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(originally published by Booz & Company)


Network Effects: The Virtues of Telecom Regulation

A strong, competitive telecom market plays a crucial role in promoting a country's overall economic development -- but the government must first institute intelligent regulatory policies and practices.

There is a school of thought, prevalent in certain parts of Washington, D.C., and elsewhere, that says the only good regulation is no regulation. That may be true for some highly developed nations in certain advanced markets with reasonably self-regulating players. But under many circumstances, and especially for developing nations, unregulated markets simply won’t work. Indeed, poor regulation — or no regulation — can be downright detrimental, both to the growth of the particular market and to the country’s overall economic growth.

This is particularly true in the telecom arena, which has the potential to significantly stimulate a country’s overall economic growth — but only if the liberalization of its telecom sector is promoted thoughtfully. Why telecom? Because a strong telecom industry brings with it a wide range of beneficial “network effects”: Disparate markets are connected, making it easier to share knowledge, and labor productivity is increased. Numerous studies have shown that a properly regulated, competitive telecom market can increase revenues for telecom players and boost foreign investment and promote technological innovation in the sector, which ultimately benefits a country’s entire economy.

A study published in the journal Telecommunications Policy found that a fully competitive telecom sector’s contribution to its country’s overall economy can be as high as 3.38 percent of GDP, compared with just 2.33 percent in monopoly markets. And research by the World Bank published in 2002 found that lowering telecom costs by 10 percent in a particular market can increase trade by 8 percent.

Given the benefits of well-coordinated regulation, it is incumbent on a country’s government to work to put together a package of policies and regulatory mechanisms that can effectively promote telecom within its borders and leverage the virtues of a strong telecom sector throughout the economy. What, specifically, is the government’s role in this process? To operate at the highest, policy-making level to promote the development of the sector, the national economy, and society as a whole. That means establishing the sector’s primary objectives, enacting telecom laws and statutes, and ensuring that sector-specific policy concerns stay in line with other national policy issues such as trade and the environment. And it means establishing the regulatory body that will actually determine and carry out regulations, and cooperating with industry players in developing policy.

To that end, the first order of business for the government in developing a successful national telecom policy is to stay out of regulatory implementation and instead set up an independent body to carry out regulatory policy. It should be independent not just institutionally but on several other fronts as well: The government must allow it independence from political influence by giving it a distinct legal mandate, appointing regulators for fixed periods, and protecting them from arbitrary removal. The entity must remain independent financially through an adequate, reliable source of funding and the legal means to fund itself. Finally, it must remain independent commercially by maintaining a high degree of transparency in the appointment and functions of regulators and board members. Together, such policies will boost the credibility, transparency, and long-term sustainability of the regulatory body, thus making the sector that much more attractive to potential investors.

Second, the government must set policies that reduce its degree of ownership in the telecom sector’s incumbent players. Curtailing the level of government ownership has been shown to increase foreign investment and encourage new entrants. Not that the government will have a smaller role to play in the sector — it must continue working with regulators and industry players to create a strong, competitive market.

Third, the government needs to establish guidelines for the financial obligations of telecom operators, removing such onerous payments as the royalties some governments still demand from telecom operators, but maintaining corporate taxes at levels that will sustain the government’s regulatory efforts, research programs, and Universal Service Funds for promoting telecom service in rural and less-developed parts of the country. Reducing such payments will, in the long run, boost innovation by encouraging industry players to reinvest at higher rates and new players to enter the market.

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  1. Bahjat El-Darwiche, Fady Elias, Karim Sabbagh and Chady Smayra, “Towards More Effective Regulation: Unlocking the Value of Telecom Markets in the MENA Region,” Booz Allen Hamilton white paper, March 2007: The article on which this Leading Idea was based takes a closer look at the effect of regulatory liberalization on the economies of the Middle East and North Africa. PDF download.
  2. Carsten Fink, Aaditya Mattoo, and Randeep Rathindran, “An Assessment of Telecommunications Reform in Developing Countries,” World Bank Policy Research Working Paper No. 2909, October 2002: An analysis of regulatory reform in the telecom industry on a worldwide scale; a bit old, but still very useful. PDF download.
  3. “MENA 2007 Economic Developments and Prospects: Job Creation in an Era of High Growth” (World Bank, July 2007): An in-depth look at the economy of the MENA region, with particular attention paid to job creation. Click here.
  4. Christiaan Poortman, “Speech to World Economic Forum on Infrastructure Challenges,” May 20, 2005: A useful overview of infrastructure needs and economic development in the MENA region. Click here.
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