Strong positive impact of telecom on economic growth in developing countries

Back in August I wrote about an article by David Canning that shows there is a large productivity benefit from telecoms investment over and above the normal productivity of capital.  That study focused on OECD countries, i.e. the developed world, and a time (1960-1990) before mobile phones were significant.  I concluded that post, "My sense is that the advent of mobile phone competition and soaring adoption has only accelerated the trends identified by Canning but, as yet, I haven't found an analysis based on more recent data." 

Shortly thereafter, Bob Schechter and Andrew Odlyzko each gave me pointers to more recent work, but other priorities intervened.  However, this post from Mobile Pundit VeerChand Bothra pointed me to the recent Annenberg workshop on wireless communication and development, which in turn caused me to pick up the loose threads from ten weeks ago.

Indeed more recent research suggests, telephony's impact on economic growth may be twice as large in developing countries compared to developed countries.

In response to last August's post, Bob pointed me to two articles in the March 10th 2005 issue of The Economist (subscription required) Calling across the divide and The real digital divide.  These articles present the high level summary for non-economists.

Plenty of evidence suggests that the mobile phone is the technology with the greatest impact on development. A new paper finds that mobile phones raise long-term growth rates, that their impact is twice as big in developing nations as in developed ones, and that an extra ten phones per 100 people in a typical developing country increases GDP growth by 0.6 percentage points.

And when it comes to mobile phones, there is no need for intervention or funding from the UN: even the world's poorest people are already rushing to embrace mobile phones, because their economic benefits are so apparent. Mobile phones do not rely on a permanent electricity supply and can be used by people who cannot read or write.

Andrew gave me pointers to several works by Wallsten of the World Bank, the direct citation for the paper the Economist was citing which is The impact of telecoms on economic growth in developing countries by Leonard Waverman, Meloria Meschi, Melvyn Fuss, and indirectly lead me to an excellent set of policy papers on the Vodafone website.

As with the earlier work, Waverman, Meschi & Fuss seek models and data analysis techniques which disentangle two effects:  better communications support higher income and higher income allows more people to use communications networks.  Is there any causality?  From my personal experience, it seems clear that improved telecom dramatically improves individuals' lives and incomes by improving information flow, broadening markets, substituting for physical travel and transport and reducing transaction costs.  But does the data show this?

Yes! 

Waverman et al. examine 38 developing countries for which full data was available for the period 1996-2003.  Among other things, they conclude:

Differences in the penetration and diffusion of mobile telephony certainly appear to explain some of the differences in growth rates between developing countries...
... There are increasing returns to the endowment of telecoms capital (as measured by the telecoms penetration rate).

and  a variety of specific comments such as:
... the results suggest that long-run growth in the Philippines could be as much as 1 percent higher <per year> than in Indonesia, were the gap in mobile penetration evident in 2003 to be maintained.

None of this is to downplay the developing world's need for clean water, public health initiatives and access to medical care, but if there is one area where capital investment provides out-sized returns for individuals and nations, it's mobile telecom.  And this is one area where developing nations can easily attract outside capital investment with regulatory policies that favor open access and competition.