Mexico, most optimistically, can only aspire to reach 9% of the world market share when it becomes part of the first world. As you can see, the liberalisation of telecommunications is a very recent phenomenon. It is only when technology can break its dependency from wires that real competition is possible. When companies are able to reduce fixed costs, a lower equilibrium point permits the entry of many companies and competition begins. This is true for long distance carriers, cellular telephony, radiolocalisation services and in some parts of the electronic channels of communication. Following Mexico’s example, the liberalisation in long distance carriers has attracted some companies, although everything seems to indicate that only three of them will be able to survive in the middle-term. A similar number of companies have the possibility of surviving in cellular telephony, in radiolocalisation, as well as in television (aerial and cable). It is clearly evident that the legal liberalisation of these markets has certainly attracted new competitors, but not in the necessary numbers required to guarantee all the benefits economic theory promises from real competition. What is actually occurring, is that technological circumstances do not allow a greater number of competitors. Coincidentally, it is not because the three long distance companies which operate in Mexico are business partners of North American companies (MCI, ATT, Southwestern Bell), the same is true for other telecommunication services. The most important market trends in this industry in Latin America, and particularly in Mexico, are: a) because of the limited existing coverage (in Mexico there are nine telephones for every 100 citizens), the market potential is amazing. If a reasonable economic growth occurs in the subcontinent, this will be the world’s fastest growing market, compared both against other local markets and against the world wide telecommunication market; b) the trend toward concentration on the supranational level will continue. It is possible that three big hubs will be established accordingly with the three most important commercial agreements in this area: NAFTA, Andean Pact, and Mercosur. c) in any case, the telecommunications companies will have mixed capital: regional-international, with a slight European advantage in Mercosur and a North American advantage in the rest of the region; d) the government’s intervention over the market will intensify, due to the fact that competition will not be enough to guarantee optimal results. Conclusion With these trends in progress, it is clear that the market of telecommunications in Latin America will be very attractive to global investors. It is only a matter of not forgetting that in order to keep the promises of profits, internal markets in Latin America must grow at a good pace, something that cannot be guaranteed at this point in time, given the economic policies applied in some of these countries. The future of telecommunications, like any other industry which depends on internal markets, will only improve if the income of Latin Americans improves as well.

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