Telecommunications Reform, Access Regulation, and Internet Adoption in Latin America

Latin America is betting on the potential "new economy" productivity payoffs from telecommunications reform. It wants fast improvements in the quantity and quality of its information and communications technology. The optimistic ten-year growth target issued by Chile's Telecommunications Subsecretariat in mid-2000 for fixed line, mobile phone services, and Internet products is quite illustrative. ¹ By 2010, it expects fixed phone penetration to more than double, reaching 49 percent of the population, mobile penetration to triple to 60 percent, and Internet access to quadruple to about 50 percent. ² Similar statements made by key policymakers from Argentina to Mexico suggest that this optimism is shared throughout the region. The underlying assumptions are, first, that the liberalization of the sector has progressed enough to allow the countries of the region to make the most of cheaper technologies and the lower costs of access to web-enabled telecommunications technologies and services; second, that most policymakers expect that once supply has increased enough, demand will quickly follow thanks to the diffusion of the new technologies throughout the region, thus requiring very little input from the government beyond ensuring the liberalization of the telecommunications sector; and third, that this process should significantly contribute to closing the gaps between the poorest and the richest citizens across and within countries. ³

The generalized optimism evident in these assumptions seems somewhat excessive for now. The main purpose of this paper is to show that competition is not yet the effective norm in Latin America's telecommunications sector and that the government still has a strong role in the sector to ensure that the new economy spreads its expected benefits throughout the region. More specifically, we argue that much regulation, in particular in the area of interconnection rules, must still be introduced in the noncompetitive segments of the business if the telecommunications sector is to be competitive enough to achieve the desired goals. Effective competition and regulation are crucial if the telecommunications reforms are to allow the new economy to yield gains for everyone.

The empirical analysis of this paper tests the assumption that the Internet, like any other innovation, will enjoy an autonomous diffusion process, as argued recently by many analysts. ⁴ Once we account for unobserved country-specific characteristics, we find little evidence to support the view that such an exogenous Internet diffusion process is taking place in Latin America. We argue instead that regulatory actions and policy interventions are needed, especially in terms of access to phone lines (both fixed and mobile) that are still lacking in the region. In that context, we show how the main regulatory determinants of access rules in Latin America drive the odds of network integration and hence the incentives for investment in telecommunications infrastructure necessary to sustain the regional diffusion of the Internet.

The paper is organized as follows. We first review some stylized facts on reform and its effects on the level of telecommunications and Internet penetration in the region. The subsequent section econometrically tests the determinants for the differences in Internet penetration rates around the world and in the region, including tests of the importance of regulation as a determinant of cross-country differences in Latin America. We then summarize some of the main regulatory issues that will have to be addressed by the region's telecommunications regulators. The section also draws the main lessons from existing theory for the outstanding regulatory agenda. In particular, we highlight all the issues regulators must consider when designing interconnection agreements. The final section concludes. Appendix A outlines the basic technical and economic features of a communication network, while appendix B provides a glossary.

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