From Iron Fist to Invisible Hand: The Uneven Path of Telecommunications Reform in China (review)

In 1980, there were 2 million telephones in China. By 2005, there were 744 million. In 1994, it cost ¥3,000–5,000 (US$350–$583) to install a wire line phone or activate a wireless connection. It became free in 2001. How did this happen? The rapid growth of the Chinese economy in the past thirty years has impressed the world, yet the growth of the telecommunications market has been even more surprising. Irene S. Wu in this volume provides some clues to the miraculous performance by a comprehensive and balanced account of the uneven development of the telecom market. She explains how new players entered into the monopolized market as a result of bargaining among government agencies, and how the industry was frequently restructured in order to promote competition and sever the ties between regulators and operators (chaps. 3 and 4). By detailing the interconnection policy and practices, she reveals deficiencies in the regulatory regime (chap. 6). The stories of Internet phones and Little Smart, an extension of a cordless phone, depict vividly how new technologies enabled the providers to break free from the regulatory grip, which intensified competition (chap. 8) and benefited consumers (chap. 7). In short, it is the joint forces of bargaining among ministerial bureaucrats for their own turfs, the eruption of the pent-up demand released by economic reforms, and technological progresses in telecommunications that proliferated since 1990s that have worked wonders.

To make sense of the impressive performance of the telecom industry in particular and the Chinese economy in general, one must understand the role of rivalry among government units. When economic reforms in the industrial sector were launched in 1984, practically all industries were state monopolies. Market forces at that time were no match for the politically backed monopolies, and only governments could overcome politically erected entry barriers. Ministerial/ provincial governments, competing for resources, started to support or invest directly in enterprises under their jurisdiction. Irene Wu tells us that the first entry into the telecom market by Unicom was a result of a power struggle between a coalition of the Ministries of Electronics Industry, Electric Power, and Railways (MEI, MEP, and MR, respectively), and the Ministry of Post and Telecommunications (MPT), which, in effect, owned the incumbent China Telecom (CT). Another major entrant, Netcom, was a joint venture of the Chinese Academy of Sciences, the Shanghai Municipal Government, the State Administration of Radio, Film, and Television, and the MR. In both deals, the highest power, the State Council, was involved. This was the pattern of early development in many other industries as well, including home appliances and electronics, tobacco, automobiles, and airlines.

A question then arises: What has made governments behave like profit-seeking entities? In 1980 and later in 1994, the central government implemented a series of fiscal decentralization measures, which gave local/ministerial governments greater autonomy, but at the same time drastically reduced the budgets they would receive from the central government. As a result, provincial governments and ministries had to seek new revenue sources for their survival and development. Those ministries that already had telecom capacities installed would certainly want a share of the ever-growing market.

However, governmental competition has its costs. While governmental competition may translate into market competition, the same motive to secure prosperity within their own jurisdiction can also induce governments to take measures that impede market competition. In particular, in a regulated market such as telecom, political bargaining can distort regulatory arrangements. Worse still, if the regulatory agency has conflicting interests, the agency itself may turn out to be an entry barrier, especially to private entrepreneurs who lack political backing. Numerous incidents that reflect shortcomings of governmental competition can be found in Irene Wu’s book, and interconnection in particular exemplifies the costs involved. In the telecom market, access or interconnection by newcomers to the local...