The end of the 20th century saw a deluge of proposals to reform the telecommunications sector, and nations around the world had their own ideas.
So many changes complicated the situation for investors wanting to evaluate the regulatory climate of different countries. It also made it more difficult for policy analysts to predict the difficulties that reform may bring to some jurisdictions.
According to IESE economics professor Jordi Gual and Francesc Trillas, reforms can be studied and measured by looking at two key indicators, which they describe in their paper "Telecommunications Policies: Measurements and Determinants." The first are entry barriers. To what extent should the reform policies favor entrants versus incumbents? And how biased should regulation be in the market-opening phase?
The second indicator is regulatory authorities. Some scholars and international institutions advocate establishing independent regulators, which begs the following questions: How can their exact degree of independence be determined? And how can this independence be made sustainable?
By measuring entry barriers and regulatory independence, say Gual and Trillas, it is possible to rank countries in terms of how far they have gone in lowering barriers to entry and in separating regulation from governance. They based their study on data from 37 counties reflecting telecommunications policies and institutions in the year 1998.
Their ranking exercise required several steps. The first was to construct original indices that consider both the barriers to entry and the regulators as multidimensional phenomena. The second step was to test hypothesis about what determines these two dimensions and to use a battery of institutional indices to assess the relation between reform and countries' institutional endowment.
As for entry barriers, the authors began under the premise that entry barriers are negatively associated with interventionism, yet positively related to the weight of interests groups and the partisan ideology of the reforming government.
To test this hypothesis, they considered the following variables: investment conditions of any kind imposed upon the industry, and the average number of mobile providers in 1996 and 1997 (as an indicator of how easy or difficult it was to enter the industry immediately prior to the study's reference year). They also examined how the spectrum was allocated (allocation by auction is, for instance, associated with lower entry barriers). Are a nation's phone numbers portable both for fixed and mobile phones? If yes, then switching costs, consumer inertia and thus entry barriers are lower. Is there carrier selection and pre-selection in local, long-distance and international calls? If so, entry barriers are lower. Is local loop unbundling available? If yes, entrants may share the incumbent's infrastructure and their entry into the market will be simpler.
The second hypothesis that Gual and Trillas tested is that the decision to set up an independent regulator depends on the institutional endowment and on the interests of dominant interest groups. Eleven indicators were established to address the following questions: Is the agency competent in licensing, interconnection, tariffs, resource allocation and universal service? Do agency funds depend on the government's discretion? How is the agency head appointed and how long is his/her term in office? How tight is the agency's obligation to report to the government? When was the agency established and what percentage of private ownership does the incumbent have? Telecommunications performance, political and institutional variables were also taken into account.
The data revealed that countries with lower entry barriers include the U.S., Canada, the UK, Germany, New Zealand and Chile. High barriers are found in India, Ireland and Ethiopia.
The study also shows that less interventionist societies tend to have lower entry barriers and to impose regulations that favor the incumbent to a lesser degree. It also indicates that telecommunications does not appear to be related to government ideology.
Regulatory independence does not show a high correlation with any of the other institutional indices. This could mean that it is compatible with different levels of general regulatory or institutional quality, and is unrelated to the country's level of development.
The study also proves that countries with a larger incumbent are more prone to create specialized agencies. A possible explanation for this apparent contradiction is that incumbents may find that specialized regulators (whose staff members may well be recruited from their staff) may be more easily captured than governments.