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LEAPFROGGING DEVELOPMENT: MYTH OR REALITY?
THE 'HOW' AND 'WHY' OF TELECOMMUNICATIONS
IN DEVELOPING COUNTRIES
by
Jatinder Pal Singh
A Dissertation Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(Political Economy and Public Policy)
May 1995
Copyright 1995 Jatinder Pal Singh
UMI Number: 9621630
UMI Microform 9621630
Copyright 1996, by UMI Company. All rights reserved.
This microform edition is protected against unauthorized
copying under Title 17, United States Code.
UMI
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UNIVERSITY OF SOUTHERN CALIFORNIA
THE GRADUATE SCHOOL
UNIVERSITY PARK
LOS ANGELES, CALIFORNIA 90007
This dissertation, written by
Jatinder Pal Singh
under the direction of h.k?........ Dissertation
Committee, and approved by all its members,
has been presented to and accepted by The
Graduate School, in partial fulfillment of re
quirements for the degree of
DOCTOR OF PHILOSOPHY
Dean of Graduate Studies
Date ....
DISSERTATION COMMITTEE
.
1 /ir\ Che Chairperson
DEDICATION
To my loving mother
and the inspiring memories of my father
"....And the souls in Plato riding up to
heaven in a two-horse chariot would go in a Ford
car now,” she said.
"Or a Rolls Royce: Plato was an aristocratI"
"Quite l No more black horse to thrash and
maltreat. Plato never thought we'd go one better
than his black steed and his white steed, and have
no steeds at all, only an engineI"
"only an engine and gasi" said Clifford.
D.H. Lawrence
Ladv chatterlev's Lover
IV
ACKNOWLEDGEMENTS
University of Southern California's interdisciplinary program in Political
Economy and Public Policy provided me the prefect opportunity to study
international development issues rigorously without confining myself to
the narrow bounds of any one academic discipline. Faculty members
themselveB interested in and inspired by interdisciplinary methods guided
me every step of the way. The enthusiasm and patience of one particular
person, my mentor Professor Jonathan D. Aronson, stands out as a truly
remarkable effort. He motivated me to study telecommunications policy and
also to find a balanced mix between theory and policy so that my
contribution here would be relevant for the myriad of difficult choices
facing decision-makers in developing countries. I am also indebted to
Professor Aronson for his patience which helped him put up with my many
idiosyncracies (like the four months I took out to finish a novelI) and
re-inspire me to work. Perhaps it is his joie de vivre which helped him
put up with my errancy.
Professor Jeffrey Nugent's comments helped me appreciate the shortcomings
and advantages of institutional economics. Professor Sandra Ball-Rokeach
helped me place the work in a sociological and strict methodological
framework. I am also greatly indebted to the insight I received from
Professor John Odell whose eclectic methods and passion for international
political economy I have tried to emulate in this dissertation. My
classes with Professor Thomas Biersteker opened my eyes to things
conventional social science ignores. professor Jagdish Sheth kept me
sensitive to the needs of the telecommunications industry. Professor
Ronald Steel convinced me that I did not have to buy into everything in
academia to be in it.
I gained immensely from my three institutional affiliations while writing
and revising this dissertation. My work as a Research Associate at the
Center for Telecommunications Management at USC'S School of Business
Administration exposed me at close quarters to the world of
telecommunications. My one year teaching appointment at Scripps college
helped me expose my ideas to several faculty members at the Claremont
Colleges. My current appointment at The University of Mississippi which is
funded by the BellSouth corporation to teach telecommunications policy
keeps me in touch with the dynamic world of telecommunications policy
which intersects academia, business and policy-makers.
I thank Mr. Ashok Advani for making the archives and resources of his
magazine Business India available for me during my field research trips to
India. I also thank the officials at India's Department of
Telecommunications, Mahanagar Telephone Nigam Limited and videsh Sanchar
Nigam Limited who were forthright and extremely helpful in making data
available. I am especially grateful to Dr. A.K. Seth and Mr. A.K. Gupta
of MTNL for coordinating and arranging field interviews for me.
But it is to friends that I turned everytime I had a half baked idea which
needed feedback or an emotional crisiB which needed support. Many stood
by me and inspired me to carry on. Jana Harrison was always there, she
helped me stay rational (even when I did not want to) and fed me a barrage
of critiques which in the long-run helped more than I expectedI Without
her friendship, I would not have endured the many frustrating hours of
dissertation writing, sunita Rajan's concern for my hopes helped when I
tended to forget. Fred Peck believed in me even when I did not.
Elizabeth Fife helped me smile when it got cheerless. Gerry Power showed
me wayB I had not known before. I thank Lori Allio, Katrina Burgess,
Christine Kearney and Virginia Walsh for their comments and their
discipline (which I hope to imitate one day).
I thank my family for giving me the attitude that anything is possible if
VI
we do not take no for an answer. My parents instilled the love for
education in me. My sister and brother in working for their dreams
inspired me to work for mine. My two uncles in the united States always
reinforced the values my parents gave me.
Finally, I thank Mr. M.J. Parel, my political science and economics
teacher at my high school, The Lawrence school, sanawar, who helped me
dedicate myself to development questions with his poetic intensity. It is
Mr. Parel's work which Prof. Aronson helped me bring to fruition. I would
have repaid my debt if my efforts help in any which way to make even a
small dent in the quest for answers to the problem of development. It is
a pitiful paradox that just as we talk of the splendors of our high-tech
era, a majority of world's population must live below standards befitting
human dignity.
VII
TABLE OP CONTENTS
Page
PART I
CHAPTER 1 INTRODUCTION 1
Argument 3
Research Questions 6
Characteristics of Telecommunications 7
Explanatory Variables 12
what about Leapfrogging? 29
Research Propositions 31
Research Design 34
Data Sources 36
Chapter Outline 36
Significance 37
CHAPTER 2 LITERATURE REVIEW 39
Section I: 39
Section II: 42
Theories of communication and Information 42
Telecommunications and Development 45
Focus on Demand 52
Section III: 55
Existing Production structure 57
Globalization of Markets 65
Ideas and Technology 70
Interest Groups and Social Coalitions 77
state DeciBion-Making structure 86
Section IV: 96
CHAPTER 3 TELECOMMUNICATION CHOICES IN DEVELOPING COUNTRIES 99
Information Policies 100
Regulatory Framework 120
Industry Structure 126
Conclusion 145
PART II
INTRODUCTION: THE INDIA CHAPTERS: 4-8 146
CHAPTER 4 "SUCH AN ENGINE OF POWER" 149
TELECOMMUNICATIONS FROM 1851-1950
Introduction 149
The Development of Telegraph in Colonial India 150
The Development of Telephone in colonial India 156
Legacies of the Nationalist Movement after 1947 160
Conclusion 165
CHAPTER 5 THE RISE AND DECADENCE OF THE INDIAN DYSFUNCTIONAL 166
STATE: 1950-93
The Nehruvian State (1950-67) 169
'License-permit-quota Raj ': 1967-84 174
Decadent dysfunctional state: 1984-present 184
Conclusion 189
VIII
CHAPTER 6 SLOW GROWTH & ENTRENCHED INTERESTS 191
IN TELECOMMUNICATIONS: 1950-85
Lack of Investment Funds 191
Growth of Telecommunications Services (1950-1985) 192
Pitfalls of isi in Telecommunications 194
Demand for Telecommunication Services since mid-70s 203
Telecommunications: A Development Priority 207
Organizational/Administrative and Regulatory Reform 212
Developing indigenous Technology versus Imports 219
Large and Urban Users versuB Rural users 224
CHAPTER 7 PROVISION OF TELECOMMUNICATION SERVICES IN INDIA 228
THE SEVENTH PLAN [1985-90] AND BEYOND
Introduction 228
The Telecommunication Plan: 1985-2000 229
'Mission: Better Communications' 231
DoT and seventh Plan 235
Performance of MTNL and VSNL 238
Dedicated [Leased Line] Networks 259
Conclusion 266
CHAPTER 8 LIBERALIZATION OF MANUFACTURING 268
Introduction 268
Customer Premises Equipment 269
The Transmission Market and Private Manufacturing 274
The Switching Market and Private Capital 275
Import Policy and Foreign Manufacturers 278
Conclusion 282
PART II CONCLUSIONS: CHOICE OF TELECOMMUNICATIONS POLICY, 283
REGULATIONS AND INDUSTRY STRUCTURE
PART III
CHAPTER 9 TELECOMMUNICATIONS AND DEVELOPMENT 291
Club Goods and collective Action 292
state Decision-Making Structure 300
Pace and Scope of Telecommunications Reform 305
Leapfrogging Development 311
Postscript 316
IX
LIST OF TABLES
Table 1.1
Table 2.1
Table 2.2
Table
r o
CM
Table 3.1
Table 3.2
Table 3.3
Table 3.4
Table 4.1
Table 4.2
Table 4.3
Table 5.1
Table 6.1
Table 6.2
Table 6.3
Table 6.4
Table 6.5
Table 7.1
Table 7.2
Table 7.3
Table 7.4
Table 7.5
Table 7.6
Table 7.7
Table 7.8
Table 7.9
Table 7.10
Table 7.11
Table PII:
Page
State Behavior 21
Theories of communications and Information 46
Selected Studies Linking Telecommunications to 48
Development by Level of Analysis
Studies showing Benefits of Telecommunications 50
According to User Groups
National Telecommunication infrastructures 105
Telecom investment Indicators in Selected countries 107
Distribution of Gross Domestic Product 108
Growth of Merchandise Exports 109
Telephone Subscribers in India [1881-1951] 161
Telephones Per 100 Population [January 1951] 162
Population & Telephones in Major World Cities, 1951 163
India's Share of World Exports: 1948-1970 182
Total Central Plan outlays for Telecommunications 193
Telecommunication Infrastructure in India 195
Growth Rates of Telephone Service 196
Growth of International Telecommunications Traffic 205
India (1980-93)
Demand for Telephones and Telex 208
Proposed Telecommunication Plan per Year 232
Preliminary Estimates of Telecommunications 233
Market in India
Quality of Telephone service Indicators (India) 236
MTNL 6 VSNL: Total Revenues and Gross Profits 240
Reducing the Waiting List for DELs: Bombay & Delhi 245
Total Number and Increase in DELs: Bombay & Delhi 248
Quality of Service: Bombay & Delhi 249
Number of Employees per 100 Telephones 250
VSNL: Growth of International Services & Facilities 254
Answer to Se-Shore Rate for Incoming International 255
Calls: 15 Major Indian cities
Major Dedicated (Leased Line) Networks in India 264
Telecommunications Market structure in India 285
X
LIST OF FIGURES
Page
Figure 1.1 Equilibrium Conditions for Provision and Membership
Levels for Telecommunication Services
17
Figure 1.2 Flow chart of variables Affecting changes in
Telecommunication sectors in Developing Countries
24
Figure 6.1 Policy, Regulatory, Operations Chart
Telecommunications sector in India: 1986
216
Figure 6.2 Policy, Regulatory, Operations Chart
Telecommunications sector in India: 1989
217
LIST OF HAPS
Map 4.1
Map 4.2
Telegraph Map of British Empire in India
The GPSS Network in India
152
257
XI
ABSTRACT
Several leBS developed and newly industrializing countries (LDCs and NlCs)
are making telecommunications a development priority and hoping to
"leapfrog" into the information age. However, the causal links between
telecommunications and development will remain unclear until we first
examine how telecommunications services are demanded and supplied.
A telecommunications infrastructure leads to development in a few cases
only where the state as a supplier is a successful catalyst among various
user groups who (as induced agents) accede to the state line. The state's
function must always be analyzed in terms of its links with user groups
which demand telecommunication services.
changes in the underlying national and international economic structure,
and the available pool of ideas and technology provide incentives and
disincentives for demands by user groups at the micro club level and
collective societal action at the macro level. An understanding of the
impact of telecommunications on development requires a synthesis of club
goods and collective action approaches (demand factors) with analyses
which examine state decision-making procedures (supply factors).
A two-step research design is constructed. First, a structured-focused
comparison is carried out at the level of societal actors and their
interaction with the state in selected NlCs and LDCs to test the argument
at a general level. The countries are chosen on the basis of differences
in telecommunication policies adopted. second, to avoid
overgeneralization, an in-depth case study examines the choice of
telecommunication policies in the crucial case of a state-led development
strategy, India. Data was collected on two field research trips and from
published sources.
The study concludes that most states in LDCs and NlCs are not catalytic.
In supplying telecommunication services, they are either special interest
driven or act predatorily in the interest of constructing and maintaining
their legitimacy. This hinders development.
1
PART I
CHAPTER 1
INTRODUCTION
The phrase "leapfrogging development” reflects the growing belief among
policy makers and theoreticians that information technologies, especially
telecommunications, can help developing countries accelerate their pace of
development and/or telescope the stages of growth. This results from the
modernization and expansion of telecommunications infrastructures in
developing countries. The infrastructure, in turn, feeds into demand for
telecommunications services by other sectors of the economy.
The telecommunications literature uses the word "leapfrogging" in three
ways. First, it is meant to imply that telecommunications can help
developing countries skip over the stages of development and become
members of a post-industrial society.1 Second, leapfrogging is used in
'an engine of growth' sense to mean that telecommunications can help
developing countries accelerate their pace of development.2 Finally,
leapfrogging is used in a technical sense to signify skipping over the
technological frontier or product cycle.3 often the word 'leapfrogging'
is used interchangeably in both technological and economic ways.4
1 Stages of growth argument go back to Rostow:1960. For its use
in the leapfrogging sense, see: Karunaratne, Neil Dias.
"Telecommunication and Information in Development Planning strategy." in
JUBsawalla and Lamberton, 1982:212.
2 The idea of accelerating the pace of development through newer
technologies and state-led mechanisms goes back to Gerschenkron: 1962.
For its application in telecommunication literature see: Bruce, Robert.
"Options and Developments in the Telecommunications Sector.” in
Wellenius et al. 1989:45.
3 See: Nulty, Timothy. "Emerging Issues in World
Telecommunications." in Wellenius et al. 1989:10.
4 Soete: 1985
At a theoretical level, an increasing demand for telecommunication
services in our emerging information era due to changes in global and
domestic economic structures is well documented.-' Among other things, the
strategic role information plays in better decision-making, creation of
markets, reduction of transaction costs, decentralization of
organizational hierarchies, and controlling the patterns of distribution,
consumption and production etc. is noted by these works6. These factors
account for the growing demand for telecommunication services. But demand
does not always beget supply.
Empirically, the linkages between telecommunications and economic
development are explored in a range of quantitative and qualitative
studies. Empirical studies range from crude economic models correlating
indices of development with indices of telecommunications infrastructure
and services7 to detailed qualitative case studies outlining the role of
telecommunications in providing a diversity of social and economic
services, especially to remote and rural areas.6 At a more sophisticated
quantitative level, studies show the backward and forward linkages of
telecommunications in an economy using input-output tables and/or the
telecommunications multiplier9. The precise causal mechanism between
s Sapolsky et al:1992, Pool: 1990, Bar:1990, Beniger: 1986,
Williamson:1985, Pavlic & Hamelink:1985, Rogers:1983, Simon:1982, Nora &
Mine:1981, Arrow:1979, Porat:1977, Bell:1973.
6 In economics, Machlup [1962] was the first to write of an
'information society' in which, according to him, the rate of growth of
the information sector in the U.S. waB more than double the rate of
growth of GNP.
7 stone:1991, SaunderB et al:1994
8 schmandt et. al:1991, Parker:1989, ITU:1984 and 1983, Hudson
et.al: 1979.
9 DRI/McGraw Hill:1991, Saunders et. al:1983. Forward linkages
induce investments by making an input (output) available for later
stages of production while backward linkages come from inducing
investments in industries which supply the output (input) to the
industry in question.
telecommunications and development, however, is something which is assumed
or asserted rather than explored by these studies.
Argument:
This dissertation holds that causal links between telecommunications and
development will remain unclear until we first examine how
telecommunications services are both demanded and supplied. A political
economy of these demand and supply groups points us toward the mechanism
by which telecommunications sectors in different economies are evolving
and benefitting various groups in society. such micro analysis is
necessary to answer the question poised in the title of this dissertation.
In almost all developing countries telecommunications sectors are (or
until recently were) state-run monopolies. The supply factors are then
heavily contingent upon state decision-making procedures. The demand
comes from users who while in need of telecommunication services may or
may not be organized or powerful enough to get their demands met from the
government.
Before presenting the main argument of this dissertation, two dominant
explanations can be summarized (in a simplistic fashion). One holds that
state respond to interest group pressures in supplying telecommunications
services. This applies well in industrialized democracies where interest
group pressures almost alwayB yield results. In developing countries,
states are strong and not always responsive to interest group pressures.
This does not contradict the explanation. It merely diminishes its
importance. A second school of thought holds that state agendas are
shaped by powerful interests and that state often work hand in glove with
these powerful (often capitalist) interests. This does not explain
initiatives in telecommunications which first arise in governments before
they get adopted by businesses and other users. It also does not explain
situations where states act in contradistinction to powerful capitalist
interests.
The main argument in this dissertation runs as follows: a
telecommunication infrastructure leads to economic development in those
countries where the state is a successful catalyst among various user
groups who (as induced agents) tow the state line1 0 . Depending on
historical circumstances, the catalytic state can come about in response
to (or independent of) interest group pressures although its function must
always be analyzed in terms of its links with these groups. In cases of
state owned telecommunication monopolies, state decision-making procedures
ultimately determine the supply of telecommunication services. As it
suggests, a catalytic state is neither reactive nor proactive. It is also
not a mere pawn in the hands of dominant interest groups. It is a state
which expands its role and legitimacy by feeding into existing pro
development policies and hastening them. While a catalytic state sounds
similar to a developmental state, the former terminology emphasizes the
state's connection with the various pressure groups. A developmental
state merely represents the state'b own commitment to development.1 1 in
telecommunications, the East Asian 'success stories' and to some extent
others like Mexico and Malaysia fit this picture of a catalytic state.
Under these circumstances, the state not only makes telecommunications a
priority but also seeks to reduce the gaps between demand and supply in
telecommunication services.
1 0 Specific user groups are usually identified in
telecommunications literature based on similarities in their demand
preferences. A few well-identified user groups in the economic
development context are: urban, rural, small/medium sized businesses,
large userB, government administrations, social delivery systems and
exporters.
1 1 See, white:1988 for an exposition of the developmental state.
A dysfunction between the state and user interests where the interests of
the two parties do not coincide can lead to any number of outcomes. It may
result in telecommunications not even becoming a development priority at
all, as in many African countries. It can result in telecommunications
services being supplied to a select few, as in China. It can result in
haphazard development in telecommunications and provision of services to
those who did not even demand them that much, as in rural India. Apart
from a few well touted success stories, haphazard development is the norm
in most developing countries. This is the argument of dysfunctional
state-user group relations developed in this dissertation.
The political economy of telecommunications, which includes state
decision-making processes and user groups, then provides the context for
understanding why a high-technology item like telecommunications is
becoming a development priority in the first place (along with traditional
agricultural and industrial strategies). It also provides better
comparative measures across countries by taking into account (and not
excessively standardizing) the differences among telecommunications
sectors. Lastly, it helps to show the extent to which various user groups
are able to influence (or be influenced by) state decision-making in
developing countries.
At a theoretical level, this dissertation's argument is a synthesis of two
disparate schools of thought: club goods and new institutional analyses.
Telecommunications is a club good. A club good is one in which members
sharing certain common characteristics voluntarily join to provide
themselves a good. Other examples of club goods are toll highways,
international alliances, country clubs etc. The club shares the cost of
provision of this good and it can exclude others from its benefits. Too
many members can result in congestion which erodes the quality or quantity
of the good supplied. Telecommunications is a club good because members
can provide themselves with a service by pooling their resources while
excluding others from its consumption by tolls or tariffs.
As explained later, in a market economy optimal levels of club good
provision can be expected from the equilibrium between the demand and
supply characteristics of its members. Quite obviously, these results may
or may not hold true when the club good is supplied by a centralized
authority such as the state. Xt will depend upon the nature of
interaction between the club members and the state decision-makers. The
latter feature brings in the importance of new institutionalist analyses
noted previously. The politics of club goods provision are important.
Research Questions:
Before presenting the main argument of this dissertation in terms of club
goods and new institutionalist analyses, the research questions of the
dissertation can be outlined.
1. Why are less-developed country (LDC) states (with or without user
pressures) making telecommunications a development priority?
The question examines not only cases where the state responds to interest
group pressures but cases where it acts autonomously. scocpol
characterizes the latter approach "Tocquevillian" to show that states
"matter because their organizational configurations, along with their
overall patterns of activism, affect political culture, encourage Borne
kinds of group formation and collective political actions (but not
others), and make possible the raising of certain political issues (but
not others)."1 2
2. How do LDC stateB supply a club good like telecommunications?
• 2 scocpol, 1985: 21.
It is unclear in the dominant explanations (as the two noted above) why
developing countries are taking different approaches toward supplying the
different kinds of telecommunication services. Alternatively stated, this
question examines why developing country governments are making different
choices for revising the polices, structures and regulatory frameworks of
their telecommunication sectors. Differences in choices means that one
country's experience in telecommunications and development needs to be
qualified or contextualized to be relevant for another's, it casts doubt
on many of the generalized quantitative indicators which correlate "x"
amount of telecommunications services with ”y" amount of development.
3. Which users are better off as a result of increased provision of
telecommunication services in developing countries? And how?
Whether developing countries accelerate or skip through the stages of
development will depend upon who gets these telecommunications services
first and to which uses it is put.
Characteristics of talecoaaunieations
CLUB GOOD:
Host analyses tend to portray telecommunications as a public good.
However, telecommunications is more accurately portrayed as a club good.
As such, it lies on the spectrum between a private good (no joint
supply/consumption) or a public good (no exclusion). It can be jointly
supplied by its members who share the costs and exclude non-members.
An important characteristic distinguishing club goods from public goods
are congestion effects, crowding or congestion effects arising from the
poor quality of the network or long waiting lists for connections are of
particular importance in noting the club goods character of
telecommunications in developing countries. Quality of the
telecommunications network is often low as evidenced by the difficulty
experienced by callers trying to get through during the peak hours of
calling. Non-connection and network congestion are norm in metropolitan
centers. Quality of network is often dependent on usage rates and number
of callers. Long waiting lists for telephone connections which often run
in to years are another indicator of congestion. such crowding costs
during utilization and the preutilization crowding or queuing costs as
they are known often act as an exclusion mechanism for others seeking
connections.1 3
Congestion effects made a recent World Bank study term telecommunications
a private good.1 4 A good is perfectly congested when its consumption
precludes the consumption of it by another. A hamburger is perfectly
congestible. in this sense, telecommunications is not perfectly
congestible (or it is only 'partially rival' to use another economics
term). One person's use of the telecommunications network does not
preclude its use by another either at that time or in the future.
Telecommunication networks are then akin to toll roads which the same
World Bank study takes as an example of club goods.
A case is often made for telecommunications as a public good because of
the positive externalities which result from the network1 3 . These
external benefits result from the impact of telecommunications on the
economy at large by raising its productive efficiency through a fall in
information costs which reduce transaction costs. Thus, "a fall in
information coBts may help facilitate some of the institutional changes
that facilitate long-term economic development. Hore generally, the
1 3 Sandler and Tschirhart, 1980: 1495.
1 4 World Bank, 1994: 25
1 3 Externalities refer to costs/benefits accruing over and above
for those for whom they are intended.
social gains we have discussed are part of what Charles P. Kindleberger
epitomized as 'transformation': a society's capacity to respond quickly
and effectively to new problems and opportunities. That capacity is a
public good par excellance."1 6 This analysis ignores the crowding effects
from telecommunications which make telecommunications a non-public good.
Hore important, it can be used as a rationale for any number of goods to
be called public goods. This was precisely the case with the growth of
public sector enterprises in developing countries.1 7
Positive externalities alone cannot be used to classify a good as a public
good. First, club provision does not necessarily mean that such
externalities will not be forthcoming for the society at large as not all
of them can be internalized. second, telecommunication policies and
regulations might be sufficient to ensure such externalities where they
are not automatically forthcoming. Universal service requirements in many
advanced countries beginning with the U.S. is one example. Nonetheless,
"some advocates of government subsidies for telecommunication services
have focused exclusively on the public-goods characteristics of
telecommunications investment externalities and have based their subsidy
arguments on a contention that telecommunications services are or should
be treated as public goods."1 8
1 6 Leff, 1984: 263.
1 7 At a broader level, see Hirschman's [1958: 55-61] critique of why
the government should not try to internalize externalities through
pursuing a strategy of balanced growth.
1 8 Saunders et. al. 1994: 170.
10
ECONOMIES OF SCALE AND EQUILIBRIUM:
Falling average costs over time to some extent characterize the supply
curves of telecommunications although technological advances have made it
less and less so. Nonetheless, the high amounts of fixed costs required
result in economies of scale. It was such economies of scale which helped
telecommunication companies make claims for being natural monopolies.
Natural monopoly claims are in disrepute now. changes in technology
continue to lower costs (both of entry and production) and
telecommunications markets (and sub-markets) are becoming competitive. It
is argued that competition might have come to telecommunications industry
sooner if the natural monopoly idea was contested. Technologically, a
claim to natural monopoly could only be made for basic local Bervice in
the early years of telephone service.1 9 "Indeed, one of the turning
points in the regulation of communications came when economists began to
grow suspicious of many of the cost claims of engineers."2 0
Non-existence of natural monopoly does not mean that economies of scale do
not exist either. The issue of economies of scale extends beyond the
natural monopoly issue. It implies that a strict general equilibrium
situation in which supply and demand equal each other is difficult to
obtain in telecommunications. Falling average or marginal costs make it
difficult to derive optimal demand and supply results as well as making
marginal cost pricing difficult, with advances in digital switching and
fiber optics etc. enabling over a 100,000 lines to be provided from a
single switch, one might expect that installed capacity will outpace
demand. Therefore, demand and supply seldom meet each other.
A case where installed telecommunication capacity exceeds demand is termed
1 9 Cowhey, 1990: 183.
2 0 ibid, p. 184.
11
"development via excess capacity" of social overhead cost a (SOC) which
include infrastructural provision21. This is not the case in developing
countries where waiting lists for telephone connections alone are long.
The average main lines per 100 in developing countries is 1.5 compared
with 31.5 in the industrialized countries22.
The telecommunication situation in developing countries can best be
described as "development via shortage.1 , 2 3 Shortages of infrastructure,
telecommunications in this case, means that we should expect demand for
the infrastructure from other productive sectors of the economy (known as
directly productive activities or DPA) which utilize the social overhead
capital (telecommunications in this case) the most. This is precisely the
case in major metropolitan and manufacturing centers in the developing
world. The waiting lists are high in Bangkok, Bombay, and Buenos Aires.
The inducement to supply telecommunications in these areas is then not
from building ahead of demand but to catch up to it. in fact, in most
developing countries the neglect of telecommunications is a serious
impediment to further growth of DPA. This is what Hirschman described as
the effect of complimentarities of production in which the production of
A leads to "pressure for increasing the available supply of B...[and]
manifests itself in the form of complaints about shortages, bottlenecks,
and obstacles to development. Action in this case does not take place
through the operation of the profit motive but through group pressures on
public authorities and agencies."2 4
2 1 Hirschman, 1958:88. "SOC is usually defined as comprising those
services without which primary, secondary, and tertiary productive
activities cannot function." [p. 83]
2 2 Saunders et al. 1994:6. The statistics are for January 1988.
2 3 ibid, p. 88
2 4 ibid, p. 69-70.
12
This dissertation will show that far from constructing 'white elephants'
or building ahead of demand, public authorities in developing countries
are trying a hard game of catch-up even as many of them continue to
profess that telecommunications is a high-tech luxury item. The latter
line is usually adopted when the public authorities either lack the will
or the resources to bring about any changes in the telecommunications
sector.
Thus economies of scale in telecommunications imply that demand and supply
seldom match each other strictly, in both excess capacity or shortage
circumstances. In such a case, where demand and supply of SOC is seldom
in sine with DPA, development proceeds as "a chain of disequilibria"2 5 in
which the shortages of either SOC or DPA act as an incentive for the other
(complimentarity of production) to follow. This iB induced investment.
Vast public sector projects in s o c which try to anticipate demand rather
than follow it are discouraged by Hirschman.2 8 Given the shortages of
telecommunications, one need not worry about the implications of the
latter scenario, at least in circumstances where the public authorities
try to meet registered or latent demand.
The Explanatory Variablesi
The following analysis shows why we need to move beyond economic factors
to examine the causative agents for change in telecommunications. It
includes factors which short-run economics holds to be constant, namely,
2 5 ibid, pp. 65-70.
2 6 "When the authorities responsible for public utilities and other
SOC facilities fail to respond to dangers so clear and present and to
needs as obvious as those that are signalled by collapsing bridges,
derailed trains, and constant power failures, what hope is there that
these same authorities would know how to plan the construction of
bridges, railroads, and power stations ahead of demand, without the
grossest waste of resources?" ibid [p. 97]. "In situations in which
motivations are deficient, it therefore seems safer to rely on
development via shortage than on development via excess capacity." [p.
93]
13
ideas, technology, and political institutions and processes at both the
state and sub-state level.
WHY NOT ECONOMIC FACTORS ALONE?
For sectors like telecommunications where state control plays a role, the
problem with analyses which focus on the market alone is that they are
insufficient. It is argued here that while economic necessity is
definitely a precursor for change, it is a partial explanation unless the
actors that economic necessity motivates and their interaction with the
state in the political market is identified.
Provision of an adequate telecommunications infrastructure is important as
developing countries edge away from their former state led import
substitution industrialization [ISI] strategies and as they try to enter
global markets (or expand domestic ones).2 7 In fact, without information
flows supported by an adequate telecommunication infrastructure,
developing countries run the risk of marginalization from increasingly
interdependent global markets and continued fragmentation of their
domestic markets.2 8 The problem is compounded by the fact that the
existing industrial structure in the telecommunications sectors of
developing countries (as also many developed and East European countries),
characterized by state run monopolies or PTTs (Posts, Telegraphs and
Telecommunications departments), is ill-equipped to handle the rise in
2 7 ISI strategies sought to reduce a developing country's
dependence on industrial imports by manufacturing them at home instead,
thereby the name import substitution industrialization. By its nature,
ISI involved varying degrees of central planning and industrial
regulation. The movement away from a state-led import substitution
strategy toward market-oriented mechanisms is the subject of a vast body
of literature. For exemplar works of relevance to developing countries
see, Feinberg:1990, Kornai:1990, BelaBsa:1989, Vernon: 1989.
2 8 Mody:1989, Sheth:1989, Aronson < ■ Cowhey: 1988
14
demand for telecommunications services.2 9 They are also circumscribed by
prior development strategies which accorded to them a low development
priority chiefly because telephones, which still account for over 90
percent of all telecommunications services in the developing world (and
parts of the developed world), were historically perceived as a luxury
item by states.
Demand for telecommunication services in these countries is not resolved
through the market as the state is the supplier. In a scenario where the
actions of interest groupB demanding telecommunications services and the
governments which supply them are important, the economic market
explanation only provides the necessity of providing telecommunications
services. ThuB, the demand for telecommunication aervicea increaaea aa
developing countriea expand domestic and international markets.
[Proposition One of this dissertation]. The resolution of this necessity
is, however, as much a result of the workings of the political market as
it is of the economic market30.
HOW DO POLITICS HATTER?
The problem of making telecommunications a development priority and that
of making revisions in the policies, structures and regulatory frameworks
2 9 Telephony:July 1992 & Nov.1992, Osborne:1992, Cowhey et.al:1989,
Wellenius et al:1989, ITU:1984
3 0 This does not mean that politics matter only in cases of market
failure as is assumed by many economists, if the assumption of perfect
information is relaxed, the role of institutional and political
variables becomes apparent. This helps in analyzing political and
economic actions of individuals, firms and governments on a continuum
rather than in two distinct spheres, the economic one using positive
methodology and the political one confined to normative rules. Buchanan
notes that, "[T]he discovery of market failures is normally based on the
usage of a narrowly constrained utility function which describes
individual market behavior in terms of narrow self-interest [guided by
perfect information]. If, in fact, individuals behave in such a manner
in the marketplace, the inference should be that they will also act
similarly in other and nonmarket behavioral settings." [Quoted from
Buchanan, James M., "Toward Analysis of closed Behavioral Systems," in
Buchanan and Tollison, 1972:22]
15
of telecommunications sectors in developing countries is a problem of
demand and supply of a club good thorough the means of a centralized
authority. At a macro level, it is a problem of collective action as
multiple clubs within telecommunications (sometimes in conjunction with
other sectors of the economy) try to wrest the operation and production of
telecommunications equipment and services (and other sectors) away from
the state (the centralized authority) and do it themselves31. Such a
coalition may not come about voluntarily and thus needs to be
distinguished from club goods. I take up each of these points separately
below.
Club Goods and State:
States are revenue and power maximizers. Provision of telecommunications
services is a sub-part (often a minuscule part) of this agenda. When the
club good ia supplied by a central authority auch aa the state, It may not
result In pareto optimality If the state's interests and motives behind
supplying the good do not coincide with those of the demandeurs
[Proposition Two].3 2 Pareto optimality results only from a strict
congruence between state supply and user demand interests. North sums up
the issue well: "[I]t is exceptional to find economic markets that
approximate the conditions necessary for efficiency. It is impossible to
find political markets that do."3 3
club goods analysis shows how the size of the club (membership condition)
and quantity of the goods supplied (provision condition) are determined
3 1 "Collective action is concerned with the formulation of groups
and the behavior of these groups in allocating resources to collective
goods that provide benefits to a clearly defined set of individuals"
[Sandler, 1992:193].
3 2 A pareto-optimal distribution is one in which it is impossible
to make someone better off without making someone else worse off. A
general equilibrium solution results in pareto-optimality.
3 3 North, 1994:361.
16
simultaneously to yield a pareto optimal solution. optimal provision
follows from members equating their marginal benefits from the club good
with their marginal costs. An undesirable situation exists when the cost
of provision of an extra unit of club good exceeds the benefits derived
from it. similarly, it is possible to go on increasing the total members
in a club as long as the benefits of a marginal increase in membership are
equal to or greater than the marginal costs. Provision and membership
conditions by themselves give partial equilibrium. They must be
determined simultaneously to provide general equilibrium (see Fig. 1). In
situations where optimal provision is less than optimal membership, it may
be possible to increase provision by increasing membership. in
situations, where optimal provision is greater than optimal membership,
the provision may need to be reduced so that the costs to membership are
not greater than the benefits.
Will the state supply the club good efficiently in accord with a perfectly
competitive scenario indicated above? states are discriminating
monopolists in violence whose main interest is in power and revenue
maximization34. Political objectives therefore influence the state supply
of any good whether it is public or private. The politics of this
provision boil down to two things, either state decision making procedures
themselves or the access of other groupB to these procedures.
The reasons for institutional intervention (for example, by state) in
supply of a club good are well documented. In situations where the club
population is made of heterogenous members, the good in question is a
multi-product one, and where increasing returns to scale to scale are
present, a centralized authority can resolve several dilemmas.3 3
3 4 This is the Weberian definition of state, see worth [1981] for
an excellent use of this conception of the state.
3 3 This discussion borrows from Sandler: 1992 and Sandler and
Tschirhart: 1980.
FIGURB 1.1: PROVISION AND MEMBERSHIP CONDITIONS FOR CLUB GOODS
17
Membership
equi.
equi.
provision level
18
Heterogenous populations have difficulty with setting goals and reaching
decisions. Multi-product clubs necessitate the supply of several goods
which may not be demanded by all club members. For example, business
units may demand dedicated networks while residential consumers demand
telephony. In both cases the central authority can help to regulate
membership conditions and provisions conditions, in the latter case, it
can also help in resolving cross-subsidization issueB. where increasing
returns are present, marginal cost pricing will not help to recover costs
because average costs are higher than marginal costs. In such cases, a
central authority can help to recover costs by instituting a flat rate for
becoming a member apart from utilization charge. We may also add that in
poor countries the high level of fixed costs required may call for
institutional intervention because private capital may not be available.
But the rationale for intervention by a central authority doeB not inform
us about the particular form of this intervention on two counts. First,
that such intervention has usually come from state instruments is partly
due to the dominant nature of the state as an actor and partly due to
historical circumstances, second, to assume that the state will supply
the club good under optimal circumstances is to assume that the state has
no other agenda apart from selflessly supply the good in question. State
decision-making procedures are important here.
Three aspects of state decision-making procedures are important for
development by scholars working in the new institutionalist tradition.3 6
3 4 This is consistent with the view taken by many theorists in the
new institutionalist tradition [Putterman and Rueschemeyeri 1992,
Haggard and Kaufman: 1992, Haggard:1990, Nelson:1990, Milner:1988,
Samuels:1987 Gourevitch:1986] as well as classical institutional
economists such as Hirschman and Myrdal and more recent ones like Nabli
and Nugent [1989:33] who refer to the LDC state as "bureaucratic
authoritarianism" or Bardhan [1989] who refers to the "elite state."
For early applications of this view in telecommunications, albeit
without taking the economic factors as necessary conditions creating
interest group demands, see Duch: 1991, Teske:1990.
19
First concerns state autonomy or the degree to which the state is
independent from interest groups or the population at large in carrying
out its actions. This is especially important for the state to ensure its
independence from special interest groups. The second characteristic
concerns the degree to which the state is actually successful in its
actions, which in turn depends on its cadre of officials and other
resources (financial, institutional, historical circumstances). This is
known as state capacity. Finally, the degree to which state actions are
development oriented are dependent on the degree to which the state
expresses an interest in development.
In the context of development, this dissertation builds upon the preceding
concepts to speak of state "responsibility" and "maneuverability".
"Maneuverability" takes into account the embeddedness of autonomy and
leaves room for the state to impose its agenda and shape societal choices.
Thus, we may speak of 'external maneuverability' as the ability of the
state to shape societal choices and internal maneuverability or the
ability of the state to shape its agenda given societal pressures and
preferences. The two types are, of course interconnected, and take into
account state capacity and resources. State "responsibility" directly
benefits the cause of development while also helping the state increase
its legitimacy.
A catalytic Btate can both maneuver and be responsible. It shapes an
active developmentalist agenda with respect to vital societal interests.
A dysfunctional situation follows if one or both of the variables is
missing. An absence of both will produce a state which is either driven
by special interests alone or is unstable or both. It might need
repressive force to continue its rule. A corrupt and/or predatory state
might have room to maneuver but lacking responsibility it takes few
developmental initiatives. Table 1 summarizes these results.
20
Hhat do these categories mean in terms of this dissertation? It means
that demand alone will not create its supply in state hands. It will be
filtered through the access of interest groups and the state decision
making procedures, the latter being contingent on the state's construction
of legitimacy.
A catalytic state will not only meet user demands but also play a
dirigiste role in shaping future preferences [Proposition Three],
Dysfunctional states will do one of the following things:
A) supply services to those with the most access to its decision-making
procedures (special interest driven state)[Proposition Four A],
B) Not supply services to any group or all to those groups which help it
dominate (predatory state) [proposition Four B]. in special cases it may
supply these services to those who did not even demand them only because
it helps the state increase its legitimacy.
Host economists assume that activities of the political market deviate
away from efficient outcomes in that interest groups are able to attain
special privileges for themselves through their access to the state which
would not be possible through the market. Mainstream economists like
stigler note that "regulation is acquired by the industry and is designed
and operated primarily for its benefit."3 7 The preceding analysis shows
that this holds true only in specific circumstances. What Stigler and
institutional economists such as Olson3 1 assume is a passive state which
simply reacts to interest group pressures. In actuality, the decision-
3 7 Stigler, 1970:3. While Stigler makes his argument with respect
to regulatory agencies and interest groups, it can be easily broadened
for developing countries where historically the spheres of regulators
and policy makers have overlapped.
3 1 Olson, 1965, 1982
21
TABLE 1:1
STATE BEHAVIOR
MANEUVERABLE RESPONSIBLE
CATALYTIC STATE Yes Yes
DYSFUNCTIONAL
STATE: Special Interest
dominated
No No/Yes
DYSFUNCTIONAL
STATE:
Predatory
Yes No
22
making structure of the state and the access of the interest groups to
this structure are important.
Most models of political behavior offered by economists assume a
representational government and an efficient economic market. This leads
Olson to conclude that exclusive groups (analogous to clubs) perform only
a redistributive and an economically inefficient role in a political
market. In a non-democratic and/or non-pareto-efficient market setting,
exclusive Interest groups may infact lead to market oriented reform as the
actions of large users of telecommunications services In developing
countries shows39 [proposition Five],
Not all interest groups demand telecommunication services. The two
opposing groups which impact upon the structure of state maneuverability
and responsibility are:
1. Major users of telecommunications services (and a small number of
private sector telecommunication manufacturers in a few developing
countries) who stand to benefit from these revisions. More often than
not, these groups seek to make state run monopolies more accountable to
the market demands.
2. Historically powerful and entrenched bureaucracies in state run
telecommunication monopolies who stand to lose from moves toward
deregulation and privatization of service provision and manufacturing.
The central part of figure 1:2 captures the activities of these interest
groups vis-a-vis the state and bureaucracies. Taken together they account
for the club goods explanation of this dissertation.
3 9 This is what economists call positive rent-seeking behavior [for
example, see Nabli & Nugent:1989 t Colander:1984].
FIGURB 1.2: FLOW CHART OF VAR1ABL2S DETERMINING TELECOMMUNICATIONS,
POLICY, REGULATIONS AND INDUSTRY STRUCTURB
Necessary Auxiliary
Economic
conditions
Technology
Clubs
St
States
Maneuverability
' ' ' i f ) State
I Bureaucracs j
Underlying social coalition
defining sate-business
relations
I
I
I
I
I
I
I
I
I
I
I
I
I
,1
Options for telecommunications policy,
regulations and industry structure
Sufficient Conditions
24
All this leads to one inevitable conclusion. He cannot expect that a
centralized authority such as the state will supply a club good
efficiently (as many club goods analysis assume for simplicity) but its
actions in concert with clubs (exclusive groups) may help it approach
optimality rather than deviating from it. The sub-optimal outcomes, the
result of state's calculations about its legitimacy, themselves will be of
one of the following types:
a) Restrictions on membership and provision: States can muster any number
of arguments ranging from resource constraints (material, financial,
human) to an outright rejection of telecommunications as a development
strategy to restrict membership and provision [Proposition Six A]. Thus
telecommunications may not be a development priority because the state
feels it is a luxury item or it may not commit resources to it even after
making it a development priority. Telecommunication thus continues to
reveal congestion or crowding effects even though the membership and
provision levels may increase especially where the marginal benefits are
greater than marginal costs.
b) cross-subsidization: Levels of cross-subsidization among services,
often quite high, reflect the differential treatment accorded by the state
to different user groups [Proposition Six B]. Rural areas may be
emphasized in state plans whereas urban areas need these services the most
because the state needB to increase its legitimacy in these areas. or
rural areas may be left out altogether where the state effectively keeps
them out of its decision-making procedures. The extreme case of cross
subsidization, one that extends beyond telecommunications, is one where
the state uses the telecommunications sector as a "cash cow" and siphons
off revenues to be used in other sectors40.
It needs to be emphasized that all this is possible because clubs have
4 0 Cowhey, Peter F. and Jonathan D. Aronson. "Trade in services and
Changes in the World Telecommunications system" in Cowhey et al. 1989.
25
limited power. The heterogenous nature of these multiproduct clubs in
telecommunications give the state considerable maneuverability, unless
sector or economy wide collective action is forthcoming, states may move
very slowly toward addressing the problems of telecommunications.4 1
Collective Action and StateBi
The problem of supply of telecommunication services in this dissertation
is not just one of supply of club goods through the state. At a larger
level it entails reconstructing the rules and institutions of a production
structure which is deemed inefficient by a growing number of producer and
consumer groups. It may encompass sectors other than just
telecommunications. Revamping the production structure means providing
property rights or collective goods, in the form of liberalization and
privatization, these property rights are now being demanded by various
interest groups including those in telecommunications in many parts of the
developing world. For telecommunications, it means multi-product clubs in
telecommunications coming together perhaps with other sectors to press for
these changes ("alliance valence” in Gourevitch's terminology42). But to
do so, these heterogenous groups face problems of collective action.
Large heterogenous groups have a hard time coming together and demanding
a collective good (in this case new forms of property rights). The
incentive to join is diminished by the fact that individual benefits from
joining the collective action coalition may be incalculable or low. The
incentive to free ride becomes high.
If these groups can overcome their problems of collective action, then,
the sequence of changes to the rules and institutions of
4 1 The problem of alliance formation across heterogenous products
and differentiated markets is addressed by Eichengreen:1989.
4 2 "Alliance valence" of groups BtandB for their "propensity to
form alliances with other groups to support particular policies.”
[Gourevitch, 1986:159].
26
telecommunications will be the result of the access of the these groups to
the decision-making process of the state. The difference is that since
this is a problem of collective action, the groups will not come together
voluntarily as was the case with clubs. Their degree of cohesion will be
the reBult of (a) the severity of the economic crisis which makes
collective action imperative (b) effect of changes in ideas and technology
(explained later) which act as an incentive for a collective action
coalition.
This dissertation shows that moves toward liberalization and privatization
in many countries is slow precisely because while clubs face few (or no)
problems of collective action, large heterogenous groups have many. It is
easier for clubs to get the club good provided by the state than to
transform its supply structure altogether. Efforts to transform the rules
and Institutions of supply structure are weak because: (1) such efforts at
the club level may be insufficient to alter existing rules and
institutions, or (11) incentives for this club to be part of a larger
coalition within the telecommunications sector or other sectors may be
lacking [Propositions Seven A & B]. This accounts for the piecemeal
nature of economic reform in many developing countries.
These conditions limit but do not altogether diminish collective action.
For example, while at the club level, large business users may demand the
provision of dedicated networks from the state, they may also be part of
an industry wide coalition which is demanding the privatization of these
and other services and wants the state out of service provision. At yet
another level, the telecommunication groups may be a part of a social
coalition which is changing the rules and institutions of the economy as
a whole. These macro-level Bocio-economics of the reform process are
important if we are to understand (i) the interconnection of micro-level
club action with macro economy-wide action and (ii) the dynamism and
27
complexity of change in developing countries. This is the logic behind
the embeddedness of states and interest groups in underlying social
coalitions in Figure 1:2.
We can then expect revisions in the policies, regulations and structure of
the telecommunications sector to be sequenced according to (i) the access
of clubs to the state and their degree of synergy and (ii) collective
action by various clubs and interest groups at a macro level. The
exception will be caseB where an encompassing interest group coalition
leads to all collective action problems to be overcome simultaneously,
though it rarely happens unless revolutionary circumstances prevail. In
the telecommunications Bectors of LDCs, the former two conditions seems to
be the case.
The problem is how does one distinguish the results of club action from
that of a collective action coalition. The answer comes from a detailed
look at decision-making procedures of the state, it is here that we can
discover the ultimate intent of reform and the groups which this reform is
meant to appease in the state's construction if its legitimacy.
Furthermore, clubs by their very nature concentrate on getting their
demands met from the existing structure. Where they join forceB with
other clubs to transform this structure, the problem becomes one of
collective action. The following results are often found in developing
countries: (i) club demands are matched by the state in those areas where
the decision-makers are more receptive to demands from users with little
opposition from their own bureaucracy. Thus, privatization of cellular
services in many developing countries might be easy because the service
has never been bureaucratic turf and the state lacks vested interest in
supplying cellular services itself, (ii) Privatization of basic telephony
or equipment markets where the bureaucracy is heavily involved, on the
other hand, may need pressures beyond those of an individual club and thus
28
collective action problems arise. However, like in Rousseau's stag hunt,
it may still remain beneficial for clubs to seek their share of the pie
though the existing state run telecommunication structure which they find
easier to get than to press together for a transformed bigger pie to come
in the future through a transformation of that structure.
A multi-club coalition leads to demands for transforming the existing
policies, regulatory framework and services if these groups are able to
overcome their problems of collective action. [proposition Eight A]
Given the ability of users and manufacturers to overcome problems of
collective action, the beneficiaries of the revision package will be those
groups with greater access to the decision-making structure of developing
country states and those benefltting from the state's inclination toward
introducing these changes depending on its maintenance of legitimacy
[Proposition Eight B].
Ideas and Technology
Finally, interest groups as well as the decision-making structure of
governments are both influenced by the flow of ideas as well as by changes
in technology. Thus, the recent dominance (or as some argue the
vindication) of market oriented ideas as well as the breakdown of the
natural monopoly argument in telecommunications have both empowered the
interest groups and decision-makers to seek an industry structure which
displaces state run monopolies in telecommunications.4 3 such ideas and
4 3 For examples of triumph of market-oriented ideas see
Biersteker:1991, Hallj1989. More specifically, World Bank and other
multilateral aid agencies have begun to emphasize the move toward
market-oriented mechanisms in provision of telecommunications services
and equipment, see two recent discussion papers from the World Bank
which echo these positions: Ambrose et al:1990, Ivanek et al:1991. For
an application of ideational influences at an international level in
telecommunications as well as the breakdown of natural monopoly argument
internationally see Cowhey: 1990. The influence of new technologies such
as microwave, cellular, digitalization and fiber opticB etc. in
telecommunications is of course discussed by all works examining the
role of telecommunications in development. The very faith in
"leapfrogging" rests on the availability of cost-effective and modern
29
changes in technology by themselves explain little in terms of causal
sequences of events unless we show bow they empower or disempower groups
in society. Available ideas and technologies reduce barriers to
collective action and/or bolster club demands but, in the short run
atleast, they are unable to explain policy outcomes by themselves.
[Proposition Nine]. in other words, ideas and technology are taken as two
of the auxiliary causal variables and not the only ones in this
dissertation [See Figure 1:2].
what about Leapfrogging?
It is not the purpose of this dissertation to issue the final word on
telecommunications and development but to show that before making any such
claims we need to take into account the political economy of
telecommunications as presented above. This political economy, however,
helps us show which users stand to gain the most from these revisions now
(and/or in the future). Furthermore, the benefits obtained by these users
(producers and consumers) are directly related to the access that these
groups have to a modern telecommunications infrastructure. 'Modern' here
refers to the ability of the telecommunications network to provide a
diverse range of services at present and its intelligence or
reconfigurement ability to provide other services in the future4 4 . By
definition, access to a modern telecommunications infrastructure may mean
expansion of the network into new areas and quality of telecommunications
service which is found satisfactory by users.
Finally, as iB suggested in the previous paragraph, the idea of access to
technologies.
4 4 The idea of a modern network buildB on Bar [1990] and Davidson's
[1990] discussion of the same. These authors assume 'access' or
availability of the network to users, a reasonable assumption in the
case of industrialized countries, por developing countries, network
expansion may need to take place before universal access can be assumed.
30
and provision of a diverse range of services implies that what the network
helps particular beneficiaries of telecommunications services actually do
is more important than what it is capable of doing technologically.4 5
The three final propositions of this dissertation may now be stated:
The link between telecommunications and development la stronger when
telecommunications services meet demand than when they try to create or
anticipate demand [Proposition Ten]
At the specific regulatory level, decision-making processes which are not
captured by special state or a few interest group pressures will benefit
end users more than one which reflects these interests [Proposition
Eleven]. This proposition explains the moves toward separating
telecommunications policy from regulations and designing independent
regulatory agencies in many countries. The evidence in this dissertation
shows that the "non-capture" of the regulatory structure by a few interest
groups is far more important than its institutional independence,
separation of regulatory bodies from policy and provision roles is a step
in the right direction but it is not sufficient.
At the policy level, revisions In the telecommunications sector will have
greater impact on development if they are accompanied by formulation of a
comprehensive Information policy drawing upon the backward and forward
linkages within the economy [Proposition Twelve]
The final proposition follows from earlier analysis which showed that for
any information policy to work effectively, the state can not follow a
4 1 For exemplar works on why demand pull factors are more important
in development rather than pure supply push technological factors, see
Landes:1969 and Fishlow:1965. Landes [1980: 115] has stated the case
succinctly as such: "Invention may follow genius, but production follows
demand." similar reasoning was at work in the discussion about social
overhead costs and directly productive activities earlier in this
chapter.
31
piecemeal approach. It needs to not only socialize the various domestic
actors in the formulation and implementation of this policy but also tie
its notions of construction of state legitimacy into it.
Thus, while this dissertation will not attempt provide a complete answer
to the linkages between telecommunications and development, it would
provide a better framework for future explorations of this question.
Research Propositions:
The research propositions developed earlier may be now restated together.
1. In a scenario where the actions of interest groups demanding
telecommunications services and the governments which supply them are
important, the economic market explanation only accounts for the necessity
of providing telecommunications services. Economic necessity means that
demand for telecommunication services increases as developing countries
expand into international and domestic markets and also carry out economic
reforms. The severity of the economic crisis does, however, determine the
intensity of interest group pressures.
2. When the club good is supplied by a central authority such as the
state, it may not result in pareto optimality if the state's interest and
motive behind supplying the good do not coincide with those of the
demandeurs. In cases where states supply club goods, pareto optimality
results only from a strict congruence between state (supply) and user
group (demand)interests.
3. A catalytic state will not only meet these demands but alBO play a
dirigiste role in shaping future preferences. A catalytic state is one
which can both maneuver and be responsible (terms explained earlier).
32
4. Dysfunctional states will do one of the following things:
A) Supply services to those with the moBt access to its decision-making
procedures (special interest driven state).
B) Not supply services to any groups or all to those bodies which help it
dominate (predatory state).
5. In a non-democratic and/or non-pareto efficient market setting,
exclusive interest groups may lead to market oriented reform instead of
creation of non-market special privileges. For example, the actions of
large users of telecommunications services in developing countries to
wrest control of the equipment and cellular markets resulted in
competitive markets for their provision.
6. Sub-optimality of supply by states takes one of the following forms:
A. states can muster any number of arguments ranging from resource
constraints (material, financial, human) to an outright rejection of
telecommunications as a development strategy to restrict membership and
provision.
B. Levels of cross-subsidization among services, often quite high, reflect
the differential treatment accorded by the state to different user groups.
7. It is easier for clubs to get the club good provided by the state than
to transform its supply structure altogether. Efforts to transform the
supply structure are weak because: (i) such efforts at the club level may
be insufficient to alter existing rules and institutions, or (ii)
incentives for this club to be part of a larger coalition within the
telecommunications sector or other sectors may be lacking.
8. A multi-club coalition leads to demands for transforming the existing
policies, regulatory framework and services if these groups are able to
33
overcome their problems of collective action. [proposition eight A]
Given the ability of users and manufacturers to overcome problems of
collective action, the beneficiaries of the revision package will be those
groups with greater access to the decision-making structure of developing
country states and those benefitting from the state's inclination toward
introducing these changes depending on its maintenance of legitimacy
[Proposition eight B].
9. Available ideas and technologies reduce barriers to collective action
and/or bolster club demands but, in the short run atleast, they are unable
to explain policy outcomes by themselves.
10. The link between telecommunications and development is stronger when
telecommunications services meet demand than when they try to create or
anticipate demand.
11. At a more specific level, a regulatory structure whose decision-making
processes are not captured by state or a few interest group pressures will
benefit end users more than one which reflects these interests.
3 1. Revisions in the tele, xnmunications sector will have greater impact on
development if they are accompanied by formulation of a comprehensive
information policy drawing upon the backward and forward linkages within
the economy.
In short, economic factors specify the necessary conditions46, political
ones specify the sufficient conditions and ideas and technology specify
4 6 Necessary conditions here mean antecedent to the cause.
Necessary conditions are often used in a ceteris paribus sense and thus
the distinction drawn here is useful. Refer to McClelland, 1975: 73-74
for further explanation.
34
the auxiliary conditions. Figure 1:2 thus illustrates the major
conclusions of this dissertation.
The research propositions are referenced at several places in this
dissertation by the numbers given above (in italics) when the text
directly and indirectly touches upon a specific aspect of the proposition
in question.
Research Design
A two-tiered approach is followed for the research design. The firBt step
emphasizes generalizability. The second step emphasizes detail.
Developing countries are making disparate choices for the policies,
regulatory frameworks and industry structure of their telecommunication
sectors, chapter three looks at the political economy of these choices in
several developing countries (as also a few developed countries for
illustrative purposes) to examine the political economy of these choices
in several issue areas in telecommunications. The intent is to bring out
the commonalities and differences among them for the purposes of
generalizability. While I concentrate on developing countries, newly
industrializing countries (Nice) are included because of the widespread
attention they are receiving as possible pace setters for
telecommunication policy choice (this itself informs proposition nine of
this dissertation, NICs being repositories of ideas and technology). The
various choices made by LDCs and NICs in their telecommunication policies,
regulations and industry structure are weighed againBt the available
evidence of the prevalent economic, political, technological and
ideational conditions in these countries. The validity of this method
lies in establishing propositions by finding evidence for their
confirmation in a large number of caseB while also remaining sensitive to
35
the differences among the cases to ascertain the causes for variation47.
Left as such, the dissertation still stands open to the criticism of, what
Hirschman called, overgeneralization and underdocumentation. Hirschman
argues that generalizations are produced from a few observations and
tested through an "intimate acquaintance with an individual country."4 8
For the purpose of detail, the major developing country case study
examined is India which is widely regarded as the classic and oldest case
of an import substitution industrialization strategy now trying to
liberalize and enter world markets. Also, because of its geographical
size, India offers the ability to observe the effects of
telecommunications on both the domestic as well as international markets.
India made telecommunications a development priority in 1984 and now
accounts for the highest investment expenditure on telecommunications
among the developing countries.4 ’ As one of the first low income
countries to have made telecommunications a development priority along
with measures toward liberalization and deregulation, the country's
experiment with telecommunications (among other sectors) is being watched
closely. The method followed in the India chapters is to bring out the
conditions, contexts and detail underlying the general issueB raised in
chapter three to illustrate the propositions of this dissertation
deeply.5 0
4 7 Quite obviously, this borrows from what is known as the
comparative historical method, see, Smith,1981:11-12 and Scocpol,
1985:348-350 for a delineation of this method.
4 8 Hirschman, 1958 :v
4 8 Telephony:Jan. 1992. If newly industrializing countries are
included, India has the fourth highest expenditure after Taiwan, Mexico
and South Korea.
5 0 see, singh: 1991 for a delineation of this method. I argue that
international relations theorists have much to gain from seeking
'universalizability' of their arguments by using detail oriented
techniques developed in the canonical works of late 19th and 20th
century European and North American novelists.
36
Data Sources
Data for India was collected on two field trips during Oct - Dec. 1990 and
July-August 1993. This included collection of raw data and interviews
with telecommunications officials and policy makers. The data collected
included archival research on the Indian telecommunication sector during
the colonial days. Quantitative data was collected on major demand and
supply indices of telecommunication services, the size of the
telecommunications market, its growth projections and the quality of
services provided. The interviews focused on the politics and
bureaucratic rivalries shaping policy choice. As part of my field
research I went through the document sections of major business and
financial news media publications in India. Quantitative and qualitative
data was also gathered on technological and ideational conditions from all
the sources mentioned above.
The major source of qualitative data for other developing and newly
industrializing countries were archival resources on these countries at
the Center for Telecommunications Management at use and the personal
archives of Dr. Jonathan Aronson. Quantitative data is drawn from data
sources such as ITU [1994] and AT&T [1992] and trade publications.
Additional data was obtained from existing studies on these countries in
the library.
Chapter Outline
FART I
Chapter 1: Introduction, statement of the problem, research propositions
and methodology.
Chapter 2: A review of the literature which informs the debate on the
political economy of telecommunications. It alBo places the arguments of
this dissertation in a theoretical and empirical context.
Chapter 3: Telecommunications in developing countries
37
PART II: INDIA
Introduction
Chapter 4: Telecommunications From 1851-1950
Chapter 5: The Rise and Decadence of the Indian Dysfunctional state
chapter 6: The Political Economy of Telecommunications in India: 1950-85
Chapter 7: Provision of Telecommunication Services in India: The Seventh
Plan [1985-90] and Beyond.
chapter 8: Liberalization of Manufacturing: 1985-91
PART III
chapter 9: Discusses the evidence on the research propositions of this
dissertation especially in the context of the relationship between
telecommunications and development.
Significance
The dissertation makes contributions at both policy and theoretical
levels. While some of theBe were noted earlier, they are briefly restated
now.
1. As developing countries liberalize their telecommunications sectors,
this study provides a useful framework for examining the relative
influences of various economic, ideational, technological and political
factors making for revisions in telecommunications policies, regulatory
frameworks and industry structures of these countries, such analysis will
be useful for multilateral agencies, government bodies and transnational
enterprises participating in the process of these revisions especially as
it helps them to plan better for the future as well aB help them look at
the experience of other countries in a comparative perspective.
2. It provides a theoretical synthesis between club goods analysis and
new institutionalist approaches to show how states supply these goods.
38
3. It places the current thinking on the information revolution in
developing countries in a political-economic context. It provides a
framework for judging the optimistic as well as pessimistic claims being
made about the effects of the information revolution in developing
countries.
4. Much of the literature on telecommunications comes with a supply push
technology bias. Typical comparative studies look at the levels of
telecommunications modernization in various countries. This dissertation
takes a different position. It looks at how the supply of these services
benefit the various groups who are demanding them and at how these demands
are being met at all. "Leapfrogging" implies that telecommunications will
help developing countries accelerate their pace of development and/or skip
the stages of development. Developing countries are far from the goal of
universal service. ThuB, who gets these services first and how do they do
so will be important for determining whether or not these countries
"leapfrog."
39
CHAPTER 2
LITERATURE REVIEW
SECTION I
Two recent studies note that even though there are many links between
telecommunications and economic development, most developing countries are
yet to take advantage of this area of growth. A paper by Heather Hudson
evaluates the decade following the publication of the Maitland commission
report in 1984 which sought to highlight the importance of
telecommunications for developing countries, she notes that many of the
reports recommendations and goals remain unfulfilled and proposes a
comprehensive agenda for action.1 A recent analytical monograph from
Harvard's Program on Information Resources Policy lists the studies since
1963 which have posited a positive correlation between telecommunications
and socio-economic development and then notes the relatively little
influence that these studies have had on policy-makers in developing
countries and on academicians in general.2 "How could this be?” the
author asks.3 He answers the question by noting that the quantitative
rigor of these studies turned away many academicians and general
practitioners. The studies targeted telecommunications practitioners and
ignored the policy-makers and planners involved in third world
development.4
1 Hudson: 1994
2 0sborne:1992.
3 ibid. p. 20.
4 He echoes Bjorn Wellenius, one of the leading telecommunications
development specialists at The World Bank, who argues that "more of the
same will do little to help promote accelerated telecommunications in
developing countries...Rather, the efforts should now...concentrate on
conveying existing sector knowledge to governments and international
agencies." quoted in ibid. p. 20. ITU's position on the issue is similar
to the world Bank's. See ITU: 1984.
40
This dissertation focuses on the "Bov can this be?" question in a
different way. It notes that an increasing number of developing countries
governments have in fact started making telecommunications a development
priority in the last decade. This is happening because of pressures from
users and related parties within and outside the developing countries'
governing institutions. Furthermore, each developing country is following
a unique approach toward telecommunications based on its economic
structure and political processes. Second, if policy-makers remain
unconvinced of the benefits, it is precisely because in making claims
about telecommunications and development, many studies did not mention the
politics behind the framing of developmental priorities. As noted in the
previous chapter, political economy of telecommunications is tied in with
competing pressures on the state and its own struggles for legitimacy. A
focus on academicians and policy-makers alone for analyzing the problem of
making telecommunications a development priority would then be clearly
insufficient. To make telecommunications a development priority means
getting the politics right to do so.
The next section examines the literature on telecommunications and
development and the theoretical literature in economics and communication
studies which provides the wider context for the former. It concludes
that the correlations between telecommunications and development need to
examined in light of UBer groups who stand to benefit or lose from the
provision of telecommunications services. It is also argued that to chart
the benefits of telecommunications to development we need to be sensitive
about what provision of informational services helps (or does not help)
beneficiarieB do. The latter exercise helps to Bpecify the causality
between telecommunications end development which at times is missing from
many of the quantitative studies to date. This is where qualitative
studies are useful.
41
The focus on user groups and the way their demands are met bring us to the
political economy of telecommunication service provision. It is also
unclear in most explanations why LDCs are taking different approaches
toward supplying the different kinds of telecommunication services, while
it may be intuitively apparent that LDCs have to move away from state-led
ISI strategy and what they must do to join the global markets, these
factors do not explain 'how' they would do so or 'why' they differ so much
in doing so. section III then examines how the state supplies a club
good like telecommunications. It seeks to combine club goods analyses
with new institutional political economy. At a macro level, it examines
how various clubs come together to change the very structure, regulations
and policies governing the telecommunications sector. The latter
decreases the role of the state in provision of telecommunication
services. A collective action framework is employed here.
I conclude that the answer to whether or not telecommunications
infrastructures will or will not help developing countries "leapfrog"
economic development is not just one of positive correlations between the
two. Whether developing countries accelerate or skip through the stages
of development will depend upon who gets these telecommunications services
first and to what uses it is put. Ultimately, it depends upon why and how
telecommunication services are provided to those groups who are demanding
them.
The contribution of this literature review lies in synthesizing approaches
from various Bocial sciences which inform ub on thiB issue and
specifically extending them to a sectoral level issue such as
telecommunications. The propositions presented in the last chapter are
developed and explained in detail in the following sections.
42
SECTION II
The literature examining the role of telecommunications in development
comes in the wake of broad theories of information by economists and
communication theorists. The telecommunications specialists have by and
large drawn upon the branch of economics dealing with uncertainty and
information3. This latter field consists of economists trained in the
neo-classical tradition and incorporating information related variables in
their models, while following the lead taken by this branch of economics
has presented us with strong linkages between telecommunications services
and development, it has also led to a neglect of the politics and
sociology of telecommunications development programs. When applied to
telecommunications specifically, quantitative indices of
telecommunications infrastructure fall short of the theoretically rigorous
way in which information is treated by economists in formal models.
Theories of Cossnunication and Information
It may be useful to start with a brief outline of these general
theoretical works before taking up the telecommunications and development
literature in particular.
The assumption of perfect information in neo-classical models of economic
behavior underlies how economic agents act in market and non-market
settings.3 General equilibrium theory depends on perfect information for
a pareto-optimal solution. In such a scenario, the sum of individual
rationalities guided by perfect information produces efficient outcomes in
the market. However, if these agents have accesB to imperfect
5 A survey of this literature is provided by Hirshleifer and Riley:
1979.
*A related body of literature has looked at the role played by
information in economic activity without tempering with the concept of
perfect information. The seminal work remains stigler, 1961. For a
critique, see Bell, 1982: 173-175 and Beniger, 1986: 172-174.
43
information, then they may end up satisficing rather than maximizing.7
Much of this literature then focuses on how individuals and organization
make decisions given differential imperfect information.1 The models
presented either include information as a constraint or as an input in
decision-making. cases of market failure are often analyzed when
imperfect information exists. The role of information is examined at the
level of individuals, organizations and marketB [see Table 2:1].
A related field in economics documents the riBe of the information sector
in developed countries. These works document the growth of employment in
information related tasks in an economy and the contribution of the sector
to the GNP. The seminal work was that of Machlup’. He estimated that the
rate of growth of information sector in the U.S. between 1947 and 1958 had
grown at a rate double that of the GNP and in 1958, it accounted for 29
percent of the GNP and 31 percent of the labor force. Porat later showed
that the information sector accounts for more than 50 percent of the GNP.
He refined the concept of 'information sector' further by identifying
information related tasks and workers using national accounts.1 0
The genesis of the interdisciplinary field called communications studies
lay in mathematical theories of communication about the rate at which
information is distributed in a communication system.1 1 Communication
theorists since then have focused mainly on developed countries which,
they argue, graduated from being predominantly industrial societies to
information societies. While there are differences among theorists, the
7 simon, 1982
'cyert and March:1963, Williamson:1985, Akerlof:1970, Arrow: 1969.
’ Machlup:1962.
l 0 Porat:1977
"shannon and Weaver:1949.
44
centrality of information technologies and communication media in society
is noted by all of them.1 2 Perhaps because of the training of these
theorists or because developing countries do not qualify as post
industrial 800161:138, few of these works focused on developing
countries.1 3
The influence of communications research on telecommunications and
development literature is significant even if indirect and small. The
very focus on telecommunications in this literature comes from
communications researchers who singled out point-to-point
telecommunications infrastructures as the electronic highways which
distribute information flows in any society. The influential Nora & Mine
study focused on -the convergence of telecommunications and computing in
societies which they termed 'telematique.'M The Nora-Minc study in fact
was the philosophical basis of the telecommunications modernization
program launched by the French government in the mid-1970s which
overhauled one of the worst telecommunications sectors in Europe.
The telecommunications and development literature owes a philosophical
debt to the communications theory research for pointing out the centrality
of telecommunications in an information society. Thus, for example, in an
influential report released by the international Telecommunications Union
during the World communications Year in 1983, it noted:
communications systems in general, and
l 2 Bell:1962, McLuhan: 1964, Etzioni: 1968, Beniger:1986. Writers who
have conveyed the sense of this societal transformation to audiences
beyond the academia include, Toffler: 1980, Naisbitt:1984 and Negroponte:
1994.
1 3 A notable exception is Schramm who comes from that branch of
communications research which focused exclusively on the role of the mass
media in national development. The importance given to broadcast media in
planning models is partly due to the ideational influence of Schramm's
ideas, see, Schramm: 1964.
1 4 Nora & Nine: 1980.
45
telecommunications in particular, are one of the
major systems through which a society transfers and
uses information taken in its broadest sense, and
this system has many characteristics in common with
the human brain and the communications networks
within the body. In this perspective,
telecommunications may be viewed not simply as one
technology among others, but as the neural system
of a society....then it follows that a
telecommunications ByBtem is probably much more
than a simple infrastructure, and certainly
deserves much more attention on the part of policy
makers than it has received until now.1 3
Table 2:1 presents a summary of the theoretical literature discussed here.
Telecommunications is explicitly included in the processes of societal
transformation in all theories except for two sub-fields of information
economics in which it is referred to only indirectly. The two fieldB not
discussed so far (diffusion of innovations and information gap included in
the table) will be taken up in detail later. It will be argued that
technological diffusion which takes existing needs or demand into account
assists development faster than one which is of supply push type only. As
for the information gap thesis, it can be argued that the information gap
can be corrected only if the coalitions and interest groups which demand
revisions in telecommunications have a broad base in society to overhaul
the structure of production.
Telecommunications and Development
As yet there is no consensus among scholars on a unique technique to
measure the role of telecommunications in development. This itself is
reflective of a larger challenge: the evolving political economy of
information is overly abstract and theoretical. Operational variables
usually tend to trail behind formulation of theoretical concepts and much
of the empirical analysis in telecommunications is thus heuristic in
nature. But techniques correlating telecommunications with development
trail behind the economic theories of information in a more important
sense. The most sophisticated empirical studies deal with the simple uses
I S ITU, 1983:19
TABLE 2-1: THEORIES OE COMMUNICATION & INFORMATION: REPRESENTATIVE WORKS
FIELD EXEMPLARY
WORK
MAJOR
CONCEPTS
VIEW OF
DEVELOPMENT
VIEW OF
TELECOM.
1. INFORMATION ECONOMICS
A. Decision-Making
Simon 1982
Cyert & M arch 1963
Satisficing,
Bounded Rationality
mkt. equilibrium always sub-
optimal
not explicitly stated
If. Organization Econ. Arrow 1979 Organizational advantages
in information gathering
(division o f Jabor)
efficiency or sclerosis of
orgns. lies in their ability to
receive market signals
available technologies alter
feedback of information in
economies
C. Imperfect M arkets Williamson 198S
Akerlof 1970
M arkets vs. hierarchies
Information creates
markets
better information leads to
more efficiency
not explicitly staled
2. INFORMATION SOCIETY Machlup 1962
Porat 1977
Information Sector Growth:
productivity & emp.
share of information
activities in GNP increasing
fundamental to information
sector growth
3. COMMUNICATION THEORY
A. Information Society
Bell 1973
Beniger 1986
Centrality o f information
in contemporary society
info, networks produce
better coordination among
societal ramifications
fundamental to spread of
information society
U. T eleuialique’ Nora & Mine 1980 convergence between tel.,
computers & mass media
telematique reduces
bureaucratic inefficiency
produciug decentralization
important for decentralizing
societal relations
4. DIFFUSION O F TECH.
INNOVATIONS
Rogers 1983 Tech. innovation once
begun picks up life of its
own: supply push argument
diffusion fundamental to
progress o f societies
fundamental contemporary
technological diffusion
......... . ..
5. INFORMATION OAF Pavlic &
Hamelink 1985
O ’Brien 1983
into, gap exists: further
diffusion benefits info, rich
structural S l world systemic
overhaul necessary to correct
information gup
same as above
47
of telecommunications (contacting business associates, obtaining emergency
help etc.) given the presence or absence of an infrastructure which makes
this possible. This is a far cry from the problems of intra-
organizational decision-making, market signalling, moral hazard, second-
best pareto-optimal solutions etc. that the economic theories of
uncertainty and information investigate.
Table 2 presents selected studies at the three levels of analysis usually
employed to test the role of telecommunications in development, overall,
the studies definitely posit a strong link between telecommunications and
development even though the causality is not always clear in these
studies. This link is brought out by these studies in two major ways:
First, at the level of the user group, the benefits from
telecommunications are measured according to the various uses of
telecommunications for the various agents involved, be they individual
business firms or an entire sector, in many ways, techniques measuring
consumer surplus at the individual level are but an extension of this
analysis, in that the value that consumers place on telephone service, for
example is strongly dependent upon the various uses of the telephone to
these consumers.
Second, the causal link is implied at the economy wide level. single
equation models note the positive correlation between indices of
telecommunications service provision (e.g. telephones per 100 population)
and those of economic development (e.g. GNP). structural models identify
the backward and forward linkages of telecommunications in an economy by
the use of the input-output analysis. The latter technique is especially
useful for three reasons: (i) it shows that telecommunications serves aB
an input to just about every sector in the economy; (ii) the benefits from
telecommunications to development are independent of the level of
TABLE 2-2: SELECTED STUDIES LINKING TELECOMMUNICATIONS TO DEVELOPMENT
BY LEVEL OF ANALYSIS
Individual/
Microeconomic
Sectoral/
User Group
Economy wide:
Correlational
Economy wide:
Structural anal.
REPRESENTATIVE
WORK
Ch 8 & 9
Saunders 1983
Hudson 1981
Tyler 1981
Parker 1980
Hardy & Hudson
1980
Stone 1991
Ch. 5: Saunders
DRI/McGraw Hill
1991
TYPE OF
ANALYSIS
Quantitative/Descriptive:
involving estimates of
consumer surplus
Quantitative/Descriptive:
indicators of telecom
density compared with
indicators of dev.
Correlations between
indicators of telecom, and
development
Input-output analysis
showing backward &
forward linkages
MAJOR FINDING
Telecom, benefits best
assessed by those
demanding access to
telecom.
im portant for social
delivery
♦lack of telecom: cost on
industry
♦savings in transportation
costs
♦telecom: greater dev.
benefit in LDCs than DCs
♦telecom increases GDP
more in areas with low
telecom density
*telecom is an input in
every industry
♦identifies sectors with
high telecom intensity
WEAKNESSES
’ Snapshot view of
development: no indication
of dynamic processes
underlying demand &
supply
*Partial analyses difficult to
generalize
*Dynamic processes
missing.
*Implies rather than
explores causality
*Causality exogenously
assumed
49
development of the various countries studied. This is because the
relative coefficient of telecommunications varies little among these
countries; (iii) the studies help to identify sectors which consume
telecommunications services more than others. They point out that the
service sector (retail, transport, hotels, tourism, banking, etc.)
consumes telecommunications more than the industrial sector while the
latter does so more than the primary agricultural sector. The service and
industrial sectors also include businesses identified as TIBS or
Telecommunications intensive Business services.
The usefulness of economy wide studies can be increased by incorporating
analysis from user group level. in order to identify how an economy is
affected by telecommunications, we need to know who is affected the most
by the telecommunications supply and who demands it the most,
telecommunications development analysis at the level of the user group is
helpful here because it identifies the various uses of telecommunications
by individual groups and thus delves deeper into the causal links between
telecommunications and development.
Table 3 summarizes some of the findings vis-a-vis these user groups.
However, these groups are not mutually exclusive and are presented here
only for analytical clarity. Thus, an exporter may also be a small sized
firm and a large user could be one of the government administration
services. Furthermore, we only have a scattered and, at times, a non-
generalizable idea of benefits of telecommunications to various users.
There is no single study which incorporates all the user groups in an
economy let alone examining the links of telecommunications with
development based on the idea of user groups. Therefore, the table draws
upon several different studies to examine the uses of telecommunications
to the various groups.
TABLE 2-3: STUDIES SHOWING BENEFITS OF TELECOMMUNICATIONS
ACCORDING TO USER GROUPS
USER GROUP REPRESENTATIVE WORK BENEFITS OF TELECOM.
1. Urban Residential Chs. 10-11:
Saunders 1983
Demand for telecom highest among highly educated and high
income people
2. Rural Users Parker et. al. 1989
Helps diversify economic base of rural America, much of it
through externalities
3. Small/medium Sized
Businesses
Tyler 1981
Business costs incurred in Kenya due to lack of telecom (e.g.
supply cost, managerial costs): sales loss for industry &
services
4. Large Users NTIA 1992
Several examples of large users (e.g. banks, retailers) reaching
markets and linking busi. units
5. Government Administrations Kochen 1982
Ch. 7: Saunders 1983
’Computer conferencing for central planning
’Substitution of telecom for travel
’ Administrative efficiency
6. Public/Private Social Delivery
Systems
NTIA 1992
Saunders 1983
ITU 1983
Telecom helps deliver health services, education, emergency
services etc.
7. Exporters IIFT 1988
Telephone/telex traffic and international trade: parallel growth
rates, former growing faster than latter
51
Designing telecommunications policies to benefit specific user groups
brings in politics. The studies which have identified benefits of
(mostly) telephone service to various groups of users have done so in a
kind of socio-political vacuum. They have been concerned with the uses of
telephones once provided or the potential uses of telephones if provided
(in the future). None of them (at least in those works which analyze
development questions) investigate the dynamic processes of demand and
supply underlying telephone service provision. It may even be argued that
these works assume pareto optimality in telephone service provision
whereas the state run telecommunications sector in developing countries is
full of market distortions. Thus, these analyses are only partially able
to answer the following questions which are of paramount importance if we
are to fully examine the role of telecommunications in development:
1) Does it make a difference to the development process if the
telecommunications services are provided by government or the private
sector, or by multiple operators instead of one?
2) which user groups are able to (or more likely to) obtain access to
acceptable quality of telecommunications services? Why are they demanding
these services in the first place?
3) As quality of services and the acceBB to telecommunications services
clearly vary a great deal among developing countries, how are the various
groups affected by these differences?
4) What difference does it make to the development process if rural areas
where both the marginal returns or benefits and cost of telephone service
provision are high are able to obtain these services at the expense of
urban users where the marginal returns and the costs of telephone service
provision are smaller?
5) What difference does it make to the development process in terms of
the type of technologies employed to satisfy user demands?
52
These questions are but a variation of the research questions posed in
chapter 1. They are restated here to show how the preceding analysis
bears on the paramount question of leapfrogging development in this
dissertation. Whether developing countries accelerate or skip through the
stages of development will depend upon who gets these telecommunications
services first and to what uses it is put. Quite clearly then a scenario
where a few groups benefit exorbitantly at the expense of others is
undesirable. While a fuller understanding of proposition 11 must await
further discussion, the fact that telecommunication services are demanded
by disparate groups means that the regulatory structure must not be
captured by a few interest groups only. A regulatory structure whose
decision-making processes are not captured by state or a few interest
group pressures will benefit end users more than one which reflects these
interests.
similarly, telecommunications development is not just a question of
supplying services to relevant user groups but also ensuring through
market or non-market mechanisms that a country is well-positioned to
become an information society. Proposition 12 highlights this point.
Revisions in the telecommunications sector will have greater impact on
development if they are accompanied by formulation of a comprehensive
information policy drawing upon the backward and forward linkages within
the economy. The latter implies that policies must be explicitly or
implicitly linked to benefits at the user group level and the
corresponding links between the user groups and their linkages with the
economy.
Focus on Demand
This dissertation extends collective action analysis by bringing in the
political economy of user demands in telecommunications and development.
The focus on demand factors is important theoretically. Many development
53
economists as well as communication theorists have pointed out that
development (industrial and post-industrial) relied heavily on demand
factors. They argue that infrastructural supply where it is meant to
create future needs or demand (instead of meeting it) seldom works.
Hirschman's advice to policymakers to develop infrastructure where it is
demanded rather than trying to anticipate it needs restatement here.
"When the authorities responsible for public
utilities and other s o c acilities fail to respond
to dangers so clear and present and to needs as
obvious as those that are signalled by collapsing
bridges, derailed trains, and constant power
failures, what hope is there that these same
authorities would know how to plan the construction
of bridges, railroads, and power stations ahead of
demand, without the grossest waste of resources?"1 6
"In situations in which motivations are deficient,
it therefore seems safer to rely on development via
shortage than on development via excess
capacity."1 7
The focus on existing needs and demands limits the use of the railroads
analogy in calling for infrastructural change in telecommunications which
is widely employed in the telecommunications and development literature.
It can be shown that the very emergence of railroads itself is part of a
crisis in industrial societies, conceptualized at the simplest level as
the need to move industrial products costlessly and efficiently into the
markets.1 * The causality here is not that of vast amounts of
infrastructural investment in railroads leading to industrialization but
how the crisis in the latter lead to the provision of other
infrastructures. Fishlow emphasizes that railroads followed rather than
1 6 Hirschman, 1958: 97
1 7 ibid, p. 93
1 8 This iB a logical extension of Beniger's [1986] argument on the
emergence of information processing activities as the result of crises in
distribution including, inter alia, the problem of controlling railroad
movements. This school of thought goes back to Durkheim and Weber who
attributed the rise of bureaucracies to the need for rational control in
industrial societies, similarly, chandler attributes the rise of middle
management to a crisis of control in industrial organizations at the turn
of the century.
54
preceded industrialization.1 9 This is a powerful caveat to planners and
policy makers who argue that infrastructural investment by itself would
somehow lead to industrialization.2 0 Beniger and Fishlow's analyses
applied to development would mean that infrastructural investment should
follow rather than try to anticipate demand or create needs when they do
not exist.2 1 The multiplier effects of infrastructural investment where
it meets current demand, following Fishlow's argument, are larger than if
infrastructure were supplied with little reference to user demands.
Bar applies Fishlow's argument to telecommunications. He notes that "It
suggests that rather than hoping to attract completely new activity
through the construction of networks, development policy should foster the
initial development of networks addressing existing needs, and should then
focus on stimulating their use by other sectors. Different network
arrangement can be used to help grow economic activities that already
exist in a given region and to make existing businesses more productive,
competitive, and better able to survive changes in their marketB."2 2 In
the last decade both Ireland and Singapore have invested huge sums into
telecommunications but while Ireland hoped to attract investment with its
telecommunications, Singapore was by and large following existing patterns
1 9 Fishlow: 1965.
2 0 This argument does not necessarily diminish equity concerns (for
example providing telephones to lower income groups or remote areas) but
to caution againBt overdue investment in infrastructural investment in
hopes of creating demand for them later.
21. Saunders et al. [1983:173] have noted that micro-economic
analysis (analogous to user groups in this dissertation) "revolves around
the assumption that total benefits of telephone access and use can best be
perceive and assessed by those who actually have or are demanding access
to use of a telephone. As such, the analysis does not usually consider
benefits external to the telephone subscriber or caller, the indirect or
secondary benefits, or the distributional effects of benefits." In the
light of the discussion presented above, it is nonetheless important that
the criteria for selecting between various development projects remain
demand based.
2 2 Bar, 1990: 27.
55
of investment in hopeB of attracting more of it. The preceding analysis
iB captured in proposition 10. The link between telecommunications and
development Is stronger when telecommunications services meet demand than
when they try to create or anticipate demand.
Finally, because of the high technology nature of telecommunications, the
studies in telecommunications and development deal with developed and
developing countries together. Many of the propositions presented here
draw from developed countries and then apply them LDCs. It would seem
that this confirms Gerschenkron's thesis of late developers gaining from
the experience of early developers.2 3 However, these studies also
practice what Hirschman would call a monoeconomics claim which holds that
the experience of late developers will not be different from those of
early developers. In the context here it means that they can all grow
faster by using information technologies.2 4 While the final evaluation of
these claims is left to the laBt chapter, at this point it helps to
illustrate why a few developed countries are included in this dissertation
for illustration. similarly, the model developed in the next section
relies heavily on the development experience of developed countries,
clearly, my propositions will be refuted if the model does not apply to
developing countries.
SECTION III
Various explanations are given for changes taking place in the
telecommunications sectors in developed and developing countries. These
were summarized in chapter 1. A detailed look can be given here, one
2 3 Gerschenkron:1962
2 4 see Hirschman: 1981. The monoeconomics claim goes back to Rostow's
delineation of the five stages of growth through which all countries must
pass. Rostow:1960
56
school emphasizes the economic or the 'objective factors./ 2 S Another
views these changes as resulting from political institutions and their
processes including the state-society relations. A third group regards
changes in telecommunications resulting from the changes in
telecommunications technology which have broken down the traditional
'natural monopoly' argument in telecommunications service provision. A
variant of this version emphasizes that changes in technology are not
enough for telecommunications monopolies to be broken up but that we also
need to include the recent resurgence of market-oriented ideas.
While the three explanations given above are not mutually exclusive, most
studies in telecommunications tend to emphasize one or the other.
Attempts to integrate the explanations (as this section will argue is
needed) are few and far between and tend to omit or underemphaBize either
political or economic factors.2 6 It remains unclear how exactly economic,
political, technological and ideational factors interact. These models
also do not clearly specify the weightage they would give to the
explanatory variables. Other attempts to take into account multicausal
factors are so descriptive and general as to lose the theoretical rigor
necessary for generalizability. This dissertation brings the political,
economic, technological and ideational factors together to explain the
revisions taking place in telecommunications as a problem of collective
action. It follows the lead taken by new institutional political economy
literature and applies it specifically to telecommunications along with
2 6 A term used by Belassa [1989:172] to argue that privatization is
not just the result of changes in ideologies or governments but to induce
efficiency and productivity in formerly state owned enterprises.
2 6 See Cowhey [1990] and Aronson & Cowhey [1988] as excellent
examples of integrative explanations. While these authors emphasize the
politics and technology of change (the Cowhey piece also includes ideas),
their economic analysis is limited to demands by large users or not
explicitly stated. I will return to these works later in this section.
Cowhey [1991] emphasizes "state institutions" to the exclusion of
everything else. similarly, many political analyses coming from
economists are limited to descriptions of interest group activity.
57
integrating relevant approaches from other social sciences, particularly
economics.
This section first notes the necessity for a telecommunication
infrastructure which lies in the economic structure of the economy which
includes the domestic production structure as well as the reigning global
market conditions. Furthermore, it is argued that changes in ideas and
technology can either affect the preferences of actors and/or act as
incentives for user groups to press for changes in telecommunications
structure. User groups in telecommunications can act alone as exclusive
clubs trying to get a particular telecommunications service from
authorities or they can all get together (sometimes with groups in other
sectors) to form a wider social coalition wanting change. An obvious
example is that of the post-colonial social coalitions in developing
countries which gave government the 'commanding heights' role in the
economy. I then turn to the state decision-making structure (a few
elected officials and senior bureaucrats) in developing countries which
often times arbitrates among competing interest group preferences and
confers privileges on those groups with most access to it.
Existing Production Structuret
The high priority given to telecommunications by policy-makers in
developing countries is in stark contrast to the near neglect this sector
suffered in the development strategies until the late-1970s. An inward
oriented development strategy (also known as import substitution
industrialization) was the dominant strategy adopted by developing
countries until the late 70s and early 80s.1 7
2 7 The economic underpinnings of IS! strategy were simple: domestic
markets with a large import element were identified and protection was
afforded to domestic manufacturers. Where the economies of scale were
large (as in telecommunications) and private capital was not forthcoming,
the state itself stepped in as a producer. All this necessitated some
degree of central planning.
58
Why did telecommunications begin to receive importance by the late-70s?
There are two groups of scholars who provide an answer, those looking at
telecommunications from within the isi tradition and those analyzing this
sector from outside this tradition. The former group's writings reveal
that around the 1970s the realization that telecommunications is integral
to development within the ZSI context had begun. Its most pronounced
effect was in the demand for a New International/World information-
Communication order (NWICO) to accompany the New International Economic
Order.2 8 The second group of scholars look at the inefficiency of the ISI
sector to examine why LDC states are increasing competition in their
telecommunications sectors and making it a development priority, while
the latter argument is better at examining the shift away from ISI
strategy, both these arguments are not in fact mutually exclusive. The
impact of NIEO/NWICO can still be seen in many of the equity/self-reliance
concerns of the LDCs. Also, many scholars who earlier supported ISI/NIEO
to its teeth are now arguing for moving away from it. I now turn to
examining these arguments in detail.
TELECOMMUNICATIONS AND ISI:
Among the big development debates of the 1940s and 1950s,
telecommunications was seldom mentioned among the key sectors slated for
a thrust in development strategies or in central plans.2 9
2 8 The Declaration of Establishment of NIEO was formally adopted
by the UN General Assembly in 1974. It grew from the LDCs' perceived need
to alter the terms of trade, which were seen as inimical to their
interests (the Prebisch-Singer thesis) and to initiate more trade among
LDCs themselves (South-south trade). These objectives, LDCs argued, could
be met only through better control over their own productive assets and
the national and international norms which governed trading. For
provocative discussions of the debates surrounding NIEO, see Bhagwati
[1977], Brandt [1980], and Amin [1976].
2 9 This is the period dubbed by Hirschman [1981:1] as an "eminently
exciting era in development economics" in which one economic model after
another showed how the "dragon of backwardness” could be slain.Late
industrialization and rural underemployment were seen as the two major
development obstacles. The major debate in terms of industrialization was
between those who argued for balanced growth or simultaneous investment
Telecommunications investments in LDCs, at least until the mid-70s was
usually around 0.3 percent of the GDP.3 0 Five reasons (not mutually
exclusive) might be mentioned to explain this. First, it was partly due
to the emphasis upon satisfying 'basic needs' where drinking water and
electricity was more pressing than the need for telephones, second, the
economic development discourse was set up in terms of primary and
secondary sectors with other sectors such as the services or the tertiary
ones (which would include telecommunications) receiving left over
importance. Third, it was not until the early 70s that studies began to
examine the impact of telecommunications on development and their
correlation. Fourth, telecommunications occupied a low place of
importance even among many developed countries, for example, France.
Finally, the telecommunications bureaucracies set up during the colonial
days catered to elite interests. With their jobs secured in post-colonial
administrations, they had no incentive to try to increase their role by
supplying telecommunication services to the masses.
The emerging importance of telecommunications within ISI might be traced
to two factors: recognition of the importance of communications in general
(including radio, T.V., media) to the development process and secondly,
the explicit importance given to development of telecommunications in the
call for NWICO. Wilbur Schramm's Mass Media and National Development
(1964) was seminal in its attempt to link development with the spread of
information, hence literacy and education, through mass communication
instruments. While Schramm's ideas might have been limited to mass
communication initially, they did highlight the importance of information
in all key sectors [Rosenstein-Rodan:1943, Nurkse:1952] and those like
Hirschman who called for investment in economic infrastructures (SOC or
Social overhead Costs) which would in turn stimulate entrepreneurs to
invest in consumer goods activities (DPA or directly productive
activities).
“Saunders:1994
to development for the first time. This led directly to examining the
information imbalances within and across LDCs, especially between
industrialized and developing countries. This later came to be known as
the 'communication gap'.3 1 The call for a NWICO at the international
level was a culmination of such efforts.
The idea of a NWICO was launched formally after the 1976 Colombo meeting
of the Non-Aligned countries and the 1976 Nairobi 19th General conference
of UNESCO, initially, the NWICO laid importance on correcting the one way
flow of negative news and information from LDCs to DCs. But by the time
of the MacBride Commission (1979) Report and the influential work Many
Voices. One World (1980), developing Belf-reliant communication
infrastructures within LDCs became important.
The MacBride Commission thus wrote that
"communication be no longer regarded merely as an
incidental service and its development left to
chance. Recognition of its potential warrants the
formulation by all nations, and particularly
developing countries, of comprehensive
communication policies linked to overall social,
cultural, economic and political goals. Such
policies should be based upon inter-ministerial and
inter-disciplinary consultations with broad public
participation. The object must be to utilize the
unique capacities of each form of communication,
from interpersonal and traditional to the most
modern, to make men and societies aware of their
rightB, harmonize unity and diversity, and foster
the growth of individuals and communities within
the wider frame of national development in an
interdependent world."3 2
The emphasis upon telecommunications was apparent in international trade
and services issues where access to and control over telecommunications
became primary concerns.3 3 The need for a viable telecommunications
infrastructure with the growing importance of international trade became
3 1 Streeten:1982, 0'Brein:1983, ITU:1984
3 2 Quoted in Pavlic and Hamelink, 1985:22
3 3 The authors in O'Brien [1983] sum up these arguments.
61
increasingly recognized.3 4 what emerged from NWICO were ideas emphasizing
self-reliance in individual LDCs and collective reliance across them.
Many authors during the 1970s while not expressly endorsing NWICO
recognized the importance of self-reliance in telecommunications as also
to make transfers of technology from developed countries more suitable to
LDCS.3 5
To sum up, the NWXCO-isi line of thinking shows that telecommunications
was becoming increasingly recognized as a priority even before LDCs began
moving away from an ISI strategy in the 1980s. Thus it could be argued,
perhaps counterfactually, that LDCs would have continued to make
telecommunications a priority even without abandoning ISI. For example,
IBRD reports recognize that changes in telecommunications thinking began
to emerge around the mid-70s before ideas of privatization and
deregulation had become popular among LDCs.3 6 One could add, however,
that this thinking did not come into being fully until the XSX strategy
was considerably more in disrepute by the late 1980s and developing
countries (along with soviet Union and East Europe) abandoned it.
MOVING BEYOND ISI:
The low level of investment in telecommunications in developing countries
did not meet the high demand for even basic telecommunications services
and continued to be low despite high rates of return in
3 4 Pavlic & Hamel ink: 1983
3 5 On a more general level in communications, this is reflected in the
writings of streeten [1982] and Galtung [1982]. Pitroda [1976] argued
that a creation of a Technology Development Center in developing countries
could go a long way toward making these countries self-reliant while
making sure that technology remains labor intensive and sensitive to the
shortage of capital. Some of these types of concerns are also addressed
by okundi: 1975 and Mody, Ashoka, "Information Industries in the Newly
Industrializing Countries" in Crandall and Flamm:1989.
3 6 See Saunders et al:1994.
62
telecommunications. 3 1 In the meantime, technological change and
globalization of markets (discussed in subsequent portions of this
section) have broken down the traditional 'natural monopoly' argument
which called for high levels of investment usually taken up by I>DC states.
Moreover, the number of telecommunications services demanded by users have
multiplied manifold, under these circumstances, many scholars now argue
that not only is telecommunications of utmost importance to
industrialization and development, but that the traditional ISI model
which rested on the state run PTTs in the telecommunications sector is
simply inappropriate to meet the growing demand for telecommunications
services.
The basic gist of studies like these is threefold. First, they attempt to
show that no matter how elaborate the central plans, capital resources
have remained scarce for sectors included in the plans while others have
had to be excluded due to lack of resources. The consultative Committee
on Telephones and Telegraph (CCITT), an important advisory body within the
ITU, notes that in spite of the importance of telecommunications to
building the national economic infrastructure, it is consistently plagued
with underinvestment: "a permanent shortage of investment fundB ... leads
to capital rationing which can be quite arbitrary in effect. This often
results in the treasury of the country allocating a given sum to
telecommunications, even though a much larger amount would be
warranted."3 1 Not limiting himself to any particular sector, Vernon notes
that while in theory state enterprises might have promoted growth and
3 7 Estimates of economic rates of return vary between 17 and 50
percent and averaging about 17 percent. The World Bank also estimated
internal financial rates of return on 12 projects in telecommunications it
funded as ranging between 11 and 35 percent and averaging 18 percent.
Saunders et al. 1983: 13-14.
3 1 An ITU report cited in Saunders et al, 1983:18
63
development, in practice most of the resources are diverted rescuing
financially troubled enterprises.3 9
second, drawing upon the studies linking telecommunications to
development, national planning agencies juBt as they have begun to make
telecommunications a priority have also realized the inability of their
resource constrained state-run telecommunications sectors to provide
better telecommunications.4 0 At a general level, public enterprises in
LDCs during the 1970s recorded heavy deficits, coupled with huge
borrowings in the capital markets.4 1 studies show the relative
inefficiency of the public sector vis-a-vis private enterprises with the
latter accounting for high rates of return, higher labor productivity and
profits, and lower production costs. Belassa notes that "the absence of
clear-cut objectives for managers and state intervention in firm decision
making" are the two basic conditions for examining the relative efficiency
of the state-run sector.4 2
3 9 Vernon:1989. Import substitution by itself called for either
importB of technology or development of such technology indigenously. The
former lead to foreign exchange shortages, unwillingness by technology
owners to transfer it and finally, foreign debt. Trying to develop
technology indigenously led to its underdevelopment, scarcities, high
costs and, often, inflation, see Power [1966], Nacario [1965], Bruton
[1970] for a summary of theBe arguments. Excerpts of these authors are
reprinted in Meier [1976]. on a similar note, Hirachman has identified
three categories of uncertainty which have plagued development projects in
LDCs: 1. demand uncertainty or establishing industries with low domestic
demand and low export potential, 2. technological uncertainty flowing from
adoption of new technologies, and 3. administrative uncertainties.
4 0 chowdhary [1989:107] notes that "it is increasingly recognized
that there are disadvantages in having telecommunications services
provided by government. The disadvantages relate to the financing,
pricing, development and regulation of these services." He writes that
while it is difficult for governments to invest in telecommunications from
their limited financial resources "if, however, these providers were non
government corporations, they would have much more freedom, for example,
to market shares and bonds, wellenius et. al. [1989] (which includes the
Chowdhary article) note similar cases of privatization and deregulation
spanning the LDCs.
4 1 Belassa: 1989.
4 2 Belassa, 1989:176.
Third, telecommunications become important as the services or tertiary
sector receives more importance in developing countries. It was noted
earlier that development strategies of LDCs were once preoccupied with
primary and secondary sectors. However in spite of the low importance of
services their dynamism and productivity lies in the fact that the biggest
growth rates in LDCs (as well as developed countries) in the post war era
have been recorded in the services sectors of these economies. These
sectors constitute areas such as banking, finance, travel, tourism,
distribution networks, telecommunications and media. Services are now
estimated to provide 18 percent of the employment and 48 per cent of the
GDP in LDCs wile the comparable figures for developed countries are 67 and
66 per cent respectively.4 3 Furthermore, the growth rates of the services
sectors have been far higher than that of agriculture and industry, for
both developed and developing countries. These growth rates infact
increased in the 1980s as more and more countries moved toward an export
oriented strategy. Rapid flows of information are important for making
the services sectors efficient and competitive. "Telecommunication
services are at the heart of any modern service economy. Indeed the
merging of computers, communications, and product technologies is creating
a world information economy."4 4
To sum up, I have so far noted the importance of telecommunications for
development in LDCs in the 1970s. By the late 70s, governments also found
themselves strapped for funds to modernize their telecommunications
4 3 Quoted from Aronson [1988:97]. This article provides an
excellent summary of the impact and challenges of knowledge intensive
service industries for LDCs.
4 4 Aronson and Cowhey [1988:5]. Aronson and Cowhey introduce a
"significant twist” [p. 10] to the importance of telecommunications. They
note that telecommunications are not just essential to holding a modern
service sector together but "the effort to spur greater competition in
telecommunication services will in itself reshape the definitions of free
trade and foreign investments." Telecommunications would do so, for
example, by bringing in services which could not be traded earlier.
65
sectors while the existing state run telecommunication monopolies were
seen as inefficient. The 80s then became a decade when not only did
telecommunications begin to be made a development priority but a cautious
move to involve the private sector in telecommunications service provision
and equipment manufacture began to be considered. The discussion gives a
clue to 'why' telecommunications was made a priority but is missing the
'how' and 'by whom.' Before these questions are addressed, we need to
include the global perspective hinted at in the preceding discussion.
Globalization of Markets:
Globalization of markets perspective lookB at the rapid changes taking
place in production, distribution and consumption patterns at the global
level to show that it is imperative for LDCs to improve their
telecommunications systems to get integrated with the world markets, such
a perspective, also known as the systemic level perspective in
international relations, looks at the world economic system as a whole to
examine the changes that it produces in its sub-partB, be they nation
states or trans-national enterprises [TNEs]. It is directly connected
with global interdependence defined as "situations characterized by
reciprocal effects among countries or among actors in different
countries.m 4 5 The pursuit of policies, such as expansion of
telecommunication services, to integrate with the world economy would also
be seen by political theorists such aB Waltz as pressures of the 'third
image' (the global systems level) which induces changes in individual
states.*
The globalization of markets perspective in economics is presented
somewhat differently by scholars who have argued that an export oriented
4 5 Keohane and Nye, 1977:18
4 6 See Waltz:1979. Also see Gilpin:1987, Cox: 1987 for systemic
perspectives.
66
or outward focused strategy is better suited for development than an ISI
or an inward oriented strategy.4 7 An export oriented strategy allows LDCs
to become part of the emerging global economy. The economists' argument
implies that LDCs have a choice and they can opt to Btay out of the world
system if they so wish. International relations theorists write that
either the weaker powers (LDCs) are coopted in the world system or
marginalized from it. The picture may be somewhere between the choice
economists accord LDCs and the lack of choice international relations
theorists accord them.
Here I do not discuss these perspectives separately but instead combine
them to present four major changes in the world system.4 8 These in turn
necessitate the improvement of telecommunications sectors in LDCs. They
are not mutually exclusive.
1. The current international division of labor is such that the
traditional notion of comparative advantage and product cycle with nation
states specializing in the production of commodities must now be
transformed to account for two profound changes. First, the final product
might reflect the specialization or value added by several nations rather
than one. second, introduction of new technologies, especially
microelectronics, are making uncompetitive industries in some countries
competitive once again. This has happened in 'downstream industries' in
the product cycle where LDCs traditionally claimed comparative advantage.
Thus "producers with access to newest technologies in industries as
diverse as automobiles, textiles, and machine tools are defining new
4 7 See Belassa:1989, Bhagwati:1977, Bhagwati and Srinivasan: 1977,
Bhagwati and Desai:1970 and by international development institutions and
the IBRD. For an emphatic endorsement of an outward oriented strategies,
see World Bank:1991.
4 8 Many of these changes have themselves come about as a result
of the revolutions in technologies which will be discussed later as part
of the 'ideas and technology' explanation.
67
production frontiers that give them an absolute cost advantage over
competitors relying on older technologies."4 9 The coordination of the
international division of labor depends on rapid flows of information
which makes telecommunications a necessity.
2. Global economy at present is characterized by intense competition not
just in the number of firms operating in any industry but also in the way
that the firms create their market shares through product differentiation
and flexibility of production.5 0 Thus some firms may create a competitive
advantage over others by their use of information technologies. These
technologies can help to reduce costs, improve quality, and provide value
added and competitive intelligence.5 1 It is estimated that one-third of
world trade is intra-firm trade.5 2
3. Global consumption patterns: The importance of telecommunications in
capturing markets marked by intense consumption was noted earlier. It is
then important for the producing firms not just to keep in touch with
fluctuations in world demand or elasticities) but also keep the
distribution channels efficient, some scholars now go a step further to
point out that trade has moved the capitalist world toward homogenized
consumption patterns, where market shares would depend upon the ability of
the firm to deliver the same product with slight differences in different
countries at the same time.5 3
4 9 Tyson and Castells, 1988:57
5 0 Tyson: 1992, Tyson & zysman: 1983. ABoka Mody: 1989 writes
specifically of niche markets.
5 1 Sheth:1989
5 2 Aaron: 1995
5 3 see, for example, ohmae:1985
68
4. Change in telecommunications regime:
International relations theorists also examine the sources of change in a
given issue area by looking at the changes taking place in international
regimes which are "principles, norms, rules, and decision-making
procedures around which actor expectations converge."5 4 Specific
examination of regime theories as applied to telecommunications come from
Krasner and Cowhey.5 5 Krasner writes that international telecommunication
regimes reflect the underlying distribution of power in the world.
Nation-states receive prime importance in his schema. Principles, norms,
rules and decision-making procedures emerge in areas where nation-states
either agree or can coopt others into agreeing upon them. Cowhey writes
that the international telecommunications regime was epitomized in the
series of multilateral negotiations which led to the formation of the
International Telecommunications Union (ITU) and the International
Telecommunications Satellite Organization (Intelsat). This regime gave
the prime of place to government run PTTS and also "fostered an epistemic
community devoted to the idea of a 'natural monopoly' for telephone
services."5 6 According to Cowhey, two specific changes have caused this
regime to move toward more market and trade oriented ideas for a
telecommunications regime of the future. These are: technological changes
which have eroded the natural monopoly argument, and demands by large
users, computer and electronic firms and service companies to open up the
telecommunications service and equipment manufacturing market top
5 4 Krasner, 1985:4.
5 5 Krasner:1991, Cowhey:1990.
5 6 cowhey, 1990:198. Cowhey's analysis includes the role played by
domestic actors, ideas and technology in the creation and maintenance of
international regimes. As such, it traverses more than one category of
analysis in thiB section. It is placed under the globalization of markets
here only for pedagogical purposes.
69
competition. 3 7 Cowhey then goes beyond nation-states in noting the
causative agents for regime change and is more in line with the analytical
bent in this dissertation.
It is unclear in analyses of international regimes whether they are the
causes or consequences of change or both. If we take international
regimes themselves as causal agents for change, then the degree of
weightage to be assigned to regimes as opposed to other explanatory
variables becomes a problem. In addition, factors quite exogenous to the
regime itself are causing changes in the international regime. Thus
this dissertation eschews regime theory in favor of a simpler approach.
It opts for the flip side of regime theory as presented by cowhey in that
it takes his explanatory variables instead of the regime itself and treats
them as separate exogenous variables.3 1 International actors such as
ITU, IBRD (significant in the LDC context), Transnational Enterprises and
other international and large users etc. are thus modeled aB interest
groups which impact upon domestic political processes.3 9 changes in
technology and ideas are themselves treated as separate exogenous
variables.
Finally, the systemic level or the globalization of markets perspective is
seldom taken by scholars without any reference to shortcomings of the ISI
strategy. They are in fact saying that now as LDCs are experimenting with
an outward (perhaps fully or partially export oriented) strategy,
3 7 Large users "typically, less than 5 percent of all users constitute
over half of the long distance traffic and about one-fifth of local
traffic." cowhey, 1990:187.
3 1 1 cowhey'e schema is preferred because of Krasner's exclusive focus
on nation-state power as the explanatory variable. As the preceding and
following analysis make clear, Krasner's is an insufficient explanation.
3 9 By taking into account the production structure and other factors
impinging upon the globalization of markets, the dissertation also delves
more deeply into the economic motivations for their behavior.
70
provision of a modern 'telecommunications system has become a necessity for
them to re-join the very markets they had abandoned earlier. It is thus
common to find modern telecommunication facilities in the major export
centers of LDCs (such as along PRC's east coast). In turn, transnational
firms look for modern telecommunication facilities before going in to the
LDCs.“
Proposition 1 makes sense in light of the discussion presented here about
the shortcoming of the existing ISI production structure and globalization
of markets, in a scenario where the actlonB of interest groups demanding
telecommunications services and the governments which supply them are
important, the economic market explanation only accounts for the necessity
of providing telecommunications services. Economic necessity means that
demand for telecommunication services increases as developing countries
expand into international and domestic markets and also carry out economic
reforms. The severity of the economic crisis does, however, determine the
intensity of interest group pressures.
Ideas and technology i
Technology and ideas are important variables in any model of economic
behavior because they are alternative ways of changing the relations among
factors of production and in turn changing the relative power of interest
groups. Labor groups opposing capital intensive technology or the
influence of socialist ideas on central planning are well known examples
in economic history. Most economic models however deal with the so-called
vshort-run' and take technology and ideas to be constant which is not the
case in this dissertation. (Of course, the big constant in these models
4 0 More than perhaps even the writings of the academic scholars,
there iB seldom a media report (in print or in broadcast) which does not
note the state of telecommunications in countries trying to integrate with
the global economy, see, for example, Los Angeles Timas' series on "East
Europe's tough Transition to a Free Market" (July 8, 9, 10, 1991), all of
which noted the importance of telecommunications for local and
international businesses.
71
is institutions which will be taken up in the next two sub-sections).
Even Schumpeter who included the role of technology and institutions in
his theory of development, warned against trying to tackle the 'non
economic bottom.The role of ideas and technology vis-a-vis
telecommunications is now discussed briefly.
TECHNOLOGY
Technological innovations have challenged the traditional notion of a
natural monopoly in telecommunications. This natural monopoly argument
rested on the fact that telecommunications infrastructure required large
investment for economies of scale and scope to be realized, thus imposing
high costs of entry. But changes in technology which lowered the costs of
providing telecommunications services (for example, microwave links)
allowed for new firms to contest markets or parts of markets controlled by
monopolies.6 2
The criticism of the contestability theory is that a monopoly still haa
several ways in which it may block competition and/or new entrants.
Aronson and Cowhey while largely challenging the contestability theory
also note that "there has been so much investment in fiber optic,
microwave, and private satellite systems that future contestability seems
assured. (If nothing else, once a fiber optic cable is laid, someone can
6 1 Schumpeter, 1961:5. Many significant works by economic historians
do not take them as constants. For an explanation which relies upon
technology as a key causal agent see Landes: 1969. For an explanation
which endogenizes technology and ideas as a society's stock of knowledge
and ideology along with a theory of institutions, Bee North: 1981 and North
t Thomas:1973. Among, international relations scholars, technology is
taken as one of the key agents of change by Gilpin: 1981.
6 2 The concept of contestability of markets is associated with an
'uprising' by a few Bell related economists who note that the mere threat
of a competition is enough for a monopolist to start charging marginal
cost efficient prices. See Baumol et al: 1982
72
buy it if the original builder goes bankrupt. The 'fire sale' lowers
entry costs for the next generation."6 3
Monopoly power was also disputed by equipment manufacturers who challenged
the dominant telecommunication monopolies in providing all of the
telecommunications equipment needs.6 4 In the united States, the Hush-A-
Phone decision in 1956 which allowed for a muting device to be attached to
the mouthpiece and the Carterphone decision in 1967 are taken as seminal
cases opening the AT&T dominated equipment manufacturing market for
competition, similarly, FCC granted MCI the right to provide private line
connections between St. Louis and Chicago in 1969 based on the potential
of a new technology, namely microwave instead of land based lines.
The blurring of lines between telecommunications and computers dubbed
'telematique' (Nora & Mine) or 'Compunications' also posed a challenge for
telecommunications monopolies because computer and micro-electronic
industries have always been more competitive, the software market being
close to perfect competition in some cases. Business executives also note
that the information needs of strategic planning are now being decided by
the Mis (Management information systems) or computers people rather than
the telecommunications managers in large corporations.6 3 All these
arguments taken together are empowering groups and organizations who
6 3 Aronson and Cowhey, 1988: 73
6 4 An early account of this is 1956 "Hush-a-phone” decision which
authorized non AT&T manufacturers to attach their equipment to the AT&T
network, in developing countries the customer premises equipment market
was one of the first to be liberalized though the government still
continues to tightly regulate it in some cases. For an account of how
other manufacturers and trading companies (in the Japan case) got into the
telecommunications market, see Aronson and Cowhey: 1988.
63. I am thankful to Bob Burger of Decision Management Associates,
Los Angeles, for bringing this to my attention. I would add that
computers people rather than the telephony people making these decisions
epitomizes the demand pull nature of user needs.
73
oppose the state or privately run telecommunication monopolies, power of
PTTs“.
IDEAS
The move toward a more market-oriented industry structure in
telecommunications is also explained by the diffusion of neo-classical
ideas among the decision making elite and (to a lesser extent) the
societal groups in developing countries. Two quotations serve to
illuminate the argument made by this group of scholars:
1. "The internationalization of economic training,
through the Bretton WoodB institutions and the
graduate departments of American and European
universities, has clearly increased the viability
of orthodoxy [read neo-classical economics] by
creating a cadre of economists in many developing
economies who can understand its outlines and are
attracted (in part) to its coherence.1 , 6 7
2. "Ideas may come to play an independent
explanatory role by way of several different
processes. They may be general contagion effects
and international 'policy emulation' as in the case
of NICs, or a trickle-up process where ideas gain
initial acceptance among academic economists who
subsequently press their policy advice on the
political leadership."M
The position taken by the World Bank and the International
Telecommunications Union vis-a-vis the need to convince policy-makers and
academicians about making telecommunications a development priority seems
6 6 As noted in chapter 1, non-existence of natural monopoly does not
mean that economies of scale do not exist either. The issue of economies
of scale extends beyond the natural monopoly issue. It implies that a
strict general equilibrium situation in which supply and demand equal each
other is difficult to obtain in telecommunications. Falling average or
marginal costs make it difficult to derive optimal demand and supply
results as well as making marginal cost pricing difficult. With advances
in digital switching and fiber optics etc. enabling over a 100,000 lines
to be provided from a single switch, one might expect that installed
capacity will outpace demand.
6 7 Kahler, 1990:59.
“ Biersteker, 1991:24.
74
to be consistent with the quotations above.6 9 More recently, the World
Bank officials have begun to emphasize the move toward market-oriented
mechanisms in the provision of telecommunications services and
equipment.9 0 It has also been noted that the new coalition of large
users, microelectronics firms and computer manufactures which is
challenging the PTT dominated model in telecommunications has "turned to
the organizing principle of free trade as a guide for reform."7 1 The
spread of neo-classical ideas would also seem to be consistent with the
diffusion of technology and innovations literature. By definition,
diffusion is deemed to be a "process by which (l) an innovation (2) is
communicated through certain channels (3) over time (4) among the members
of a social system."7 2
In spite of the seeming consistency of the last paragraphs with the two
quotations which preceded it, there is one vital difference. The
statements by Kahler and Biersteker assign an exogenous role to ideas.
They play down the legitimization of orthodoxy/neo-classical ideas due to
the disrepute of ISI strategies in late 80b. a similar view is taken by
Altsculer who attributes liberalization in telecommunications to the
ascendance of ideas about deregulation in general.7 1 These three authors
are taking a long-term view and do not resolve the issue of whether it is
ideas or their articulation through interest groups and social coalitions
that is more important. The former case normally holds in short-run
6 9 see Wellenius:1984 for the IBRD position and Pierce &
Jecquier:1983 for the ITU position. Both acknowledge the need to convince
policy-makers and academicians.
7 0 World Banks 1994. Also see three recent discussion papers from
The World Bank which echo these positions: Wellenius:1993, Ambrose
et.al:1990, Ivanek et. al:1991.
7 1 Cowhey, 1990:199.
7 2 Rogers, 1983:10.
7 3 Altsculer: 1992
75
circumstances. None of the statements made in the last paragraph make
this omission. The World Bank studies, for example, specifically note the
failure of public enterprises to provide telecommunications services. The
market-oriented coalition described by Cowhey finds its rationale not just
in market-oriented ideas but in an industry structure which works against
their favor. Even diffusions literature which may be taken to lay
emphasis on supply of innovations as opposed to the demand for them
acknowledges that "[I]t is unthinkable to study diffusion without some
knowledge of the social structures in which potential adopters are located
as it is to study blood circulation without adequate knowledge of the
structure of veins and arteries."7 4
The point is simple: economic ideas cannot be disengaged from the
underlying social and economic structure which makes for their adoption or
rejection. This further highlights the importance of demand factors which
were referred to earlier in this section. The fact is that neo-classical
ideas have been around for a long time and while their adoption now may
certainly be due to the effects on the decision-making elite and
academicians in developing countries, it is no co-incidence that this
should happen after the failure of the ISI strategy than before it.7 1
Social coalitions may block the adoption of specific ideas or
innovations.7 4 socio-economic contexta work similarly. It is thus no
coincidence that in the 1930s, it was KeyneB and not Schumpeter who found
a ready audience. Even though Schumpeter's theory was more encompassing,
it was Keynes who directly addressed himself to saving capitalism from the
Great Depression.
7 4 Elihu Katz quoted in Rogers, 1983:25.
7 5 In India, for example, ideas of neo-classical economists such as
Bhagwati, Belassa, Desai, and Srinivasan have for three decades asked for
a move away from an ISI strategy but were an anathema among the planners
until recently.
7 4 Olson, 1982: 62.
76
Ideas and technology are therefore treated as auxiliary variables by this
dissertation because of the underlying economic structure which creates
the need for them and the Bocial groups which make for their ultimate
adoption or rejection. The case is succinctly stated by Landes:
"Invention may follow genius, but production follows demand."7 7
Proposition 9 follows (In the context of clubs referred to In chapter 1).
Available Ideas and technologies reduce barriers to collective action
and/or bolster club demands but. In the short run atleast, they are unable
to explain policy outcomes by themselves.
The economic reality or the "objective factors” along with changes in
ideas and technology have essentially limited or broadened (depending on
how one looks at it) the development policy choices available to LDCs.
But while they might point the LDCs toward a particular direction, they do
not show how exactly the LDCs would travel along this direction,
specifically, they must show why telecommunications are becoming a
development priority now than ten years earlier when, too, the objective
factors were as apparent.
It is also unclear in these explanations why LDCs are taking different
approaches toward supplying the different kinds of services. The answer
to these questions lies in the workings of economic agents (firms,
consumers, interest groups, social coalitions, governments etc.) impacted
by the changes in the production structure, globalization of markets,
technology and ideas. The objective factors of economic markets might
have broken barriers to moving away from an inward oriented strategy (PTT
dominated in the telecommunications sense) but the objective factors
7 7 Landes, 1980:115. As Landes states, this is not a theory of
invention but of production even it sounds similar. "Necessity may be the
mother of invention, especially if backed by money, but there is no
substitute for the kind of environment that generates novelty" (p. 114).
For a fuller treatment of this subject, see Landes:1969.
77
underlying state behavior and formation of interest groups and social
coalitions might or might not work toward a speedy realization of such a
move.
interest Groups and Social Coalitionsi
The economic structure (including the domestic production structure and
the globalization of economic activities) provides incentives or
disincentives for interest group activity in telecommunications. It does
so by imposing costs and benefits upon the various economic agents.
Thus, it may be beneficial for a group of manufacturers to challenge the
monopoly of a dominant provider in telecommunications equipment. This may
happen as entry costs decline while the dominant provider is beriddled
with production inefficiencies, on the other hand, it may be beneficial
for the dominant service provider to incur costs to lobby for regulations
which ensure its monopoly existence.7 *
Historically, the PTTs (or the dominant service providers such as AT&T)
tended to be vertically integrated and obtained equipment from affiliated
government owned firms or preferred private manufactures. It was within
the interest of the PTT to continue to lobby for protectionist legislation
and/or regulations which helped preserve its monopoly position, in the
early versions of regulatory theory, it was even argued that "regulation
is acquired by the industry and is designed and operated primarily for its
benefit."7 9 The break-up of AT&T then in the U.S. iB attributed to the
7 8 The point is made provocatively by Gourevitch [1986: 58-59] for an
economy at large: "Where does power come from? In a significant way power
is linked to economic situation; it is empirically circular. Economic
situation arises from the from the functions that groups play in the
economy. The economy operates by means of these functions — investment,
management, labor, buying, professional services. Individuals and groups
perform these functions, and power depends on the importance of the
function to the economy and the resources that control of the function
provides."
7 9 Stigler, 1971:3
78
eroding relationship between the corporation and federal and state
regulators.8 0
Early versions of the regulatory theory as espoused by the Chicago school
of economists did not take into account the countervailing power of other
interest groups and the decision-making structure of regulators
themselves. Theories of pluralism which arose in political science did
not make this omission. While the decision-making structures are taken up
in the next section, interest group politics are discussed here. As noted
earlier, among other things such as changes in ideas and technology, the
telecommunications monopolies were challenged by large users and
microelectronics and computer manufacturers. This new coalition of
interest groups then stood in contrast to the dominant service provider in
telecommunications. In the case of the U.S. it is noted that "the FCC,
state regulators, AT&T, and residential consumers formed a stable, winning
coalition in telecommunication regulation for many years; this stability
ended when MCI, IBM, large users, the U.S. department of Justice, and
competitive technology entered the telecommunications regulatory arena."8 I
TELECOMMUNICATIOI ': A CLUB GOOD
The interest group activity in telecommunications is concentrated
predominantly among the actual and potential service providers, equipment
manufacturers and business users. This is explained by the particular
nature of the telecommunications sector as well as the nature of interest
group activity. A specialized issue like telecommunications tends to find
interested constituency among specialized groups than the general
8 0 Temin, 1987.
8 1 Teske, 1990:20.
79
populace.8 2 In case of PTTs, the power of these interest groups is
particularly strong "because state enterprises are ultimately controlled
by politicians and government can more easily compensate public
enterprises for the costs of accommodating these powerful interest
groups."8 3 This point leads me to the very nature of interest group
activity itself which works in the favor of special interest groups as
opposed to larger societal groups.
Formation of specialized groups in telecommunications is closely tied to
the club goods nature of telecommunications explained in the last chapter.
A few main points can be recapitulated here. These specialized groups can
jointly supply themselveB with the service in question by sharing the
costs and excluding non-members. Telecommunications fits the case of
those goodB where clubs solve the dilemma of service provision through
institutional intervention. such intervention, mostly by means of the
state in the case of telecommunications, becomes necessary when the club
population is made up of heterogenous members, the good in question is a
multi-product one and where increasing return to scale are present.
Political objectives influence the state supply of anything whether they
are public or private. The politics of this provision boil down to two
things, either state decision making procedures themselves or the access
of other groups to these procedures (see proposition 6 below for how the
state supplies the club good inefficiently). When the club good is
supplied by a central authority such as the state, it may not result in
pareto optimality if the state's interests and motives behind supplying
8 1 Duch, 1991:97.
8 3 ibid, p. 28.
80
the good do not coincide with those of the demandeurs [Proposition Two].9 *
Pareto optimality results only from a strict congruence between state
supply and user demand interests. North sums up the issue well: "[I]t is
exceptional to find economic markets that approximate the conditions
necessary for efficiency, it is impossible to find political markets that
do.1 , 8 5
It was shown in the last chapter that telecommunications reform in
developing countries is slow precisely because of the club goods aspect of
telecommunications. Moves toward liberalization and privatization in many
countries is slow because while clubs face few (or no) problems of
collective action, large heterogenous groups have many. It is easier for
clubs to get the club good provided by the state than to transform its
supply structure altogether, the latter entailing a collective effort by
many clubs. Efforts to transform the rules and institutions of supply
structure are weak because: (i) such efforts at the individual club level
may be insufficient to alter existing rules and institutions, or (ii)
incentives for this club to be part of a larger coalition within the
telecommunications sector or other sectors may be lacking [Propositions
Seven A s B].
TELECOMMUNICATIONS AND COLLECTIVE ACTION
The problem of trying to transform the policy, regulatory and industry
structure in telecommunications is one of collective action demanding
simultaneous efforts by several clubs, both within telecommunications and
sometimes with groups outside of telecommunications seeking reform. Olson
argues that it is easier for smaller groupB (Buch as large business users
8 4 A pareto-optimal distribution is one in which it is impossible to
make someone better off without making someone else worse off. A general
equilibrium solution results in pareto-optimality.
9 5 North, June 1994:361.
81
in our case) to solve problems of collective action due to their
homogeneity of interests, smaller groups also have the advantage in being
able to provide benefits which outweigh costs to their members. Larger
groups, on the other hand, apply compulsion or selective incentives to
goad their members toward collective action.*6 In trade relations, for
example, it is easier to negotiate and reach agreements in small fora like
the G-7 than in large multilateral fora like the GATT, incentives to free
ride in large heterogenous groups is high.
Collective action does come about in telecommunications because of a
mixture of incentives. t w o of these incentives were mentioned in
propositions developed earlier, severity of economic crises and expansion
of markets (Proposition 1) can bring about a degree of cohesion in
disparate groups seeking similar outcomes. Furthermore, ascendance of
liberal ideas and changes in technology which have made the natural
monopoly argument redundant both can act as an incentive for groups
seeking pro-competition policies and regulations in telecommunications
(Proposition 9). These factors would tend to account for phenomena like
industry wide coalitions demanding the privatization of telecommunication
services. The latter might be coupled with a (seemingly contradictory)
stance by an individual club seeking these services form the state.
Furthermore, the industry wide coalition just mentioned might itself be
part of an economy-wide business or social coalition seeking to change the
rule and institutions of the economy as a whole.
Proposition 8 can be now understood. A multi-club coalition leads to
demands for transforming the existing policies, regulatory framework and
services If these groups are able to overcome their problems of collective
action. [proposition Bight A] Given the ability of users and
manufacturers to overcome problems of collective action, the beneficiaries
M Olson: 1965, 1982
82
of the revision package will be those groups with greater access to the
decision-making structure of developing country states and the state's own
inclination toward introducing these changes depending on its maintenance
of legitimacy [Proposition Eight B].
(The meaning of proposition Eight B will become further apparent form the
discussion in the next section)
COLLECTIVE ACTION AND DEVELOPING COUNTRIES
While the analysis presented above helps to explain why clubs and their
coalitions arise in the telecommunications sector, it does not explain two
anomalies which arise specifically in the case of developing countries.
First, it is generally assumed by Olson and his followers that interest
group activity is market-displacing and produces divergences from pareto-
optimality. However, most interest group activity in developing countries
in telecommunications has lent itself -toward creation of markets away from
state control than the other way round* Why would interest groups create
seek market creation favors in developing whereas they seek to displace
markets in developed countries? The second anomaly comes from the favors
bestowed to groups of telecommunications users who may not have lobbied
for them. Thus, for example, why are policymakers in developing countries
so concerned about and devoting large parts of resources to provision of
telephone facilities to rural areas although the population in rural areas
may not have asked for these. I now explain each of these anomalies with
reference to relevant literature.
Economists tend to assume that interest groups activity takes place in a
stable democracy which is also pareto-efficient. In such a scenario, the
role of the interest group is contrary 'to what the electorate at large
desires, when interacting with the state, their actions would demand
market-displacing favors in trying -to capture a large share of the
83
economic pie for themselves.8 7 However, in developing countries the
assumption of a stable democracy and pareto-efficient markets do not
hold.8 8 As most markets in developing countries are heavily regulated
(PTT controlled) and/or non-existent, interest group activity may in fact
focus on removal of such regulations.8 9 This, for example, seems to be
characteristic of the situation in telecommunication equipment
manufacturing where private firms want the market liberalized. olBon and
his followers have concentrated on market stagnation but to explain market
reform, the theory of collective action needs to be amended as noted
above.
In cases where interest group activity results in more competitive or
pareto superior outcomes, it should help us in building a positive sum
theory of rent-seeking.9 0 Interest group activity which results in better
telecommunication markets and provision of better services than before
8 7 olson does distinguish between "narrow special interest groups"
which seek economic favors for an insignificantly small section of the
population and "encompassing special interest group organizations" which
"encompass a substantial portion of societies” (olson, 1982:47) and thuB
"have an incentive to make sacrifices up to a point for policies and
activities that are sufficiently rewarding for the society as a whole."
(p. 48)
8 8 This may also be the case in some developed countries too as a
whole or in specific sectors.
8 9 The point is acknowledged by olson in a footnote. "A measure that
would reduce economic efficiency if introduced in a Pareto-efficient
society could conceivable increase efficiency in a society with prior
distortions." (Olson/ 1982: 247, fn.6). Apart from this footnote, Olson's
analysis proceeds without any reference to it and assume pareto-efficient
societies where there existence may be questioned, both in developed and
developing countries.
9 0 The following definitions of political and economic rants are
useful. Economic rent is defined by Tollison [1982: 577] as ”a receipt in
excess of the opportunity cost of a resource." Political rents are
conceived by Nabli & Nugent [1989] as the interaction of interest groups
"in the political market to obtain regulations favorable to their
interests." The term ' ‘ rent-seeking' was coined by Krueger [1974]. For an
excellent exposition of rent-seeking analysis in the various sub-divisions
of economics, see Colander [1984].
84
could be called "rent diminishing” rather than rent seeking activity.9 1
Proposition 5 may now be restated. In a non-democratic and/or non-pareto
efficient setting, exclusive interest groups may lead to market oriented
reform even if in the short-run they seem to create special privileges for
themselves. For example, the actions of large users of telecommunications
services in developing countries to wrest control of the equipment and
cellular markets resulted in competitive markets for their provision.
The second anomaly in telecommunications, namely provision of
telecommunications services to groups such as those in the rural areas,
who have not lobbied for them is easily explained by the larger backdrop
of social coalitions in any country. As noted earlier, the state responds
not just to interest group activity but also to the mandate it has
inherited from the electorate at large and/or societal groups from which
it draws support in construction of its legitimacy. The breadth or
narrowness of electoral base and/or structure of support for governments
varies from one country to another. It is nonetheless true, however, that
often times the state may be responding to these bases of support even
though the interest group activity is concentrated in other areas. In
India, where rural areas account for 73 percent of the population, every
major state program must pay close heed to rural interests even though
they may not have cohesively organized themselves around the specific
issue in question. In other countries, it may be the case that while a
few interest groups may be lobbying in favor of market-liberalization and
economic reform, the state may be constrained by a broader social
9 1 Nabli and Nugent [1989:31] note that "collective action by an
interest group is usually aimed at increasing the group's share of a fixed
or diminishing stock of wealth at the expense of other groups. But, why
shouldn't the analysis also apply to situations which, atleast in the long
run, are characterized by positive sum games?" They quote a study by
Roumasset & La Croix [1987] which showed that rent-seeking led to the
provision of "socially beneficial private property rights" in Hawaii in
the mid-19th century.
85
coalition which has benefitted from the market displacing activities (IS!)
in the past.
The broader context of social coalitions helps to explain why particular
interest groups may be unable to capture all the regulatory space by
themselves. My analysis here diverges from economists who tend to
emphasize interest group activities only and political scientists who
emphasize social coalitions or social actors.9 2 It also suggests that
interest groups in developing countries may not be as cohesively organized
as in developed countries such as to block the influence of wider social
coalitions. It is however consistent with analyses which suggest that a
"wide coalitional base with deep social roots protects the state from
interference by any one specific group."9 3
while a fuller understanding of Proposition 4 must await the next section,
most of its meaning should now become clear. Dysfunctional states will do
one of the following things: A) Supply services to those with the most
access to its decision-making procedures (special interest driven state).
B) Not supply services to any groups or all to those bodies which help it
dominate (predatory state).
Any state responds to a plurality of pressures from various interest
groups and social coalition pressures but we cannot predict the outcome of
these activities without reference to the state's decision-making
structure which arbitrates among these pressures. The influence of the
9 2 See, for example, Gourevitch [1986: 59] who writeB that "to
explain a country's policy choice requires us to do some mapping of the
country's production profile: the situation of the societal actors in the
international economy, the actors' policy preferences, their potential
bases of alliance or conflict with other forces, and the coalitions that
emerge."
9 3 Crone:1988:260. The paper is itself an encompassing review of the
literature examining the role of states with reference to domestic social
actors in Southeast Asia.
86
state decision-making atructure upon telecommunications policy,
regulations and industry atructure ia the subject of the next section.
state Decision-Making Structure:
To what extent does the state decision-making structure — its
institutions and rules, its relative independence, its cohesiveness, its
capacity — impact on the choice of economic policy and regulatory choice?
These guestiona which have assumed importance at an economy wide level in
the last decade are now beginning to impact the political economy of
telecommunications.9 4
Before turning to the specific literature on telecommunications, and new
institutionalist and statist analysis as they are known at a more general
level, it may help to define what is meant here by the state decision
making structure, simply stated, it refers to an elite body consisting of
elected officials and key bureaucrats.9 5 Building on Weberian concepts,
9 4 Neo-classical models of economics usually neglected the state in
its analysis.. Works by economic historians [North: 1981, North &
Thomas: 1973, olson:1982] and public choice theorists were the first to ask
if the state was able to make choices as costlessly and efficiently as
most economists had presumed. Buchanan's [1972: 153] comment is apt that
"in orthodox discussions of economic policy, economists tend to presume
they are providing advise to a benevolent despot who will, costlessly and
willingly, implement those measures which analysis suggests to be
efficient. This often unrecognized assumption may not exert relevant
feedback effects on the policy analysis itself in many cases.” on the
other side of the spectrum from neo-classical economists, neo-marxists
have moved away from Marx and Engels' conceptualization of the state as
"the committee for the management of the common interests of the
bourgeoisie” to account for state autonomy. But most of them still regard
the state as an instrument in the hands of the dominant classes (see, for
example, dependency perspectives: Cardoso 6 Faletto [1971], Evans [1979]).
Not only is the notion of class an ill-defined abstraction making the
analysis of the state to be one of "crude instrumentalist variety”
[Bardhan: ], but as scocpol [1982] writes, the development of the state
doeB not necessarily parallel the development of other dominant groups due
to the multiplicity of interests, organization structures and resources
represented by the state.
9 5 This is consistent with the view taken by many theorists in
the statist tradition [Haggard: 1990, Nelson:1990, etc.] as well as
classical institutional economists such as Hirschman and Myrdal and more
recent ones like Nabli and Nugent [1989:33] who refer to the LDC state as
"bureaucratic authoritarianism” or Bardhan [1989] who refers to the ”elite
87
its identity is usually taken to be that of a discriminating monopolist
with a comparative advantage in violence seeking to maximize its
revenues9 6 and power.9 7
Where the state is also is also a producer, as is the case in most LDCs,
the analysis becomes complicated. Here the state acts to protect its
production interests just as it responds to non-state production and
consumer interests. However, the former can also be treated as interest
groups (usually lower level bureaucrats) who influence the state decision
making structure in seeking to protect their interests (jobs, salaries,
perks etc.). This dissertation therefore distinguishes between the state
decision-making structure and state production interests aB such.
New institutionalist analyses emphasize political rules and processes as
much as it does the existence of permanent institutions. Before turning
to it, two other variants are discussed. First, earlier versions of
institutionalist analysis (as the nomenclature suggests) looks at the
state's institutions, the country's constitution and rules to examine
outcomes. Its focuB is more on institutions than the process. Cowhey
considers the nature of the political system (presidential or
parliamentary), type of voting system, and the degree of federalism as the
most important determinants of telecommunications reform in developing
countries.9 8 This approach has several shortcomings, (i) In taking these
state."
9 6 alternatively referred to as wealth.
9 7 Traditionally, political scientists emphasized the 'power'
role of the Btate while economic historians like North built an economic
theory of the state. A better synthesis is now available building on
viner's [1948] classic treatment of the state in "Power versus Plenty as
objectives of Foreign Policy in the Seventeenth and Eighteenth Centuries."
See Cohen [1989: 274-275] for a brief Bummary of this issue.
9 8 cowhey:1991. Noll [1986] also emphasizes the institutional
characteristics of the government in his analysis.
institutions as exogenously given (making the analysis static), it must
resort to factors other than government institutions to explain
differences in outcomes in various countries. Thus outcomes in the final
analysis are explained with political parties and processes and interest
group activity etc; (ii) similar results can be obtained regardless of
the particular type of institutions (constitutional and historical).
Regulation and concentration of industry are norm in telecommunications in
both Singapore and France inspite of the differences in institutions and
regimes; (iii) dissimilar results may follow regardless of similar
institutional or regime characteristics. Mexico and Brazil are both
Presidential democracies but Mexican telecommunications is considerably
more deregulated than Brazil's. This leads one to believe that it is not
types of institutions but something intrinsic to the nature of these
institutions which accounts for results. This was the genesis of new
institutional literature which focuses on the process rather than the type
of institution or regime etc; (iv) the existence of permanent or highly
developed institutions is a tenable assumption to make in many developing
countries.
Second, a slight variant of new institutionalist analysis has focused on
the regime type to explain outcomes. The pace of privatization
initiatives in various developed countries is thus explained by whether
the regime represents several competing interests (pluralist),9 9 one in
which the state plays a strong role (statist)1 0 0 or one which is colonized
by existing interests (corporatist). "The United Kingdom, dominated by
pluralist institutions, is the most receptive to both privatization and
liberalization initiatives. On the other hand, France, with its statist
traditions, is less fertile ground for these policy initiatives, and
9 9 Also known as weak state.
1 0 0 alternatively called a strong state.
89
Germany, characterized as corporatist, is reluctant to adopt such
measures."1 0 1
Economy wide studies show that it iB incorrect to assume that a particular
regime would necessarily adopt a particular development strategy, it is
noted that even in a strong state such as France, sectoral alliances
effectively "colonize" the state.1 0 2 As for developing countries, it is
noted that in Latin America, for example, "there's no strong theoretical
reason to link ISI with authoritarian rule" and that infact ISI "mobilized
new social groups into political life.” On the other hand, many East
Asian NICs have pursued outward oriented policies under authoritarian
rule.1 0 3
similarly, analyses which focused on the so-called strong versus weak
states argument focusing on whether states shape or reflect Bocietal
preferences has been shown to vary considerably according to historical
and sectoral circumstances.1 0 4 Sectoral analysis of telecommunications
would then hardly be possible using weak-strong or democratic-
authoritarian type arguments, we need to delve deeper into the ever
changing political decision-making structure and processes rather than any
objective reality of the state as provided by its institutions or regime
type alone.
, 0 ' Duch, 1991:263.
1 0 2 Milner: 1988
1 0 3 Haggard, 1990:25.
1 0 4 For a refined analysis of this issue, see Samuels [1987],
Haggard [1990]. For the classic statement of the strong versus weak state
argument, see Krasner [1985]. In economics, these concepts were employed
a little differently. See Myrdal [1968] who focused on "soft" versus
"developmentalist" state.
90
NEW INSTITUTIONALIST ANALYSIS:
The real answer behind whether states reflect or Bhape societal or
interest group choices, depends on the degree to which state decision
making structures are: i) relatively autonomous/insulated in carrying out
their decisions, ii) the development goals of the state, and iii) the
resources that the state commands.1 0 3 The focus on these factors which
emphasize historical evolution of deciBion-making processes helpB to Bolve
a few apparent anomalies. For example, why have Britain and Japan, both
two-party parliamentary monarchies, followed different approaches toward
the regulation and structure of their telecommunication sectors? why
cannot we compare the united States with Mexico, both federal presidential
systems (even though admittedly the party system is slightly different in
Mexico? As previously noted, new institutionalist analyses help us
transcend the difficulties inherent in pure institutionalist or regime
type analysis noted here.
State autonomy or insulation has so far received the most attention from
scholars. Samuels analysis of the energy markets in Japan suggests that
the degree of state autonomy was determined by the specific nature of the
historical interactions between this industry and state.1 0 6 Along these
lines, Haggard has hypothesized that states enforcing a social contract as
in democracies are likely to be less autonomous in decision-making than
states which might be more corporatist and authoritarian, the latter
limiting "political organization and contestability to a few groups."
The development goals of the state need to be situated historically. in
terms of telecommunications, as noted in chapter 1, it means that we sift
1 0 5 Gourevitch: 1986, Katzenstein: 1978 & 198S, Haggard: 1990,
Samuels: 1987, Hall: 1986 6 1989.
1 0 6 "Clearly, we must seek underlying dynamics and understand how
private interests are invited into the interior processes of the
government: but we must also understand how the government is invited into
the interior processes of the market." Samuels, 1987: 287
91
through history to determine if the Btate has followed a reactive or
proactive, and a sympathetic or antagonistic approach toward user groups.
The third characteristic concerns the degree to which the state is
actually successful in its actions, which in turn depends on its cadre of
officials and other resources (financial, institutional, historical
circumstances). This is known as state capacity.
Focusing on these characteristics has its advantages and challenges, its
advantages lie in generalizable categories which transcend institutional
or regime type focus which were just analyzed.
The approach also offers Beveral challenges. it is grappling with
conveying the dynamism and complexity of the state decision-making
process. The categories of autonomy, capacity and developmentalist goals
are quite embedded in each other. Evans has developed the concept of
"embedded autonomy1 ' which shows that development comes about from the
embeddedness of the state in societal relations (or correspondence with
private business) rather than its insulation.1 1 1 7 The concept not only
brings the idea of state autonomy and developmentalist state together but
also touches on state capacity. "In the absence of a coherent, self-
orienting, Weberian sort of administrative structure, embeddedness will
almost have deleterious effects."1 0 * similarly, Waterbury shows that
shifts in economic policy are due to "change teams" which comprise
"technocrats with few or no links to the political arena" and who "in
their brain trust of the political leadership will be politically isolated
and utterly dependent upon the head of state.""1 9 Finally, Rueschemeyer
and Putterman write of a "paradoxical" feature of state-society relations
1 0 7 Evans: 1992.
I 0 * ibid, p. 179.
1 0 9 Waterbury, 1992: 191.
92
in which "autonomy and a power balance that gives the state a chance to
prevail against partial opposition must be complemented by rather close
relations between policymakers and business elites."1 1 0
The will for state action, its notions of its legitimacy and survival are
missing in these approaches. In other words, they do not convey the
overall context of "embedded autonomy” or "change teams” etc. One may
ask: Whither "embedded autonomy" or "change teams"? state have their own
agendas. This was conveyed through the notion of the "Tocguevillian” in
chapter l.1 1 1 The latter borrows from the Weberian definition of
"domination" which meanB "the situation in which the manifested will
(command) of the ruler or rulers is meant to influence the conduct of one
or more others (the ruled) and actually does influence it in such a way
that their conduct to a socially relevant degree occurs as if the ruled
had made the content of the command the maxim of their conduct for its own
sake."1 1 2 Domination in the modern context is legitimized through a
"system of rational rules” which "finds its typical expression in
bureaucracy.”1 1 3 This shaping of societal relations goes beyond the
embeddedness of state autonomy or change teams. It refers to the caveat
that ■ ■ [E]ven the most plausible state functions must be analyzed in a
context of political choice and thus of social and economic power."1 1 4
States in developing countries are often caught in a desperate struggle to
survive and state formation is a slow exercise. Telecommunication is but
a minuscule part of this agenda. Thus, a hypothetical state may need to
1 1 0 Rueschemeyer and Putterman, 1992: 256.
1 1 1 As explained by scocpol, "Tocguevillian" state referB to the
ability of the state to affect political action and salience of issues.
1 1 2 Weber, 1968: 946.
1 , 3 ibid, p. 954.
1 1 4 Rueschemeyer and Putterman, 1992: 247.
93
balance demands for high-tech telecommunication services against pressures
by primordial ethnic groups for legitimacy. Thus, the games that state
play in the developmental context must be analyzed in terms of
construction of their legitimacy.
LDC states have governed the 'commanding heights of the economy'. States
in LDCs are strong partners in production and regulation of economic
activities. Just as social interests might have multiplied during the ISI
phase, so also the resources and instruments that the Btate commands.1 , 5
The multiplication of interests during the ISI phase might have led to
formation of interest groups who want the state to now move away from an
ISI strategy but the degree of their success would depend on their access
to the state.1 1 6 The latter itself would be dependent on the degree of
state autonomy and unity. Resistance to reform by bureaucrats, often
noted by the current literature on economic reform,1 1 7 is in effect the
hold that the vested interests of bureaucrats have on the current
decision-making structures of the state. This role is specified not just
by the role bureaucrats play in political administration but also by the
role bureaucrats play in managing state owned enterprises. Moreover, many
states rely on protected businesses and trade unions created by the ISI
strategy itself for their political support and survival. The degree to
which a given LDC state will pursue economic reform or move away from an
ISI strategy would depend on the degree to which the decision-making
structure of the state is able to reflect the interests of those who want
economic reform and whether such a move fits the state's notion of its
legitimacy.
1 1 6 This discussion has built upon Samuels [1987] concept of
'development of the state' and Haggards' concept of 'state instruments.'
1 . 6 Hardin: 1982
1 . 7 See the 1991 World Development Report by the World Bank which
holds the bureaucracy as when one of the major actors resisting
privatization and reform of state owned enterprises [pp 138-47].
94
A few studies of regulatory choices by state public utility commissioners
in the United States have begun to attribute regulatory change in
telecommunications to factors similar to those the state decision-making
structure outlined above.1 " These studies note that regulatory choice is
determined by i) the degree to which public utility commissioners are
insulated from direct voter and legislative pressures through their
appointments by the governor, ii) the size and role of the staff who have
their own vested interests, and iii) the resources through budget and
staff available to the commissioners.1 1 ’ Each of these categories
correspond to the categories developed by new institutionalist analysis.
Note that these categories while including institutions go to the heart of
the decision-making process.
CATALYTIC STATE:
one of the major points in this dissertation is that even state actions in
telecommunications need to be placed in the larger context of the state's
construction of legitimacy. The concepts of state 'maneuverability' and
'responsibility' were introduced in chapter 1 in this context and combine
the ideas of state autonomy, developmental orientation and capacity.
"Maneuverability" takes into account the embeddedness of autonomy and
leaves room for the state to impose its agenda and shape societal choices.
Thus, we may speak of "external maneuverability' as the ability of the
state to shape societal choices and internal maneuverability or the
ability of the state to shape its agenda given societal pressures and
preferences. The two types are, of course interconnected, and take into
account state capacity and resources. State "responsibility” directly
1 1 1 An excellent summary of these studies is presented by Teske,
1990:23-25.
1 , 9 The peculiar nature of the United States makes this studies focus
on regulatory agencies. They are equally valid for executive and
legislative decisions and in fact the wider body of literature where this
tradition is coming from haB focused on these processes.
95
benefits the cause of development while also helping the state increase
its legitimacy.
A catalytic state can both maneuver and be responsible. It shapes an
active developmentalist agenda with respect to vital societal interests.
A dysfunctional situation follows if one or both of the variables is
missing. An absence of both will produce a state which is either driven
by special interests alone or is unstable or both. It might need
repressive force to continue its rule. A corrupt and/or predatory state
might have room to maneuver but lacking responsibility it takes few
developmental initiatives.
As noted in propositions three and four, whether a state is catalytic or
not determines the outcome of user group pressures or demands within the
state's decision-making procedures.
A catalytic state will not only meet these demands but also play a
dlriglste role In shaping future preferences [Proposition Three].
Dysfunctional states will do one of the following things:
A) Supply services to those with the most access to its decision-making
procedures (special interest driven state) [Proposition Four A].
B) Not supply services to any group or all to those groups which help It
dominate (predatory state) [proposition Four B].
States also find a variety of ways of controlling the supply of the club
good in question. The reasons for doing so of course need to be situated
in state's maneuverability and responsibility. Proposition six captures
this scenario. States can muBter any number of arguments ranging from
resource constraints (material, financial, human) to an outright rejection
of telecommunications as a development strategy to restrict membership and
provision [Proposition six A] Levels of cross-subsidization among
96
services, often quite high, reflect the differential treatment accorded by
the state to different user groups [Proposition Six B].
In summary, the state decision-making structure explanation would then
suggest that the content and pace of revisions in the telecommunications
sector would be determined by the relative autonomy, developmentalist
orientation and resources of the state's decision-making elite. These
concepts are compacted into the categories of state maneuverability and
responsibility to yield us a picture of a catalytic versus a dysfunctional
state. We would also expect rent-seeking in telecommunications to be
higher in states reflecting few competing interests and where their
decision-making structures are relatively insulated. Finally,
bureaucratic resistance to reform typically associated with state
enterprises cannot be explained without reference to the states'
construction of legitimacy or its goals of power and wealth maximization
and the role that the bureaucrats have played in the realization of these
objectives.1 2 0
SECTION IV
The major conclusions reached in this chapter are as follows:
1. A country's domestic and international economic structure is
insufficient to explain why developing countries are making
telecommunications a priority. The economic structure, however, explains
the need for this priority, similarly, ideaB and technology can provide
incentives for change but are insufficient to explain all components of
change by themselves.
2. The incentives and the necessity for change lead us to the human
1 2 0 Power maximization often entails limiting the power of the
rivals to the state, in this case market oriented private firms, state
structure explanations then show the causality behind the continued
existence of state enterprises even though their relative inefficiency is
a fait accompli.
97
actors involved, namely the interest groups or clubs which demand or
resist change. whether or not telecommunications iB made a development
priority depends on the access of these clubs to the state decision-making
structure which arbitrates among these demands. Finally, in the context
of developing countries, it is important to place them against the wider
back drop of social coalitions, some decisions by the government may be
in response to the wider social coalitions or its social bases of support.
3. Economists have tended to assume that interest group activity results
in market-displacing favors. This need not be the case if the assumption
of a stable representative government is removed, especially in cases
where the government has a narrow base of support.. Interest group
activity may actually result in market-creation in developing countries.
4. As developing countries liberalize their telecommunications sectors,
this study provides a useful framework for examining the relative
influences of various economic, ideational, technological and political
factors making for revisions in telecommunications policies, regulatory
frameworks and industry structures of these countries. Such analysis will
be useful for multilateral agencies, government bodies and transnational
enterprises participating in the process of theses revisions, especially
as it helps in long term strategic planning as well as help them look at
the experience of other countries in a comparative perspective.
5. Much of the literature on telecommunications comes with a supply push
technology bias. Typical comparative studies look at the levels of
telecommunications technological modernization in various countries. This
dissertation takes a different position. It looks at how the supply of
these services benefit the various groups who are demanding them and
examines how these demands are being met (if at all). "Leapfrogging"
implies that telecommunications will help developing countries accelerate
98
their pace of development and/or skip the stages of development.
Developing countries are far from the goal of universal service. Thus,
who gets these services first and how do they do so will be important for
determining whether or not these countries "leapfrog".
99
CHAPTER 3
TELECOMMUNICATION CHOICES IN DEVELOPING COUNTRIES
The purpose of this chapter is two-fold. it explains the disparate
choices available for telecommunication policies, regulations and industry
structures in developing countries and a few relevant developed ones. The
last chapter examined the factors which shape these choices but the latter
themselves were not spelled out. Second, this chapter highlights the
propositions of this dissertation in the context of these countries. The
validity of the propositions is established by finding evidence in a large
number of cases at a general level before examining them in detail in a
specific case (India) in the following chapters.
in order to explain the available choices in telecommunication, the
chapter focuses on the three dependent variables in this dissertation,
namely policies, regulatory frameworks and industry structures governing
the telecommunication sectors. Macro level telecommunication polices tend
to be part of the overall information policies of developing countries and
also help to gauge the extent to which telecommunications iB a development
priority. TheBe policies can be placed on a spectrum ranging from close
coordination of the telecommunication sector of the economy with the other
sectors (e.g. Singapore) to a loose formulation of the intent to develop
telecommunication sectors, perhaps with enhanced resource allocation, but
with little reference to the needs and demands of users (e.g. Indonesia).
In either case the policies are a result of the peculiar decision-making
structure, inter-bureaucratic rivalries and the degree of access of users
to these instruments. information polices are analyzed first in this
chapter because they provide the overall framework within which
regulations and industry are determined. Propositions 1, 10 t 12 are
teBted in this section.
100
Regulations often define the day to day workings of the information
policies and concern themselves with the micro details of industry
choices. They are examined next. Regulatory frameworks in developing
countries range from independent regulatory agencies with varying degrees
of power (e.g. Malaysia) to government ministries in charge of both
formulating policies as well as regulating the telecommunication
providers. in an extreme case the department of posts and
telecommunications is the sole provider with little regulatory
supervision. The need for and the emergence of regulatory and
administrative control is examined in order to test the validity of
proposition 11 of this dissertation.
Finally, this chapter examines five issues impacting on the emerging
industry structures of telecommunication sectors in developing countries:
decentralization, competition, equity concerns, transnational agreements,
and type of state. These issues are delineated in the context of the
remaining eight propositions of this dissertation. The decentralization
section provides the context for preliminary evidence for the propositions
dealing with club goods, the competition section for those dealing with
collective action, equity concerns for those dealing with regime
legitimacy and trans-national agreements for international influences.
State type (here identified as catalytic versus dysfunctional) helps bring
the overall argument of this dissertation in context.
Information Policies
Information policy is here conceived narrowly as the set of state policies
designed to integrate the telecommunications sector with the workings of
the rest of the economy. This is especially important for those users and
manufacturers who stand to gain the most from enhanced quality and
quantity of telecommunications services. To capture the variation among
these policies, three different sets of policies are analyzed: statements
101
of Intent, Piecemeal Modernization, and Industrial Policy Modernization.
Before presenting these three alternatives, a review of information
policies in the developing countries since colonial times is presented to
capture the essential elements of the past trends. Pressures for change
(which were noted in chapter 2) are reiterated.
COLONIAL & POST-COLONIAL INFORMATION POLICIES
information policies in a cohesive, albeit exploitative, fashion existed
in developing countries during the colonial days, studies reveal the way
in which telegraphs, railways and a well organized western style postal
system were used for colonial command and control and communications.1
Telephones were also an important part of the colonial communications
structure but they were introduced in a limited way mainly to help in the
day to day functioning of business houses.
The Dutch established Indonesia's first post office in Jakarta in 1746.
Telegraph was introduced in 1856 connecting Jakarta with Bogor. Local
telephone service was introduced in Jakarta in 1882 and a long distance
network connected the city with Semarang in 1884.2 similarly, foreign
nationals (including Japanese, Americans, Chinese etc.) brought
telecommunications to south Korea. Telegraph came in 1885 followed by
telephone service in 1902.3 Telephone service was introduced by the
British to Hong Kong in 1882 by the oriental Telephone & Electric
Company.4
1 See, Innis: 1950.
2 Indonesian history material drawn from Parapak, J.L. "The
Development of Telecommunications in Indonesia." Unpublished Paper.
3 sung, Keuk Je. "Korean Telecommunications Policies into the 1990s"
Unpublished Paper.
4 Eward: 1984.
102
The early Introduction of telecommunications to colonial countries not
only underscores the importance of these services to colonial
administrators and business houses but also points out the rapidity of
technological diffusion in telecommunications in that era. The validity
of Proposition 12 is ironically established for colonial times. It seems
that colonial administrations designed information policies which drew
upon the linkages in the economy even if the ultimate purpose of drawing
upon these linkages was economic exploitation and not growth.
Telecommunications diffusion Blowed down in post-colonial times. These
countries lacked the foreign exchange to purchase the technology and with
their commercial and administrative interests removed, telecommunication
equipment producing countries were not interested in state of art
technology transfers. Furthermore, the newly formed post-colonial
governments perceived telephones as luxurious and exploitative instruments
and the department of posts, telegraphs and telecommunications was moved
lower down in the rungs of power. As these countries turned toward inward
oriented development strategies, the telecommunication sector also lost
its most powerful constituency, namely foreign owned businesses which
depended on a communication infrastructure for their operations.
Two exceptions prove the rule. It is not surprising that the most
expansive and up-to-date technologies in telecommunications are found in
two countries which built upon, rather than replaced, the colonial model
in telecommunications. These are Hong Kong and Singapore. In both
countries, the governments continued their partnership with foreign
businesses which in Singapore's case, in fact, worked to the detriment of
domestic producers.1 In both countries, telecommunications is integral to
1 "Local capitalists, who have been gradually marginalized by foreign
capital, are a minor element in Singapore's dominant elite" [Crone, 1988:
260]. See also, Haggard:1990 for comprehensive discussions of the role
played by foreign capital in these entrepots.
103
the development process and their success as entrepots. Both are
significant telecommunication hubs in East Asia. Among commonwealth
countries, Singapore generates the fourth highest telecommunications
traffic after the U.K., Australia, and Canada.6 Hong Kong is a major hub
for Cable and wireless international network, a company which has
historically provided the island's international services. In fact, Hong
Kong and Singapore telcos act as competitors. For example, rates between
Singapore and Tokyo reflect the rates between Hong Kong and Tokyo.7 The
National computer Board (NCB) in Singapore released an ambitious
government plan in April 1992 known as IT2000 which would make Singapore
an "intelligent island" within IS years and will connect all homes and
businesses through computer networks. The first step will be a National
Information infrastructure building on the country's ISDN.
Singapore and Hong Kong also offer examples of demand led development
crucial to our understanding of Proposition 10. in both cases, the
infrastructure catered to international demands though in Hong Kong's case
domestic capital was not aB marginalized as in Singapore.
Telephone service during colonial days was often provided by private
businesses while the state provided and extensively used telegraph
service. As telephones were far more effective for local communications,
a number of local networks sometimes owned by different companies sprang
up. In some cases these remained unintegrated and a few countries
inherited vastly fragmented networks. This was typically the case in
Latin America where the state historically possessed little regulatory
power over local and international businesses. Brazil's telecommunication
8 Eward, 1984: 149
7 Cowhey, Peter F. and Jonathan D. Aronson. "Trade in Services and
Changes in the World Telecommunications system." in Peter F. Cowhey et al.
1989: 12-13.
104
system when integrated under Telebras in 1966/67 consisted of 3 federal,
600 state, 200 municipal and 90 private companies. Local companies were
eventually reduced to 25 corporations under the Telebras umbrella,
similarly, Telefonos de Mexico in which the Mexican government acquired
majority control from foreign and private investors in 1972, had 108
subsidiaries with exclusive telecommunication jurisdictions. Integration
and interconnection of disparate networks was the first step toward
framing comprehensive telecommunications polices in these countries.
Excepting entrepots like Hong Kong and Singapore, the state of
telecommunication services before becoming a development priority exhibits
common strains. As Table 3:1 shows, the number of main lines per 100
population was low and the waiting list for telephone connections was high
in the early 1980s. A sizable portion of the main lines are concentrated
in the largest city of the country. The countries which are yet to
streamline or reform their telecommunication organizations also reveal
large number of staff per 1000 lines meaning low labor/output ratios.
Telephones per hundred people in 1981 for developing countries as a whole
was 2.8 for developing and 44.5 for developed countries. Among the
developing countries this density varied from 0.8 for Africa and 5.5 for
Latin America.8 Africa figures reveal the lack of business and
manufacturing activity during colonial and post-colonial times in those
nations whereas the figures for Latin America confirm the influence of
domestic and international businesses.
Telecommunication outlays did begin to pick up around the late-70s in
developing countries and this is reflected in the figures reported in
Table 3:2. Before this period, telecommunication investments were about
8 ibid, pp. 14-15.
TABLE 3:1 - NATIONAL TELECOMMUNICATION INFRASTRUCTURES
Main Lines Per 100
Population
W aiting List
(000)
Forecast
Tele
density
Waiting
Time:
Tele. Line
(yrs)
Pay
Phones
Per 100
Popu.
Largest City Main Lines
1992
Telco
Staff per
1 .0 0 0
Lines
1980 1992
1980 1992 2000 1993 1992
Pop. as
% of
Total
Main
Lines %
o f Total
T ele
density
1992
Zaire 0.09 0.09
- - 0.11 - - 9.8 - * -
Nigeria 0.20 0.31
- 243 0.52 7.1 7.9 33.9 1.36 50
E g y p *
1.09 3.97
629 3.46 6.1 0.07 16.4 33.6 8.12 24
Mexico 3.73 7.54
409 663 12.5 1.0 1.40 23.4 36.1 11.6 7
Argentina 7.70 11.122
934 373 14.2 3.0 1.10 35.6 56.2 17.6 10
Brazil 3.93 6.83 -
510 9.5 1.0 1.66 11.6 16.9 10.0 9
India 0.33 0.73 594 (82)
723 2.07 4.9 1.0 14.0 6.7 59
China 0.35 0.68
164 2,289 2.33 0.8 0.13 - - - 63
S. Korea 7.34 33.68
604 .2 48.39 - 5.99 25 30.0 39.6 4
Singapore 25.86 39.85
4 .4 57.09 - 9.58 98 94 38.2 9
Malaysia 2.95 9.91
133 139 29.11 0.9 1.51 10 15 12.1 16
Indonesia 0.25 0.68
45 307 2.10 2.6 0.13 5 8.9 20 32
source: ITU. Yearbook o f Telecommunication Statistics.vmrvm
105
106
0.3 percent of groes domestic product for developing countries on
average.9
PRESSURES FOR CHANGE
It was against the colonial and post-colonial backdrop that pressures for
change in telecommunications grew. Economic necessity (Proposition 1) and
demand-led development (Proposition 10) are highlighted in this
phenomenon. Waiting lists for telephones (Table 3:1) were high for both
residential and business demand. Furthermore, as noted in the last
chapter, sources of explicit or latent demand for telecommunications
included the expanding service sector of these economies and the
globalization of economic activity. Table 3:3 gives the structure of
production for selected developing countries. It will be seen later that
countries with close to or more than 50 percent of their GDPb coming from
services are at the forefront of telecommunication development,
similarly, Table 3:4 showB the average annual growth rates of merchandise
trade between 1965-80 and 1980-90. It was around 1980 that a number of
developing countries declared their intent to expand telecommunications.
There is a positive correlation between telecommunications investments and
export activity. Better telecommunications are demanded by export groups
and the telecommunication sectors in turn require foreign exchange (earned
through exportB) for investment purposes. Thus the countries which stuck
to the goal of telecommunications development were either those which
experienced an increase in merchandise exports such as Singapore, India
and Malaysia or those countries in which growth rates even after the fall
in 1980-90 were otherwise quite high such aB Korea and Hong Kong.
After the drop in oil prices, Indonesia and Nigeria's exports dropped
significantly and it iB only recently that telecommunications investments
picked up. Brazil and Mexico present a special case. The debt crisis
9 Saunders et al. 1983: 7.
TABLE 3:2 - TELECOM INVESTMENT INDICATORS IN SELECTED COUNTRIES
Investment as percentage
of GDP
Investment as percentage of GFCF Revenue as
percent of GDP
Teleco investment
percent of revenue
1980 1992 1980 1992 1992 1990-92
Nigeria 7.0 38.3
Egypt 2.49 1.03 3.4 1.2 49.3
Mexico 2.11 17.69 3.4 1.8 49 (1992)
Argentina 3.24 3.2 1.2 44 (1992)
Brazil 5.18 21.96 4.7 1.4 59 (1992)
India 2.78 .82 12.75 2.3 (1991) 0.9 76.1(89-91)
China 0.57 .36 1.2 0.9 61.7
S.Korea 21.7(83) 1.04 69.09 (83) 3.0 2.2 59.3
Singapore 9.51 .99 19.44 4.0 3.3 27.6
Malaysia 50.4 1.22 169.78 3.7 2.3 31.3
Indonesia 2.47 11.84 3.1 1.1 50.2
Source: ITU. Year >ook of Telecommunication 5 Statistics, various years Key: GFCF: Gross Fixed Capital Formation
TABLE 3:3
DISTRIBUTION OF GROSS DOMESTIC PRODUCT (PERCENT)
AGRICULTURE INDUSTRY SERVICES ETC.
1965 1992 1965 1992 1965 1992
Zaire 20 30 (1990) 32 33 (1990) 48 36 (1990)
Nigeria 55 37 12 38 33 25
1 Egypt
29 18 27 30 45 52
| Mexico 14 8 27 28 59 63
| Argentina 17 6 42 31 42 63
Brazil 19 1 1 33 37 48 52
India 44 32 22 27 34 40
China 38 27 35 34 34 38
S.Korea 24 8 26 45 49 47
| Singpaore 3 0 24 38 74 62
| Malaysia 28 - 25 - 47
-
I Indonesia 51 19 13 40 36 40
Source: World Bank, World Development Report. 1992 & 1994
109
TABLE 3:4
GROWTH OF MERCHANDISE EXPORTS
(Average Annual Growth Rates)
Zaire
1965-80 1980-92
4.7 -11.2 (80-90)
Nigeria 11.1 1.7
Egypt -0.1 3.1
Mexico 7.7 1.7
Argentina 4.7 2.2
Brazil 9.3 5.0
India 3.0 5.9
China 4.8 11.9
S.Korea 27.2 11.9
Singapore 4.7 9.9
Malaysia 4.6 11.3
Indonesia 9.6 5.6
Source: World Bank. World Development Report. 1992 & 1994
110
forced these countries into a corner. Exports (which are themselves
dependent on telecommunication services) were severely needed to repay
debtB leaving few resources for investments elsewhere. This may be one of
the reasons which forced Mexico toward privatization (discussed later) to
relieve the resource constraint while the Brazilian state flirted with
this idea atleast until President Col lor was removed from power in
November 1992. President Cardoso's administration in 1995 began to
consider constitutional reform to make way for private investment in key
sectors such as petroleum, mining and telecommunications.1 0 in any case
the rate of telecommunication modernization has been significantly faster
in Mexico than in Brazil. Mexico offers evidence for how the severity of
the economic crisis often determines the high intensity of pressures for
change (Proposition 1). In Mexico's case, international pressures played
a key role in economic reform (including telecommunications) which
followed the debt-crisis.
STATEMENTS OF INTENT
Information policies making telecommunications a priority in developing
countries in the most rudimentary form consist of statements of intent by
government leaderb to modernize the telecommunications infrastructure.
This was the case with many African countries until the late 1980s. The
Tanzanian government had declared its intent "to review the regulatory
framework and to define sector objectives more clearly” whereas in Uganda
interest was beginning to be "expressed in institutional strengthening and
in reviewing the ways in which the sector is managed and operated."1 1
While African states may have moved marginally toward waking up to the
importance of telecommunications, they lack the political will, resources
1 0 The Wall street Journal. Jan. 30, 1995. p. A20.
1 1 Wellenius, Bjorn. "Beginnings of sector Reform in the Developing
world" in wellenius et al. 1989: 97.
Ill
or organized pressures to move forward in telecommunication modernization,
let alone formulate comprehensive information policies. One survey of
Sub-Saharan Africa noted that in three-quarters of the region
"telecommunications organizations, policies, and services are so
unsatisfactory as to make it questionable whether the situation can be
significantly improved (or deterioration reversed) in anything less than
several decades."1 2 Furthermore, without external aid these countries
lack resources to modernize their telecommunications sectors.
While the benefits of modern communication systems
may be beyond doubt, the political will to allocate
priority to this sector is lacking. As Dr. Robert
Ouko, Kenya's minister for planning and national
development, told the [International
Telecommunication Union's] forum [held in Nairobi
in 1986], it seemed natural to place food, health,
education, transport and power in front of
telecommunications.1 3
In a few cases, however, the state may respond to powerful business
interests by providing them with specialized services which help them
bypass the local network. ThiB seems to be the case with the booming
cellular phone business and dedicated lines in Africa. In Zaire, private
businesses either communicate via cellular radio or large users like
hotels own their own private lines. other telephone links are being
provided where the business demand is high as in the lucrative
southeastern mining district of Gecamines where the microwave-based
telecommunication Bystem was expected bo provide 4000 lines at a cost of
$7 million.1 4 In Nigeria, a U.S. led consortium was spending about $500
million toward Nigeria's first cellular telephone system along with
services such as trunked radio, paging and mobile radio-based voice mail
networks.1 3 The cellular business in Egypt, used mostly by business
1 2 Guttman, 1986: 333
1 3 Williamson, Oct. 1986:60.
1 4 Los Angles Times: Nov. 11. 1988
1 3 Williamson, Oct. 1992: 18
112
people, 1b one of -the most sophisticated in Africa and the Arab world.
The business is a monopoly service of ARENTO (Arab Republic of Egypt
National Telecommunications).
PIECEMEAL MODERNIZATION
Most developing country states in Asia and Latin America recognize the
importance of telecommunications to development and now include
telecommunications among the sectors given priority in development. This
translates into enhanced financing for projects, an overhaul of the market
structure (to be explained later) and an exploration of the linkages
between telecommunications and other sectors. Some of these changes are
revealed in the difference for the figures between the early 80s and early
90s in tables 3:1 and 3:2 However, the modernization falls short on one
or more of the following counts:
— Telecommunication modernization encounters opposition within and
outside the state decision-making structure; often the telcos themselves
are opposed, slowing down the program.
— state runs in to resource constraints: capital, human resources or
technology may be lacking.
— Powerful interests within and outside the state gain from the
modernization program while many productive groups most in need of
telecommunication services get ignored.
— (Opposite of the last point) The state has to satisfy so many different
constituencies that telecommunication services are spread thin among
groups of users, resulting in no special benefits to any one group.
Brazil started off by trying to revamp its information polices to tie them
explicitly with the productive sectors of the economy but its politics
took the policies down another path. The country haB followed what
amounts to a piecemeal modernization program since 1966 when
telecommunications was nationalized and Telecommunicacoes Brasilieras s.A.
113
(Telebras) was created with the intent of integrating and spurring the
country's information sector.
In virtually all developing countries nationalized
monopolies have been created with the intention,
sometimes honest but mostly misguided, of providing
some services to the common people of the country.
With the passage of time, however, the monopolies
become entrenched in nepotism, politics, and
bureaucracy,perhaps in that order, and these breed
inefficiency, to the detriment of the end user.
Telebras has been no exception to this general
rule. shortly after the act of nationalization,
every state in the country, regardless of the
number of telephones installed in it, wanted its
own ROC, no doubt to support the "sons of the
soil.” As a result of returned political favors,
as many as 28 ROCs sprouted.1 6
Brazil began to experiment with designing comprehensive information
policies beginning in the early 1970s. Its experiments often
resulted in benefits for special interests through widespread
protection for infant industry. The Coordinating Commission for
Data Processing Activities (CAPRE) was created in 1972 to coordinate
the government's electronic data processing activities. From 1974
onwards, it started drafting the national policy on information
which from its inception involved protection of domestic producers.
The task was taken over by the Special secretariat of Infromatics
(SEX) in 1979. A World Bank study recently noted that because of
rapid technological change, the information sector is perhaps the
least suited for protection and infant-industry arguments.1 7 It
calculated that protection in Brazil may have cost $500 million
annually to users, both firms and public, in direct costs alone.
The major thrust for telecommunications came in 1976 with the state
deciding to invest $3.44 billion over the next decade. Brazilian
economy was prospering then and both the residential and business
1 6 Dutta-Roy, 1992: 2.
1 7 Hanna, 1991: 43
114
demand was high.1 8 However, the Brazilian modernization proceeded
slowly because the low telephone rates (especially local calls)
generated insufficient revenues. Telebras was used as a 'cash cow'
and the limited revenues that it generated were used for other
politically popular projects. Furthermore, Brazil's life tenured
telecommunications bureaucracy, entrenched trade unions in Telebras
and Embratel (the international carrier), and state-favored
equipment suppliers created a strong constituency for the status quo
slow modernization. User demands, international pressures and
exigencies of the debt crisis were pushing Brazilian Btate into a
corner. Before his impeachment in October 1992, President Fernando
Collor had created the National Communications Secretariat (SECOM)
to pave the way for privatization of Telebras.1 8 President Itamar
Franco was against this move. As noted earlier, President Cardoso
is considering privatization.
Indonesia offers another example of piecemeal modernization.
Telecommunications, especially through microwave links and
satellites, holds great potential for unifying a country like
Indonesia with its 13,677 islands stretching over 5,110 kilometers,
significant demand for telecommunications services exists not only
among residential users (some on waiting lists for over 7 years) but
also among the large financial and industrial businesses, and with
multinationals in Jakarta and Surabaya.2 0 Indosat, the
international carrier, introduced international data package service
1 8 Dutta-Roy, 1992: 2. The rest of this paragraph is drawn mostly
from this report.
1 9 see, Dibble: 1992 for an analysis of what deregulation would
entail for Brazil's telecommunications industry.
2 0 Bruce, et al. 1988: 438-439.
115
In 1986 and the major takers were banks, trading companies and oil
concerns.
The Indonesian state is shy of external involvement in its
telecommunication sector. For example, Indonesian state was
severely strapped for funds after the fall in oil prices and the 50
percent devaluation of the rupiah in 1978. But the fear of foreign
domination going back to colonialism argued against substantial
foreign participation and thus Indonesia did not turn to foreign
capital to address its resource crunch. Perumtel (renamed PT Telkom
in 1991), the domestic carrier, for example, finished only 50
percent of its projects during the third five year plan (1978-83).2 1
It may also be argued that the Indonesian state which rules from a
narrow coalitional base with a great degree of coercion is no hurry
to satisfy user interests. commenting on Indonesia's "state
corporatism in an authoritarian and not a pluralistic setting” one
author notes that "[P]resident Soeharto is the strong and
independent chairman of the board, the army and bureaucratic elite
are the senior partners, and indigenous capital, rural sector and
regional interest the junior partners. ' , 2 2 However, with continuing
failure to meet business and residential demand, the government
began to move toward reorganization and liberalization of portions
of the telecommunications market in 1992. Foreign projects for
Bervice provision to remote areas through satellite and microwave
were given serious consideration by the fiscal 1988-89 year.2 3
Furthermore, the Telecommunications Law of April 1989 allows for
private participation in investment to meet the "increasing demand
2 1 Lowe, 1988: 6-7.
2 2 Woo, 1988: 339.
2 3 Parapak, Jonathan. "Indonesia" in Noam, Eli. 1994: 114.
116
for new services.1 , 2 4 Privatization measures were in consideration
by 1994. All in all, the slow process of telecommunication
modernization in the country can be traced to the peculiar nature of
the Indonesian state and the inability of a wide section of producer
and consumer interests to get their demand met.
"Telecommunications in Indonesia appears quite
politicized, and the build-operate-transfer scheme
and 'soft' loans are anticipated to further
aggravate the situation. Thus, the use of private
investors to spearhead telecommunications expansion
has resulted in preference being given to
entrenched interests."a
INDUSTRIAL POLICY MODERNIZATION
An information policy which is tied specifically to user needs and macro
national objectives is termed industrial policy modernization here. At
times, the policy is itself driven by an overarching philosophical
network. France and Japan are the two most widely cited cases among
developed countries. France, which possessed one of Europe's worst
telecommunication networks, modernized with a vengeance after President
Giscard d'Estaing declared telecommunications a national priority in 1974.
The influential "Nora-Minc Report" was a clarion call for France to wake
up to centrality of computers and telecommunications in social
organization, termed 'telematique., 2 t Japan underwent a similar
reformation in its information policy. Intellectually the movement was
led by the "johaka shakai" which used an interdisciplinary and holistic
approach toward analyzing the impact of information activities in Japanese
society.2 7 Subsequently the Japanese information policy was closely
coordinated through the Ministry of Posts and Telecommunications'
2 4 ibid, p. 116
2 1 Lowe, Vincent. "Malaysia and Indonesia." in Noam, Eli, 1994:
129.
M Nora, Simon and Alain Mine: 1978/1980.
2 7 See, ito: 1981 for a good introduction to the school.
117
"gyousei-shidou' or administrative guidance.2 * Even as the principal
domestic provider NTT was privatized in 1985 and it may be further headed
toward divestiture, the Japanese telecommunication providers are strictly
regulated and industrial policy plays a big role in this.
East Asian NlCs offer examples of countries with comprehensive information
policies. Singapore, Korea and Taiwan are similar to Japan in that the
diffusion of informatics is made easier because "[A] variety of
productivity, research, standardization, extension, and marketing
institutions have been used to gather and disseminate information to small
and medium-sized firms."2 9 The East Asian NICs may in fact be the best
poised to take advantage of the information revolution because of their
diverse production bases, educated workforces, scientific potential and
their key position as demandeurs and suppliers in the global electronics
marketplace.3 0
Korea, for example, followed a sequencing strategy in its industrial
policy moving slowly along the product cycle before becoming a major
player in microelectronics and telecommunications.3 1 While Korean
industry was afforded protection, it was made to graduate and start
competing internationally. This was in contrast to India and Brazil which
did not follow a sequencing strategy and where protection seemed to extend
indefinitely. The government run R(>D institutions were furthermore tied
directly with private business. In telecommunications, this was the case
with Korea Institute of Advanced Science and Technology (KAIST), Korea
2 8 Sato, 1992
2 9 Hanna, 1991: 42.
3 0 castells, Manuel and Laura D'Andrea Tyson. "High-Technology
choices Ahead: Restructuring interdependence." in Sewell et al. 1988.
3 1 This paragraph draws extensively from Mody, Asoka. "Information
Industries in the Newly Industrializing countries." in Crandall, Robert
and Kenneth Flamm. 1989.
118
Institute of Electronics (KIET) and Korea Electrotechnology and
Telecommunications Research Institute (KETRI).3 2
The demand for an advanced telecommunications infrastructure increased
intensely after the country began moving from a heavy industry to an
electronics base. This coupled with general Korean economic prosperity
meant that there was little in the way of launching an ambitious
telecommunications plan. Whereas telecommunications share of gross
capital formation was less than 3 percent in the 1970s, it increased to
7.5 percent during the sixth economic plan (1982-86).3 3 The waiting list
for telephones which was 111,000 in 1975 and 619,000 in 1979 was brought
down to zero by 1987.3 4 Along the way the country's PTT, Korean
Telecommunications Authority (KTA) was corporatized in 1982, privatized in
1989 and a second carrier Data Communication Corporation (DACOM) was
introduced in the Korean market in 1982. "Communications had always been
perceived as an infrastructural component of industrial growth; with the
bottleneck of telecommunications that occurred in the late 1970s South
Korean policy dealt with the problem in a most effective and dramatic
fashion.n3S Korea can now boast of the world's tenth largest service
market.3 6
Along with Korean economic prosperity and the "discipline of the market
and private property"37, its domestic political institutions ensured that
3 1 KIET and KETRI are merged into one unit now.
3 3 Sung, 1989:6.
3 4 ibid, p.4.
3 3 Sullivan, 1988: 27.
3 6 Galbraith, July 1990: 28.
3 7 Wade, 1992: 312.
119
telecommunications and information policy reform flowed smoothly.3 8 Labor
does not have any access to the deciBion-making elite in Korea and
agriculture does not make any demands. Korean businesses, especially the
30 large conglomerates known as 'chaebol', organized through the Korean
Businesses Association, have functioned closely with the government's
powerful Economic Planning Board (EPB) and the Ministry of Finance in a
system which has worked to the advantage of Korean business. This does
not make the Korean decision-making structure a mouth piece of big
business. Until Jan. 1993, Korea was run on a authoritarian model and
along with the cohesiveneBS of its decision-making structure (the
President's position being paramount), the state had picked up enormous
capacity along the way along with insulation from domestic pressures. In
telecommunications, while the state is giving into pressures for further
competition, it has also been able to keep the 'chaebol' or industrial
conglomerates at a safe distance from the service market so that it does
not get saturated by a few dominant firms.3 9
preliminary evidence for Proposition 1 in this section highlights the fact
that economic necessity by itself doeB not lead to modernization and
reform in telecommunications unless those empowered by this necessity are
able to get their demands met by the Btate. Exceptions may be found in
cases where an overwhelming economic crisis (such as in Mexico) leads to
large scale reorganization of the economy. In providing telecommunication
services, states in developing countries are responding to explicit or
latent pressures from a variety of users. Those states which match these
demands with an explicit policy focusing on the productive capacities of
the economy are better suited for economic growth {Proposition 10 s 12).
This distinguishes the African states from East Asian ones like Korea,
3 8 This part builds on Haggard: 1990.
3 9 Galbraith, op. cit. p. 32.
120
Japan or Singapore. In these states, Information policy not only
prioritized the telecommunication sector but drew upon its linkages in the
economy. Such strategies were often derailed by politics or economic
criseB in states such as Brazil and Mexico.
This section also implicitly touches on the commitment made by the state
itself toward development (state 'responsibility' in the context of this
dissertation). while a detailed discussion of this will follow later, it
is important to recognize here that such notions of responsibility are
often part of the way the state responds to challenges to its legitimacy
and survival. The importance given by the Singapore state to foreign
capital as opposed to Korea and the state control over several production
interests in Korea as opposed to Brazil are all part of the equation of
state survival.
Regulatory Framework
Proposition 11 states that a regulatory structure whose decision-making
processes are not captured by state or a few interest group pressures will
benefit end users more than one which reflects these interests. A
distinction between the regulatory and policy-making functions of
governments in telecommunications is only now beginning to emerge in
developing countries (as sIbo in many developed countries). In the past
when PTTs provided all telecommunication services along with a network of
preferred equipment suppliers (or a single 'national champion'), the
government ministry in charge of the PTT was sufficient for regulation.
In fact the regulation and policy spheres coalesced. But as the industry
structure changes in developing countries to incorporate more players in
the telecommunications marketplace, the need for an agency or department
to play a regulatory role becomes strong for "detailed interpretation of
121
the [telecommunication] policy in specific cases, enforcement of the law,
and resolution of disputes."4 0
The need for an independent regulatory agency arose in Britain with the
liberalization of the equipment market in 1982. The Department of
Industry's failure to check the monopoly interests of British Telecom led
to the establishment an independent regulatory agency, the office for
Telecommunications (Oftel).4 1 The establishment of oftel and the
Telecommunications Act of 1984 which privatized British Telecom signified
that in Britain user interests won over those of the monopoly provider.
The Thatcher government headed a pro-business coalition which helped it
prevail over entrenched bureaucratic interests opposed to the
liberalization as well as the establishment of Oftel.4 2 Over the years as
the British telecommunications market continues to get more competitive,
the role played by oftel continues to increase. It is now generally
understood that liberalization is not Bynonymous with deregulation.4 3
Two conditions for British "success' in establishing an independent
regulatory agency may reveal why there are so few autonomous or semi-
autonomous regulatory agencies in developing countries. First, the user
interests in Britain were able to counter the influence of producer
interests favoring status-quo through the Thatcher administration's
decision-making structure, with its pro-market bent. Thatcher government
4 0 Nulty, Timothy and Eric schneidwind. "Regulatory Policy for
Telecommunications." in Wellenius et al.1989
4 1 Hills, Jill. "The Politics of international Telecommunications
Reform.” in Sapolsky et al. 1992:124.
4 2 Morgan, Kevin and Andrew Davis. "Seeking advantage from
telecommunications: Regulatory innovation and corporate information
networks in the U.K." in BRIE/ OECD: 1989. The authors note that "the
moBt important contribution of Thatcherism in this sector
{telecommunications] was that, for the first time, user interests were
elevated above producer interests" (p. 275).
4 3 see, for example, Noam, 1992: 11.
122
is often cited by the ideational school of thought to show how policy
ultimately results from the power of ideas. Proposition 9 of this
dissertation modifies this claim to show how ideas bolster demands made by
particular sections of society, pro-market business in the specific
british case cited here.
Telecommunications departments and bureaucracies are still very strong in
developing countries. The state, in other words, must have enough
autonomy to allow it maneuvering room to set up a regulatory agency which
neither reflects the wishes of any particular user group or service
provider •
Second, developing country states and communication ministries
historically are very centralized and not wont to give up their power to
regulatory agencies easily. The Thatcher government headed a
decentralization minded pro-business coalition in a country with a long
history of democratic rule.
A look at developing countries reveals a motley of regulatory frameworks.
A recent study of telecommunications infrastructures in APEC countries
showed only Malaysia and Philippines with independent regulatory bodies
among tbs developing countries.4 4 Most developing countries (including
others in APEC), are either regulated by the policy-making authority or an
agency closely supervised by the policy-maker. In a few cases, several
government ministries and departments act as regulators often with
overlapping jurisdictions. These categories are not mutually exclusive.
Thus, it is conceivable that while a semi-autonomous agency closely
supervieed by the ministry may have been set up, other government agencies
may algo be involved in regulation. Examples of these frameworks are
briefly reviewed below.
4 4 APEC Telecommunications Working Group: 1991.
123
INDEPENDENT REGULATORY AGENCY: MALAYSIA
Jabatan Telekom Malaysia (JTM), which was Malaysia's monopoly operator
since the 1940s became the regulator in 1984 when a public sector
corporation was spun off from the original structure. The corporation
Telekom Malaysia, known as Syarikat Telekom Malaysia (STM) until 1990,
was created with the eventual aim of privatization. JTM, sometimes called
"miniature oftel", continues to be sub-part of the Ministry of Energy,
Telecommunications and Post and it is expected to continue close
coordination with the ministry.4 1
While the creation of JTM and the privatization of Telekom Malaysia do not
resemble the British model, a few parallels may be drawn. User interests
were becoming increasingly dominant in Malaysia. After the ethnic riots
of 1969, the government launched the "New Economic Policy" (NEP) which
sought to redress the economic imbalance between Malays (Bumiputeras) and
other natives (mainly Chinese and Indians). NEP included a push to
attract foreign businesses and enhanced telecommunications expenditures.
JTM was unable to meet the telecommunications demand between 1971 and 1985
and this was one of the major reasons leading toward corporatization.
More important, however, the Malaysian state is considered to possess
considerable maneuverability due to the hierarchical ordering of its
ethnic groups which "insulate the state form the demands of organized
groups."4 6 Thus, the state decision-making structure is shielded from
undue influence from the domestically powerful Chinese capitalists or
labor which were marginalized to attract foreign businesses. The
maneuverability of the state decision-making structure and its decidedly
pro-business stance allowed the move toward the setting up of an impartial
4 1 Bruce et al. 1988: 433.
4 6 Barker Lemay, 1993: 86. crone [1993: 59] characterizes it as a
"moderately broad regime" and "the governing coalition is an attempt to
encompass as broad a social spectrum as possible while maintaining Malay
political control and a secular state."
124
regulatory agency. The ruling party also commanded a two-thirds majority
in the Parliament and many beneficiaries of the reform efforts in the
country can be ultimately traced to the interests supporting the governing
coalition.
Malaysia's (as also Britain's) experience suggests that the emergence of
an independent regulatory structure depends on the ability of the state to
maneuver (suggesting a high degree of state autonomy and capacity) and a
commitment to the reform process. once formed, however, there is no
guarantee that the regulatory body will always act impartially. Even in
Malaysia's case, the state explicitly protects the interests of the ethnic
Malaysians over those of the Chinese and Indians although the recent moves
toward liberalization of value-added services do not maintain this bias47.
MULTIPLE AGENCY REGULATION:
Regulation by several agencies is the result of the history of
telecommunications in several developing countries and might be the result
of low priority accorded to telecommunications in the past. Thus,
telecommunications departments were shunted from one ministry to another
for supervision. various regulatory combinations of ministries either
simultaneously or through the passage of time exist in developing
countries. TheBe ministries include industry, commerce, finance,
planning, transport, tourism, infrastructure and communications. A
curious situation may in fact develop as telecommunications becomes a
development priority. Ministries which might have earlier treated
telecommunication regulatory functions as a burden might now find added
incentive in being vocal about their new found politically important
preserve.
Mexico offers an example of multiple agency regulation. Ministries of
4 7 Onn, Fong chan. "Malaysia" in Noam, Eli, 1994: 153.
125
Transport and Communications, Finance, and Budget and Planning are the key
players in the regulation of the dominant provider Telmex and other actors
in the telecommunications sector. The Mexican telecommunications market
is considered to have great growth potential but so far insufficient
attention has been accorded to analyzing the strengths, weaknesses and
evolution of the Mexican regulatory model.
POLICY-MAKER AS REGULATOR:
This is the model followed in most developing countries and can take two
forms. it results in an elaborate system of political favors and
lucrative contracts where the state is not insulated from powerful
business interests. The state decision-making structure may face little
opposition in continuing the status quo and the regime legitimacy may
itBelf depend on the system of political favors that it has set up.
Brazil (until the late 80s) and Indonesia approximate this case.
The second variation comes in a less corrupt context, albeit one in which
the state is closely aligned with domestic or foreign businesses which are
favored in its regulatory and policy-making functions. Korea approximates
the first case of partnership with domestic businesses while Singapore
approximates the second case, while threats to regime legitimacy exist in
these cases, too, the Btate historically widened its bases of support by
appeals to several groups and this may account for the lower levels of
nepotism in these countries.
India's case presented in Part II is an example of a midway point between
an independent regulatory agency and the ministry as regulator. A
Telecommunications Commission was set up in 1989 to help regulate the
various organs of the telecommunications sector but its authority was
curtailed severely by all the interests involved: government ministries
which did not let go, the telecommunications bureaucracy which fought it
126
tooth and nail, and producer interests who sought to capture favors by
influencing the government decision-making structure.
This section shows that an autonomous regulatory agency does not guarantee
that all user interests will be dealt with impartially. It does seem to
suggest, however, that such an agency is necessary to ensure day-to-day
workings of telecommunication carriers as countries move toward
corporatization and/or privatization. Beyond that, as a recent ITU
sponsored study suggests, much depends on the mandate given to the agency,
its decision-making processes including the politicization and
transparency of these procedures41. It is for this reason that Proposition
11 emphasizes a regulatory structure whose decision-making processes are
not captured by state or a few Interest group pressures rather than merely
the presence of an autonomous regulatory agency. Arguably, multiple
agency regulation may benefit end users where the comparative influence of
any one agency works against the regulatory decision being captured by one
dominant interest alone. in the long-run, however, an independent
regulatory agency is the best way to ensure an institutionalized means of
ensuring that regulation is not captured by a few interest groups alone.
For example, it can be argued that even though Singapore's regulatory
system allows for economic growth, it marginalizes labor, consumers and
domestic capital and accords far too much priority to foreign capital.
Industry Structure
This section touches on five issues that are crucial in analyzing the type
of industry structures emerging in developing countries. These are:
decentralization, competition, equity concerns, transnational enterprises,
and Btate type. All five issues are explained with reference to the
explanatory variables and propositions of this dissertation. The section
4 1 Tyler and Bednarczyl: 1993. The findings do not represent the ITU
position.
127
touches on general trends. There is no guarantee that all developing
countries will fit the patterns described here though many approximate it.
DECENTRALIZATION:
Decentralization here refers to the state's loosening of control over the
monopoly provider. As telecommunications is made a development priority,
decentralization is often taken as the means to address the major causes
of the myriad problems plaguing the telecommunications sectors of
developing countries: ill-defined sectoral linkages and priorities, lack
of resources (especially foreign exchange), and poor administration and
organization.4 " The major problems, in turn, may be identified as unmet
demand and long waiting lists, underinvestment in infrastructure,
excessive infrastructural congestion and concentration of the network in
a few urban centers [see Table 3:1 and 3:2].*°
The various forms of decentralizing mechanisms used are supposed to take
care of the ultimate goal of expansion of services by making telcos more
responsive to customers (instead of government policy-makers) and help
them raise private finance for network expansion. As most
decentralizations are accompanied and/or followed by introduction of
competition in various aspects of the industry, a certain degree of faith
is placed in the regulatory discipline of market forceB.
Three forms of decentralization are discussed here: corporatization,
privatization and devolution. None of them is a prerequisite for any
other. One pre-requisite exists for all. The department of
telecommunications must exist as distinct from the department of posts.
The point is procedural but many countries have divorced the two
4 9 Wellenius, Bjorn and Peter A. stern. "Structural Change in
Telecommunications." in Bjorn Wellenius et. al. 1989.
5 0 Wellenius and stern, ibid. Bruce, Robert R. et al. 1988: 409.
128
departments simply to rationalize their planning for both and to produce
better accountability.
corporatization;
The move entails reorganizing the monopoly provider as a state owned
corporation. Limited private ownership may be allowed. It opens the way
for raising funds on the capital markets. It can also produce more
organizational efficiency if the public enterprises do not promise life
time employment as government departments do. Telecommunications
literature is replete with references to 'introduction of management
culture' (as opposed to 'bureaucratic inertia' or 'post-office
mentality').
Corporatization is not limited to developing countries. Corporations were
created out of government departments in countries such as France,
Germany, Sweden, Holland, Belgium etc. Employees in Deutsche Bundespost
Telecom negotiated to keep their civil service status91, not a surprising
outcome given Germany's corporatist decision-making structure.9 2
Some of the most closely watched cases in developing countries are
corporations now or have been so before telecommunications became a
development priority. Singapore, Hong Kong and Indonesia are examples of
the latter. Korea and Malaysia are examples of corporations created out
of government departments. Korean corporatization followed the state's
need to expand telecommunications without extending the government budget
further. Korean Telecommunications Authority (KTA) was spun off from the
Ministry of Communications in 1982. It is noted that "such a transition
was not easy, in a country where being a governmental employee is a long-
9 1 Noam, 1992: 8
9 2 DBT is now headed for privatization, termed "mother of all
privatizations," its stock value is calculated at upwards of $100 billion.
129
honored tradition, even though the separation raised the salaries of
employees transferred to KTA and created job opportunities.1 , 5 3 The
transition was a bit easier in Malaysia because of the state's ability to
appease the labor unions through favorable terms.5 4 Inspite of thiB,
Malaysian trade union leaders criticized the corporatization measures and
organized strikes and picketing.5 5
Pressures for corporatization may be ultimately traced to end users.
Korean government's efforts at meeting telecommunication demand during the
sixth economic plan and bringing the waiting lists down to zero by 1987
started with the corporatization of KTA in 1982 followed by its
privatization by 1989. while user demand in the past might have been
limited to demands for connection and complaints about tariffs, organized
pressures continue to emerge. In 1988, the computer and Communication
Promotion Association (CCPA), an organization representing 85 companies
eventually prevailed upon the MOC to relax its definition of closed user
groups to allow for relaxation of restrictions on leased lines.5 6
International pressures for liberalization of telecommunication markets
have come from Korea's domestic electronics firms, transnational
enterprises such as banking and foreign media and foreign governments such
as the 1987-88 Market Access Fact Finding (MAFF) talks with the U.S.
government during 1987-88.5 7
From the end user's point of view, however, there is little difference if
5 3 Sung, Keuk Je, 1989: 8.
5 4 Isahak, Daud bin. "meeting the challenges of privatization in
Malaysia." in Wellenius et al. 1989
5 5 Lowe, Vincent. "Malaysia and Indonesia: Telecommunications
Restructuring." in Eli Noam, 1994: 121-122.
5 6 choo, Kwang-Yung and Myung-Koo Kang. "South Korea: structure and
Changes." in Eli Noam, 1994: 305-306.
5 7 ibid, pp.306-307
130
the telecommunication provider is a government department or a public
corporation. If the degree of political control over public sector
enterprises is not reduced, they may work as inefficiently as government
departments. ThiB seems to have been the case with the three corporations
in Indonesia which have dominated the telecommunications sector: pt
Telecom for domestic services, PT indosat for international services, and
PT Inti is the preferred equipment supplier, similarly, special interests
dominate the telecommunication corporations in Brazil and its two
corporations, TelebraB and Embratel, accounting for much of the sector's
inefficiency.
This sub-Bection sheds light on proposition 2 this dissertation. Korea
comes closest to a congruence between state (supply) and user group
(demand) Interests. The Korean state's ability to meet a wide variety of
user interests came from its need to increase its legitimacy among the
growing numbers of middle income groups, the need to keep powerful
business interests (Chaebol) at a distance and, the explicit linkage
between telecommunication and Korea's growing production base in high-
technology industries (including electronics).
The unorganized nature of user interests also shows that it is easier for
user groups (clubs) to get the club good (telecommunication service)
provided by the state than to transform the telecommunications supply
structure altogether in their favor (Proposition 7). only in cases where
the economic crisis is severe or where a wide coalition begins to develop
in favor of a particular change does the state move toward a bigger
overhaul of the supply structure. The south Korean experience with urban
users, domestic producers and international interests may be then examined
in light of Proposition 8 which examines the role of a multi-club
coalition in overcoming its problems of collective action to transform the
industry structure.
131
Privatization;
The selling off of government: shares in the dominant provider may come in
two ways. It may be a gradual (though it might be contested by vested
interests) move after years of corporatization with the intent of
privatization down the road. on the other hand, the provider may have
existed as a corporation for a number of years and privatization may take
place eventually. Korea and Malaysia approximate the first case and
Mexico the second. While in Korea and Malaysia, the telecommunications
bureaucracies may have been able to forestall privatization for a while,
full privatization is likely to take place. In Malaysia it may be easier
because privatization will not take away the dominant status of STM. in
Korea, privatization was to be accompanied by competition in the provision
of basic services, a move opposed by it bureaucracy. The KTA-MOC
relations may have soured as a result. All in all, "[K]TA may be a
monopoly suffering from too much bureaucracy and inefficiency, but it has
been playing a pivotal role in meeting the government's obligation to
provide public services nationwide and also in the plan to develop South
Korea's information society •”s a The pro-market and privatization
coalition of large users, domestic and international producers and led by
Korea's powerful Economic planning Board (EPB) may be difficult to
forestall for too long.
The privatization of TELMEX in Mexico came after the debt crisis allowed
the ruling Partido Revolucionerio Institucional (PRI) party to change its
pro-labor stance to a pro-business one. starting in the 1970s, the
opposition party Partido Accion Nacional (PAM) began to widen its base of
support as business began to fear the radical elements in PRi .** PAN made
significant electoral gains in the early 80s and in the 1988 presidential
5 8 Galbraith, 1990: 32.
* Frieden; 1991
132
elections, the former budget and planning minister Carlos Salinas de
Gortari won by a 50.39 vote share which compared with PRI's past vote
shares was a marginal victory. Salinas' predecessor, Miguel de la Madrid,
had been courting business following the 1982 debt crisis inorder to boost
exports and meet debt payments.6 0 The 1988 elections allowed PRI
leadership the ability to distance itself from its traditional bases of
support. Salinas was able to 'delink' himself from PRI further and bring
in a more market-oriented technocracy.6 1 such delinking is analogous to
Waterbury's concept of "change teams" mentioned in the last chapter.
Times of economic crisis, Waterbury notes, allow for the heads of state to
bring in "technocrats with few or no links to the political arena" who
help the Btate make a shift in economic policy. In terms of Mexico, we
can now modify a claim made earlier. while the severity of Mexican
economic crisis did lead to a significant change in its policies
(including telecommunications), yet they cannot be understood without
regard to the Btate decision-making structure. Mexican privatization was
then a combination of economic necessity, international interests and the
state's ability to maneuver to effect particular outcomes.
As the Mexican government began to "emphasize competition, privatization,
and an export based strategy", selling of public assets became possible
and also to generate revenues.6 2 Telmex privatization was completed on
Dec. 20, 1990. A consortium of southwestern Bell, France Telecom and
Grupo Carso paid $1.76 billion for a 20.4 percent controlling interest
6 0 Under President Portillo (1976-82) earlier, the government prodded
by big business and PAN made it easier for Mexico to join GATT.
Burgess:1993.
6 1 I am grateful to Denise Dresser of instituto Tecnologico Autonomo
de Mexico for bringing the concept of 'delinking' to my attention.
6 2 cowhey, 1991: 20. He callB the "financial bonanza" to be reaped
from such a strategy the "Nippon Dividend." (p. 24). The Japanese
government was able to reduce its deficit by the sale of NTT in 1985 and
the Japanese National Railway in 1987. See, Sato: 1992.
133
with the remaining stock going public and "Telmex has since become one of
the most actively traded companies on the New York stock Exchange."6 5
It is noted by several authors that neither corporatization nor
privatization is a guarantee for efficiency. Public sector corporations
may perform just as well as private ones if the degree of political
control over them is lessened.6 4 while Singapore may seem to provide
such an example, its telecommunication revisions often reflect the wishes
of international users than the domestic ones, and producer interests
dominating over consumer ones. Singapore 'success' with its
telecommunications sector is a lot due to the state's special commitment
to it as a critical sector. The kind of collective action by a multi-club
coalition necessary to transform the supply structure (Proposition 8) may
be quite difficult in Singapore's case. Singapore's experience is
difficult to generalize.
It is also argued that private monopolies can mimic a public monopoly
provider and privatization may change nothing.6 5 Quite obviously,
privatization can not be treated as an end in itself. In reality, it is
often accompanied by competition in its own spheres of influence or its
future operations. Finally, the expectations of private shareholders are
different from those of government ministries and an inefficient private
monopoly, excepting a total market failure, may face more incentives to
change.
Devolution:
Devolution or division of the monopoly provider is a decentralizing
mechanism as it devolves spheres of influence on to local governments and
6 3 Luxner, Feb 1992: 23.
6 4 Duch: 1991.
6 5 Melody: 1992
134
areas. In reality, few examples of such a move exist unless historically
local telcos existed or there is strong federal structure with local
powers of influence which can challenge the decision-making structure at
the center. India and Indonesia both had plans on paper to divide their
domestic monopolies in to several regional providers but opposition from
the bureaucracies have made the move impossible until now.
Brazil, on the other hand, may be the best suited for devolution.
Telebras is the holding company for 28 local telcos although the status of
Telesp, Sao Paulo's telco, iB first among equals.6 6 President collor's
privatization initiative called for creating seven regional carriers out
of the 28 telcos. This move may be still possible and may even make for
easier privatization later.
The privatization of monopoly provider Entel in Argentina also resulted in
its division into two carriers. This is partly due to the fact that the
Argentinean federalist structure has strong provincial governors and
national Presidents are not as strong as they are in countries like
Mexico.6 7
Eventually, then the state's intent to devolve power depends on its
ability to cater to provincial demands in the maintenance of its
legitimacy (Proposition SB). Brazilian state's resistance to devolution
might be linked to its fear of giving up its power and legitimacy.
6 6 Sao Paulo accounts for 60 percent of the national telephone
traffic.
6 7 Cowhey: 1991. "Presidential and federalist systems have much
harder times with policy coordination at the national level, aB a general
rule.”
135
COMPETITIONS
The preceding section shows the difficulties associated with trying to
decentralize the structures of monopoly providers. introducing
competition would seem to be even more formidable. However, limited
competition has been possible in three major cases: competition in
specialized and value added services, competition in equipment
manufacturing, and limited common carrier competition.
competition in value added and specialized services:
Dominant providers are jealous guardians of their turf but they are
vulnerable where their turf did not exist historically. This may be the
case with specialized services such as cellular phones or value added
services such as value added networks (VANs). in a few countries
competition has been introduced in such services. Market entry by other
firms may be strongly challenged by the dominant provider but
countervailing pressures may be at work here.
First, with rapid technological change the dominant providers have been
unable to shield themselves with the 'natural monopoly' argument,
specialized and value added services may be provided by alternative
operators without damaging or taking away the economies of scale of the
dominant providers traditionally supplied services (Proposition 9). The
challenge to the dominant providers will come indirectly. For example,
"[Tjechnology is increasing capacity so rapidly that overlay services as
a group collectively soon will pose a challenge to the core monopolies of
the public telephone network.nH In Malaysia, privately owned Celcom Sdn
Berhad and Sapura Holdings have emerged as major competitors to Telekom
Malaysia for cellular and radio-paging services.
In many cases, the provider may itself lease lines for shared use by
M Cowhey and Aronson, 1993:ch.7
136
closely aligned user groups, whether or not this group can then resell
unused capacity or other services along this network remains a hot issue
in these countries. Both Korea and Indonesia, for example, allow shared
use but very limited resale. As noted, large users were able to move the
Korean state toward relaxation of leased line regulations while the
Indonesian state is able to resist these pressures.
second, many of the specialized and value added services are strongly in
demand often by powerful business or state interests. Opposing well
organized large users with access to the decision-making structure is
often far more difficult than disparate and unorganized residential
users.6 9 No surprise, therefore, that cellular business has boomed all
over the world and finds a strong constituency among business users.
Powerful state ministries and user interests in even a strongly
centralized state such as China are beginning to wrest control away from
the Ministry of PostB and Telecommunications (MPT) .7 0 This is the case
with the Ministry of Electronics Industry (MEI) for equipment
manufacturing. Large users, such as China's domestic airline, are also
setting up private networks. "The MPT has been working hard to defend its
monopoly position. However, opposition from a few powerful ministries,
including the ME, Railways, Electric Power and other large users, opens up
the possibility that the state Council may soon introduce competition in
telecommunication services.1 , 7 1
69 The point applies beyond specialized and value added services.
"The key to the political economy of these large customers was the
concentration of purchasing power in the hands of the largest companies
and government agencies... .Because their numbers are small and the
significance of their purchases is rising for the overall operation, it is
growing easier to organize these customers for political action." cowhey
and Aronson, 1993:7.9
70 Tan, Zixiang, 1994.
7 1 ibid, p. 178.
137
Third, with globalization of economic activity, specialized and value-
added services offer the best opportunity for transnational enterprises to
get into developing country markets. They are another powerful interest
group in this change. Global conglomerates may be found in these niche
markets in developing countries, all hoping to build on their success or
find a foothold in these markets. For example, Northern Telecom and
Motorola are competitors in the Mexican cellular market. The U.S.
partners in the Brazilian cellular consortia include Motorola, AT&T,
Ameritech, BellSouth, Bell Atlantic and GTE.7 2
Competition in equipment manufacturing;
Technological change and pressures from alternative suppliers (especially
foreign firms) are at play here. Some of the first challenges to telco
monopolies globally came from equipment manufacturers. The cost of entry
in terminal equipment markets is especially low and this was one of the
first markets to be liberalized.7 3 The story is not any different in
developing countries. In Indonesia, Siemen's was one of the first foreign
entrants to produce digital telephone systems and local firms produced
more than one-fifth of the transmission equipment and over 50 percent of
the telecommunications cable by 1988.7 4 In a few cases foreign
governments have taken up the cause of its equipment manufacturers for
market liberalization. This was the case with the U.S. initiated Market
Access Fact Finding (MAFF) talks with Korea in 1987-88 with the U.S.
pressing for liberalization of the equipment market. U.S.'s Electronic
Data Systems corporation along with Korea's Lucky Goldstar is one of the
biggest customers for DACOM, the second major carrier in Korea. Equipment
markets more than any other offer the best argument for incentives offered
7 3 Dibble: 1992.
7 3 Aronson and cowhey, 1988: 27.
7 4 Williamson, 1988: 44
138
to clubs to try to capture a portion of existing monopoly markets in
telecommunications (Proposition 9).
Limited common Carrier competition:
There are two variations here. First, in many cases historically there
are either regional carriers which provide indirect competition to each
other or they may be separate carriers for domestic and international
services and they may view each other as potential competitors, often,
the international carrier provides better services and sets the standards
for efficiency. This is the case with both Brazil's Telebras and Embratel
and Indonesia's PT Telecom and PT indosat. Additional competition comes
in Brazil from the 31 companies included in the Telebras umbrella. Both
Brazil and Indonesia have further plans of creating regional carriers.
Four are planned for Indonesia and seven in Brazil.
Korea has followed the example of many developed countries in nurturing an
alternative carrier to provide competition to the dominant carrier.7 1
Data Communications Corporation (DACOM) was licensed by the government
along with the corporatization of the KTA in April 1982. One third of
DACOM iB owned by KTA and two-thirds is held privately. It was originally
commissioned to provide data services over leased lines from KTA. It was
allowed to Btart offering international voice services in 1990 and may
soon Btart offering domestic long-distance services. DACOM growth has
been bitterly opposed by KTA whoBe relations with the MOC have Boured over
the past decade. A new carrier was expected to enter the mobile
communications market in 1994.
The Korean duopoly model maybe the exception than the general rule in
7 1 Relevant developed country cases are Britain and Japan. Of tel
encouraged the market presence of Mercury which acts as a competitor to
British Telecom. in Japan, MPT encourages and protects new entrants,
especially to reduce NTT'b monopoly power.
139
developing country service markets. A more likely scenario is an
oligopolistic market with a dominant provider and several others providing
and competing for value added and specialized services.
EQUITY concerns
The preceding sections with their analysis of special and vested interests
and the efficacy of meeting business demands may be taken to mean that
telecommunication monopolies are woefully unprepared to meet social equity
concerns. On the contrary, in theory atleast, the developing country
telecom monopolies were run as PTTs in the name of social welfare. Cross-
subsidization and cash cow mechanisms were meant to ensure this outcome.
Long-distance rates subsidized local rates, the assumption being that the
average user needed to make local calls whereas the business users made
long-distance calls. Urban areas subsidized rural areas. Revenues
generated in urban areas were used for network expansion in rural areas.
Furthermore, rates of return in telcos being high, extra revenues
generated could be cream-skimmed and used for other development projects.
In reality the picture was different. Telephones were owned by the elite
and network expansion into rural areas seldom took place. 50 percent of
Indonesia's phones are in Jakarta. Sao Paulo accounts for 60 percent of
Brazil's telephone traffic. Resource allocation into other projects from
revenues generated by telcos went to projects more according to political,
rather than economic, coBt-benefit calculations.
Meeting social obligations through provision of telecommunications
services is tied up with arguments about state legitimacy developed in
chapters 1 & 2 and the propositions which reflect thiB concern
(Propositions 6b and 8B). states being power and revenue maximizers will
provide telecommunications services to rural areas and small and medium
scale users only if doing so helps them widen their bases of support or
140
maintaining regime legitimacy. Two examples illustrate this point. The
Malaysian government depends on economically less-powerful Malays for its
major basis of support. Malays are concentrated in rural areas and in
small and medium sized businesses. Provision of telecommunications
services to these groups of users iB therefore a political priority.
Although the penetration rate into rural areas is 3.4 telephones per 100
population, this rate and the overall rate of 8 telephones per 100
population, is one of the highest among low income developing countries.
The Malaysian government plans to have 25 telephones per 100 people by the
year 2000. Korean expansion into providing universal service to
households is driven by a combination of regime legitimacy and business
pressures. It was noted earlier that residential demand and waiting lists
were high in Korea in the mid-70s. These were times of economic
prosperity for Korea and that of regime strengthening for Presidents Park
Chung Hee and Chun Doo Hwan. It was easier to meet this demand for
telephones than try to suppress it. second, MOC has slowly liberalized
its policies to allow businesses to provide data based and educational
services to households over leased lines. It is a mutually beneficial
relationship: the state, businesses and households all gain.
There is a belief among a group of scholars that competition mitigates
against equity concerns and that only a monopoly carrier with in-built
social obligations can meet universal service requirements.7 6 However,
one only needs to look at the record of PTTs to examine the poor record of
universal service. Second, and more important, the ability to articulate
equity concerns need to be placed in the larger backdrop of regime
legitimacy as argued here rather than making blanket policy
recommendations (as telecommunication specialists often do) with no regard
to the country's particular politics.
7 6 For example, see Kim, Jae-Cheol and Tae-soek Ro: 1993
141
TRANSNATIONAL COOPERATION
The purpose of this brief section is merely to underscore the trend toward
transnational cooperation in the provision of telecommunication services
and building of infrastructure among developing countries.7 7 The purpose
is to place such efforts within the context of global interdependence and
the resultant loss of state autonomy, both of which are important factors
in the context of this dissertation.
The primary reason for developing country telecommunication providers and
states to cooperate are cost factors involved in international and intra-
regional links. Thus, many east asian governments have invested jointly
in submarine cable systems. The ASEAN optical Fibre Submarine Cable
Network (AOFSCN) is an ambitious project which started by connecting
Brunei with Singapore in 1991 will not only connect ASEAN countries but
also connect with networks in neighboring countries.7 * Africa's microwave
and satellite based project 'Panaftel' is an ITU based idea launched in
1973 to cover all of Africa eventually.7 9 The Caribbean Association of
National Telecommunications organization (CANTO) pools together the R&D
resources of the region and encourages telecom technology transfers.*0
Transnational cooperation in high-cost projects should not be taken to
revive the economies of scale and high-cost based natural monopoly
arguments for several reasons. First, from a strategic aspect it may mean
giving up a part of national autonomy rather than preserving it through
7 7 Space limits a full discussion of the causes and consequences of
transnational cooperation, a hot subject for scholarly research currently.
Two excellent discussions, although in the context of developed countries,
are: Cowhey and Aronson: 1993, Sandholtz: 1992.
7 1 see Williamson: Sept. 1992 for an analysis of other Asian links.
7 9 Hebert: 1986. Also see Bender: 1987 for a brief summary of
prospects for African telecommunications reform and cooperation
1 0 Duncker: 1993.
142
promoting national champions as was done with natural monopolies, second,
sharing costs may be a rational strategy because it allows for sharing of
costs instead of a monopolist footing the bill. Third, it comes in the
context of global interdependence rather than national isolation and
champions of the natural monopoly era.
Finally, transnational cooperation in telecommunications is not new. For
example, Intelsat and Inmarsat providing satellite based services are
globally owned and operated. ITU is one of the oldest surviving
international institutions. Transnational institutions once formed can
themselves act as international interests which impact upon the state
decision-making structure. Thus, ITU's recent carefully crafted moves
toward reevaluating the monopoly role played by PTTs will definitely lead
to the removal of international legitimacy for these state-run dominant
carriers. Transnational organizations may also lead for a greater voice
for users as at an international level a particular state's decision
making procedures might or might not hold clout. The emerging free-market
oriented GATT regime in telecommunications effects this as it seeks to
replace the PTT dominated regime.8 1
CATALYTIC VERSUS DYSFUNCTIONAL STATES:
Given economic necessity and the existence of technology and ideas to
empower clubs and coalitions, telecommunications service provision reBultB
form the particular state type. As noted earlier, catalytic states will
meet the demand for services. The following analysis touches in detail on
propositions 2 6 3 of this dissertation.
Catalytic states can maneuver and be responsible and play a dirigiste role
in shaping future preferences. Korea and Singapore are examples of such
states. Both states are strong enough in terms of their resources and
8 1 Aronson t cowhey: 1988, Cowhey: 1991.
143
hold over society without being controlled or beholden to any particular
interest group giving them considerable maneuverability to arbitrate
societal preferences. While Singapore follows an outward oriented
development strategy which favors international over domestic capital,
foreign capital does not dictate Singapore's internal politics. The
telecommunications sector itself remains state run. similarly, while the
Korean state protects domestic over foreign capital, the state makes sure
that the 'chaebol' do not gain too much in political strength. The
Economic Planning Board deliberately sought to prevent monopoly interest
through the workings of the Chaebol during the period of rapid growth and
deregulation in telecommunications.
Both Singapore and Korea designed comprehensive policies which made
telecommunications a part of long run development strategy. Singapore's
drive to become an 'intelligent island' is closely tied to its status as
an entrepot and the desire to remain an important financial center. Its
"second industrial revolution" implemented in the 1980s emphasized
services and high-technology and relied on information technologies to
effect the transition.8 2 Korea's drive in telecommunications was
similarly guided by the impetus given to its electronics industry in the
19808. 1983 was singled out by the state as ushering in "the period of
the development of the information industry."8 2
The results are impressive in both states. Tables 3:1 and 3:2 show that
both countries stand strong by any standard indicator. Telecommunication
densities are high and waiting lists non-existent. while labor was
marginalized in both cases (and also the agrarian sector in Korea), the
state has focused on meeting the demand from middle income groups to widen
8 2 Kuo, Eddie C.Y. "Singapore" in Eli Noam, 1994: 265.
8 2 Quoted in choo, Kwang-Yung and Myung-Koo Kang. "South Korea:
structure and changes" in Eli Noam, 1994: 299.
144
their bases of support. The efficiency of the telecommunications sector
itself as revealed by telecommunication staff per 1000 lines is
impressive, showing them to be two of the most efficient among developing
countries.
Mexico and Malaysia come close to being catalytic states. In Mexico's
case, the chief element driving change was a deep seated economic crisis
and change was ushered in fast. Regulation and information polices are
still catching up with the transformations in the industry structure. The
state's commitment to development with an outward oriented strategy will
in the future guide future telecommunication reforms. The Malaysian state
was able to impose its agenda because of its political strength but much
depends on itB ability to shuffle the various ethnic groups in society.
However, in both cases, the telecommunication indicators come close to
those of Singapore and Korea (see Table 3:1).
Dysfunctional Btates are either special interest driven or predatory.
China, Indonesia, Brazil are examples of special interest driven states.
Most of Chinese telecommunications efforts benefit powerful ministries in
the polity and an influential group of large users. Indonesian
telecommunication contracts have an amazing way of finding their way in
the hands of President Soeharto's family and friends. Brazilian
telecommunication benefits large users and transnationals. Productive
sectors of the economy were favored even by catalytic states noted above.
The difference here is that other sectors are completely ignored because
of the hold of special interests over the state. overall,
telecommunication densities are low and waiting lists may be high. The
telecommunication sector is beridden with inefficiencies. Comprehensive
information polices of the sort found in East Asia are lacking. In
Brazil's defense it may be mentioned that whereas the state has sincerely
tried to design comprehensive information polices, its efforts were
145
successively derailed by special interest or the unstable political
system.
A predatory state is the worst case scenario. The state is strong and
autonomous but lacks the will or the ability to meet societal demands.
Many of the African states (see statistics for Zaire in Table 3:1) meet
this scenario. A few users might benefit from state handouts but there is
no consistency in policy, regulation or long-term plans for an industry
structure.
CONCLUSION:
Propositions 5&6 can be used to highlight a few of the arguments developed
in this chapter. The state remains a powerful actor in developing country
politics. Not only is it in a position to design comprehensive
information policies and regulations, it can do the opposite. As in the
case of Zaire (outright rejection), Malaysia (preferential treatment),
Indonesia (nepotism), Korea (controlling big business), Singapore
(marginalizing domestic capital), it can use a number of instruments to
curtail membership and provision in the supplying a club good like
telecommunications. (Proposition 6A). The flip-side of this analysis
means that pareto optimal conditions will seldom prevail (Proposition 2).
The picture, however, is not so static. Pressures from user clubs and
their coalitions can lead to enhanced supply or transformations in the
supply structure. Even in communist china pressures from influential
large users and powerful state ministries is leading to market oriented
reform in telecommunications. The case in not different in any of the
other developing countries examined in this chapter (Proposition 5).
146
PART II
INTRODUCTION
[THE INDIA CHAPTERS: 4-8]
Part II evaluates the political economy of the Indian telecommunications
sector. The Indian state is conceptualized as one falling between
catalytic and special interest driven. Even though the Indian state
maintains considerable maneuverability, its responsibility is often marred
by its own struggle to survive or by the lack of synergy with the various
users and other interest groups in society (similar to the Brazilian and
Chinese cases in the last chapter).
At independence in 1947, India favored a government-led Import
Substitution Industrialization (ISI) strategy. ISI was supported by the
coalition which led the nationalist movement against the British. An ISI
strategy was seen as the best way for India to rapidly industrialize and
central planning was deemed essential to coordinate and guide the
development goals of disparate sectors.
During the 1950s, the ISI strategy placed telecommunications among the low
priority sectors perhaps because of the elitist and marginal roles
telephones played in the colonial period. Telephones during the colonial
days remained limited to a few cities and lubricated the exploitative
control of the British business houses. At independence, the small
domestic private sector, mostly limited to consumer goods industries, did
not contest the state's role in running the telecommunications sector.
The Department of Posts and Telegraphs provided telecommunications
services and two public sector corporations, Indian Telephone Industries
(ITI) and Hindustan Cables Limited (HCL), were created in 1948 and 1952
respectively to manufacture telecommunications equipment.
Chapter 4 traces the development of telecommunications and the political
147
economy of the Indian state during the colonial period under British rule
and provides the historical backdrop for the dissertation. This colonial
period is important for two reasons. First, the model of
telecommunications adopted in independent India was shaped by and
reflected the colonial experience. The legal framework of
telecommunications remains 'The Indian Telegraphs Act, 1889,' and itB
precursor 'The Electric Telegraph Act, 1854.' second, the origins of the
coalition which supported state-led ISI lie in the colonial period. The
period helps explain support for ISI in the 1950s. Moreover, the
historical reference points for the explanatory variables of this study
are rooted in the colonial period.1 The chapter helps clarify the factors
in the colonial past which continue to shape the present.2
Telecommunications in poBt-independent India is inextricably tied to the
progress and failures of the ISI strategy. Economic growth was slow and
state involvement in the economy was riddled with inefficiency, vested
interests and unmet priorities. ISI strategy is import intensive, but the
lack of priority given to the export sector resulted in foreign exchange
shortages and consequently economic crises. over the years the
nationalist coalition weakened and fragmented, both within the society and
the state. Pressures on the state to either move away or revise the ISI
1 This is especially important in the context of this dissertation
which includes institutional variables. For example, the dynamic
development of state maneuverability and responsibility in India is
delineated historically to understand past policy as well as to make
predictions and policy recommendations for the future.
2 Such historical analysis is important methodologically, too.
Stanley Hoffman's [1977: 57] caveats about the academic discipline of
'International Relations' in the U.S. apply equally well to all social
sciences. He writes that the "quest for certainty" has made for
"premature theoretical formulation" and that there is a "preponderance of
studies dealing with the present." The latter, Hoffman writes, "leads hot
only to the neglect of a wealth of past experiences — those of earlier
imperial systems of interstate relations outside Europe, of foreign
policy-making in domestic policies far different from the contemporary
ones — but also to a real deficiency in our understanding of the
international system of the present."
148
strategy came from: (i) the private sector which felt locked out of
investment opportunities which the state controls and owns, (ii) the
services sector which since the 1950s usually played second fiddle to the
industrial/manufacturing sector, (iii) agrarian groups which gained little
from the urban oriented ISI strategy, and (iv) the urban middle-income
groups dissatisfied with the slow growth and provision of goods and
services. Despite these pressures, the chapters 5 & 6 show, a counter
coalition within the state which might replace the weakened consensus on
ISI has not emerged. Chapter 5 specifically examines the political
economy of the Indian state in the post-independence era. It provides the
'macro' backdrop for the telecommunications sector and provides evidence
for economy-wide changes pursued by societal coalitions (Proposition 8).
Chapters 6-8 provide the evidence for the majority of this dissertations's
propositions in India's case. They attempt to show overall how the state
oscillates between being catalytic and dysfunctional in the Bupply of
telecommunication services. Chapter 6 examines how the inefficiency of
the existing telecommunication sector led to demands by major UBers and
manufacturers. It then turns to examining how the Indian state made
telecommunications a development priority in the mid-1980s and the major
regulatory and policy decisions changes which followed resulting in
piecemeal modernizations and regulatory reform. Chapter 7 looks at the
changes which came in the provision of services during the seventh plan
period (1985-90). chapter 8 discusses the liberalization of the
telecommunications equipment market during the same plan period. Part n
conclusion summarizes the findings of the India chapters.
149
CHAPTER 4
"SUCH AN ENGINE OF POWER":
TELECOMMUNICATIONS FROM 1851-1950'
Introduction
This chapter develops three themes. First, the period 1851-1950 was
marked by the penetration of the telegraph to almost all parts of India.
The telegraphs (along with railways) helped the British institute a
centralized means of administrative control and catered to British
mercantilist interests. As in the last chapter, it shows how important
telegraph was to the maintenance of economic and political administration
in the colonies (validating proposition 12 for colonial times even though
we must substitute economic exploitation for development). By contrast,
the telephone introduced in November 1881 wsb perceived as an elite item
by the colonial government and its Bpread remained limited to a few major
cities. Centralized administrative control and perception of telephones
as a luxury item were two legacies of the colonial past which continued in
to the post-independence period.
The second theme of this chapter is the exploitative British colonial
policies that led to the rise of the nationalist movement. The
nationalist movement coopted the domestic merchant class in its ranks and
emphasized 'Swadeshi' (buy and produce Indian goods) which served as a
precursor to the ISI Btrategy. In the telecommunications Bector, ISI
accorded the Indian state the exclusive control and privilege of providing
telecommunication services.
The nationalist movement was led by the Indian National Congress (INC),
1 Although India became independent in 1947, it remained a British
dominion until 1950 with the British Viceroy serving as the head of state.
Thus the period 1947-50 is dealt with in this section.
150
which emerged after independence as the Congress party.2 The congress
party remains the dominant political force in India today. The roots of
the congress party decision-making structure which would impact the
development of telecommunications in post-independent India are traced.
Last, the origins of the Indian bureaucracy which, arguably one of the
chief obstacles to economic reform in India is noted.
The Developsmnt of the Telegraph in Colonial India
The Revolt of 18573 against the East India Company by sections of the
North Indian society touched off a period of consolidation of British rule
in India. The telegraph and railways aided this consolidation and
increased British administrative control. The East India Company saw its
advantages soon after the invention of the telegraph.
The introduction of telegraphs began in 18514 connecting the headquarters
of the East India Company in Calcutta with Diamond Harbor, a distance of
50 kilometers.3 Map 1 shows that by 1855, telegraph routes traversed the
major administrative centers of control. By 1857, there were 6,800
kilometers of telegraph lines connected to forty-six receiving offices6.
2 The term 'Indian nationalist movement' is the colonial counterpart
of the 'nationalist coalition.' The movement for ousting the British
directly gave birth to the post-independence coalition which gave wide
legitimacy to the Indian state for its policies.
3 Dubbed 'Sepoy Mutiny' by the East India Company and many western
historians, and the 'First war of Independence' by nationalist Indian
historians, I feel the term 'revolt' (being used increasingly by
historians now) is a more neutral term.
4 The same year as Western union was founded in the United states
Indian telegraphs are the oldest public utility in the world. In Britain,
at that time, it was run privately, source: shridharni, 1953.
5 Dr. William O'shaughnessey, a doctor of medicine from Ireland and
teaching medicine at Calcutta, had begun experimenting with the telegraph
in 1839. Later appointed the Director General of Telegraphs, he is
credited with introducing telegraphs in India and convincing the company's
directors in London of its usefulness in the 1850s to ensure its
expansion.
6 Source: shridharni, 1953: 21.
151
Telegraphs thus preceded the railways in India though both grew rapidly
thereafter.7
[HAP 1 HERE]
The revolt of 1857 was led by Mughal princes* and feudal aristocracy9 hurt
by economic and political policies of the East India Company.1 0 The
troops of the East India Company quelled the revolt; the telegraph played
an important role, summoning troops from far flung provinces. The rebel
soldiers destroyed 1479 kilometers of telegraph lines. Dalhousie, the
Company's viceroy in India, noting the importance of telegraph during the
revolt termed it "such an engine of power.H > > "Electric Telegraph saved
India," he declared.1 2
The Revolt of 1857 ended East India company's direct political control
7 Total length of railway lines in India in 1853 when introduced was
34 kilometers growing to 53,596 kilometers in 1950. source: Government of
India, 1990:606-608
8 Mughal rule in India lasted from 1492 to 1857 but it waB on decline
by the mid-18th century when states either broke away from Mughal rule
(and were run by Hindu and Muslim princes) or were conquered by the East
India Company.
9 A few Hindu rulers joined in. EaBt India Company's Doctrine of
Lapse, designed to seize states lacking a royal heir, was the major reason
for the Hindu and Mughal princes to join the revolt. The feudal landlords
were hurt by the Bystem of taxation which the company had introduced. The
revolt was confined to North India and even there major areas, like the
Punjab, did not join in.
1 0 See similar interpretations in Kothari [1970] and Moore [1966].
While I agree with this revisionist school of history, I think it does
miss two important factors. First, even though the revolt was limited to
sections of North India, it later had a powerful psychological impact on
the Indian nationalist movement. On the human side, it denieB the fact
that while the Mughals had settled and assimilated with the Indian
population borrowing from and adding to its traditions and was not
colonial rule, the British rulers essentially remained 'ferangis'
[foreigners] until 1947.
1 1 Quoted in shridharni, 1953: 20.
1 2 ibid. p. 167
MAP 4:1
TELEGRPAH MAP OF BRITISH EMPIRE IN INDIA
152
153
over India.1 3 With Queen Victoria's Proclamation of 1858, the task of
phasing out such control began. By 1861, India was brought under direct
British rule. As part of "Pax Brittanica", India's political and economic
interests were tied to those of Britain.1 4 The policy instrument used
within India was 'divide et impera', the British henceforth relied on
rulers in the non-Mughal princely states and the large Hindu landlords for
support. (The British were suspicious of Muslims after the revolt, a
trend which continued into the twentieth century).
A source of administrative support came from the increasing numbers of
Indians educated in the western tradition.1 3 This education produced an
army of English speaking clerks and lawyers, well versed in British legal
practices, who became loyal members of the Indian civil Service [ICS].
The education also produced the nationalist movement's political
leadership, initially a "timid annual gathering of the English-speaking
intelligentsia."1 6 Indians employed in the British bureaucracy,
especially the Indian civil service, offered no threat to the Raj. Their
numbers were small. They were pro-British and removed from Indian social
1 3 India was governed under the doctrine of 'dual control' exercised
by the British government and the East India company since 1784.
1 4 It explains why mercantilist policies were applied in India and
free trade used with regions like Latin America where the British lacked
direct political control. see, Gallagher and Robinson [1953]. They
conclude that "The main work of imperialism in the so-called expansionist
era was in the more intensive development of areas already linked with the
world economy, rather than in the extensive annexations of the remaining
marginal regions of Africa. The best finds and prizes had already been
made; in tropical Africa the imperialists were merely scraping the bottom
of the barrel." [p. 127]
1 3 The demand for western education came from Hindu reformers
themselves beginning in the 1830s. Reform minded Hindus viewed western
liberal education as a way out of the stagnation of the Hindu religion
during Mughal rule.
1 6 unknown source quoted in Moore, 1966: 372
154
life. Later they were criticized by the nationalist movement for
betraying fellow Indians.1 7
The telegraph was made a government monopoly by the Electric Telegraph Act
of 1854 to institute British administrative and mercantilist control. For
strategic reasons, few Indians were allowed into the telegraph service
during the 19th century.1 8 Telegraph continued to be the mainstay of
imperial communications until 1947. The telegraph's rapid deployment in
India was coupled with the opening of lines to London by 1865 via land
routes through Europe, it took seventeen days for a telegram to reach
India from Britain. A new line was opened under British contract by
Siemens in 1870, reducing this time to 6 hours.1 9 Before the advent of
the telegraph, ships carrying letters took anywhere from three to eighteen
months to reach Britain via the Cape of Good Hope. 'Pax Brittanica'
rested on a strong communication base after the telegraph; colonies like
India no longer remained isolated front Westminster and Buckingham Palace
for long periods of time.
The demand for expanding the telegraph infrastructure for the rest of the
colonial rule came mostly from the British administrative and mercantile
1 7 Horris-Jones [1987: 25] notee: "In a country where any kind of
government employment carried appropriate prestige, membership of the
highest civil service of all [the ICS] lifted a man into a social
stratosphere."
1 8 An interesting by-product of this was a call by many Britishers to
make telegraphs a public monopoly in Britain. An editorial dated Jan. 17,
1855 in the influential Bombay Timas and Journal of Commerce noted:
"Wherever it [telegraph] is set up it becomes the most perfect means of
communication, it modifies the arrangements of trade, and influences every
feature of society. That such an engine should remain in private hands is
repugnant to the instinctive commonsense of mankind.” [Quoted in
Shridharni, 1953: 6]
1 9 This is the same time that the transatlantic submarine cable was
completed. At the inauguration of both these cables, the viceroy of India
sent President Grant a cable in Washington D.c. from Simla, India's first
telegraphic contact with the United states, president Grant replied: HI
congratulate you upon the successful connection of your country with the
rest of the world." [shridharni, 1953 x 33]
155
Interests and the English language press.2 0 By 1948, there were 118,395
kilometers of telegraph lines and 3324 telegraph offices in India.2 1
The rising demand for the telegraph led to setting up of training centers
and production facilities in India. The heat, dust, monsoons, floods and
differences in terrain were among the peculiar geographical factors which
required 'indianization' of technology. India led developing countries in
indigenizing the technology for tropical climates. Indians also were
recruited into the telegraph service by the end of the nineteenth century.
By 1947, Indians were able to run the infrastructure themselveB.
The training centerB set up by the British produced engineers and
technicians. Telegraph personnel, including many Indians during the
twentieth century, also were sent for the major telegraph conferences of
the international Telegraph Union.2 2 This ensured that standards of
telegraphs developed in India would be in harmony with international ones,
ensuring international interconnectivity.2 3 The telegraph also was
readily accepted by rulers in the princely states who, fearing direct
British control, had earlier resisted transportation links with British
administrative centers.
2 0 Telegrams in Hindi could not be sent until 1949. Thus, the
telegraph was a powerful means of censoring and containing political
dissent. The vernacular press on which the Indian nationalist movement
relied for information had little access to the telegraph.
2 1 shridharni, 1953: 2 & 8
2 2 The International Telegraph union founded in 1865 is the precursor
of what since 1934 came to be known as the International Telecommunication
Union. For a summary of the role and development of international
organizations in telecommunications, see Codding ("International
constraints on the use of Telecommunications: The Role of the ITU") and
Easton ("International Aspects of Telecommunication operations") in Lewin
[1979].
2 3 Participation by large developing countries like India also
explains the impetus given to development aid by the ITU since the early
60s.
156
Administratively, the telegraph effected a profound change in Indian
politics. For the first time, a centralized, hierarchical means of
control emerged, first from Calcutta and then from New Delhi after 1912
when it became the seat of the Raj. This system of centralized
administrative control outlasted the Raj ended. Indeed, a highly
centralized Btate acted against the emergence of strong federalism in
India, a country often described as 'federal in form but unitary in
spirit'. In the context of this dissertation, these factors explain the
peculiar nature of the Indian state, lying as its is between catalytic and
special interest driven.
Since the 1860s, the British claimed to promote the telegraph as a public
service, tariffs were low and subsidized by the government. This may have
created a public dependence on the telegraph which made it contrary to the
public interest to cut telegraph lines. Telegraph was highly subsidized.
Indeed the Department of Posts and Telegraphs was unprofitable until the
telephones became popular in the major cities in the 1920s.
The Developswnt of the Telephone in Colonial India
The telegraph was the chief means of administrative and long distance
communications in British India. Telephones were different. Telephones
were introduced by private industry. Their use was limited to intra-city
commercial and administrative demands. In 1948, there were only 82,000
telephones and 17,600 kilometers of trunk lines in India. Three reasons
explain the slow development of telephones under private control.3 4
First, the telephone was a luxury suited to the intra-city communication
interests of business firms. The existing telegraph network already in
3 4 some of these reasons are given in shridharni [1953] and others
are based on interviews conducted with officials in the Department of
Telecommunications in India during Nov.-Dec. 1990.
157
place was more cost effective for long distance communication. Telephones
were expensive and did not work well over long distances.
Second, the British government could censor telegraph communications. The
widespread use of telephones by Indians was thus not politically
desirable. As a result, most of the subscribers were British business
houses and administrators.2 1
Third, the pomp and pageantry of colonial rule made office messengers
popular for inter and intra official communications. The telephone did
not become a popular instrument for intra-official administration
communications. A work culture in which the telephone played a central
role was an alien idea in the hierarchically controlled imperial
administrations. officials went so far as to resist telephone
installations in their offices. [Even now in many Indian offices, written
and oral messages continue to be provided this way even when a simple
phone call would suffice.2 6 Many Indians prefer to personally conduct
many types of business instead of using telephones].
2 6 For both the British and IndianB, an interesting exception (and
the importance of telephones) is provided by H.K. Gandhi who, beginning
with the 1920s, allowed himself only two modern luxuries, a watch and a
telephone. Prominent Indians had telephones beginning with the 1920s.
2 6 The lack of dependence on the telephone also reflects the way
European states in general perceived the telephone. For example, Hudson
["Toward a Model for Predicting Development Benefits from
Telecommunication Investment" in Jussawalla and Lamberton, 1982, p. 176]
notes that North Americans "use the telephone as a virtually indispensable
part of personal and organizational activities” but that this might not be
the case with Europeans and people in developing countries "that have
taken their cue from the Europeans.” in this article she also notes
[p.167] that, "a telecommunication system that allows for consultation
among and between various levels in a government agency may be viewed as
counterproductive or even a threat to the established centralized
bureaucracy," an observation which would probably hold true in many
developing countries today. On the other hand, it does seem that the peon
system did lead to intra-organizational communicational problems aB
shridharni [1953] notes instances where memos were written by senior
officials asking their juniors to discontinue resisting installation of
phones in their offices.
158
Licenses were granted to private British companies in Bombay, Calcutta,
Madras (and Rangoon) in 1881 to provide telephone services.” For reasons
mentioned above, the British government itself had little interest in
providing telephone facilities. The decision to allow private companies
to provide telephone service was due to the powerful influence of the
British Chambers of Commerce upon the civilian government in the major
metropolitan areas. Back in 1880 when the British government considered
introducing telephone service in Bombay, the Bombay chamber of commerce
lobbied for a privately run telephone system. The oriental Telephone
Company was granted permission to run the telephone system in Bombay and
subsequently other telephone companies were allowed in other cities aB
well as Bombay. The government did run a few telephone systems itself,
especially in cities where there were no privately-run telephone systems.
The foremost interest of the British in India was economic and the
influence of the Chambers of Commerce is understandable. Shridharni notes
that "the Viceroy's annual address to the Bengal chamber of Commerce was
the supreme occasion for the enunciation of imperial policies."* The
chambers of Commerce remained influential till the end of British rule,
speedy nationalization of major industries took place in the 1940s but the
nationalization of telephone companies was particularly slow because of
the influence of the chambers of Commerce.
Private ownership of telephones, their spread in major towns, potential of
private or state monopoly versus competition, royalties to government,
problems of interconnectivity etc., raised the need for coordination and
control which the government assumed. A revised legal framework provided
2 7 Calcutta was the capital of the British Raj until 1912 when it was
moved to the area adjoining Delhi which came to be known as New Delhi.
Telephone service reached New Delhi in 1912.
2 1 Shridharani, 1953: 88
159
the basis for this control. The Electric Telegraph Act of 1854 was
superseded by "The Indian Telegraph Act of 1889" which is still the legal
framework for telecommunications in India.2 9 The Act gave the Central
Government "the exclusive privilege of establishing, maintaining and
working telegraphs" except that the government can grant licenses to
private manufacturers when it chooses [Part II: 4.1]. In addition, the
government can "delegate to the telegraph authority all or any of its
powers." [Part II: 4.2]3 0
The British government reserved the power to lay trunk routes and build
exchanges to suit its needs. Thus by 1914, the little hilltown of Simla,
the summer capital of the British, had India's first automatic exchange
with 700 lines, making it the third largest network after Calcutta and
Bombay.
Table 4:1 charts the number of telephone subscribers in four Indian cities
from 1882-1951, together accounting for 60 percent of the total telephone
subscribers in India. Table 4:2 compares the telephone density of India
other countries in 1951. Table 4:3 compares the telephone density of
Bombay, Calcutta and Madras against other major world cities in 1951. The
slow diffusion of telephones in India is evident. In 1951, India had only
2 9 As defined by this act, the 'telegraph' stands for any form of
telecommunications transmission and any kind of equipment used for doing
so. see The Indian Telegraph Act, Part I: 1.3.1. The act was amended
thrice before independence and six times thereafter mainly to include
newer technologies in its wording and in 1972 to include supposed security
interests giving government the power to intercept messages.
3 0 This is an important measure because in 1985, the Ministry of
Communications by means of a simple directive was able to allow the
Department of Telecommunications the power to issue licenses to private
manufacturers of equipment, similarly, divorcing the Bombay and Delhi
operations from the department posed on legal problems. In many other
countries, deregulation/ corporatization/privatization (as the case may
be) has entailed difficult legislative debates. [see, for example, the
articles on Sri lanka and Malaysia in wellenius et. al. (1989), which
mention the difficult legislative processes along the road to deregulation
and privatization. In Britain, privatization was effected through the
Telecommunications Act of 1984].
160
168,300 out of the 74.8 million telephones in the world (even after a
spurt from the 82,000 phones in 1948). The population of India in 1951
was 361 million giving a density of 0.05 phones per 100 population, the
lowest among developing countries.
Nonetheless, telephones were the only section of the Department of Posts
and Telegraphs making profits, all of which went toward subsidizing other
activities of the department. Even during the depression period, the
1931-32 fiscal year, telephones generated a surplus of Rs. 117,916 as
against a deficit of Rs. 9,385,146 in the department as a whole.
Legacies of the nationalist movement after 1947
The limited spread of the telephone and its exclusive use by British
business houses and Chambers of commerce symbolize the economic
exploitation of India and the workings of the Pax Brittanica. This
exploitation gave widespread support and legitimacy to the nationalist
movement headed by the Indian National congress (INC). Founded in 1883,
INC brought together a group of western educated intellectuals interested
in social and political reform.1 1 INC's base of support increased as it
made British exploitation of Indian resources a rallying cry for the
Indians to oust British rule. M.K. Gandhi's unique contribution lay in
taking a largely urban movement to the Indian villages.
Three particular features of the nationalist movement and the INC which
would later impact on the development of telecommunications in India are
noted were:
1 1 The British authorities actually aided in its establishment. pax
Brittanica meant a hands-off policy in social reform issues. Formation of
INC would mean that the government could deflect such demands from itself
while believing that a handful of western educated reformers would have
little political acceptance among the masses of India.
Table 4:1
Telephone Subscribers in India f1881-19511
Pour Major Cities
(Year for which data applies given in parentheses)
I CITY 1882 1890S 1900 1910S 1920S 1951
Bombay 90 N.A. 1,600
(1906)
N.A. 6,000
(1921)
44,500
Calcutta 102 437
(1890)
821
(1900)
n.a. 10,000
(1921)
33,829
Mew Delhi
.........................
- - - n.a. 8,000
(1920)
11,844
Madras
— — * ■ -
24 n.a. n.a. 250
(1910)
1,224
(1923)
11,102
(1952)
Total number of phones in Jan. 1948: 82,000
January 1951:
Total number of telephones in India: 168,300
Telephones per 100 population: 0.05
Total population in 1951: 361 million (240 million in 1901)
Total number of phones in the four metros: 100,173
Percentage of phones out of the total in the four cities: 60%
Sources: Shridharni. [1953]. pp. 102-113. (telephone data)
Department of Telecommunications. [1988]. p. 1
Government of India. [1990]. pp. 8-11 (population data)
161
162
Table 4:2
Telephones Per 100 Population
(telephone density>
January 1951
COUNTRY No. of
Telephones
Telephone
Density
Argentina 798,391 4.6
Ceylon (Sri Lanka) 16,800 0.2
Cuba 120,668 2.2
Egypt 115,500 0.5
India 168,300 0.05
Ireland 82,031 2.7
Iran 28,620 0.2
Malaysia 23,694 0.4
Sweden 1,685,200 23.9
United States 43,000,000 28.1
Source: Shridharni. [1953]. pp. 112-113.
163
Table 4:3
Population & Telephones in Major World Cities
January 1951
CITY Population
in thousands
Number of
Telephones
Telephone
Density
Bombay 3,700 44,550 1.2
Calcutta 5,700 33,829 0.5
New Delhi 1,194 11,844 1.0
Buenos Aires 4,955 502,251 10.1
Cape Town 530 60,068 11.3
London 8,417 1,632,900 19.4
Washington DC 805 487,472 60.6
New York 7,927 3,137,405 39.6
Source: Shridharni. [1953]. p.113
164
First, the INC was able to build a nation-wide consensus on the economic
policies for an independent India. The strategy was for heavy and
infrastructural industries to be controlled and run by the state while
private capital would be mostly limited to the consumer goods market.
British policies discouraged the development of a domestic capitalist
class in India and its rankB were confined to merchants and a few
industries, notably textiles. The INC believed that for an independent
India, only the state had the resources to generate the capital needed for
infrastructural development. During the 1940s, most heavy and
infrastructural industries, including telecommunications, were
nationalized and their workings turned over to the state. Private capital
being small and unorganized, was not in a position to contest itB
exclusion from infrastructural development, but secured protected domestic
markets. The 'Swadeshi' movement, make and buy Indian products, was thus
the powerful precursor of the ISI strategy.
Second, central planning was deemed necessary for post-independence
industrial development. Many INC members were influenced by the Russian
'Gosplan' model. An elaborate central plan, the Bombay Plan, was drawn up
by 1944 "where the principle of planning was clearly accepted and welcomed
by the leading [private] industrialists."3 2 a major goal of central
planning was mdian self-sufficiency, 'Indian Telephone Industries' was
established in 1948 to manufacture telephone and telegraph equipment.3 3
As chapter 5 shows, telecommunications received a low priority in central
plans. Like the former colonial rulers, Indian planners accorded a higher
priority to telegraphs than telephones. One result was that in the 1980s
India's telecoismunications infrastructure was one of the worst.
3 2 Banerjee and Ghosh, "Indian Planning and Regional Disparity in
Growth" in Bagchi, 1988: 105.
3 3 The major center for telegraph equipment before 1947 was Karachi
which became a part of Pakistan.
165
Third, the tradition of consensual decision-making within the INC ensured
that the post-independence economic agenda was not contested within INC.
Consensual decision-making easier in the colonial period because ousting
the foreign rulers was the INC's main gaol. In practice, major decisions
were made at the national level by the Congress Working Committee (known
as Congress High command) and then adopted by the rest of the party.
After independence, this made for smooth decision-making in key issues,
which directly or indirectly affected telecommunications.
Conclusion
Post-independence telecommunications development flowed from the three
points noted above. state-led ISI resulted in slow growth of
telecommunications and other industries. The chapter provides the
historical context for the oscillation of the Indian state from catalytic
to special interest driven. The nationalist coalition's support for state
policies produced inadequate economic growth. Finally, the Congress party
continued to use consensual decision-making even as it went through
several post-independence splits and found it difficult to impose its
agenda on its rank and file. By the late 1970s, the state could no-longer
count on maintaining a broad base of support without a serious
redefinition of its economic policies, in telecommunications, it meant a
reduction of the state's monopoly control.
This chapter makes two other important points in the context of this
dissertation's propositions. First, it places user groups in
telecommunications within the larger political-economic backdrop of a
society (important for understanding propositions BA s B). second, it
shows the existence of comprehensive information polices during colonial
times in India (Proposition 12). Telegraph was the mainstay of imperial
control whereas telephones were available to British mercantilist
interests who needed them most.
166
CHAPTER 5
THE RISE AND DECADENCE OF
THE INDIAN DYSFUNCTIONAL STATE: 1950-90
The Indian state received legitimacy and support from a wide social
coalition during the first decade and a half if its existence. Its
position grew increasingly untenable following the Congress party's
decline in support after the 1967 parliamentary elections. Two sets of
interrelated factors explain the rise and the declining legitimacy of the
Indian state. The first set of factors relates to the relationship
between private capital and the state within the context of the ISI
strategy. The second set relates to the state's relationship with the
nationalist coalition which accorded the state the 'commanding heights'
role in the economy at the time of independence from colonial rule.
The first set of factors gave rise to a highly protected domestic industry
which received economic privileges from the state as well as accorded such
privileges to it. These privileges are absent in an economy which
operates on market principles approximating a Walrasian equilibrium. The
exchange of such privileges resulted in the rise of a rentier state1 with
a vested interest in continuing the status quo of protectionist policies.
While domestic private capital in India favored such protectionism, it
also has grown since 1947 when it could do little more than enter the
consumer goods industries, it now finds investment opportunities limiting
and is locked out of industries controlled by the huge state-run public
sector. The result is a dysfunction between state polices and private
1 This conception of the state is consistent with theories of rent-
Beeking developed by international economists, public choice theorists and
economic historians. In conceptualizing the rentier-state, I include not
just the loss in the social welfare function due to protectionist policies
but also the gamut of state corruption, bribes and the barriers to entry
which result in favoring certain interest groupB over others.
167
capital demands at a micro sectoral level and the emerging coalition
seeking to replace state-led development at the societal level.
Whereas the rentier state concept emphasizes the loss of productivity to
an economy, the dysfunctional state concept emphasizes the state's
motivations and means vis-a-vis other societal groups. The Indian state
is partially special interest driven some of which are within the state
itself.
The slow economic growth induced by the dysfunctional state led to a
crumbling of the nationalist coalition which at one time supported its
policies. This is apparent not just in domestic private capitalists
arguing for internal liberalization of the markets but also in the rise of
agrarian interests2 since the late 60s, increasingly dissatisfied with
state policies and the slow trickle down of economic growth. The dilemma
of Indian politics lies in the fact that even though the nationalist
coalition is crumbling, no counter coalition has emerged to fully
challenge the dysfunctional state. &11 in all, the chapter sheds light on
the meaning of catalytic versus dysfunctional state in the macro-Indian
economic context (propositions 3 6 4). It also illustrates the broad
national coalition in the economy which envelopes the telecommunication
sector (touching on proposition 8).
The analysis of the Indian state is divided into three periods. The
period 1950-67 saw the rising influence of the state in economic
activities and one in which the state's ISI policy was supported by the
nationalist coalition. The state sought to play a catalytic role in
society, state capacity during this period increased and even though the
2 The term 'agrarian interests' is used here instead of agrarian
interest groups or coalition because they are not so organized for them to
fall in the latter two categories, falling in what is often referred to as
the "unorganized sector.'
168
ISI policy was not working as expected, the state remained insulated
against any counter political and economic pressures and acted cohesively.
The economic crisis of the mid-60s tarnished this image. This period is
referred to as the 'Nehruvian state' in the following discussion.3
From 1967-84, the state's economic agenda was consistently opened to
debate by the inefficiency of the ISI policies. But ISI itself had
created strong vested interests in the form of an entrenched bureaucracy,
increased centralization of power and protected capital (especially the
public sector). These vested interests were against the discontinuation
of the ISI policy. Private capital wanted liberalization only to the
extent that it would gain access to the sectors formerly controlled by the
state. While the state kept losing its support from the nationalist
coalition, it ensured itB survival with appeals to populist interests
characteristic of Indira Gandhi's rule as prime minister. This period is
referred to as 'the license-quota-permit Raj'. State responsibility
declined while the maneuverability wavered as the state at times reflected
special interests and at others acted predatorily.
The third period, 1984-present, is marked by a state unable to maintain
its support by appeals to populist intereBtB and a Btate unable to
maintain its agenda of ISI against competing pressures. Its ability to
act predatorily continues to decline giving it less maneuverability. The
1991 liberalization program instituted by the present Narasimha Rao
government has provided market access to foreign capital in response to
international pressures. Domestic private capital, however, retains its
stronghold over protectionist regulations governing the consumer goods
3 Nehru was prime minister of India until 1964 but the policies he
instituted remained intact until the 1967 parliamentary elections. After
these elections, ISI policies under Indira Gandhi took on the character of
'bureaucratic authoritarianism' and less
that of a state enjoying a wide base of support.
169
market which is liberalizing far more slowly. This period is referred to
as the 'decadent rentier state' here.
The Nehruvian State (1950-67)
The role of the private capital vis-a-vis the state was defined during
this period within the broader context of the nationalist coalition. The
industrial policy resolutions of 1948 and 1956 while calling for a 'mixed
economy' in which the state and private capital would coexist, in
actuality assigned the dominant role for the public sector. The clearest
articulation of this program is in the 1955 resolution by the dominant
congress party to work toward a 'socialist pattern of society.'4
Increasing state involvement in economic affairs increased the power of
the bureaucracy which secured for itself the right to run the burgeoning
public sector complex in India. Private capital, while occupying a
subordinate position to state capital, Becured for itself the privilege of
catering to India's largely regulated and protected consumer goods
markets.3
The state elite which came to power after 1950 had a pluralist base of
support in India's nationalist coalition — the peasantry, private capital
and the educated middle class. This base of support and its standing at
the forefront of the nationalist movement gave to the government "a
sufficiently unified sense of purpose about the desirability of state
4 Quoted in Morria-Jones, 1987:201. in 1949, Nehru had noted the
urgency of government led industrialization and the need to catch up with
the west in the following words: "Now India, we are bound to be
industrialized, we are trying to be industrialized, we must be
industrialized.” [Quoted in Byres, 1982:135]
5 The industrial sector (public and private) accounted for only 11
percent the total employment in the 1960s. state run industries
accounting for two thirds of this employment. Source: Balasubramaniam,
1984:112.
170
intervention to promote national economic development."6 By the end of
the third plan period (1966), the state's share of total investment was 58
percent, the rest taken up by the private sector.7 The idea of a mixed
economy with the public sector playing the dominant role, as in the case
of telecommunications (though it was defined as "luxury sector" by the
1956 industrial policy resolution), was articulated in the second Plan
(1956-61).®
The civil services soon consolidated their position within the state and
were guiding, implementing and managing the state enterprises created by
the ISI agenda.9 In 1956, the Indian Administrative Service [IAS]
thwarted an attempt by the national parliament to create an 'Industrial
Management Service' with a cadre of officials trained in management
techniques to run public sector enterprises.1 0 However, Nehru's
6 Bardhan, 1984:38. Similarly, Rudolph and Rudolph [1987: 14]
characterize the period from 1952 to 1964 as that of 'command polity'
where "the state is sovereign — differentiated, autonomous and
authoritative. Command politics can orient policy toward future societal
benefits and public capital goods or toward the appropriation by state
political elites, and employees of state-generated wealth, power and
status." A second period of command politics noted by the authors (and
one which typifies to them the aggrandizement of wealth, power and status
by Btate officials) is that of 'Emergency [authoritarian] rule' under
Indira Gandhi from 1975 to 1977.
7 Balasubramanyam, 1984:116
8 "The public sector haB to expand rapidly. It has not only to
initiate developments which the private sector iB either unwilling or
unable to undertake; it has to play the dominant role in shaping the
entire pattern of investments in the economy, whether it makes the
investments directly or whether these are made by the private sector."
[Second Plan document quoted in Banerjee and Ghosh, op. cit., 1988:105].
9 Rudolph and Rudolph note: "As Nehru's coauthors and implementors
civil servants were the vanguard of the lobby for an industrial strategy,
collaborating in the creation of basic and heavy industry under the second
and third five year plan." [1987:77].
1 0 The IAS (the post colonial descendant of the ICS) is of particular
importance for analyzing the role played by the bureaucracy in the Indian
economy. It remains the most prestigious body among the All-India
Services and serves as a role model for the others, which in the case of
this dissertation would includes the Indian Telecommunications Service.
Each year 40,000 to 50,000 candidates compete for the 200-300 positions in
the IAS. Despite the IAS presence in almost every sphere of
171
leadership style (analogous to that of M. K. Gandhi) established a wide
support for state policies outside the immediate precincts of the
decision-making elite — the parliament and the electorate — and also
served to contain bureaucratic power.
Telecommunications was part of the Department of Posts and Telegraphs and,
like most other departments of Government of India at that time, its
Secretary (head of the department) came from the ranks of the IAS. The
IAS also controlled the two major public sector enterprises catering to
telecommunication equipment needs: namely Indian Telephone Industries
[ ITI ] created in 1948 and Hindustan Cables Limited [HCL] created in 1952.
Private capital while playing a marginal role in the economy strengthened
and institutionalized its access to state decision-making instruments.
As subsequent sections show, this gave the power to private sector to
obtain regulations in its favor and India's first phase of liberalization
of telecommunications after 1985 largely benefitted the private sector.
In securing such access to the state decision-making structure, the
private sector continued the legacy of the British chambers of Commerce
which in post-independent India came to be known as the Federation of
Indian chambers of commerce and industry (FICCI) and the Associated
Chambers of commerce and industry (A ccx). Like their colonial
predecessors, these chambers of commerce exercised their influence on
state policy by maintaining close contacts with the executive as opposed
to the legislative bodies of the state.1 1 in the Nehruvian State, the
administrative and economic activity, the total number of IAS officers in
1985 was only 4,284. [Goyal, 1989, p. 425-426]. In 1948, there were 800
officers and 2,600 in 1969. [Morris-JoneB, 1987:129]
1 1 "Unlike the pluralist representation of organized interests in the
united States — where congress matters — business interests in India
focus their attention on executive agencies rather than Parliament, which
plays a limited role in the formulation, choice and implementation of
policy." Rudolph and Rudolph, 1987:31-32]. while these authors are
correct in outlining the limited influence of legislative bodies in the
172
Ficci had access Ho most of the ministries, including the politicians and
the bureaucrats.
RENT-SEEKING IN THE NEHRUVIAN STATE:
There in evidence that rent-seeking was widespread in India by the early
1960s • Krueger1 2 calculates that by a conservative estimate the level of
rent-seeking in Indian society was 7.3 percent of the national income in
1964. Moreover, Bauer1 3 argued in 1961 that the licensing requirements of
Indian industry "bear especially harshly on medium and small scale
enterprises. Many of these firms are efficient low-cost producers or
distributors; but their owners and mangers do not understand the legal
position, cannot face prolonged disputes, and are easily overawed by
authority, so that their establishment and progress are particularly
hamstrung by these measures."1 4
The IAS was criticized for following a colonial style administration based
more on superior attitudes and high-handedness than on following any kind
of a social contract with the people. ThiB argument applies equally to
Indian Parliamentary form of government, I feel that the historical
evolution of the chambers of commerce during the colonial period are
squally important in describing the private capital's relationship with
the decision-making elite relationship in India.
> 2 Krueger, 1974:294. 70 percent of this rent came from the auction
of import licenses while 20 percent of it came from control over
commodities like steel, cement, coal, passenger cars, scooters, food etc.
she notes that her estimates are crude and do not include rent-seeking
from investment licensing (which is probably as important as import
licenses) for lack of data. Banerjee and Ghosh, op. cit., [1988] note
that the practice by powerful industrial houses of blocking entry in
competitive markets by obtaining all available licenses for a product
began during thia period.
1 3 Bauer, 1961: 89. see chapter IV of this book titled "The Private
sector Under the Plan" for the effect of the second Plan and the
Industrial Resolution of 1956 upon private industry.
■ 4 See also Bauer's critique [1976: 197-198 and 217-219] of Gunnar
Myrdal along similar lines. In his famous work, Aslan Drama. Myrdal had
argued that private capital can do little to lift South Asian economies
out of economic backwardness and viewed wealth maximization as being
correlated to political power and exploitation.
173
the telecommunications sector. Jagota noted in 1962 that "the IAS
inherits the power, prestige and security of British colonial society."1 5
Sovani argued that the bureaucracy comes from a social background,
(English speaking middle class), which is favorable to the structure of
the Indian political syBtem but not its efficiency.1 6
The impressive 6 percent growth rate in the manufacturing sector during
the Nehru years from 1950-63 was largely due to the success of the First
Plan (1951-56) as a result of better control over the economic surplus
without colonial rule and the recovery of Indian industry after the war.
From 1963-76, this growth rate was 3. 35 percent.1 7 The droughts in 1965-
66 and the war with Pakistan in 1965 strained the economy and by the 1967
parliamentary elections, the nationalist coalition no longer extended
whole hearted support to the state's economic agenda. It seems that the
ISI strategy backfired limiting the ability of the Indian state to
continue playing a catalytic role in economic affairs.
The failure of the third five year plan (1961-66) to come anywhere near
its goals was the biggest factor bringing the ISI strategy under question.
The third plan emphasized agriculture but the annual average growth rate
of agricultural production was -1.4 percent during this period. GNP grew
at a rate of 2.5 percent against a target of 5.0 percent.1 8 India's share
of world exports declined from 2.42 percent to 1.13 percent in 1960 and to
a minuscule 0.65 percent in 1970. Import substitution is import intensive
1 5 Quoted from Jagota, "Training of Public Servants in India" in
Braibanti and Spengler, eds 1963:57. He continues to note that, "hence it
[IAS] continues to attract young men of non-bureaucratic inclinations who
if other avenues were open might be Sanskrit poets, artists, scientists,
or successful men of commerce.”
1 6 Sovani, "Non-Economic Aspects of India's Economic Development," in
Braibanti and Spengler, eds., 1962:269.
1 7 Statistics quoted from Brahmananda, 1979:4-5.
1 8 Morawetz: 19 7 7.
174
but India's ISI did not acknowledge the role of exports until the mid-
1970s.1 9 Foodgrain shortages, the 1965 drought, inflation, foreign
exchange shortages, the war with China (1962), the war with Pakistan
(1965) all resulted in a bleak economic picture which resulted in the
postponement of the fourth five year plan for three years. Meanwhile,,
the foreign exchange crises of 1966-67, 1973-74 and 1980-81 were in part
dealt by IMF aid and increasing centralization of power and/or
authoritarian control.
Even though Gross Capital Formation as a percentage of the GNP was high
during this period (15.6 percent per annum for 1961-66) and 14.1 percent
per annum for 1966-69), industrial production grew slowly and erratically
(9.0 percent per annum during 1961-66 and 2.0 percent during 1966-69).2 0
This was tied to ISI. Lack of technology imports introduced bottlenecks,
made efficient specialization impossible and impeded economies of scale.
"The result was the loss of many opportunities and a performance for a
long time inferior to that of the average developing countries.
Particularly serious was the slow growth of manufactured exports — the
most dynamic sector for the developing countries and on in which India was
well placed for success in the 1950s.”2 1
'License-permit-quota Raj,nt 1967-84
The dysfunction between state and private capital on one hand and between
state and society on the other became entrenched during this period. From
1967 onwards the educated middle class and the agrarian population, two of
1 9 Bhagwati and Srinivasan:1975.
2 0 Morawetzs 1977.
2 1 Wolf, 1982: 12.
2 2 A popular label used to describe the result of economic policies
followed by the successive Indira Gandhi administrations between 1967-84.
175
the prominent groups in the nationalist coalition, became increasingly
dissatisfied with slow economic growth. Private capital continued to
support the state in return for favorable regulations but also exerted
pressure on the state to liberalize and to let it play a bigger role in
the successive central plane.
The post-1966 period revealB how the state gave in more and more to
special interests (both within and outside its ranks) and its struggles
for legitimacy took it farther away from a responsible pro-development
agenda. As the nationalist coalition weakened, Indira Gandhi, who became
prime minister in 1966, sought to consolidate the survival of the Congress
Party within the state by increasing populist appeals to minorities, caste
groups and members of India's diverse religions by trumpeting the cause of
'socialism, secularism and democracy'. Rudolph and Rudolph note that such
'plebiscitary politics' were a 'hallmark' of Indira Gandhi's leadership
ability.2 3 But, instead of rethinking the government-led ISI model, the
government followed, what often seemed like, contradictory economic
policies which reflected the imperatives of capturing and holding on to
power rather than attempts to restructure the economic agenda of the
government. Thus, at times the government spewed populist socialist
rhetoric (appealing to lower income groups), at times showed genuine
concern for economic reform (to get IMF loans etc.) and at other times
granted favorable concessions to the private sector. Bhagwati and
Srinivasan have noted that the state in India was never earnest about its
liberalization program. Thus, for example, they write that the 25 percent
devaluation of the rupee following an IMF loan in 1966 and the liberal
trade policies instituted were short lived as by 1968, most of the
restrictive trade policies had been reinstituted.2 4
2 3 Rudolph and Rudolph, 1987:78
2 4 Bhagwati and Srinivasan:1976
176
Indira Gandhi effectively changed the style of decision-making from one
where the elite made policy by seeking (or reflecting) a wide consensus
(as during the Nehru era) to one where top-down decision-making and
increasingly personalized politics became the rule. Rudolph and Rudolph
note that Indira Gandhi "systematically eliminated actual and potential
party rivals. She thus undid the remarkable institutionalization of the
party at the state and district levels that had been the distinguishing
mark of the congress since 1920, when Mohandas Gandhi built a political
organization unparalleled in Third World countries."2 5 Indira Gandhi
increasingly turned to a closely knit group of advisors, chosen
politicians and bureaucrats, for advise and policy-making.2 6
The 1967 election had made the imperative of rethinking state-led ISI
strategy as dominated by Congress party politics apparent.2 7 For the
first time in national and state elections, the Congress party's total
percentage share of the vote dipped. The congress party received an
average of 60-70 percent of the vote in the previous elections. It
received only 44 percent of the vote in the 1967 elections. The rest of
2 5 Rudolph and Rudolph, 1987:7. In Morris-Jones [1987: 264] words
"it resulted in de-institutionalization, not only of congress but of the
party system as a whole” as rival parties sought to capture state power by
resorting to populist politics as Indira Gandhi had done.
2 6 Rudolph and Rudolph [1967] summarize this trend which culminated
after 1980 with Indira gandhi's increasing reliance "on place advisors,
many of whom were senior civil servants. In Nehru's time, confidential
advise and deliberation on policy and politics had been the province of
cabinet colleagues, state chief ministers, the Planning Commission
members, and senior party leaders."
2 7 Other variables which are often taken into account are 1) Indira
Gandhi's highly personalized leadership style itself, 2) India's pro-
Soviet policy after 1969, 3) inability of democratic systems to survive in
developing countries. As supplemental explanations, there might be
something in each of these variables but I think that the original causal
variable for Indira gandhi to act the way Bhe did and for india to seek
soviet help was the pressure on the state to change its ISI policy. As
for the third variable (a chief proponent is Moore, 1966), it remains a
source of debate. Kothari [1970:8-9] traces the origins of thiB view to
"a variant of the judgment of [former] colonial powers that the colonies
are not fit for self-government... .one that must ultimately give way to
prophesies of doom....that something must go wrong somewhere."
177
the vote share was divided among a variety of candidates representing
various parties and thus even with a 44 percent vote share the Congress
managed to get more than 50 percent of the seats in the Parliament and a
little less in the state assemblies.2 8
However, while most of the left wing communist parties which like the
Congress party supported the state-led ISI agenda lost their electoral
shares in the 1967 elections, the pro-private sector parties on the right
— the swatantra party and the Jan Sangh (a precursor of the present BJP,
the Hindu fundamentalist party) — were able to gain.2 9 Financial
contributions by private business to the two parties helped the two
parties with their electoral gains.
The challenge from the right to the Congress — and thus continuation of
the ISI strategy and the associated 'socialistic pattern of society' —
after the 1967 election led to debate within the Congress party with right
wing members calling for a move away from ISI and left wing members
arguing for a further move toward state led socialism. Eventually the
Congress split largely along the right-left lines (even though many right
wing members opted to stay with what became known as Congress-I for
Indira).
Writing in the early years of the Indira gandhi administration, Kothari
observes: "The first generation of independent nationhood dominated by
tall and inspiring men is now coming to an end and a new generation finds
itself saddled with, on the one hand, a considerable consolidation of
2 8 statistics quoted from Morris-Jones, 1987: 199.
2 9 The swatantra party represented private business and small land-
holding capitalist fanner interests but remained a politically marginal
force before 1967. see, Erdman [1967] for the influence of the Swatantra
party and the way it sought to represent business and capitalist farmer
interests. see Kochanek [1974] for the way private capital and state
interacted in the Nehruvian state and the decade following Nehru's death.
178
state power and a general consensus on the goals of the transitional
polity, but on the other hand lacking the means, the instrumentalities,
and the necessary authority to put the power they wield to effective use
for the solution of pressing issues.n3° This assessment is only partially
correct. While state power might have consolidated, its legitimacy had
declined thus leaving it with fewer ways of imposing its agenda as Indira
Gandhi's desperate struggle to stay in power shows. In terms of this
dissertation, we see a state with declining maneuverability and with a
decreasing sense of responsibility.
Two policy decisions taken by the Indira Gandhi administration checked the
rising power of private capitalists and added to the future rise of the
dysfunctional state in India. Corporate funding to political parties was
made illegal in 1967 and major banks were nationalized in 1969. The
decision to bar corporate funding was enacted by the Congress government
soon after the 1967 election (to check the flow of funds to the right-wing
parties). The legislation did little to effect the intended outcome as
both the Congress governments and the right wing parties continued to
receive this funding and it resulted in widespread corruption and bribes
to politicians and bureaucrats.3 1 From 1967 until 198S, when the Rajiv
Gandhi administration did away with the corporate funding legislation, it
went underground. The nationalization of fourteen major banks3 2 increased
state capacity to penetrate private capital as the state began to control
most of the finance capital and its officials sat on the board of
3 0 Kothari, 1970: 4
3 1 The most famous case of this corruption during this period was in
1982 when the Bombay high court ruled that the 'Indira Gandhi Trust Funds'
were nothing but donations to the Congress-I party by businesses in
exchange for cement licenses issued by the state. see: "The Antulay
Affair" in shourie [1983]. (Shourie, a former world bank official turned
investigative journalist, uncovered this political scandal in the print
media).
3 2 The nationalizations were part of a larger an agenda launched by
the Congress party known as the 'programme for socialist action.'
179
directors of most privately run firms. combined with the licensing
requirements, powerful industrial houses could now obtain both the license
and the finance with their access to the state.
Rudolph and Rudolph note that in the absence of class politics and the
diversity of minorities in India, among several other factors, the only
way for national parties to capture power in New Delhi is by maintaining
a centrist position drawing upon several social groups for support at the
hustings. This formulation misses a tendency after the 1967 election for
a competitive market system. Counterfactually, one might argue that had
Indira Gandhi not de-institutionalized the Congress party and come up with
socialist rhetoric, India by now might have had a competitive party system
with one or more parties claiming territory on the left or right or in
between. Her success with populist politics, which most political
observers now agree was her forte, took Indian politics down the road of
vested interests, bureaucratization, rentier-state and eventually forced
the opposition parties to do the same. The recourse to a populist
centrist agenda took away from the debate on ISI versus market oriented
policies and has worked against the emergence of served to impede the
workings of federalism.3 3
Throughout these changes telecommunications remained a low priority.
Meanwhile the waiting list for telephones continued to grow in major
3 3 Rudolph & Rudolph have an implicit bias in their work favoring an
ISI strategy which makeB them overlook the populist agenda which took away
from the real debate in 1967 election. They characterize the period from
1967 to 1987 [except 1975-77] as that of demand polity which in their
words "is oriented toward Bhort-term goals; toward competitive processes
for determining policies and the public interest (e.g. voting,
deliberation, and bargaining); and toward the provision of private
goods."[1987: 212] and "In the demand polity, citizens are sovereign, that
is, the state is linked to societal values and interests by processes of
representation and accountability. Demand politics orients policy toward
satisfying short-run consumption needs, services, and input requirements
of mobilized constituencies." Given the rise of the rentier state backed
by populist rhetoric, the model in India can hardly approximate one of
"demand polity' as described by the authors.
180
cities and from mid-70s onwards large users and export oriented groups
began to ask for better domestic and international services (including
data communication networks). However, the department of posts and
telegraphs was ranked low in the hierarchy of power in New Delhi and its
officials had little access to the closely-knit group of the government
decision-making elite to try to make telecommunications a priority as a
result of the rising demand for telecommunication services.3 4 The
Minister of state for communications and the IAS officials assigned to the
department considered their appointments as unimportant for their long
term political/career goals and on their assignment to the department
suffered from a "clear the time syndrome" rather than trying to effect
positive changes.3 5 one official described the department's position
before 1985 as being that of a "pity trader" where high level politicians
and bureaucrats took no responsibility for the state of telecommunications
in the country. The state elite itself exerted little pressure on the
Department of Posts and Telegraphs to improve its efficiency internally
and its cadre of engineers and other staff came cIobb to reflecting the
attitude of its IAS overseers than opposing them.
The first non-congress government, led by the Janata party in 1977, drew
upon a loose coalition of agrarian and right-wing interests. However, "it
had probably won on a negative vote against the excesses of uncontrolled
power rather than on its own positive programmes of development through
decentralization." The Janata Party failed to build on the anti-isi
interest groups in the economy which would have institutionalized the role
of not just these groups but that of the Janata party itself.3 6 The party
3 4 Based on interviews.
3 5 Quoted from an interview.
3 6 "Its [India's] 500 million voterB are as sophisticated as the
members of any democracy anywhere — not good on details, but quite able
to get the sense and drift of major events when things go badly wrong.
This is why Rajiv's mother, Indira, got the boot in 1977.... India's
181
introduced a few liberalization measures but before they could take hold
the Janata party fell due to the infighting among its varied coalitional
parties.3 7
Indira Gandhi's congress-l returned to power in 1980 and although it
continued to uphold some of the liberalization measures introduced
earlier, the power of the bureaucracy and resistance to a liberalization
program remained unchallenged until Rajiv Gandhi's administration came to
power in 1984.
Two particular trends which have significantly influenced the political
economy of the state in India, and consequently telecommunications, since
the mid 70s are noted here.
First, the emphasis given to exports since 1977 gave rise to a demand for
telecommunication services by exporters (Proposition 1). The need for
increasing exports itself came form one of the classic dilemmas of the isi
strategy: import substitution is import intensive. Choosing to focuB on
the domestic market and industrialization also meant that India needed
imported technology in order to industrialize. This import demand, in
turn led to foreign exchange shortages. By 1978-79, exports still
contributed 70 percent of India's foreign exchange receipts but itB share
of total world exports had fallen from 2.48 percent in 1948 to 0.41
percent in 1979.
tragedy is, like many other democracies before it, that it has not always
got the direction and policies from the top its democratic impulses
deserve, when the politicians don't give an honest and inspiring lead,
the voters are able to say no, but saying yes iB more difficult, since
they have no idea what they are supposed to be Baying yes to.M quoted
from Power: May 23, 1991
3 7 A few import licenses were done away with and other incentives
granted to export oriented industries.
Table 5:1
India's Share of World Exports; 1948-1970
EXPORT 1948 1960 1970 1977 1979
India's
exports (A)
1,386 1,331 2,026 6,378 6,702
World
Exports (B)
57,189 128,275 313,860 1,127,247 1,627,030
A/B
(percent)
2.42 1.13 0.65 0.57 0.41
Figures are in millions of U.S. dollars.
Source: Wolf. [1982]. p. 18.
183
A renewed thrust on exports was needed by mid-70s presenting the policy
makers with an ever increasing dilemma. Two and a half decades of ISI
since 1950 had also eroded India's comparative advantage in its
traditional exports. Thus in 1951-52, 52 percent of the exports from
India were in textiles, jute manufactures and tea, categories in which
India clearly had a comparative advantage, with the neglect of exports,
the share of these categories fell to 28 percent by 1978-79.3 8 while the
share of non-traditional manufacturing in the total exports increased,
this growth was not as much a part of a concerted export strategy as that
of spillovers from domestic production or piecemeal approaches toward
generating an export income. Bhagwati and Desai's comment on exports
before 1970 is equally apt for later times: "The twin principles governing
production and exports could be summed up, cynically and realistically;
India should produce whatever it can and export whatever it produces.n39
The folly of this strategy became apparent as India lost its market share
in traditional exports and its bilateral agreements for non-traditional
exports (manufactured goods) with the East European markets began to fall
apart in the late 80s. in Wolf'B colorful phrase, exports were a
"marginal addendum" in India's development policy.
The search for foreign exchange resulted since the mid-70s in partial
removal of restrictions on importing technology for export needs, slow
depreciations of the exchange rate, and Bome export subsidies being given
to the export sector. Half hearted, often contradictory and slow as these
3 1 Wolf, 1982: 12. Bhagwati and Desai [1970] note that in the first
decade of isi itself (1950-60), India's share of the world market in
textiles fell from 18 to 11 percent, in jute manufactures from 86 to 73
percent and in tea from 18 to 11 percent. In the textiles market, India
was overtaken by Korea, Taiwan and Hongkong and in tea by China and Sri
Lanka* only jute faced slack world demand as it had to compete with
syntbstics in the world carpet backing industry (esp. U.S.).
3 9 Bhagwati and Desai, 1970:466.
184
changes might have been, they did result in a demand for telecommunication
services.
Second, the period from the 1977 elections onwards is also marked by the
rise of agrarian interests as a political power. The Janata party was the
first to address these concerns. During the 1980s, the power of agrarian
interest groups continued to grow. Thus, while on one hand private sector
pressed for liberalization, rural interests asked for social equity
measures and infrastructural facilities which had not reached them in the
previous plans.4 0 The Indian state is unable to contain agrarian and
labor interests with the efficiency that Korea did and its economic crisis
was not severe enough like Mexico's to allow it to marginalize many
otherwise dominant interests. chapter 6 will show how these competing
pressures affected the policies governing telecommunications. It may be
stated here that, while the liberalization in telecommunications equipment
industry benefitted the private sector, one of the major objectives since
1985 has been to provide telecommunication facilities in villages, the
latter sometimes done at the sake of ignoring the demands of large urban
users (proposition 8B).
Decadent dysfunctional state: 1984-present
The state which Rajiv Gandhi inherited in 1984 was overburdened by its
economic role4 1 , under increasing pressure by the growing middle class and
4 0 "The appearance in the late 1970s and early 1980s of agrarian
mobilizations in state and national politics undid the political
settlement of the Nehru era. The Nehru settlement had been based on a
coalition of urban and rural interests united behind an essentially urban-
oriented industrial strategy." [Rudolph and Rudolph, 1987:51]
4 1 The New York Times Magazine [April 20, 1986] noted that the
"license-permit-quota Raj" was increasingly backed by "the giant cadre of
16 million permanent officials, clerks, bureaucrats and other workers who
either run the nation's publicly owned businesses or administer the rules
of its clanking government.” similarly, Srinivasan has noted that in an
economy such as India's, burdened with decades of state regulation and
production, "a chaotic incentive structure and the unleashing of rapacious
rent-seeking were the inevitable outcomes." [Quoted in World Bank,
185
private sector to liberalize and institute measures of economic reform,
and to some extent driven by agrarian interests to provide infrastructural
facilities4 2 , employment and remunerative agricultural prices for the
rural areas. Rajiv Gandhi, however, was neither able to resolve the
competing pressures on state resources nor able to break the underlying
vested interests of the bureaucracy or protected private-capital.
Rajiv Gandhi was even less successful in trying to re-institutionalize the
Congress party and broaden the arena of the decision-making process to
include the Parliament. Decision-making on national issues remained
limited to a handful of elected officials and the prime minister's
secretariat, the latter staffed mostly by senior IAS officials. Morris-
Jones summarizing forty years of decision-making through electoral
institutions in India writes: "Whereas Nehru had relished the cut and
thrust of debate (in which he was bo effective) and had accepted close
parliamentary scrutiny of government action, Mrs. Gandhi was contemptuous
of the former and resentful of the latter, while her son in Parliament has
been ill at ease and ineffective."4 3
in terms of economic reform, the administration did cut taxes, rolled back
a few more industrial regulations, sought to revitalize domestic financial
marketB, increase domestic R&D capabilities and also decreased some of the
import regulations (for example, technology requirements) that governed
export industries. The seventh Plan [1985-90] made the first big break
with earlier plans by relying more heavily on the private sector which
accounted for almost 60 percent of the total gross capital formation
1991:38]
4 2 These include roads, electric power, drinking water etc. I have
found no documented evidence for widespread demand for telecommunications
facilities in rural areaB.
4 3 Morris-Jones, 1987:270.
186
during this period, significantly, nearly half the seventh Plan outlay
was to be spent on infrastructural facilities (energy, transport and
telecommunications) •4 4
Telecommunications was made a development priority for the Seventh Plan
(1985-90) by the Rajiv Gandhi government and moved out of the list of
"luxury" sectors into the list of "core" sectors slotted for development
thrust in 1983. However, many of these reforms only benefitted, and at
other times exacerbated, the multiplying interests of the protected
capitalist interests.4 9 still, the process of economic reform may now be
irreversible:
The 1991 World Development Report4 * notes that the
"recent experience with partial liberalization —
including relaxation of restrictions against entry
and expansion, and foreign technology
diversification — has been positive. Excessive
regulation remains. It includes barriers to
adjustment and exit, and labor rules that protect
a small number of privileged workers....These
objectives will not be achieved easily because the
government will have to overcome the opposition of
protected enterprises and the regulatory
bureaucracy. But past successes indicate that
further deregulation could attract reasonable
public support."
summarizing the legacy of Rajiv Gandhi, The New
4 4 Echeverri-Gent notes that beginning with "the late 1960s,
infrastructural bottlenecks have acted as major constraints on
development." Quoted from Echeverri-Gent, "Economic Reform in India: A
Long and Winding Road” in Feinberg et. al. 1990:108. See this paper (as
also other papers in the volume) for an excellent summary of (and the need
for) the economic reform measures taken by the Rajiv Gandhi
administration. For the politics of the reform process, see Kohli [1989].
For an analysis of the pressures by large and small scale manufacturers
for liberalization, see Kochanek [1986].
4 9 "While Rajiv gandhi appears to favor a more open economy, and the
mid-eighties witnessed an increase in foreign import agreements such as
cars and for communications equipment and other high-technology products,
the vested interests in protection of both public and private sectors are
powerful." Rudolph and Rudolph, 1987:13. Belassa, 1989:181, notes that
none of the 29 public sector enterprises targeted for sales by the Rajiv
Gandhi administration had been actually sold by 1987.
4 4 The World Bank, 1991:154
187
York Times4 7 , noted that "A bright spot in the
legacy of Rajiv Gandhi, for many Indians, is that
he created an impulse to look outward from a nation
that had always found it hard to shake the myths of
its romantic and mystical past. Not ashamed to
wear jeans and drive a fast car, he appealed to the
imagination of a new generation of Indians
impatient with the asceptism, puritanism and
zealous self-reliance enshrined in the legacy of
Mohandas K. Gandhi.
The Rajiv Gandhi administration lost at the hustings in 1989 due to
charges of corruption and kick backs paid to government officials in a
lucrative defence deal with Bofors of Sweden. But the new government, a
coalition of parties known as the Nationalist Front, failed just as the
Janata government did from 1975-77. "Gandhi's major political opponents
at the national level don't really represent radical alternatives. They
rely on the momentum of political opportunity, the search for allies, the
persuasive symbol to win votes and retain constituencies."4 The
Nationalist Front soon fell apart and a fresh round of elections, the
bloodiest and most corrupt in Indian parliamentary history showed the
extent to which the rentier state and the politicians who crave its
privileges would go to secure power.
The CongresB-I government of Narasimha Rao which was installed in June
1991 inherited an economy at the brink of an economic collapse4 9 and a
state considerably undermined in its legitimacy. India's foreign debt
stood at $70 billion making it the third largest debtor nation in the
world and in May 1991 it had only one week's worth of foreign exchange in
4 7 New York Times :May 26, 1991.
4 8 Lely veld: May 26, 1991.
4 9 A. M. Khusro, am eminent economic columnist, noted in December
1990 that "The economy is riddled with open and hidden subsidies, low and
lower interest rates, tax exemptions and investment allowances, rebates
and concessions, and cash compensations and duty drawbacks. Each such
concession brings the state and central Governments, the banks and
financial institutions, closer and closer to bankruptcy. Some public
sector banks are close to disaster." Quoted from Khusro: Dec. 16, 1990.
188
the reserves to cover its import bills and debt obligations.* The Rao
government moved quickly in terms of economic reform. Manmohan Singh, the
finance minister, (a former Director of the Reserve Bank of India and a
liberal economist) within a month of coming to office instituted strong
measures of economic reform as well as pave the way for securing a $2
billion dollar standby loan request from the IMF. The rupee was devalued
by 25 percent. The economic reform package also includes abolition of
most licensing requirements for FDI, letting foreign capital own upto 51
percent of equity [up from 40 percent earlier]. Finally, the list of
companies which are to be exclusively operated by the state was reduced.
Anti-trust legislation which created the behemoth of regulations and
licensing procedures benefitting the large industrial houses was changed
to ease the entry requirements for new domestic and foreign capital which
had always had less accesB to the state's bureaucracy and politicians.
The remaining restrictions in India comprise its rigid labor laws and the
consumer goods market which remains as protected as before. Early
reaction to the economic reform measures by foreign investors pointed out
"the country's archaic, cradle-to-grave labor policies and continuing
foreign-exchange restrictions. "3 1 To this one may add corruption of
government officials who must still be bribed.
A thorough reform of the banking sector has also not yet emerged which the
World Bank in 1990 had specifically pointed out needs privatization. The
banking sector's priority lending polices have created subsidized interest
rates with marginal or nil returns on funds.3 2 Apart from the vested
3 0 Statistics quoted from Los Ancles Times. July 29, 1991 and July
30, 1991.
3 1 Los Angeles TimeB. July 30, 1991.
3 1 A world bank confidential note leaked to the print media in India
called for a privatization of Indian banking which, among other things
noted that Indian "banks are undercapitalized, have high statutory
189
interest of large industrial houses in securing low-interest credit, the
banking sector's policies are also responsible for having spawned a
plethora of small industries (including many in the telecommunications
equipment and components) which are inefficient and thwart economies of
scale.
However, given the fact that the liberalization follows demands by several
groups and not just the whims of a few state officials, it is likely to
stay instituted. "While democratic systems like India's or the U.S.'s
frequently seem less decisive and act more slowly than authoritarian ones,
when policies are vetted and voted they have a durability that
authoritarian arbitrary moves can't match."3 3
Conclusion
A radical shift in the state's economic policy came 24 years after the
1967 election when it was becoming clear that the ISI program would not
sit well with the underlying coalition. Beginning with 1977, slow moves
outward liberalization and outward-orientation dragged on through
bureaucratic delays and regulations protecting private capital until by
July, 1991, the overloaded rentier state in India almost collapsed under
the weight of its former economic policies.
The chapter shows how anti-isi and pro-market interest groups developed
during this period (Proposition 1). second, it shows how collective
action has come about at the economy-wide level (Proposition 0).
Furthermore, while the telecommunications sector was referred to
indirectly in this chapter, the discussion does help to show the struggles
'requirements for reserve ratios and low profitability on existing assets."
Quoted from The Business 4 Political observer. New Delhi, Dec. 1, 1990.
3 3 House, Karen Elliott. Feb 24, 1995. "Two Asian Giants, Growing
Apart." The Wall street Journal.
for state legitimacy which guided state provision of telecommunication
services. This theme will be taken up in the succeeding chapters.
Finally, the chapter shows how the failure of the i s i strategy led to the
Indian state becoming increasingly dysfunctional as it got caught in its
struggles to survive (proposition 4).
191
CHAPTER 6
SLOW GROWTH & ENTRENCHED INTERESTS
IN TELECOMMUNICATIONS: 1950-85
The Blow growth of telecommunications in the post-independence period in
India is usually taken to result from a lack of investment funds.1 This
chapter will show how this was just one among the many woes contributing
to the poor quality and management of the telecommunication services
provided during the 1950-85 period. Many problems which the isi strategy
in general faced (See chapter 5) also plagued telecommunications. In
particular, the entrenched bureaucracy had little incentive to respond to
the demand for telecommunication services. This section deals with the
'lack of investment funds scenario' in telecommunications before turning
to other problems in the sector. The demand for telecommunication
services by major users since the mid-1970s vis-a-vis the economic
conditions are then examined (Proposition 1). in 1983, the Indian
government made telecommunications a development priority (touching on
Propositions 10 & 12). The last section of this chapter notes the
overarching concerns of telecommunication reform in India.
Lack of Investment Funds
From 1950 to 1985, the telecommunications sector, being classified as a
"luxury sector" by Indian planners, received little investment capital.
Table 6:1 provides a summary of the total outlays for telecommunications
in India since the first plan [1951-56], The low amount of plan outlay
becomes more apparent when seen against the investments undertaken by many
of the NICs and the other developing countries from 1980 to 1992 [See
table 3:2]. The high investment in telecommunications coincides with
rapid rates of industrialization and growth of service sector in these
countries during this period. India faced similar situation but its
investment in telecommunications remained low. East Asian countries in
1 See, for example, Saunders et al:1994 and Bruce et al:1989
192
general saw their investment in telecommunications rise as their economies
expanded through exports [See tables 3:2 and 3:4]. The comparative data
also reveal the importance of telecommunications to an outward oriented
economy, the latter being one of India's goals since the mid-70s.
chapters 4 & 5 note the general perceptions about telecommunications among
the decision-makers at the time of independence, over the years, central
planners expressed similar reservations about telecommunications, Borne of
which may be noted as following (Proposition 6A):2
The primary need of the people is food, water and
shelter. Telephone development can wait."
In place of doing any good, development of
telecommunication infrastructure has tended to
intensify the migration of population from the
rural to urban areas.
There iB a need to curb growth of telecom in the
urban areas.
Telecommunication, in any case, has no role to play
in rural economy."
Telecommunication is a consumption item
particularly of the rich. At best, it deserves the
same priority as five star hotels.
Growth of Teleeosmmnications Services (1950-1985)
The Department of Telecommunications [DoT] claims that inspite of low
investment outlays the increase in telecommunications services was
nonetheless impressive for the 35 year period between 1950-85.3 The
growth in three important indicators does corroborate this claim [See
Table 6:2] The number of Direct Exchange Lines (DELs) which exclude
multiple telephone sets such as PBXs connected to the same line has
2 Quoted in Department of Telecommunications, 1988:44.
3 DoT was divorced from the Department of Posts and Telegraphs in
1985. I have relied upon a Department of Telecommunications [1988]
publication summing up the contributions made the department since 1947.
In no uncertain terms it declares: "We, in telecommunications, are proud
of our heritage and contribution, to the telecommunications, in the face
of very heady obstacles." [p. viii].
193
Table 6;1
Total Central Plan Investment Outlays for Telecommunications
(Rs. billions)
Plan/period Total
National Plan
Outlay
Telecom
Outlay
% of Total
Plan Outlay
First Plan
(1951-56)
19.60 0.47 2.40
Second Plan
(1956-61)
46.72 0.66 1.41
Third Plan
(1961-66)
85.77 1.64 1.91
Annual Plans
(1966-69)
66.24 1.59 2.40
Fourth Plan
(1969-74)
157.79 4.15 2.63
Fifth Plan
(1974-78)
286.55 7.81 2.73
Annual Plans
(1978-80)
229.50 5.19 2.26
Sixth Plan
(1980-85)
1096.46 27.22 2.48
Seventh Plan
(1985-90)
1800.00 60.00 3.33
Source: Department of Telecommunications, 1988:17.
Telecom outlay for Seventh plan is based on
interviews (original outlay for Seventh Plan was
Rs. 40 billion).
194
multiplied 17.6 times, bringing the telephone density up from 0.05 per 100
population in 1951 to 0.5 in 1985. second, Telex (mostly used by business
subscribers) introduced in the mid-60s had 26,333 subscribers in 1985.
Moreover 187 std (subscriber Trunk Dialing or direct long-distance
dialing) routes were opened during this period and international calls (a
rough indicator of a country's business links with international markets)
have increased nearly 14 fold between 1974-85.
When the performance noted above is compared against the record of some
other developing countries, the label India earned as possessing the
world's worst telecommunications system becomes clear. India's telephone
density of 0.4 percent in 1981 was below the 2.8 for developing countries,
2.0 mark for Asia, 5.5 for Latin America and even the low 0.8 for Africa.4
The situation did not improve much by 1988 when India's density of 0.4
compared against 0.9 for Asia, 5.9 for Latin America, 0.7 for Africa and
1.5 for developing countries as a whole.5 Moreover, as Table 6:3 shows
the growth in telephone lines in India was still below levels attained by
other large developing countries. Thus, by no measure was India's growth
of telecommunications great even against the heavy odds it faced.
Pitfalls of ISX in Telecommunications
The small telecommunications outlays in India resulted from the way ISI
strategies allocate scarce resources through central planning. A broad
industrial base could not be created when resources were spread too thinly
among competing sectors, "the usual temptation being to satisfy a large
4 Saunders et al. 1983: 4-5.
5 Saunders et al. 1994: 6-7. The fall in Asian figures is probably
due to data availability for more ABian countries in Asia by 1988 which
brought the figures down. India still ranks low by either of the two Asia
figures. India's overall density remained the same as growth in
telecommunication lines waB negligible compared to its population growth.
Interestingly, government of India statistics show the density to be .5 in
1985.
195
Table 6;2
Telecommunication Infrastructure in India (1951-851
Item 1951 1974 1985
No. of DELs
(millions)
0.17 1.3 3.0
Telephone Density
(tele, per 100 pop.)
0.05 0.29
(1975)
0.50
Direct log-distance
dialing routes (STD)
nil 47 217
Outgoing
international calls
(million calls)
n.a. 0.39 5.35
Telex Exchanges nil 49 187
Telex Subscribers nil 8484 26,253
Sources: Shridharni, 1953:112-113
Department of Telecommunications, 1988:46-47
Asoka Mody. "Information Industries in the NICs."
in Crandall and Fleming, 1989: 318
196
TABLE 6:3
GROWTH RATES OF TELEPHONE SERVICE (1971-78, 1979-1988)
GNP Per Capita
1987 (US
Dollar)
Percentage
Growth Rate
1971-78
Percentage
Groth Rate
1979-88
Egypt 710 - 14 .0
Mexico 1,820 -
5.3
Argentina 2,370 - 4.8
Brazil 2.020 13.5 10.1
India 300 9.4 8.1
China 300
-
9.5
S.Korea 2,690 -
18.1
Singapore 7,940 -
7.9
Malaysia 1,800 13.8 16.1
Indonesia 450 7.7 11.2
Source: Saunders, et.al. 1983, pp.11-12
Saunders, et.al. 1994, pp.6-11
197
number of pressures and to give into institutionalized vested interests in
existing patterns of investment and capital formation."6
There is also no reason to believe that the telecommunications sector
functioned any more efficiently (or worse) than other protected sectors
under an ISI strategy. The state seldom met the demand for
telecommunication services (Proposition 2) and cited several arguments to
explain the lack of services (Proposition 6A)
ROLE OF THE BUREAUCRACY:
The telecommunication bureaucracy had little incentive to meet user
demands. The engineers staffing the department of telecommunications are
drawn from the All India Engineering Services (the engineering equivalent
of the Indian Civil Services) and once selected receive life time
employment. Chowdhary characterizes this bureaucracy as "a monopolist,
centralized and civil service oriented bureaucracy."7 He argues that
telecommunications reform in India was delayed precisely because it was
not in the interest of this bureaucracy to institute this reform and risk
losing its life time employment. A newspaper article put it bluntly as
such: "The telecom organization in the country belongs to the 40s while
it is presently trying to grapple with the technology of the 90s."1 The
resistance by this bureaucracy to economic reform in telecommunications
after 1985 is discussed later.
Telecommunications is an industry characterized by high rates of return,
but the telecommunications bureaucracy lacked the will and the ability to
stop the drain of revenues to the national treasury. The bureaucracy's
6 Kothari, 1970: 344
7 Chowdhary, "An Indian Perspective on Sector Reform** in Wellenius
et al. 1989: 109.
* Quoted from Financial Express May 12, 1989:4.
198
lacked access to the decision-making elite. The department of posts and
telegraphs was ranked low in the hierarchy of power in New Delhi and its
officials had little access to the closely-knit group of the state
decision-making elite to try to make telecommunications a priority as a
result of the rising demand for telecommunication services.9 The Minister
of state for Communications and the elite members of the Indian civil
service, the Indian Administrative Service (IAS), assigned to the
department considered their appointments as unimportant for their long
term political/career goals and on their assignment to the department
suffered from a "clear the time syndrome" rather than trying to effect
positive changes.1 0 one official described the department's position
before 1985 as being that of a "pity trader" where high level politicians
and bureaucrats took no responsibility for the state of telecommunications
in the country. The state elite itself exerted little pressure on the
Department of posts and Telegraphs to improve its efficiency internally
and its cadre of engineers and other staff came close to reflecting the
attitude of its IAS overseers than opposing them.
Most of the profits made by the department were funneled back to the
treasury and plans to expand investments in new or existing services and
facilities consistently ignored by the state's elected officials and the
national Planning commission.1 1 This is an extensive form of cross-
subsidization (referred to in proposition 6B) which cuts across sectoral
lines. Inspite of this drain, most of the planned investments in
telecommunications came from the department's internal resource. During
the First plan (1951-56), only 20 percent of the investment support came
9 Based on interviews.
1 0 Quoted from an interview.
1 1 At a more general level, this is what Aronson and Cowhey [1989]
term the 'cash Cow' model of telecommunications in developing countries
where "[T]he national treasury views telecommunications as a cash cow that
is milked for funds to invest elsewhere." [p. 8]
199
from the department's Internal resources but by the sixth plan (1980-85)
84 percent of the investment made came from internal resources, being as
high as 72 percent during the Fourth plan (1969-74).1 2
There seems to have been little effort on the part of the technocratic
bureaucracy to make an effective case with the decision-making elite to
convince the latter about the correlation between telecommunications and
development. Arguably, methods of measuring these correlations are still
being developed but from the late 1960s, there have been a wealth of
quantitative studies which provide economic measurements, it is ironic
that from the mid-70s onwards when the demand for international services
was particularly high from exporters and the service sector, the only
studies available locally in India (using Indian data) measured benefits
of telecommunications for rural areas.1 3 While this may reflect the
orientation of the state to address agrarian demands as part of its
socialist agenda, the state was also trying to boost exports during this
period and should have had an interest in such studies. Agrarian
populations represent large bases of electoral support and thus the
telecommunications bureaucracy could ingratiate itself to the political
elite by studies which extended in this arena. Exporters, on the other
hand, received marginal importance within the ISI strategy and the
telecommunications bureaucracy had no interest in furthering their cause.
The first study linking exports with telecommunications was commissioned
by India's overseas carrier in telecommunications during 1988, five years
after telecommunications was made a development priority.1 4
1 2 Department of Telecommunications, 1988: 53-57.
1 3 see Kaul [1979] and Economic study cell, Posts and Telegraphs
Board, Ministry of Communications [1981]. These studies point out the
importance of telecommunications for business purposes by rural users and
the savings in transport costs. The first study to try to measure the
relation between exportB and telecommunications services came as late as
1988, See The Economic Times. Oct. 21, 1988.
1 4 Indian Institute of Foreign Trade: 1988.
200
Academic institutions offering expertise in economic development fare
worse. Graduate schools in India usually offer courses in economics of
infrastructure but none of them emphasize telecommunications even now. A
perusal of Fh.D dissertation and master's theses titles from two of the
better known institutions for economic (Delhi school of Economics and the
University of Bombay), reveals that until 1990 there had been no research
in the area of telecommunications and economic development.
The Department of Posts and Telegraphs did not lack the resources to carry
out studies on telecommunications and development and build its case.
Historically, India often provided expertise to other developing countries
for developing their telecommunications sectors and in 1978 the
'Telecommunications consultants of India Limited' was set up specifically
for this purpose. Thus, while I would agree with Bruce et. al. that one
of the major factors retarding growth of telecommunications in India and
other LDCs is that policy-makers "want more precise factual Bupport for
their decisions to allocate [scarce] economic resources to
telecommunications,, , I S I would also add that before 1985 the
telecommunications bureaucracy had no incentive to try to come up with
such evidence. All in all, thiB bureaucracy reveals the non-developmental
orientation of the state at the telecommunication sector level and its
ability to ignore most user group pressures ( proposition 4).
INEFFICIENT UTILIZATION OF INVESTMENTS IN PUBLIC SECTOR:
Emphasis on self-reliance led to the creation of Indian Telephone
Industries [ITI] in 1948 to manufacture switching equipment and Hindustan
Cables Limited [HCL] in 1952 for cable equipment. The productive
inefficiency of these manufacturing enterprises worked against self-
reliance and created problems like high capital-output labor-output
ratios. The section provides further evidence for proposition 2.
1 5 Bruce et al. 1989:425.
201
First, acquisition and adaptation of technology to Indian conditions
created delays or shortages, defeating the goal of self-reliance. In the
1950s, ITI bought Strowger electromechanical equipment technology from
Automatic Telephone and Electric (U.K.). The equipment was outdated by
the time it was installed, in 1964, ITI acquired new Pentacosta Crossbar
equipment technology from Bell Telephone Manufacturing of Belgium. This
system was installed without adapting it to Indian conditions and resulted
in major problems. Only in 1981, after seventeen years of domestic
research was the pentacosta system ready for India. By then, it was
outdated. Digital equipment had replaced the earlier systems
technologically. similarly, HCL was to meet the demand for network
expansion under the successive plans. Transmission cables continued to be
imported defeating the need for creating the HCL in the first place.1 6
second, even where equipment was made available by the public sector
firms, it came fraught with faults. ITI, for example, manufactured
customer Premises Equipment (telephones, telex machines, teleprinters).
This equipment had high MTTR (Mean Time to Repair) and low MTBF (Mean Time
Between Failures). The prices were much higher than international
prices.1 7 Telex equipment had no storage or forwarding function,
requiring manual presence to be operated at all timeB, and it also worked
at slow speeds. (Chapter 8 will show how the quality of this equipment
improved once competition was introduced in the equipment market and it
was privatized).
Third, ISI created productive inefficiencies through high capital-output
1 6 For example, between 1962 and 1984, the IBRD extended $4802
million worth of loans on eight occasions for telecommunication projects.
A put of the loan for each project was utilized for importing co-axial
cables.
1 7 "Business communication — The Indian scenario" in Indian PoBt.
Feb. 2, 1989.
202
ratios and this seems to be true of the telecommunications equipment
industry, too. Studies of these ratioB for telecommunications are not
available but a World Bank discussion paper sent to the Indian government
to lay grounds for future assistance noted that "our discussions with
members of the [Telecom] Commission1 8 have revealed that techniques in the
sector are poor and there is considerable scope for improvement."1 9 An
indicator of the capital-output ratio in telecommunications is that the
per-capita telephone operating expense is about 1.6 times the per capita
national income while for developed countries it is 0.05.2 0
Last, although one of the goals of ISI is to create employment, the
strategy backfires if most of the resources go into maintaining high
levels of employment rather than into new investment or replacement of
machinery. In India, according to one estimate, there were 100 people
employed for every 1,000 telephones while the figures for U.S. and Europe
are 10 and 20 respectively.2 1 As T.H. Chowdhary puts it:
The greatest challenge comeB in regard to the
organization itself. The Indian Telegraph Act is
more than a 100 years old, and so is the service,
the organization and its work methods and ethos.
From digging trenches for putting up telephone
posts, to the installation of an spc digital
1 8 Telecom Commission was created in 1986 as the apex deciBion-making
body for the telecommunications sector.
1 9 Quoted from Robinson, 1990. While conceivably economies of scale
might produce incremental units of output at declining fixed coBts, time
series studies on annual average and incremental capital-output ratios do
not confirm this trend in India. See, Balasubramaniam [1984] pp 72-73.
He quotes two studies: one shows that total the ratio of net investment to
changes in GNP (incremental capital-output ratio measured at 1960-61
prices) increased from 2.39 in the 50s to 4.63 in the 70s while the
average capital-output ratio increased from 2.7 in the 50s to 2.9 in the
60s and 3.33 for the 70s.
2 0 Chowdhary, "An Indian Perspective on Sectoral Reform" in Wellenius
et. al. 1989: 107. The argument that the per capita operating expense in
India is higher because it has not yet experienced economies of sales in
the developed countries is considerably weakened by the fact that the
network utilization capacities in India are high and there are long
waiting lists for telephones.
2 1 Statistics quoted from The Indian Post. Feb. 2, 1989.
203
exchange, everything is undertaken by the
Department of Telecoms itself. This has led to the
employment of a large number of unskilled, low
skilled and unupgradable staff, who, over the
years, have become more or lesB permanent and who
have aspiration for security, for promotion and
other advancement, in line with the social
philosophy that rules in the society.2 2
Demand for telecommunication services since the mid-70s:
This section dealB with the creation of user group demands crucial to our
understanding of proposition 1. By the late 70s, a slow move toward an
outward oriented strategy was evident in India, (see chapter 5) which put
increasing pressure on the government run telecommunications monopoly as
export firms tried to compete in the international markets. Two other
pressures of significance in the case of telecommunications are:
1. Increased demand for telecommunications as a result of growth in the
services and manufacturing sectors by large users.
2. Demand for telephones by the growing middle class (concentrated in
urban areas) which can now afford such services.
EXPORTERS AND TELECOMMUNICATIONS:
As India tries to increase exports after the mid-1970s, the demand for
international telecommunications services increased. Between 1971-72 and
1986-87, the overseas telecommunications traffic in telex and telephones
grew faster than India'b foreign trade.2 3 While foreign trade grew 9.5
times between 1971-87, telephone traffic grew by 71 times and telex
traffic by 23.5 times. For every Rs 1 billion increase in foreign trade,
the overseas telephone traffic grew by 534,000 minutes and telex traffic
by 165,000 minutes.2 4 Field investigations found that firms developing
2 2 chowdhary, T.H. Dec. 1988:9
2 3 Indian Institute of Foreign Trade: 1988.
2 4 Findings of the study quoted here are from "Rapid Growth in
Telecommunications Traffic” The Economic Times. Bombay Edition, Oct. 21,
1988.
204
new markets, promoting new products, firms new to international business
and large firms use international telecommunications facilities more than
others. Second, firms exporting consumer goods ubb the international
telecommunications facilities more than those exporting raw materials,
primary commodities and capital goods because consumer goods markets are
more competitive with high price and demand elasticities requiring
constant information flows. Also, India's exports of capital goods went
to E.Europe and Africa, countries with poor telecommunications
infrastructures themselveB.
Moreover, telegraph traffic fell by 6 percent as telephone and telex
facilities improved. Table 6:4 shows the high degree of receptivity for
a superior telecommunications service for less cost effective and slower
ones. Telex, telegraph and radiophoto traffic declined or remained
constant after FAX became available in 1985. The latter itself began to
register a recorded decline after 1989-90 when it became difficult to
distinguish between outgoing fax versus voice messages technologically.
The telex and radiophoto traffic was increasing before facsimile was
introduced but while radiophoto traffic declined, telex traffic increased
at a diminishing rate and eventually began to decline after 1989-90. In
the meantime, telephone traffic multiplied 27 times between 1980 and 1993.
LARGE USERS AND TELECOMMUNICATIONS:
For a long time the ISI strategy ignored the demands of large users of
telecommunications services.2 1 Many of these large users were state
officials and public Bector firms. They were themselves competing for a
pie of the five-year plan outlays and did not lobby on behalf of the DOT
2 5 Large users include media, transport, banking, finance, insurance,
tourism, academia, administration and management.
TABLE 6:4
GROWTH OF INTERNATIONAL TELECOMMUNICATIONS TRAFFIC
INDIA (1980-93)
Year Tele
phone
(a)
Tele
graph
(b)
RadiO-
photo
(<=)
Fax
(d)
Telex
(a)
Data
(e)
1980-81 22.6 157 1177 nil 26.3 -
1984-85 89.3 134 1758 nil 40.2
-
1985-86 109.4 120 1835 3851 44.9
-
1989-90 306.55 67 692 260698 50.9 540.8
1992-93 614 39.76 240
(91-92)
184000 38.67 1977
(91-92)
Source: Data collected from VSNL during field trips in Dec.
1990 and July 1993.
Key:
(a): paid minutes in millions
(b): paid words in millions
(c): square centimeters in thousands
(d): total number of pages
(e): minutes in thiusands
206
for the government budget for better telecommunications services.2 6
Furthermore, a few users actually resisted or were uninterested in the
introduction of better telecommunications services. Thus, for example,
introduction of electronic banking in India was heavily contested by
workers' and officials' union as they feared losing their jobs. It
resulted in several work stoppages in the largely nationalized banking
sector during 1988.
The next chapter will show that the private sector demanded and was far
more receptive to sophisticated telecommunications services. This is
revealed by the spread of dedicated networks among private sector large
users (chapter 7). Small users in private sector (textile,
microelectronics, garment manufacturing) fared worse. Focusing on such
immediate priorities as export licenses and favors with the state, it was
not in their interest to transform the supply structure in
telecommunications (proposition 7). Being too numerous, they also did not
form inter-industry alliances. This problem of collective action is
reflected in proposition 8.
chowdhary estimates that 7 percent of the users with existing telephone
and telex facilities account for 70 percent of the total
telecommunications traffic generating 70 to 80 percent of its revenues.2 7
For bulk users, he notes, "telecom is not a matter of convenience or
comfort or social status but an essential tool for their business
occupation or profession itself. such heavy consumers of telecom are
intensely participating in the economic, industrial, financial,
entrepreneurial, administrative and managerial processes that are
2 6 Interviews.
2 7 Chowdhary: Jan. 18, 1988. Aronson and cowhey [1988: 27] write that
in industrial countries 5 to 10 percent of the users account for more than
half the long distance traffic.
207
concerned with the exploitation of resources and creation of wealth."
However, as subsequent analysis will show, only those large users with
access to the state decision-making structure were able to get these
facilities.
DEMAND BY URBAN USERS FOR TELEPHONES:
The demand for basic services like the telephone is also a reflection of
the growing middle class in India which can now afford these service. By
one estimate it is now close to 120 million people.M Table 6:5 provides
a summary of the demand for Telephones, significantly, even as the demand
for existing services was being increased, the percentage of registered
demand met continued to fall meaning that the total demand for telephones
is greater than the registered waiting list in any given year.
The reason was that as an expansion of telecommunications services began
to take place, those users who had not even registered for a telephone
Bervice earlier (because of long waiting lists) now grew more hopeful and
began to register their demand. It was not until 1985, however, that
substantial changes began to be made in the existing infrastructure.
Telecommunications: A development priority
Both the inefficiency of the ISI strategy and the economic necessity of
increasing exports, among other reasons, called for an expansion in the
telecommunication sector and improving the quantity and the quality of
telecommunication services. Apart from exporters, pressures to improve
telecommunications services came from large users in the services sector
and the urban middle class. Lastly, (even though I have not gone into
thiB in detail here) there were pressures by the private sector to
liberalize investment in sectors controlled by the state, including
telecommunications.
a Estimate quoted from, Mody, 1990: 6.
TABLE 6:5
DEMAND FOR TELEPHONES AND TELEX
INDIA (1978-92)
| Items 1978-79 1980-81 1985-86 1990-91 1991-92
I 1. Direct Exchange Lines
| (telephones)
1867.8 2149.5 3165.8 5074.7 5809.9
2. Telephone Waiting List 243.0 447.4 985.7 1961.0 2287.0
3. Registered demand (1+2) 2110.8 2596.9 4151.5 7035.7 8096.9
4. Percentage of 3 met by 1 88.44 82.8 76.3 72.1 71.6
1 5. Telex working lines 16.4 19.3 30.5 46.7 48.6
| 6. Telex waiting list 2.7 7.3 2.8 2.8 3.3
I 7. Registered demand (5+6) 19.1 26.6 33.3 49.5 51.9
J 8. Percentage of 7 met by 5 85.9 72.5 91.6 94.3 93.6
Source: Department of Telecommunications [1989, 1990].
Annual ReDort 1987-88
Annual ReDort 1988-89
Annual ReDort 1992-93
209
in 1983, the demand for telecommunications by exporters and large and
urban users moved telecommunications from a "luxury" to a "core” sector by
the Indira Gandhi administration. By making telecommunications a
development priority, its call on investment financing through the central
plans was enhanced. More than 50 percent of the public sector expenditure
during the plan period was on infrastructural improvement including
telecommunications. The implementation took place during the seventh plan
period [1985-90].
Apart from the demands by users, two other factors made it possible for
the government to make telecommunications a development priority. Both
factors deal with the maneuverability of the Indian state and its ability
to impose its agenda. First, telecommunications was part of a broader
thinking about India's increasing capabilities in the electronics sector.
The electronics industry, launched in the mid-1960s, was seen as "poised
for takeoff" in the 1980s.3 9 The sixth five year plan expected the growth
rate in electronics to be 23 percent per annum whereas the computer
industry was expected to grow at 40 percent a year.3 0 The government body
involved in spearheading India's thinking about electronics is the
Department of Electronics [DoE], an influential department within the
ministry of industry. It was realized early on that the
telecommunications network needed to be improved to sustain any growth in
the electronics sector as well as to promote it for exports. The DoE
issued a document entitled Electronics in India and Comparison with
Electronics in South Korea. Taiwan. Singapore and Hong Kona in 1982 which
placed India favorably with these Nics and served as a basis for the
government's Technology Policy statement in January 1983. The latter
included the impetus given to telecommunications by making it a "core"
2 9 Morehouse and Chopra, 1983:5
3 0 ibid, p. 5
210
sector. The DoE was additionally involved as a key player in the shaping
of industrial policy as it affected telecommunications. The ministry of
industry is a powerful player in the government of India and its help was
crucial in making telecommunications a development priority.
second, the early 1980s also mark the ascendence of Rajiv Gandhi in Indian
politics. He became the prime minister in Oct. 1984. An engineer and an
airline pilot by profession, Rajiv Gandhi promoted high-technology from
the time he entered Indian politics in the early 1980s. "Not ashamed to
wear jeans and drive a fast car, he appealed to the imagination of a new
generation of Indians impatient with the asceptism, puritanism and zealous
self-reliance enshrined in the legacy of Mohandas K. Gandhi."3 1
Rajiv Gandhi brought in like-minded people in to policy-making positions.
This is consistent with waterbury's conception of "change teams” brought
in by heads of state during the windows of opportunity provided by
economic crises.3 2 The case of satyen (Sam) K. Pitroda is important for
telecommunications. Pitroda, a former Rockwell International executive
and an engineer of Indian origin, prevailed upon Indira and Rajiv Gandhi
to let him head India's telecommunications reform program. Pitroda
presented the blueprints for an R&D center for telecommunications to
Indira Gandhi in 1981. The engineering minded Rajiv Gandhi evinced strong
interest in the proposal and he was primarily responsible for bringing
Pitroda to India. The RSD center was commissioned in 1984. In 1987,
Pitroda became a key advisor to Rajiv Gandhi on technology issues. He
also headed the Telecommunications Commission created in 1989 in a move
toward separating regulatory functions from operations. The various
3 1 New York Times, May 26, 1991.
3 2 Waterbury: 1994
211
functions that Pitroda headed were major steps in telecommunications
reform in India and will be discussed later.
While this might seem like the formulation of a comprehensive information
policy (referred to in proposition 12), yet the haphazard and vested-
interest ridden implementation of the plan argues otherwise, while the
state was seeking to play a dirigiste role in trying to impose a
telecommunication development agenda, its overall position vis-a-vis
society was clearly dysfunctional (see chapter 5).
Apart from bumping up the status of telecommunications in the five-year
plans, the sector underwent several organizational and market-structure
changes. While the changes which took place in the provision of services
and the liberalization of equipment manufacture are the subjects of next
two chapters, three major policy and regulatory concerns are now
discussed. These are: (1) the critical need for (and provision of)
organizational/administrative and regulatory reform; (2) the choice
between developing indigenous technology or imported technology; (3) the
tensions and tradeoffs separating large and urban and rural users. The
story is interwoven with the demands for change and the inability of the
Rajiv Gandhi government to break bureaucratic vested interests or to
displace protected public sector industries by a more competitive
structure. Finally, the adverse reaction by the telecommunications
bureaucracy toward Pitroda is itself symbolic of its resistance to change.
All three of these show where the state placed its priorities in supply of
telecommunication services. As such they show how difficult it is to
expect pareto optimality in service provision (proposition 2). The
partial move toward supply reform also epitomizes effortB by clubs (user
pressures) which are not enough to transform the supply structure
altogether (see proposition 7).
212
Organizational/Administrative and Regulatory Reformj.
The Indian Administrative Services [IAS] and telecommunications
engineering services both resisted organizational changes in the
telecommunications sector. As a senior telecommunications official noted:
"Nobody sheds his power here easily, it amounts to a lot of power
mongering.u33 However, partial reform did take place in response to user
demand in the form of moving toward telecommunications corporatization
under which operations and regulatory functions are separated.3 4
BREAKING UP THE DEPARTMENT OF POSTS & TELEGRAPHS:
Rajiv Gandhi acted quickly to divorce the 'P' from the 'T' in the
Department of Posts and Telegraphs. The Department of Telecommunications
(DoT) became an independent department under the ministry of
communications in 1985. After 1985 engineers gained authority over
operations and thUB they supported this move. The IAS officials who had
headed the department until 1985 fought to retain their power, keeping
influence over day-to-day DoT decision making by having its
representatives from the Ministry of Finance (MoF) evaluate every
telecommunications project for its financial viability.3 3
3 3 Interview.
3 4 It may be argued that under Indira Gandhi, who relied strongly
upon a coterie of bureaucratic advisors, such organizational reform was
impossible. Rajiv Gandhi, on the other hand, came with a distinct
distrust toward the bureaucracy, especially the IAS.
3 3 The Ministry of Finance works closely with the Planning commission
in planning the outlays for the central plans. Moreover, it plays an
important role in import licensing, undoubtedly crucial for a Bector like
telecommunications with the need for high technological requirements from
abroad. Dominated by the IAS, the MoF is the linchpin of vested
bureaucratic interests and resistance to reform, one of the first actions
taken by the present Rao administration to weaken the MoF bureaucracy was
to appoint a liberal economiat as the Minister of Finance.
213
MOVING TOWARD CORPORATIZATION:
In responding to user pressures and its own initiative, Rajiv Gandhi
administration tried to move DoT toward corporatization. The original
idea was for the Dot to be broken up into six independent corporations
each serving a different part of India. This plan was perceived by
officials as a threat to their job security, once selected by the All-
India Engineering Services Exam, those selected serve for life (barring
suspensions due to corruption). In government corporations such automatic
life-time employment does not exist and senior officials can be fired,
even though it seldom happens, second, government corporations can hire
outsiders which the technocratic-bureaucracy in DoT perceived as a threat
to their own careers.
Therefore, a more limited experiment was tried. Two corporations, one for
domestic services in two of the metro towns and the other for
international services, were created in April 1986.M
Mahanagar Telephone Nigam Limited [MTNL] was created as a semi-public
sector corporation for New Delhi and Bombay, ostensibly, this was because
Bombay and Delhi are major commercial and political centers and because
the two metro towns officials note accounted for one-third of the total
number of dels in the country.” (Moreover, unlike Madras and Calcutta,
3 6 Bombay, Calcutta, Delhi (including old and New Delhi) and Madras,
the four largest cites, are known as the four metros towns in India.
3 7 In reality, Bombay and Delhi accounted for 749 thousand (or less
than 25 percent) of the 3166 thousand phones in India in 1986. Neither
Dot or MTNL has published the DELs figure for 1986 but it can be easily
derived by cross checking the various Annual Reports and making a few
basic calculations. In the meantime, moBt writings (including Bruce et.
al. 1988:414) continue to note that one-third of the phones are in the two
metros. It is closer to the truth to note that MTNL was created for
Delhi because of its political importance and Bombay for its financial and
commercial influence. Cowhey et. al. [1989:8] note that modernization
efforts in telecommunications in developing countries continue to pour
into "the urban centers of political influence." They specifically
mention New Delhi and Bombay.
214
they were part of the ruling political party Congress-I's strong bases of
support). The services associations (the officer's associations and trade
unions) in the DoT went on record to oppose this change and people who
were moved over to MTNL were not discharged from DoT but went on temporary
service (deputation) to MTNL. This feature later created problems of
introducing a management culture and powerful pressures from DoT to
reincorporate MTNL within its fold.
The creation of the other corporation, the Videsh Sanchar Nigam Limited
[VSNL] for international services, was easier because its predecessor, the
Overseas Communication Service, existed independently of the Department of
Posts and Telegraphs since 1947 under the Ministry of Communications. In
1986, however, VSNL was placed under Dot. This decision, VSNL officials
argue, hurt more than benefitted their organization by cutting them off
from their direct contact with the ministry.3 8
CREATION OF THE TELECOMMUNICATION COMMISSION:
A semi-autonomous policy/regulatory body came into being in 1989 in an
attempt to separate telecommunications operations from regulation and
policy aspects. The commission was founded by the Rajiv Gandhi
administration not the DoT which opposed it.3 9 The Telecommunications
Commission was supposed to take regulatory power away from the dot for
different agencies of telecommunications, dot, however, persuaded the new
Singh administration in late 1989, that Rajiv Gandhi had given far too
much power to non-DoT people like satyen Pitroda who was the chairman of
3 8 Interviews. VSNL (like its predecessor,the OCS) retains the power
to hire and fire its officials independently of DoT.
3 9 Rapid changes in telecommunications made the DoT increasingly
resentful of any more changes. By 1989, the Dot had been slowly losing
its monopoly over equipment manufacturing and it was under pressure to
improve its efficiency. For example, the relative efficiency of MTNL and
VSNL as compared to the DoT put enormous pressure on the DoT to improve
its services.
215
the Telecommunications Commission.4 0 The Singh administration perceived
Pitroda aB a Gandhi loyalist. In 1990, the new administration backed the
DoT and the work of the Telecommunications commission virtually came to a
standstill.4 1
Figures 6.1 and 6.2 compare the regulatory, policy and operations
organization of telecommunications in 1986 and 1989. The
Telecommunications Commission was supposed to be responsible for two major
functional areas:
— Formulation of perspective policies on matters
relating to telecommunications in India with
overall responsibility to modernize India's
telecommunications technology, production and
services.
— Regulation, control and coordination of all
administrative, technical, financial matters
relating to telecommunications including - (i)
Development, operation and management of national
and international telecom networks and service (ii)
Technology (iii) Production.4 2
In practice, it had less power during its first two years. Apart from the
Singh government's antipathy toward Pitroda, after 1989 every issue on the
Telecommunication Commission's agenda was eclipsed by the increasing
controversy regarding indigenous versus imported technology.
4 0 It may seem odd that the decision made within the state to carry
out the reform program were contingent upon the will and ability of a few
people but narrowing the numbers of the decision-making elite is infact a
legacy of the Indira Gandhi's period.
4 1 Reform minded officials note that even during Rajiv Gandhi's time,
Pitroda's appointment was opposed by the bureaucracy, including those
outside of the DoT. For example, the chairman of the Telecommunications
commission (Pitroda) was to be the rank of a Minister of state in the
P.M.'s (Rajiv Gandhi's) cabinet which would have given him enormous
political leverage for effecting change but the IAS got the post reduced
to a member of the PM's Secretariat, [based on interviews] The only non
elected member in the P.M.'s cabinet to occupy a Minister of state rank iB
the Cabinet Secretary, usually a senior IAS official.
4 2 Quoted from PreBs Information Bureau, Government of India, March
13, 1989: 1.
216
FlduRS 6.1: POLICY, REGULATORY, OPERATIONS CHART
(Telecommunications Sector in India: 1986)
I PM'S SECRETARIAT INCLUDING TECHNOLOGY
I ADVISOR FOR KEY MISSIONS INCL. TECH.
Ministry of
ndustry
Ministry ot
Planning
Ministry of
Finance
Ministry ot
Communications
Plannin^Csnniissior^ joEI I CMC
Public Sector
directly controlled
C-DoT
Operations MTNL VSNL
A 13 telecommunication
'tor India
:ircles
^Madras, Calcutta operations
^6 minor districts
■ Xev:
C-DoT: Centre for the Development of Telematics
CMC: Computer Maintenance Corporation
DoE: Department of Electronics
HCL: Hindustan Cables Limited
ITI: Indian Telephone Industries
MTNL: Mahanagar Telephone Nigam Limited
TCIL: Telephone Consultants of India, Limited
TRC: Telecommunications Research Centre
VSNL: Videsh Sanchar Nigam Limited
HTL: Hindustan Teleprinters Limited
217
FIGURE 6:2
POLICY. REGULATORV. OPERATIONS CHART
(Telecommunications Sector in India, 1989)
x
I
D
O
Cd
OS
PM's secretariat
including Technology Advisor
> •
u
M
of Communications
j
o
cl
Telecommunications Commission
Chairman
Member 1
Production
VSNL MTNL TCIL DoT HTL C-DoT
Kev:
(see previous page)
218
Pitroda notes4 3 that reform in telecommunications was also limited by
reform in other sectors, particularly the Indian labor laws. The DoT
trade unions secured the right of proportionate increases in employment
with every new investment project. Negotiating with the labor unions and
dealing with the bureaucracy in the DoT have been the Commission's two
most difficult tasks.4 4 India's leading business newspaper, wrote: "The
work at the Telecommunication commission set up in May 1989 with high
hopes has come to a standstill. The vast power given to it should have
enabled it to solve some of the problems... .The major stumbling block is
the inability to decide on the production of switching equipment."4 5
The Telecommunications Commission resumed its work when the Congress-I
supported Chandra Shekhar administration took power in November 1990.
Pitroda cites eight achievements:4 6 1) negotiations with labor unions led
to labor concessions to reduce the size of the workforce, 2)
liberalization of the telecommunications equipment market to allow for
private manufacturing, 3) developing indigenous digital technology, 4)
allowing corporations to switch leased lines for data networks, 5)
retraining programs for staff, 6) emphasizing management techniques for
provision of services, 7) introducing computerization and 8) deregulating
4 3 Based on interview
4 4 During 1989-90, the Telecommunication Commission acted drew up
bold plans but most of them remained bo only on paper. ISO teams with two
members from DoT were appointed to look into 150 major areas, including
role of the private sector in the future, staff retraining, trend toward
corporatization and decentralization etc. Pitroda noted that 50 percent
of DoT's 350,000 staff needed retraining (quoted in independent. May 23,
1989). In July 1989, the Telecommunications commission declared "that
decentralization and disbursal of powers to the regional heads would
improve the functioning of the telecom network." (Quoted from Economic
Times. 8.2). This objective did not sit well with the dot.
4 5 Quoted from Economic Timas. June 6, 1990.
4 6 Interview.
219
value added services4 7 to allow for non-DoT (but state run) networks and,
from July 1991 onwards, to allow private vendors.
The early workings of the Telecommunications Commission reveal how it
remains beholden to the state's internal prerogatives and those of the
various entrenched interests (bureaucracy, labor etc.). Caught in Buch a
battle, providing services to end users often becomes a secondary concern.
Thus, at times the debate is not between supplying services ahead of
demand (as in rural area), it becomes a question of supplying them without
delays or unanticipated shortages (putting a new twist on proposition 10
which notes that demand oriented investment in telecommunications leads to
development).
Developing indigenous Technology versus imports
To make telecommunications a development priority, policy makers had to
ensure the supply of modern equipment to replace the aged infrastructure.
To discourage the drain of scarce foreign exchange resources, Rajiv Gandhi
and satyen Pitroda launched a domestic R&D institution, the centre for the
Development of Telematics (C-poT), to draw on available human resources to
develop digital switches.4 1 The effort to create an R6D base was in
4 7 Telecommunications services, in countries following U.S.
convention, are distinguished as basic (telephone, telex, fax, and others
which do not alter the content of the message during transmission) and
value-added or enhanced. While there 1b no single agreeable definition
for the latter, the FCC defines it as: "The offering of computer
processing applications (in conjunction with, or as an enhancement to,
information transmission capacity) which act on the format, content, code,
protocol, or similar aspects of the subscriber's information, or which
permit storage and retrieval of information by subscribers."
4 8 India has the third largest engineering force in the world and a
sizable (even if highly inefficient) industrial base. Bruce et.al. [1988:
413] term the "reservoir of highly skilled technical, operational, and
management personnel" as India's "primary resource." See pitroda [1976]
for an early statement on the need for developing countries like India to
tap into their resources and develop self-reliant R&D centers• Pitroda
conceived the c-DoT idea for India and before becoming a technology
advisor to the Prime Minister and chairman of the Telecommunications
Commission, C-DoT was Pitroda's chief mission in India.
220
contrast to the ISI strategy. Previous "Indian research efforts have
been dispersed and diffuse.... [C-DoT] is an exception to the general
characterization of the Indian R6D sector. [C-DoT] which is developing
small digital exchanges, has had a strong commercial orientation from the
start. It has sought to design its products with a common set of
components and to work with producers to make component production more
efficient. " ■ 4 9
However, C-DoT came under attack by the entrenched Dot bureaucracy which
over the past decades developed strong preference for imports and/or
manufacturing equipment through its enterprises such as Indian Telephone
Industries (ITI) and Hindustan Cables Limited (HCL).“ with c-DoT's
preference for licensing its technology to private manufacturers, the DoT
monopoly over manufacturing was threatened. The feature is not unique to
India. The closely knit relationship between government run
telecommunications monopolies and their equipment suppliers has been
called "political telematique” .3 I
c-dot was started in 1985, three years after a CIT-Alcatel and ITI joint
venture was launched to manufacture digital electronic switches at
4 9 Asoka Mody, "Information Industries in the NICs" in Crandall and
Fleming, 1989: 317. However, designing 'small digital exchanges' (or
switches) was not C-DoT's only goal. It hoped to build on its R6D
capabilities to eventually develop large switches and cut down the need
for imported switches completely.
3 0 Some of these preference patterns and its strong support for them
by the singh administration later have to do with the large amount of
bribes public officials demand from TNEb when signing joint ventures.
The trade press did not fail to underscore this issue as the c-Dot versus
foreign technology issue developed.
3 1 Eli Noam "international Telecommunications in transition" in
Crandall and Fleming: 1989.
221
Mankapur in Uttar Pradesh.5 2 To calm the criticism directed against c-
DoT, Pitroda (the architect of the c-DoT plan) promised that c-DoT would
market a large digital exchange switch5 3 by late 1987 which would make
another Alcatel-ITI venture unnecessary and save the country enormous
amounts of foreign exchange. Moreover, these switches would cost Rs.
3,000 per line, less than half the cost of Alcatel's, and work in India
without air-conditioning unlike other foreign switches. In 1985, Pitroda
argued that such switches would be manufactured by ITI making it
independent of foreign imports and that C-DoT would offer switches for
"building a national network on indigenous technology, and not pockets of
small networks."5 4 chapter 8 will discuss how private domestic
manufacturers were allowed in to this market.
5 2 The way CIT-Alcatel technology was procured iB itself a classic
story of the workings of the state and the bureaucracy in India. The
decision to install only digital switches in the future was made in 1976
but no foreign manufacturer was willing to transfer the technology on the
conditions demanded by the Indian government (total transfer of technology
for indigenous production including subsequent improvements in the
technology). The CIT-Alcatel deal was signed in 1982 but production did
not start until 1986 [a decade after the decision to install only digital
technology!]. Moreover, by the time these switches, the E-10-B switch as
it is known, came to India, they were already outdated internationally.
The Economic TlmeB [August 1, 1990] summed up the issue in an editorial
when the Singh administration seemed to be emphasizing foreign technology
after five years of c-DoT: "It Bhould not be expected that significant
[foreign] equity participation would result by simply insisting on it.
Further, the experience of the Indian Telephone Industries from the
collaboration with Alcatel has also proved that the expectations of the
foreign collaborator meeting the obligations of R and D, indigenization
and export, is a case of wishful thinking." Senior officials also note
that the decision to locate the Alcatel-ITI venture at Mankapur in the
home state of Indira and Rajiv Gandhi was a politically convenient
decision than one based on the economic resources in the area [based on
interviews]
5 3 More specifically, c-OoT would first design digital PBXs [known aB
EAPBXs], then a 128 line Rural Automatic Exchange [RAX] to be used for
modernizing and expanding the rural networks. The 128 line switch was to
be then used to make a 512 line RAX which was to then serve as a model for
designing the 16,000 line Main Automatic Exchange [MAX]. The MAX was what
Pitroda offered as an alternative to Alcatel technology. Alcatel for its
part argued that it was impossible for Pitroda's c-DoT to come up with a
16,000 by 1987.
5 4 Quoted in Business India. July 13-26, 1987:110.
222
By 1990, however, the 16,000 line Main Automatic Exchange (MAX) switch
Pitroda had promised was Btill not ready for large scale production. But
Pitroda successfully blocked an attempt by DoT and Alcatel to set up a
second switching factory,” launched renegotiations with IBRD for a $350
million loan part of which was to go toward acquiring the Alcatel
technology, and kept all the other TNEs trying to get into the Indian
switching market at bay. In 1985 ATP, the U.S.-Dutch alliance between
AT&T and Phillips Communications had offered to supply $1 billion credit
and in 1986 offered to help c-DoT to develop technology. "While c-DoT
officials do not comment, sources in telecom circles in Delhi suggest that
any effort to gain a foothold in c-DoT by any multinational is not likely
to be very welcome."5 6 The first switch to be developed by C-DoT, the
Rural Automatic Exchange with 128 lines (RAX), was even lauded by AT&T
officials. By 1987, when C-DoT introduced its small PBXs and rural
exchanges, TNEs focused on the large switching exchanges. ATP offered its
100,000 line exchange which would go far beyond the ones under development
by C-DoT or ones being manufactured by ITT-Alcatel.5 7
However, when C-DoT was unable to supply the large digital exchange
technology on schedule, DoT approached the new Singh administration to
roll back the C-DoT effort.5 * By 1990, the debate on technological
5 5 There was speculation in 1986 that Alcatel along with ITT, its
U.S. partner, might offer its more modern switches (like ITT'b System 12)
to the Indian government for the planned switching factory in an attempt
to save its market access to India {based on a report in Business India.
Dec. 1986]. In 1990, Alcatel is reported to have hired a Paris based
public relations firm for $5 million to make its case with the Indian
government.
5 6 Business India. Dec. 15-28, 1986:114
5 7 ITT (U.S.) and Alcatel (franee) formed a transnational alliance in
1985.
5 1 Scientists and engineers in India and other countries watching the
c-DoT experiment did not think that the delay in the c-DoT technology was
anything unusual. It took the TNEs much longer to develop the switches
they currently market.
223
requirements flared eclipsing most other issues. As one newsmagazine put
it: "The debate rages everywhere, tempers have risen high, charges are
being flung freely and, very soon, it will engage Parliament's attention.
And out of the ashes of this battle will emerge the new telecommunication
policy for the 1990s — a matter of utmost anxiety for 19 lakh [1.9
million] applicants waiting for connections across the country.”3 9
The Singh administration's campaign against c-DoT misfired as the
scientific and intellectual community supported Pitroda and the R&D
effort.6 0 Many C-Dot engineers departed in the midst of this controversy
and by late 1990 c-DoT was merged with another DoT organization, the
Telecommunications Research center, to create a new organization called
the Telecommunications Engineering Center.
It doeB seem clear now that the Rajiv Gandhi administration went too far
to keep out foreign suppliers.6 1 when shortages developed in equipment
supply in 1987, a virtual moratorium was declared on imports of
technology. Although C-DoT did develop small digital switches, the
administration unwisely asked it to meet all of DoT's switching
requirements. Technology occupied so much attention that matters to do
with services, tariffs and finance were neglected.6 2 The c-DoT
* The Week. April 22, 1990: 29.
6 0 pitroda focused his attention more on the Singh administration
officials. See The Week. April 22, 1990: 28-38 and Sunday. May 13-19,
1990.
6 1 It might be argued that it was necessary for the Gandhi
administration to put up such a strong front in order to break the vested
interest of the bureaucracy, the latter having always depended on foreign
suppliers for transfers of technology. it nonetheless delayed
implementation of many telecommunication goals because of shortages in
supply and turned away multilateral institutions and TNEs who had promised
India credit for its telecommunications program.
6 2 as the Times of India. Feb.2, 1990, put it succinctly in the early
stages of the C-DoT versus Singh administration controversy: "At stake is
a slowdown in the programme expansion of two million lines a year on an
average in the eighth Plan period, culminating in 20 million lines by the
224
controversy is an example of instruments at the state's command in India
which ultimately lead to a restriction of services.
Large and Urban Users versus Rural Users
Making rural telecommunications facilities a political priority was
understandable, especially given the pressure by agrarian interests for
infrastructural facilities. But by 1989, the Telecommunications
Commission emphasized the 'telephones to the village' at the expense of
large users. Perhaps meeting the needs of large users meant import of
technology and the use of scarce foreign exchange resources but large
users are some of the highest foreign exchange earners for the country.
And domestically large urban userB generate the revenues for expanding the
rest of the country's network.6 3 Pitroda's preference for charging more
to business than residential users and more to urban than rural ones6 4
came after he called large users elitist. There is no evidence that the
demand for infrastructural facilities by agrarian interests included
telecommunication services as a high priority.
The Rajiv Gandhi government in making telecommunications a development
priority emphasized the development of rural networks. This was partly
due to the need for maintaining electoral support in rural areas and
partly to deflect form the unfulfilled needs of urban areas and large
year 2,000....The uncomfortable fact that the new policy makers are
struggling to accept is that the development of the required main
exchanges handling 20,000 to 40,000 lines each will take a few years."
6 3 Such a policy is what economists would term cross-subsidization
which is generally disfavored in developed countries. But in developing
countries such as India where networks outside of major towns and cities
are of poor quality or just do not exist, Buch cross-subsidization is a
necessity for generation of financial resources. Even those who favor
liberalization, decentralization and deregulation in telecommunications
concede that some form of cross-subsidization is a necessity in LDCs. see
Wellenius [1983], Bruce et al. [1988], Crandall & Fleming [1989].
6 4 See Pitroda's comments to this nature in Financial Express. Oct.
2, 1989, and The Sunday Observer. April 9, 1989.
225
users and the delay in the development of domestic technology (see
propositions 6A&B, 8B).
Rajiv Gandhi seldom referred to the specific needm of large and urban
users, choosing instead to highlight the overall objectives of the telecom
plan (e.g. 20 million phones by the year 2,000). At an ITU conference in
New Delhi in 1989, referring to the target of providing at least one
Public Call office in each of India's 570,000 villages, Rajiv Gandhi
declared: "We have geared our objectives to our needs. Our overall target
is to put the entire population of 800,000,000 to within five minutes
walking distance of the telecom., 6 S
Larger towns which need switches exceeding 20,000 limes and data networks
contingent on the development of domestic PSDNs were the casualties of the
overemphasis on developing rural networks have been.*6 Pitroda argued
that "multinationals will not be interested in transfer of technology"6 7
needed for data networks. Building on C-DoT technology, was the best bet
to develop an ISDN which would satisfy all of indie's telecommunication
requirements. In the meantime the dot would develop two PSDNs (named
VIKRAM and RABMN) to meet the needs of large users. But by 1989, Pitroda
the chairman of the Telecommunications Commission, shelved VIKRAM and
other such data oriented networks because they required high levelB of
imports and needed to await the development of indigenous technology6 1
6 6 Quoted in Chatterjee, May 20, 1989: 28.
6 6 A Public Switched Data Network would have ensured effective data
flows in India in which the existing network (the Public switched
Transmission Network or the PSTN) being used for providing basic services
is inadequate. An Integrated services Digital Network [ISDN] allows for
both basic and value added services being transmitted over the same
network, thus defeating the need for separate PSDNs and PSTNs.
6 7 Quoted in Sunday. Sept. 17-23, 1989:61
6 8 For detailed discussion of data networks, see dedicated networks
(Section 2:4) later in this chapter.
226
The delay in putting VIKRAM into operation delayed all other networks
awaiting its development, such as the business users network named
Indonet.
The Dot sought to develop its PSDNs but opposed plans to bypass the
domestic network for international needs. It disallowed the use of
International Business Services [IBS] provided by Intelsat whereby
business users could connect to the Intelsat satellites for international
communications without going through the domestic networks and the
subsequent international gateway facilities.8 9
similarly Pitroda characterized cellular phones aB elitist in 1988, but
changed this position in 1989 supporting cellular for various rural
applications.7 0 In 1988, T.H. Chowdhary, Chairman of VSNL, argued that
far from being elitist, cellular phones were a necessity for large users
who often could not conduct international business because of the poor
quality and congestion of local networks in metropolitan towns.7 1
Conceding that there were resource constraints, chowdhary felt that such
services could be privatized or that non-resident Indians (NRIs or Non-
Resident Indians living abroad) with foreign exchange might develop them.
In 1991 the Rao government finally gave this permission to NRIs.
The analysis makes it clear that the state's calculations about its
6 9 Texas Instruments was the only user to have been allowed this
facility in the South Indian city of Bengalore in 1987.
7 0 In October 1989, Pitroda unveiled a plan whereby DoT would work
with a group of Stanford University researchers to develop cellular mobile
radio phones and low-cost digital radio multiplexers for rural
applications. Based on a news report in Financial Expi-ass. Oct. 2, 1989.
7 1 See, chowdhary, T.H. i Jan. 18, 1988. He writes;«Those who
frequently travel by air and spend much of their time shuttling between
the airport and their office on the ground or those whose telephones, work
only now and then and hardly ever in the monsoon season know how much they
need a mobile telephone."
227
legitimacy and base of support are at the heart of service provision
(proposition SB).
Conclusion
The origins of policy choice in telecommunications in India are located in
the country's economic conditions. These conditions empowered users and
other interest groups. However, service provision is ultimately a result
of the interaction between demandeurs (users and manufacturers), and
suppliers (state decision-making structure, Dot, bureaucracy etc.). While
the Indian state responded to economic conditions and socio-political
pressures, it also reflected its own preferences. For example, the role
of Rajiv Gandhi and Pitroda in shaping this choice, and the stubbornness
of bureaucracy to this change are all important here.
Proposition 9 can be highlighted here. Even after economic conditions
became favorable for them in the 1970s, outward oriented pro-market ideas
were Blow to diffuse in India because of the resistance they met from
protected private capital and interests groups within the Btate.
similarly, while technological change allowed for the monopoly position of
PTT to be challenged, the peculiar nature of intra-state and state-user
relations influenced technological evolution in India.
228
CHAPTER 7
PROVISION OP TELECOMMUNICATION SERVICES IN INDIA:
THE SEVENTH PLAN [1985-90] AND BEYOND1
introduction
India's move away from a Btate controlled monopoly in telecommunications
is slow and haphazard. Pressures from the service sector, the export
sector2 and the private sector3 did make telecommunications a development
priority by mid 1980s. Economic factors, thus, did constrain the set of
available policy choices. Loosening monopoly control to allow for
enhanced investment and expansion became necessities.
However, the particular policies chosen need to be explained be explained
by political variables such as the access to the state's decision-making
structure by user clubs (within and outside the state), other interest
groups, social coalitions and large users (within and outside the
government) and, the inter and intra-departmental bureaucratic rivalries
within the state. Thus, the private sector's access to the state allowed
it to enter the telecommunications equipment market and obtain market
regulations in its favor. Until August 1991, this market was aB protected
as other sectors such as consumer goods in which the private sector plays
a big role. The telecommunications bureaucracy tried to protect its
monopoly over equipment manufacture, but finally gave in to pressures by
domestic manufacturers and multilateral institutions after a protracted
1 The interviews quoted in this chapter (and cited in the footnotes
as "interview") were conducted with telecommunications officials and
policy-makers in Delhi and Bombay during Nov.-Dec. 1990. The interview
with satyen Pitroda, Chairman of India's Telecommunications Commission and
Technology Advisor to Rajiv Gandhi, was conducted by telephone on August
17, 1991.
2 The state's biggest 'hope' in its hunt for foreign exchange.
3 None of these sectors are mutually exclusive but are mentioned here
as such for analytical clarity.
229
battle. It was more successful in keeping its monopoly over provision of
basic services. The telecommunications bureaucracy was able to resist
these pressures because most of them were limited to provision of value
added and specialized services such as data communication networks and
cellular service. in 1991, value added services, which the state run
monopoly was unable to provide, were deregulated. In response to user
demands, those services which the telecommunication monopoly does provide
are also being expanded both in quantity and quality.
After considering the targets of the 7th Plan (and the preliminary targets
of the 8th and 9th Plans until the year 2,000),4 thiB chapter provides a
detailed outline of services provided from 1985 to 1990. Due to changes
in government, the 8th plan was not launched until 1992. 199091 and 1991-
92 were treated as Annual Plans. Here too economic factors constrain
India's economic choices and political factors account for the specific
choices made within the Bet of available options. The broad outlines of
the seventh plan and that of provision of services during this period is
first considered. Then the case of the two para-statal corporations in
Delhi and Bombay and the provision of leased line (dedicated) networks
for large users are specifically examined. Apart from providing evidence
for the proposition dealing with supply of services, the chapter also
shows how exclusive interest group pressures lead to market-oriented
reform (as in the case of dedicated reform).
The Telecoanunications Plant 1985-2000
When telecommunications became a development priority, it received
4 The central plan process dealt ineffectively with changes in
government. The Planning commission members who draw up the plan are
appointed by the PM and three changes in national government broke the
continuity in the planning process. Apart from the two annual plans,
1989-90 was declared a 'plan holiday.' The 8th plan being drawn up by the
Rao government appointees did, however, keep most of the targets in
telecommunications fixed by the earlier drafts of the plan even if it was
two years behind schedule.
230
enhanced investment financing. For the seventh Plan (1985-90), the dot
apparently asked for Rs. 135 billion5 but was first allocated Rs. 40
billions, later increased to about Rs 60 billion. MTNL could also raise
investment funds on the market through sales of government bonds.6 At
3.33 percent of the total plan outlay, the figure is greater than an all
time high of 2.48 percent of total outlay given to telecommunications
during the Sixth Plan from 1980 to 1985 [Table 6:1]. For the Eighth Plan
[1990-95] the projected expenditure was placed at r s. 180 billion and for
the Ninth Plan [1995-2000] between Rs 300 to 340 billion.7
These plans aimed to provide 19 million Direct Exchange LineB [DELb] by
the year 2,000, an increase of 17 million over the nearly 3 million dels
available in 1985. 1.6 million DELs were planned for the seventh Plan.
Table 7:1 shows that 5 million DELs were planned for Eighth Plan and 9.5
million for the Ninth Plan.8 The seventh plan figure was reduced to 1.1
5 Quoted from interviews.
6 Telecommunications outlays over the successive plans have varied
between 1.4 percent (Second Plan) to 2.73 percent (Fifth Plan) of the
total plan expenditures. Rs. 60 billion comprise 3.33 percent of total
expenditure for the seventh Plan, excluding the funds raised from the sale
of bonds. [Figures quoted and calculated from interviews and Department
of Telecommunications, 1988:17]
7 The telecommunication Commission set up in May 1989, subsequently
informed the Planning commission that the Eighth Plan would cost between
Rs 220 to Rb. 250 billion at 1987-88 prices, of this Rs. 170 billion was
to come from DoT's internal resources and Rs. 80 billion from market
borrowings and bilateral or multilateral loans. Figures for Ninth Plan
were not presented. Quoted from Economic Times. July 27, 1989. Two weeks
before the Telecommunications commission presented its outlays to the
Planning Commission, the Minister of Communications held a press
conference where he calculated the total Eighth and Ninth Plan
expenditures to be Rs. 480 billion, a figure more conservative than those
presented by the Telecommunications Commission.[Quoted from Financial
Express. July 13, 1989]. The data published by DoT and its various organB
is often contradictory and inconsistent, a perennial problem especially in
the statements made by senior officials and other elected representatives.
8 Table 7:1 gives the breakdown of the DELs to be provided from 1990
to 2,000 and the projected increase in switching capacity, in all media
reports and press conferences, the total of 20 million DELs is given for
the year 2,000 but i have been unable to derive this figure exactly from
the projected growth rates which have been published.
231
million DELs when its original outlay of Rs 135 billion was not approved.
It is unclear how the 19 million DEL figure by the year 2,000 was
determined but an independent study calculated that the optimum number of
DELs for India for the year 2,000 was about 21 million.9
Table 7:2 provides estimates of the total telecommunication market in
India during the 1990s. A market of Rb. 1071 billion (about $40 billion
at the August 1991 exchange rate) offers large stakes to firms which can
secure early entry for manufacturing equipment or in provision of services
which might be deregulated. Services are expected to account for 80
percent of the market, the rest of the market is in equipment of which
switching should account for 50 percent and transmission and CPE
accounting for 25 percent each.
'Mission: Better Communications'
In 1986, Rajiv Gandhi appointed Pitroda the advisor of his widely
publicized 'six Technology Missions' to upgrade the technology and expand
productivity in the six identified areas, including telecommunications.1 0
The telecommunications mission, launched in April 1986, was known aB
'Mission: Better communications'. Beyond specific number of direct
exchange lines, it focused on improving the quality of service (bringing
9 Quoted and calculated from Barve, 1989. Barve's study is a
modification of an ITU study which used GDP data from 76 countries from
1973 to 1983 and correlated it with telephone density and other
telecommunication indicators. Barve modified the projected growth rates
of GDP to adjust for the black market economy and calculated that the
optimum number of telephones for India would be 8.75 million for 1986,
12.38 million for 1990, 19.82 for 1995 and 31.65 million for 2,000. In
addition he notes that DELs would be around 2/3 of the total number of
telephones. DELs do not take into account PBXs and/or the number of
telephones connected to the same line.
1 0 Other areas were health, immunization, drinking water, oilseeds
and literacy. The launching of these missions earned Rajiv Gandhi the
title of 'Technology prime Minister'. Pitroda successfully introduced new
technologies and management techniques in these areas and the mission on
oilseeds is said to have been the most successful, saving the country
billions of rupees in import costs.
232
Table 7:1
Proposed Telecommunication Plan per year (1990-20001
DELs. Switching Capacity & Transmission Lines
Year DELs
Commissioning
(millions)
Switching
Capacity
(millions)
Optical
Fiber
(kilometers)
Eighth Plan:
1990-91 0.70 0.80 2300
1991-92 0.85 1.00 2800
1992-93 1.05 1.24 3200
1993-94 1.15 1.30 3400
1994-95 1.25 1.57 3500
Total 5.00 5.90 15200
Ninth Plan
1995-96 1.45 1.72 3000
1996-97 1.65 1.94 3000
1997-98 1.85 2.18 3000
1998-99 2.15 2.53 3000
1999-2000 2.40 2.83 3000
Total 9.50 11.20 15000
Total: 8th & 14.50 17.10 30200
9th Plans
Source: Department of Telecommunications, 1988: 52 & 61
233
Table 7:2
Preliminary Estimates of Telecommunications Market in India
(based on 19 million DELs by the year 2000)
Rs. billions
Item 1987 1990-95 1995-2000 1990-2000
Total
Telecom
Market
24.60 328.22 742.84 1071.06
Telecom
Services
16.73 261.62 607.77 869.39
of which:
Leased
circuits &
data comm.
n.a. n.a. n.a. 32.78
Telecom
Equipment
7.87 67.30 135.07 202.37
of which:
CPE 1.05 14.19 26.29 40.48
Switching 4.74 (?) 35.41 72.52 107.93
Trans
mission
2.08 (?) 17.70 36.26 53.96
Source: Ravi. [1989]. p.2, p.4.
Estimates for total telecom equipment market in
1987 from a study by Federation of Indian Chambers
of Commerce and Industry quoted in Financial
Express [July 15, 1989]
Note on 1990-2000 estimates:
Ravi has calculated the figures for CPE and switching. I
calculated the figures for the transmission market taking it
to be about half of the switching market (based on
interviews). The totals for the equipment market are mine
and also those of the telecom services market which were
obtained by subtracting the figure for the equipment market
(as calculated) from the total telecommunications market.
234
down fault rates, number of attempts made for long-distance dialing,
computerized billing services etc.). It also aimed to cut down the
waiting list for telephones in urban areas and extend the network to rural
and backward areas. This was consistent with the goals of the Seventh
Flan underway which had targeted the state capitals and 467 district
headquarters for STD Bervice, had a goal of 15,000 PCOs to be set up in
rural areas and promised provision of two PSDNs (VIKRAM and RABMN).
'Mission: Better Communications' also reorganized the Seventh Plan
objectives focusing on six mini-miss ions: 1. improving Service Quality 2.
increasing Urban PCOs 3. Improving Delivery of Telegrams 4. Providing
Telex on Demand. 5. improving Rural Communication, and 6. Building a
National Digital Network."
'Mission: Better Communications' is one among the many things that the
state did in making telecommunication a development priority. Moving
telecommunication from the list of luxury to core sectors, appointment of
the Telecommunication Commission, and increasing investment funds for
telecommunication were mentioned earlier. Thus, there is no single
indicator which one can examine when deciding whether or not
telecommunication is a development priority. It is finally the
cataclysmic effect of a number of policies and their implementation which
counts toward the prioritization of telecommunications. The sector itself
needs to be placed among the overall framework of information policies in
the country. In India, it was not clear in the late 80s how exactly its
telecommunication policies fared vis-a-vis the overall context of
information policies [proposition 1].
The success of the plan is now reviewed.
1 1 Quoted from Department of Telecommunications, 1988:71.
235
DoT and seventh Plan:
The results achieved by Dot during the seventh Plan period are impressive.
By December 1989, 1.45 million dels were provided, more than the revised
target 1.1 million. This number was expected to rise to 1.7 million by
the end of the seventh Plan period in March 1990.1 2 in addition nearly
17,000 PCOs were opened. Of the 467 district headquarters, 302 had
national and international direct dialing by April 1989 and all district
headquarters were expected to have national long distance facilities by
March 1990.1 3 Moreover as Table 7:3 shows, marginal improvements took
place in the quality of service during the 1987-92 period especially in
the area of telephone faults per month. whereas nearly a half of the
phones did not work in month in 1980-81, 80 percent of them did so by
1991-92.
A closer comparison reveals another picture. First, as Table 6:5 showed,
the demand for telephones increased more than the growth rate of DELS,
meaning that the hidden demand for telephones in India is far greater than
the registered demand for it.1 4 This suggests that DoT might not be able
to meet its goal of providing telephones on demand by the year 2,000.
Second, although 70 percent of the subscribers had direct dialing long
distance (STD) and international dialing (ISD) facilities by 1990, the
services of between 20 and 55 percent of subscribers (depending on the
area) was blocked because of excessive billing for long distance and
1 2 Quoted from Financial Express. April 20, 1990.
1 3 Quoted from Press information Bureau, April 5, 1989.
1 4 while long waiting lists continue to exist in major towns,
business subscribers can often get temporary and illegal lines through the
local exchanges by bribing the local operators. A few business users I
interviewed who had these illegal phones said that they paid a "flat fee'
to the telephone operators every month. This 'fee' or bribe which goes to
the operator is usually far less than what they would pay if they were
billed for a legal connection.
236
Table 7:3
Quality of Telephone Service Indicators (India)
Item | | March 1987 | March 1992
Call Success Rate (%)
Local Calls 93 97
STD Calls 48 89
1980-81 1986-87 1991-92
Tele, faults
(100 stns./
month)
49 28.5 19
Trunk
efficiency %
(operator
assisted)
75
in
81
Sources:
Department of telecommunications, Annual Report. 1989-90.
Department of telecommunications, Annual Report. 1992-93.
Call success rate both for local and STD calls is measured
as a percentage of successful test calls made from free
telephone to free telephone.
Trunk efficiency is measured as a percentage of successful
calls to the total trunk calls booked.
237
international calls which subscribers claimed they never made.1 3 Third,
subscribers and consumer rights organizations and the media doubted the
dot statistics on the quality of service. "These numbers would seem to be
at variance with everyday experience of the terrible inefficiency of the
telephone services, especially in manually operated exchanges which
predominate in smaller towns and villages, but then, the department
collects its own statistics and issues it to the public, which has no
option but to accept it."1 6
Fourth, the emphasis on rural telecommunications was costly, often at the
expense of upgrading the urban networks. An MTNL official noted that the
PCOs in rural areas usually make 2-3 calls per day; the revenue produced
is not commensurate with the Rs 100,000 it takes to provide a phone in the
rural areas.'1 The provision of rural telephones is more about appeasing
powerful rural voters than about existing patterns of demand). A
prominent agricultural economist noted that rural telephones are more
likely to be used by influential landlords, bureaucrats and those who
think of the telephone as a prestige item. Farmers and peasants need
roads and vehicles to carry their supplies of food grains to market before
they start using telephones to do market searches etc." Although the
telephones might help increase the efficiency of the rural service sector,
the availability of transport, irrigation facilities, seeds and
1 3 Economic Times. June 6, 1990. one of the reasons customers are
overbilled might be due to the additional traffic through illegal lines
which might be divided over existing connections because illegal phones
could not possibly be billed.
1 6 Quoted from Independent. Hay 17, 1990.
1 7 Based on interview. The cost of providing a telephone in urban
areas works out to about Re. 30,000.
" Interview, chairman. Commission of Agricultural costs and Prices,
Ministry of Agriculture, Government of India. Dec. 1990.
238
fertilizers, electric power etc. are much more important for the peasants
and small farmers.1 9
Fifth, as will be pointed out later, the telecommunications sector
continues to experience difficulties raising finances for projects even
though it accounts for high revenues. The use of the sector as a cash cow
accounts for this phenomena.
sixth, as pointed out in the last chapter, although the 7th Plan started
out with long run thinking on how telecommunications will cater to the
needs of the economy, the implementation was different. Equipment
shortages, finance problems, bureaucratic rivalries and reshuffling
priorities during the plan all caused problems.
An evaluation of the 7th plan then reveals that the state supply of the
club good was not in response to market conditions alone (proposition 2 s
10). As such, we cannot argue that a comprehensive information policy
emerged drawing upon the linkages in the economy during implementation
[Proposition 12).
Performance of MTOL and VSNL:
The performance of MTNL and VSNL was mixed. This section analyzes
performance and concerns of the two organizations. Both corporations
earned high profits and improved their quality and quantity of service.
But, they were also plagued by shortage of funds and technology. Both
1 9 Interview. The available data and evidence confirm that
priorities of rural areas advocate development of sectors other than
telecommunications first. In the meantime, given the scarcity of
resources, India might be better off first emphasizing the needs of urban
and large users and then generating enough resources to expand into the
rural areas. In the Seventh Plan, needs of large urban userB were met
only marginally, not just in the provision of enhanced services like the
development of data networks but also in the provision of basic services.
There is as yet no agreed upon formula for cross-subsidizing rural
networks and the DoT has often used it as an excuse to take away revenues
from MTNl and VSNL.
239
corporations were pressured to generate revenues for the Dot and at times
for the rest of the treasury. MTNL provoked the most debate. Trade
Unions and other official services organizations in dot demanded that
their wages be brought on par with MTNL officials. When that did not
work, DoT wanted to recapture MTNL by early 1991.
The high rates of economic returns in providing telecommunication services
is clear from the experience of MTNL and VSNL during the seventh Plan.
The rates of return were among the highest of all public sector
enterprises.2 0 During 1987-89, VSNL earned the highest gross return on
capital employed out of 210 public sector corporations in India. From
1986-89, MTNL paid the highest dividends of the 210 corporations.2 1 The
two corporations were consistently among the fewer than 25 public sector
corporations which registered improvements in their overall profitability
ratios (gross returns on total capital employed, gross returns on net
sales and profits after tax as a percentage of net worth). The pretax
revenues and profits for the two corporations during the 1986-92 period
are summarized in Table 7:4. The 40 percent profit ratios belies claims
that India is strapped for internal resources to meet its
telecommunication needs. Quite obviously, the corporations are being used
as "cash cows" for the treasury instead of utilizing their resources for
reinvestment. The overall profits of MTNL did suffer in early 90s due to
technological bottlenecks and other influences.
Apart from improving international services and those in Bombay and Delhi,
2 0 The following discussion on profitability indicators is based on
data collected from MTNL and VSNL and reports on the performance of public
sector undertakings during 1987-88 period published in Economic Times. May
22, 1989 and Financial Express. June 29, 1989.
2 1 VSNL does not pay dividends to the public because it has not
floated any bonds in the market but its officials proudly note that if
they had to do so, their bonds would be bought more eagerly by the public
than even MTNL bonds [based on interviews]
Table 7;4
MTNL & VSNL; Total Revenues and Gross Profits
240
Rs. billions
Items 1986-87 1989-90 1991-92
MTNL
Revenue 5.4 11.7 15.73
Profits before tax and levy
for rural development
1.37 4.84 4.14
Levy for rural development
-
1.6 .45
Profits as percentage of
revenue
25.32 43.41 26.3
VSNL
Revenue 1.93 3.28 6.17
Profits before tax 1.25 1.07 2.37
Profits as percentage of
revenue
64.76 32.62 38.4
Sources: Figures for MTNL are from Mahanagar Telephone
Nigam Limited, Annual Reports (various years) and
Department of Telecommunications Annual Reports
(various years)
Figures for VSNL were collected during research
trips to the corporation, in Dec. 1990 and July
1993.
241
both VSNL and MTNL were created to generate revenues for network expansion
elsewhere in the country. The state could claim that it created state run
corporations to take care of the rising demand in two major metropolitan
areas and also use the high revenues generated by the economies of scale
for network expansion elsewhere, officials interviewed at the Dot were
emphatic in pointing out the larger social responsibility, specifically
levy for rural development [see Table 7:4].2 2 However, this siphoning
process became haphazard and predatory. As the profitability of the two
corporations increased, the Government of India levied new taxes along the
way and in 1987, the government imposed a new minimum tax on book profit.
As the sole owner of the two corporations, the government already received
dividends and corporate income taxes. In 1989, it was decided that MTNL
bond issues which were tax free would no longer be so.
The Dot also kept raising the levy for rural networks and the network
charges that MTNL and VSNL pay for use of the domestic network which is
Dot owned. By March 1989, the two corporations were paying almost 40
percent of their revenues to the DoT. Then Dot decided to start charging
more. DoT used this strategy to generate revenues whenever the government
budgetary support was not forthcoming. MTNL officials attribute another
motive to Dot's behavior.2 3 They claim that MTNL being more efficient of
the two domestic providers, it provided stiff competition to the DoT which
used its powers to siphon off MTNL revenues and cripple them financially.
When MTNL and VSNL protested, the Ministry of Finance worked out a new
formula whereby MTNL would pay an additional 7 percent of its gross
earnings while VSNL, the more profitable of the two corporations, was
asked to pay an additional 18 percent. Infact, Table 7:4 shows that
VSNL's profits since 1986 declined. A major reason is charges that VSNL
2 2 Based on interviews.
2 3 Based on interviews.
242
pays to the Dot. After the Telecommunications commission was appointed,
Dot continued to demand higher charges on MTNL and VSNL. The latter two
complained to the Telecommunications Commission that after paying the
treasury and DoT, they had little left to reinvest themselves. The
Commission appointed another government department the Bureau of
Industrial costs and Prices, to examine the revenue sharing formula but it
has yet to come up with anything agreeable to the two various
telecommunications organizations.
The preceding evidence supports proposition SB which notes that levels of
cross-subsidization reflect differential treatment accorded by the state
to different user groups. The differential treatment is itself partly a
result of the access of various users to the state's its decision-making
structure or its own calculations of its ability to stay dominant. Quite
clearly, DoT continues to play a dominant role in controlling the
telecommunication entities in the country on a day-to-day basis even as
its power declines over the long-run [propositions 4A 6 B].
Meanwhile, subscribers in Bombay and Delhi complained that in spite of the
high profits of MTNL and VSNL the tariffs paid by subscribers were among
the highest in the world.2 4 The cost of installation which the
subscribers pay can reach Rs 16,000 (about $1,000 at that time) in
metropolitan towns.2 5 MTNL officials and major consumer rights advocates
and users' organizations in Bombay and Delhi2 6 agree that these prices and
services would have been even better if MTNL had more control over its
decision-making and was free from bureaucratic meddling from other
departments.
2 4 see Independent. March 17, 1989. The article concludes: “In the
ultimate analysis, the customers continue to be fleeced and become the
victims of this internecine quarrel between the Government, the DoT and
its offshoots."
2 1 Quoted from Independent. May 17, 1990.
2 6 Based on a report in The Sunday Times of India. December 9, 1990.
243
The context of these corporations can be used for presenting the evidence
for proposition 6A which notes that states can muster any number of
arguments to restrict membership and provision. DoT's attempts to thwart
initiative by MTNL and VSNL is yet another example of how the state's
motivations in supply of a club good may differ from the kind of market
calculations that a firm may make in supply of such a good.
MTNL and VSNL contend that their network expansion was slowed down after
1988-89 because c-DoT failed to meet their demand for digital switches and
they were not allowed by the DoT, and later the Telecommunications
Commission, to import these switches from abroad. Thus, while MTNL's
import needs must be evaluated against the availability of foreign
exchange in the country, sometimes official objections are based on other
things. A 12 million pounds grant-in-aid from the British government
could not be accepted because MTNL was asked to pay a 19 million pound
customs duty (in rupees) on the equipment which would have been
transferred to India. MTNL had limited power to apply for or utilize
foreign loans.
In 1987, the world Bank granted a loan of $350 million for improving
telecommunications in and between Delhi, Bombay, Madras and Calcutta. But
in July 1989, the Telecommunications commission ruled that MTNL had not
looked seriously at the technology available indigenously and that the
World bank loan had to be renegotiated before it could be used for
importing technology.2 7
2 7 MTNL officials do not agree with the Telecommunications
commission's view. They point out that the commission would have actually
liked to see the loan being utilized for developing indigenous technology
in the future rather than drawing upon whatever is available at present.
Pitroda seems to have loosened his own stance somewhat, now admitting that
the metros have large switch requirements which cannot be met through
indigenously developed technology, [interview, August 1991]
244
one MTNL officials bolds: "DoT is our competitor, controller,
everything."2 8 Pitroda counters that these corporations have a "vested
interest" in getting foreign technology. According to Pitroda, anytime
anyone mentions foreign technology, he thinks of vested interest. "I
don't care whether it's MNCs, domestic industrialists, politicians,
anybody, they all have vested interest." He is firm about utilizing
India's human and other resources for technological development. "it's
not idealistic, it's a necessity" he says, adding that "there's something
to be said for emotionally owning a product."2 9 The MTNL official cited
earlier contends that "philosophically Pitroda is right" in insisting on
domestic technology, but since it is not forthcoming, it has created
bottlenecks for network expansion.
Although MTNL shortened the waiting lists for dels in Delhi from 20 years
in 1986 to 8 years in 1988 and in Bombay from 15 years in 1986 to 9 years
in 1988, they began to climb again after that because MTNL could not
procure the switches it needed. Waiting listB were still 5 years in 1993
[Table 7:5J30. VSNL officials note that for their gateway centers in
Delhi, Bombay, Madras and Calcutta they need only 4 to 6 switches which
can handle high volumes of traffic. For such switches, indigenization is
neither possible nor necessary, but the government has not changed its
stance. Pitroda disputes the VSNL requirement saying that the corporation
would never have a large switch requirement and even if they do, they can
use the Alcatel E-10-B switch being manufactured in India.3 1
2 8 Quoted from an interview.
2 9 Quoted from interview.
3 0 They could also be climbing because of another reason noted
earlier. As the supply of telephones increased, so did registered demand
as people became more confident of receiving a telephone.
3 1 interview.
245
TABLE 7:5
REDUCING THE WAITING LIST FOR DELs: BOMBAY & DELHI
DELHI BOMBAY
Target Actual Target Actual
March 1986
-
20
-
15
March 1987 10 10 15 15
March 1988 8 8 8 9
March 1989 5 9 7 10
March 1990 4 10 4 11
March 1991 unavailable 11 unavailable 12
March 1992 unavailable 8 unavailable 8
March 1991 unavailable 5 unavailable 5
Source: MTNL Completes 4 Years
MTNL Completes 7 Years
246
VSNL also waited a long time for approval for an opportunity to link up
with a global fiber optic cable network. In February 1990, VSNL signed an
agreement with a consortium of countries to contribute Rs. 1.5 billion for
a planned digital fibre optic link between Singapore and France (about 10
percent of the total cost). VSNL wanted to make this project, known as
'sea ME HE 2' internationally, a part of the 8th Plan but VSNL officials
note that the Planning Commission and the DoT have shown little enthusiasm
for the project.3 2 The Planning commission and the Dot argued that the
foreign exchange costs are too high on the project. VSNL felt that non
approval would result in India's inability to link up with the
international fibre optic network and improve its international services.
Approval came finally in 1993 after much delay and haggling.
Still the two corporations registered significant improvements in
productivity as explained below.
MTNL:
The creation of MTNL led to more DELs and better service [Tables 7:6, 7:7
and 7:8]. DELs increased by 113.8 percent (138.6 percent for Delhi and
97.8 percent for Bombay) from 0.75 million in 1986 to 1.6 million DELs in
1993. The quality of service continued to improve but the fault rates of
nearly 16 faults per 100 telephones each month in Bombay and 23 faults for
Delhi are still high. The slowdown in MTNL's modernization after 1940 is
apparent in MTNL's quality of service statistics, too, which either
deteriorated or remained the same. MTNL brought down the number of
employees per 1,000 telephones (from 56 and 58 in Bombay and Delhi
respectively to 34 in Bombay and 40 in Delhi from 1985 to 1993 (the
3 2 in 1990, VSNL had 2,040 international circuits for telephones and
1203 circuits for telex (see Table 3:20)and expected to increase them to
15,000 by the end of the century. At present, about 30-40 percent of
India's international traffic is via cables and rest via satellites. The
major cable routes from India were opened to the UAE in 1987 (with a
capacity of 1380) and Malaysia in
1981 (with a capacity of 480).
247
national average was 59 in 1992). But reducing the employee-telephone
ratio is made difficult by rigid labor laws. But labor laws have been the
hardest to change even after the macro-economic reform accelerated after
August 1991. The stronghold and militancy of the Indian trade unions
accounts for this.
Like Dot bureaucrats, trade unions in telecommunications resisted
corporatization fearing that without being government employees they could
lose their jobs anytime. MTNL with 68,000 employees has three major
recognized trade unions and over 50 sub-unions and non-recognized unions.
The three unions are directly tied to major national political parties.
Inter-union and intra-union rivalries by themselves have been another
problem for MTNL officials. For example, one of the three unions, the
BTEF is tied directly to BJP (the Hindu fundamentalist party) and the
general manager for Industrial relations in MTNL notes: "BTEF is the most
militant and its morale was high during V.P. Singh's time." 3 3
MTNL officials admit to a problem with introducing a customer-oriented
'management culture' because its officials and workers are on deputation
from the DoT to MTNL and are not permanent officials of MTNL. The
training program for employees at DoT is supplemented by training at MTNL
but as the staff is on deputation, many continue to view themselves as
members of DoT rather than MTNL. The National Productivity Council, a
government consultancy organization, in a 1987-88 study for MTNL during
1987-88 suggested restructuring and reduction of the MTNL staff. But MTNL
officials argue that implementation was impossible because only peripheral
staff changes are possible. MTNL has limited power to hire staff outside
of DoT and it is limited in providing benefits to the staff which DoT
employees do not get. MTNL officials argue that because they can not
3 3 Quoted from interview. BJP was part of the Nationalist Front
government led by V.P. Singh.
TABLE 7:6
TOTAL NUMBER AND INCREASE IN DELs: DELHI AND BOMBAY
Figures in thousands (rounded)
1986 1990 1993
Total DELs 747 1,112 1,597
Delhi 293 459 699
Bombay 454 653 898
Total Increase over 1986-93:
Total: 850,000
% increase: 113.8%
Delhi: 406,000
% increase: 138.6%
Bombay: 444,000
% increase: 97.8%
Source: MTNL completes 7 Years
249
TABLE 7:7
QUALITY OF SERVICE: BOMBAY AND DELHI (1986-90)
Criterion City March
1986
March
1990
March
1993
No. of faults/100
telephones/month
Bombay 21.2 15.8 16.8
Delhi 34.9 22.6 23.28
CALL COMPLETION RATE:
LOCAL
(Non-toll)
Bombay 93.0% 90.13% 88.6%
Delhi 77.3% 96.05% 95.24%
STD
(direct dialing)
Bombay 28.9% 71.5% 85.2%
Delhi 30.0% 87.75% 84.75%
Operator assisted
long distance
Bombay 63.1% 75.12% 75.0%
Delhi 69.2% 71.5% 72.9%
Source: MTNL Completes 7 Years.
250
TABLE 7:8
NUMBER OF EMPLOYEES PER 1000 TELEPHONES
Year Bombay Delhi
1985-86 56 58
1986-87 54 56
1987-88 50 50
1988-89 48 48
1989-90 45 45
1990-91 39 43
1991-92 34 40
1992-93 (estimated) 30 36
Source: MTNL Completes 7 Years
251
offer any incentives to their staff it is difficult for them to introduce
a new work culture.
HTML staff were given an extra Rs 100 per month while the question
regarding deputation versus permanent staff was debated. This extra Rs.
100 which MTNL staff received itself resulted in November 1991 in one of
the worst strikes by the DoT trade unions who also asked for a similar
allowance. The strike known as the 'tool-down-pen-down-strike' virtually
brought the country's telecommunications system to a complete halt for
nearly a month. The trade union officials in Dot argued that if they
could not be given the extra 100 rupees then MTNL should itself be
abolished and merged back with dot. The strike ended when the Ministry of
Communications assured the trade unions that it needed time to decide
whether MTNL should be re-merged with DoT or not. The loss to the economy
as a result of the strike was by all accounts more than the loss which the
Dot employees felt they suffered when MTNL was started.
By early 1991, it was not clear whether MTNL would get more autonomy or if
it would be re-merged. The third alternative, dividing the country into
six independent corporations, dismissed even before MTNL was created would
probably have met even stiffer bureaucratic resistance in the DoT. It iB
being reconsidered now as India moves toward decentralization and
liberalization of the economy, the corporatization alternative might have
to be implemented regardless of the opposition it generates. An
interesting outcome of the MTNL experiment is that after corporatization,
both officials and workers have felt better off in their careers than
before. DoT argues that corporatization of MTNL would mean that terminal
benefits of Rs. 6,000 to be paid to each employee would be a heavy cost on
the treasury. MTNL officials note that they can pay these benefits from
their internal budget, interestingly, now even the trade unions in MTNL
252
do not want the re-merger. Workers, argue the trade unions, have better
wages and working environment and more chances for promotion in MTNL.3 4
VSNL:
Compared to MTNL, VSNL (because of its predecessors relative autonomy in
the past) has more autonomy in at least three areas. First, VSNL has more
influence than MTNL over the appointment and workings of its Board of
Directors (a chairman and Managing Director, 3 functional Directors and 3
part-time official Directors). Unanimity on issues with its Board of
Directors gives VSNL more bargaining leverage with dot, Ministry of
Finance and the Planning Commission, second, its staff is hired directly
rather than through the Dot cadres. Third, its headquarters are in Bombay
and the geographical distance restrains everyday interference from the
DoT.
The overall emphasis given to telecommunications in the Seventh Plan has
led to significant improvements in services provided by VSNL. Table 7:9
summarizes these developments. The biggest improvements were in the area
of basic services. Direct dialing internationally over the telephone
increased from 11 in 1986 to 233 destinations by June 1993. Facsimile
service introduced in 1985, was available to 34 countries in 1990.
Although the 5981 international circuits available were still low, they
were expected to go up now that India is joining the international fiber
optic network (SE-ME-WE-2) and as more gateway facilities are opened in
the country.3 5 Apart from the low number of international circuits, one
3 4 Cited from The Business and Political observer. December 6, 1990.
3 5 Until January, 1991, there were three international gateways but
when the Calcutta gateway facility was added as the fourth. More gateways
are planned for the future. Apart from submarine cable linkB catering to
these gateways, there are three satellite earth stations located in
Dehradun (North-East of Delhi), Arvi near Bombay and Bengalore in south
India. India has a 1.8 percent share in the Intelsat system (there are
119 member countries) and sits on its Board of Governors. The Intelsat is
India's main link for international links to Europe, North and South
253
of the major stumbling blocks for quality services is the state of the
domestic network, in 1990, the Answer to sea-shore Rate [ASR]3 6 was about
28 percent, a small increase over the 20 percent rate in 198537. Table
7:10 giveB the ASR for 15 major cities in India, accounting for nearly 84
percent of all incoming international traffic.3 8
since 1986, demands by large users resulted in a limited number of
information/data services being provided. out of the 4,300 databases
which can be accessed from 16 countries, the major ones are: ipss (U.K.),
Datex. P (Germany), Transpac (France), Telepac (Singapore) and Telenet,
Tymnet, MCI and Easynet (USA) etc. Easynet, provided by Telebase, is the
most comprehensive providing access to 1500 of the major 6,000 global
databases.3 9 The major development was the commissioning of 'Gateway
Packet switching service [GPSS]' in 1989 connecting Bix major cities to
data and information networks abroad. Four other cities were expected to
join the GPSS facility in 1991. Map 7:1 shows the way the GPSS network is
America, the far East and Australia (india also haB a 0.44 percent share
in Inmarsat, the global maritime communications satellite system). As
noted earlier, 30-40 percent of the international traffic is via cables
and the rest over satellites, only 18-20 percent of the switching system
was digitalized in 1990 but VSNL was waiting for approval to import new
switches which would augment its capacity (number of circuits available by
100 percent) and would take the digitalization to 50 percent. By 1995,
VSNL expects upto 70 percent of its switching system to be digitalized.
[Data source: VSNL and interviews]
3 8 ASR measures the percentage of success in being able to carry the
telecommunication service over the domestic network once it has been
received at the gateway facility.
3 7 Data kept by international carriers from the U.K. and U.S. shows
that the call completion rate to India is around 28 percent for telex and
26 percent for telephones.
3 8 Moreover, chowdhary [Jan. 1988:3] notes that the regional
distribution of the incoming international traffic is 25.7 percent for the
Northern region (through Delhi), 47.11 percent for the Western region
(through Bombay), 24.47 percent for the Southern region (through Madras)
and 2.71 percent for the Eastern region (through Bombay before Jan. 1991
and now through Calcutta). The traffic to the Eastern region was expected
to increase dramatically with the commissioning of the Calcutta gateway
facility.
3 9 source for figures: VSNL and The Times of India. August 28, 1989.
TABLE 7:9
VSNL: Growth of International Services and Facilities
(As of 31st March)
| 1984 1987 1990 | June 93
No. of International Circuits:
Telephone 787 1144 2040 5981
Telex 906 1134 1203
-
Public Telegraph 49 47 46
-
Leased Telegraph 141 156 158
-
Leased Voice Grade 16 34 50
-
Leased IBS 0 1 1 1
NO. of Countries\Destinations With:
ISD (Telephone) 5 19 177 233
IXSD (Telex) 111 181 184 238
FAX 0 19 34 -
Projections:
International Telephone Circuits: 2002 — 35,236
2005 — 44,271
Source: Data collected during field research, Dec 1990, July
1993
TABLE 7:10
ANSWER TO SEA-SHORE RATE FOR INCOMING INTERNATIONAL CALLS
15 MAJOR INDIAN CITIES
(Sample Day: May 9, 1990)
Total calls: 785,348
Answered calls: 218,258
ASR % : 27.79
CITY ASR% All India Dist. (%)
1. Bombay 27.9 35.5
2. New Delhi 31.3 18.2
3. Madras 20.8 8.8
4. Ernakulum 24.1 3.7
5. Hyderabad 42.7 3.4
6. Bengalore 32.3 3.3
7. Calicut 28.9 2.8
8. Calcutta 16.6 2.4
9. Jallunder 22.4 1.6
10. Pune 33.7 1.1
11. Trivandrum 21.3 0.6
12. Jaipur 21.5 0.6
13. Ludhiana 10.4 0.5
14. Surat 23.7 0.5
15. Kanpur 3.0 0.1
Source: VSNL (data collected on field research)
256
configured through Bombay to provide these services. GPSS provides
business users the ability to transfer or access data to and from
overseas. The major users are banks, airlines, hotels, software industry
and corporate communications.
Large users may be connected to the gpss through a leased line from
DoT/VSNL connecting the customer premises directly to GPSS or through the
Public switched Telephone Network. Data transmission is not yet widely
used by large users because connection to the GPSS is either not error
free or not feasible. The domestic PSTN iB unreliable. It has a low ASR
and most existing switches and cables cannot handle the speed and the
volume of transmission needed to access major databases. Although the
number of leased lines rented by large user groups when a data transfer
facility became available through VSNL4 0 doubled from 26 in 1986 to 50 in
1990 41, it is still an extremely low number [Table 7:9].
A major hurdle in improving data and information services was the slow
development of VIKRAH and RABMN, the Packet switched Data Networks, which
were to act as the backbone for other planned networks for large users.4 2
The alternative, suggested by VSNL, was to let closed User Groups (CUGs)
use the Intelsat Business service [IBS]4 3 for which only Texas Instruments
4 0 Leased lines are available from DoT to user groups with identical
or similar interests. They are known as closed user Groups or CUGs
defined by Indian Telegraph Rules [No. 491] as users "engaged in the same
or similar business or they are subsidiaries to one amongst them or other
similarly connected to one another."
4 1 Leased circuits, both telegraphic and voice grade, were being used
before 1986 but the first leased circuit for international data services
was commissioned in March 1986 for the State bank of India, India's
biggest bank.
4 2 An experimental PSDN has been available in Bombay, Delhi and
Madras since July 1987 but its use has been limited as the PSDN actually
relies upon the PSTN for most of its transmission needs.
4 3 IBS consists of small rooftop antennae providing 64 kbps data
links through Intelsat satellites. GPSS, on the other hand, can only
offer speeds upto 9.6 kbps.
257
MAP 4.2
THE GPSS NETWORK IN INDIA
D E L htl^
AHMEDABAD
CALCUTTA
HUBANESHWAR
MADRAS
TRIVENDRUM
258
based in Bangalore was allowed. IBS is especially viable for software
exports from India because it allows for reliability and speed currently
not available though the PSTN and the limited PSDN.
DoT opposed IBS links because it felt that the development of VIKRAM in
the future would meet the needs of software exporters without duplicating
this effort through installing IBS. VSNL officials object that "[IBS] can
easily be dismantled provided competitive rates are provided." DoT also
holds that if IBS is provided, DoT should provide it. VSNL feels that as
it is the international carrier and in charge of Intelsat relations, it
should provide IBS. VSNL officials also point out that ultimately 60-70
percent of the tariffs it collects from IBS would go to DoT and the
Ministry of Finance for levy, network charges and taxes and thus DoT's
fears of losing revenues are unfounded.4 4 VSNL also suggested that IBS
earth stations could be procured directly by customers just as they
procure other CPE. VSNL could perform regulatory or maintenance tasks or
do nothing.
VSNL' s historically close links with the business community makes it quite
responsive in meeting the latter's demands. Meanwhile the software
industry favors low coBt IBS which could earn more than Rs 70 billion per
year in foreign exchange and offset any costB for setting up IBS.4 5 The
Telecommunications Commission lost the battle with DoT to meet the demands
of large international users because it was preoccupied with preserving C-
DoT and its authority and independence was itself reduced by the two
4 4 The Texas instruments link is monitored by the Department of
Electronics with some stipulations attached by the Ministry of Home
Affairs (the national security administration). Users and experts argue
that the Ministry of Home Affairs regulations are archaic in that if they
had to transfer any secrets they could simply fax them over instead of
going through IBS.
4 3 Figure quoted from The Times of India. August 28, 1989.
259
national governments before the Rao government. IBS may be made available
to large users now if they can provide the foreign exchange themselves.
Dedicated [Leased Line] Networks:
The evolution of leased line networks (along with the cellular and
telecommunications equipment markets in the 1990s) offers the best
evidence for how pressures from users (large users in this case) can
result in market oriented reform, in these cases user pressures weakened
the monopoly power of the DoT ( proposition 5) . As in other cases of
Indian reform, the move toward the market was haphazard and marked by
bureaucratic meddling and nepotism.
Leased line networks, or dedicated networks as they are known
alternatively, depend on the ability of the telecommunications provider to
lease circuits to users or the ability of the users to set up such
circuits themselves. The Indian Telegraph Act of 1889 (as amended)
accords Dot the exclusive privilege to provide telecommunication services
but gives the power to the Dot to authorize any other organization to
provide such services if DoT so chooseB. The power to provide leased
circuits is specifically spelled out under Indian Telegraph Rules of 1951.
The telegraph rules spell out the conditions for shared use by 'Closed
User Groups'4 6 and resale under special circumstances.4 7 No
interconnectivity among the networks is allowed and international access
through the gateway switching facility is allowed only for special needs.
ThuB, a banking network was allowed access to SWIFT and a business network
access to international data bases. Moreover, DoT only allows one point
4 6 see footnote 40 for definition.
4 7 "The circuits provided for the exclusive use of one party shall be
used only by that party provided that the telegraph authority may, in
special cases, authorize other persons to use such circuits. The
telegraph authority shall have the right to control and censor messages
transmitted over the circuits." Indian Telegraph RuleB 476.
260
of interface for these networks. Its reasoning is that if multiple
interfaces are provided, data networks will be used for speech
communication resulting in a loss of revenues for DoT.
While the DoT (and its precursor the Department of Posts and Telegraphs)
provided leased circuits for a long time, the phenomenon of providing
leased circuits for data communications caught on only in the late 80s.
In March 1987, there were 1268 long distance and leased data circuits
while the comparable figures for leased speech circuits was 4214, for
leased telegraph circuits 6361 and for leased facsimile circuits 18.4 8
But data circuits have been growing at a tremendous rate. By 1989, there
were 10,000 circuits for data networking, a figure expected to grow to
100,000 by 1995 and 1 million by 2,000.4 9 on the services side, leased
circuits and data communications market for 1990-2000 was expected to be
Rs. 32.78 billion or about 3.8 percent of the total telecommunications
services market.
India's entry in the data communication market is relatively late and
began in the early 80s. The feasibility and growth of data networks iB
important for any country to become a part of the international economy
requiring instantaneous and cost-effective communications.5 0 Aronson and
4 1 statistics quoted from DoT, 1988: 91.
4 9 statistics quoted from Computers Today. December 1989: 29. The
magazine calculated the equipment market (mostly CPE) in data
communications to be between rb 200-300 million in 1989 with modems alone
accounting for Rs 60-70 million. If LANs (Local Area Networks covering a
distance upto two kilometers on customer premises) are included, the total
market increases by about 50 percent. The major domestic companies
involved are Computer Maintenance corporation (a Government of India
subsidiary), Zenith computers in the LANs market (it made Rs 944 million
in 1988), Tata Consultancy services and Tata Telecom, the latter being
subsidiaries of Tatas, the biggest industrial house in India.
5 0 Thus, for example, global financial management has been
revolutionized with the emergence of the international financial network
known as SWIFT (Society for Worldwide international Financial
Transactions).
261
cowhey note that leased communication circuits have defined the
international data and information services since the 1960s when PTTs
found it difficult to meet the demands of large users.5 1
As in developed countries, leased circuits were made available to large
users in India, but the DoT slowed the proliferation of the dedicated
networks by promising and then not delivering its two psdNb [VIKRAM and
RABMN] on time. RABMN, expected to be commissioned in 1991, would set up
a master satellite station and 1000 small earth stations located on
customer premises throughout the country. A narrow band ISDN was planned
for the four metro cities for 1990 but with delays in installing digital
switches and plans for VIKRAM shelved and RABMN delayed, the ISDN is a
remote possibility for the near future.5 2 in the absence of VIKRAM or
comprehensive plans for a future ISDN, the dedicated networks which have
sprung up in India do not compare well in quality and price
internationally, dot currently charges an annual flat rate of Rs. 500 per
kilometer for leased circuits which users complain is far higher than
international rates. Cross-subsidization seems to be DoT's defense. When
asked why the data circuit prices were so high, a DoT official replied:
5 1 Aronson and cowhey [1988: 78]. They write: "The PTTs are
sensitive to the fact that use of leased circuits is exploding because of
the needs of large users and because they are the building blocks of new
competitors offering global value-added and information services." They
also write that there are no reliable and comprehensive statistics
available for worldwide telecommunications services market and thus
measurements of the data communications market are difficult. However,
they cite two relevant studies. The first calculated the 1985 information
services market to be about $25.4 billion out of a total
telecommunications services market of $174 billion in the U.S., EC and
Japan. The second calculated the world data communications market
(including services and product/equipment) to be $223 billion with
services accounting for about 28.5 percent of that share in 1987. The
share of Asia in this market [including USSR] was about 25 percent, [pp
67-68]
5 2 The idea of the ISDN has not caught on in the dot. Some say India
does not need it and others say that it is difficult to develop an ISDN
when the standardization process for it iB incomplete with CCITT. very
few admit that much of the blame rests on the DoT's inability to come up
with the requisite digital technology [based on interviews].
262
"Wherefxom do we get the money to take to rural India? We hardly earn
anything in terms of money by providing telecom facilities to villages.
We have to make up elsewhere to generate resources to carry on our social
obligations. m 5 3 low quality comes from slow speeds, frequent
interruptions, delays, noise and faults in the leased circuits. It does
not seem that the high revenues being generated by the current dedicated
networks in operation have been used significantly to improve the quality.
The dot approach toward dedicated circuits emerged on a case by case basis
and there was no clear policy governing the maintenance or development of
these networks. The government and public sector enterprise networks
which came up offer a useful illustration of interdepartmental rivalry and
their relative power position within the state. Some of the earliest
dedicated networks appeared opportunistically. DoT infact had to grant
them licenses because large users like railways5 4 and defense had clout
and their ministers were part of the inner group of decision-makers in the
national cabinet. Given their political access and high budgets relative
to other departments, these users are not ones to whom either the Minister
of Communications or the Dot could say 'no.'
The chronological development of dedicated networks in India with RAILNET
(Indian Railways network) taking the lead from 1985 onwards reads like a
ranking of the several ministries in the Government of India according to
their access to or power over national decision-making. Only when it
comes to less powerful ministries does the power of DoT improve and their
objections to dedicated networks become stronger. The classic argument
5 3 Quoted in Computers Today. December 1989:31.
5 4 Historically, the Ministry of Railways (supervising the second
largest railways network in the world after the soviet Union) has always
had an important position in national politics. The railways budget
precedes and is presented separately from the national budget and is often
awaited eagerly and serves as an indicator of the shape of things to come
in the national budget.
263
put forth by Dot is that too many dedicated networks would waste national
resources given that the proposed VIKRAM and RABMN would provide similar
facilities. A limited RABMN was expected to become operational in 1991
but as Mody points out its quality and price holds limited viability for
a promising export industry like software development.a A summary of the
major dedicated networks in operation for the time being is provided by
Table 7:11.
Most large users in India come from the public sector. Potential users
(large and small) from the private sector remain skeptic of DoT's ability
to provide low cost and high quality services that they need, computer
Maintenance Corporation, a government subsidiary with the Department of
Electronics in the Ministry of industry, set up 'Indonet' in an attempt to
meet the needs of small business users. Indonet is described by Mody as "a
value-added slow (1,200 bps) star configuration of orphaned computers left
behind by IBM in 1978."* (One of the first users to hook up with Indonet
was the Welcom Group of luxury hotels owned by the Government of India).
Large private industrial houses in India have plans for their own networks
and as yet the smaller ones find it too expensive or they are just not
used to the whole idea of data networking.
Development of data communication networks for business needs in India is
now enmeshed in a chicken and egg type of paradox. The Department of
u Mody [1990: 19]. she notes: "Unless special financing is
available, a group of computer programmers who have recently graduated
from a small town engineering college will be unable to raise the $20,000
for purchase of a VSAT [the customer premises earth stations known as very
small aperture satellite terminals] and then afford the $350 monthly
access charge generally estimated. Bear in mind that the monthly salary
of a good programmer in a big metro city is around $250 a month. Added to
the high cost is the questionable utility of such a low-speed [300-1200
bps] transmission rate."
5 6 Mody, 1990:18. "Smaller firms brave the overburdened public
switched telephone network, use the private courier air services, the
government postal system, railways or airline.”
264
TABLE 7:11
MAJOR DEDICATED (LEASED LINE) NETWORKS IN INDIA IN 1991
NAME DEVELOPERS USERS COMMENTS
Ernet DOE Academic/
Research
Conceived 1986. satellite
channels to institutions
available
IA Network Indian Airlines Implemented 198S. 67 domestic
and international stations.
Indonet CMC Business
firms
Conceived in 1982.
Implemented partially: 1989.
Delay because of non
availability of imported
components and DOT'S PSDN not
ready, connected to
international networks through
Bombay.
Inflibnet several
government
agencies
University
research
ers
To be implemented 1991-96.
Link libraries across India.
Nicnet NIC government
planning
agencies
conceieved 197S. Implemented
partially by 1990. Connects
district headquarters and
state capitals with New Delhi.
Oilcomnet Oil Industry
(govt, of India)
Implemented in Bombay_Delhi.
Covers dozen govt, firms
RABMN DoT Industries
service
sector
1,000 earth stations connected
by master satellite. Planned
for 1991.
Railnet Ministry of Railways Provides computerized
reservations from 20 cities.
Touristnet Tatas Tourist
Industry
will connect travel agencies
and offices of govt, owned
airline.
VIKRAM DoT Industries
service
sector
Was meant to be the backbone
PSDN for all other network
covering 20 cities during
1985-90. Plans shelved now.
Key:
CMC: Computer Maintenance Corporation, Department of
Electronics.
DOE: Department of Electronics, Ministry of Industry
NIC: National Informatics Center, Department of Electronics
PSDN: Packet Switched Datacommunications Network
RABMN: Remote Area Business Message Network
Tatas: Biggest private industrial house in India
265
Electronics and DoT note that a data communications culture has not
emerged in India and that businesses are slow in utilizing the existing
data communication and information services. This is a strange position
taken by both departments given that most of the large users which would
be in the private sector in developed countries are in the public sector
in India. These public sector users now have their own dedicated networks
or are planning to Bet them up. These include banks, airlines,
universities, heavy industry etc.
on the other hand, at one time Tata Telecom planned on setting up a host
of networks for large private business houses like Modi Xerox, Kirloskar
Cummins, Mahindra and Mahindra, Kirloskar Electric, Bajaj Plastics etc.
Tata Consultancy Service set up 'Touristnet', which apart from catering to
a the government owned airline vayudoot, would also cater to various
travel agencies in the countries.
Private business users also complain that the existing services are
expensive and unreliable, of particular note here is the position of the
software industry for which high export targets have been envisioned
without an adequate telecommunications infrastructure being set up. Large
private users who have asked for IBS links through the Intelsat system, as
noted earlier, were denied requests by DoT.
As in the developed countries, large users stole the rug away from the
monopoly provider when it comes to data and information services. But in
the Indian context, the politics (interdepartmental rivalry etc.) are
important to understand the formation of data networks. An 'Empowered
committee for Dedicated Networks' consisting of representatives from
various departments and ministries was set up in 1989 where DoT tried to
streamline the procedures for setting up dedicated networks but with
limited success. At the Empowered committee meetings DoT did little more
266
than trying to build its case for why it must have the exclusive power to
set and license data networks. Setting up of dedicated networks in India
has truly been a 'science of muddling through.' The biggest losers have
been small and medium scale private business users and the Indian software
industry.
Conclusion
The same factors which influenced policy choice and regulatory reform also
come into play in the provision of services. However, for provision of
services, inter and intra-departmental rivalry, and trade union activity
play a greater role. This is especially true in the day to day
implementation of the overall policy and regulatory frameworks. it is
here that the government bureaucracies become relatively autonomous.
While the policy and regulatory reforms may determine the overall content
of reform, the intra-bureaucratic rivalries and trade union activity
determine the pace of this package.
The regulatory structure was controlled significantly by DoT's own agenda
which was often at odds with user preferences or other state agencies in
telecommunications. To the extent that this delayed the provision of
services, the Indian case validates proposition 11 which states that an
autonomous regulatory structure will benefit end users more.
The chapter has touched upon all the propositions except for Proposition
8A which notes that for a multi-club coalition must overcome its problems
of collective action to transform the supply structure of
telecommunications. The efforts of large users, private manufacturers,
urban users etc. were noted individually here. The heterogeneity of their
demands makes one appreciative of the problems they would have
collectively making a case. such collective action or its result is
however possible under a few circumstances. First, they can become part
267
of an even larger coalition such as the one noted in chapter 5 which would
counter the zsi coalition, second, the economic crisis or the state's
calculations of its legitimacy can drive it toward transformation of the
supply structure.
268
CHAPTER 8
LIBERALIZATION OF MANUFACTURING: 1985-93
introduction
The Department of Telecommunications [DoT] has been losing its monopoly
over procurement and production of telecommunications equipment since
1985. The DoT opposes this liberalization. It opposed the creation of a
domestic R&D center, C-DoT, because its products were licensed to private
manufacturers. Dot aligned itself with Alcatel, its preferred foreign
partner for technology transfers. Meanwhile, domestic private capitalists
favor the creation of a telecommunications equipment market for
themselves, albeit one in which there is minimal threat of foreign
competition.
The debate on indigenous versus foreign technology in digital switching
was noted in chapter 6. This chapter analyzes the liberalization of
Customer Premises Equipment, especially telephone instruments. The
liberalization of the transmission and switching market, particularly
manufacture of small switches for rural applications, is then briefly
examined. It also notes the case of TNEs which would enter the Indian
market if it was liberalized. so far many of these TNEs have either
supplied only software equipment unavailable in India (for example, AT&T's
UNIX system) or transferred their technologies for domestic production
(Siemens and Alcatel for telephone instruments and Alcatel for its E-10-B
switch).
Apart from illustrating proposition 5 which notes the efforts of exclusive
interest groups in creating markets, the chapter also deals with
proposition 9. It notes that technologies reduce barriers to collective
action but that in the short run we need to trace their influence through
the working of the groups they influence.
269
The telecommunications equipment market is big, although only crude and
often unreliable estimates are available, and thus there are enormous
opportunities to for firms to grow if they enter this market now. studies
quoted in Table 7:2 show that based on a forecast of 19 million phones by
the year 2,000, the telecommunications equipment market was projected to
be Rb. 67.3 billion between 1990-95 (average of Rs 13.7 billion a year)
and Rs. 135 billion between 1995-2000 (average of Rs 27 billion a year).
The equipment market during the 1990-2000 period is Rs 267 billion
(approximately $7.5 billion).1 Thus there are enormous stakes in entering
the market.
Customer Premises Equipment (CPE):
The CPE market was one of the first to be liberalized in 1985 with the
creation of the DoT. It was expected that with the projected growth rates
in dels and EAPBXs (together exceeding 20 million phones) until the year
2,000, ITI would not be able to cope with the demand for telephones.2
This section shows that the market was not completely liberalized and
reflects a combination of the capacity of the private sector to create
protected markets for itself and the government's deBire to do the same.
The role of foreign manufacturers is limited to technology transfer
agreements.
The Dot selected three foreign manufacturers for the transfer of
technology: Ericsson, Siemens and Face (a division of Alcatel in Italy).
The three were chosen because they agreed to transfer the technology.
However, both Siemens and Alcatel (Face is a subsidiary of Alcatel) were
already big players in the telecommunications market in India when the CPE
1 A FICCI study, on the other hand, estimates the total equipment
market during 1990-2000 to be about Rs. 10 billion (it doeB not provide a
breakdown), study quoted in Financial Express. July 15, 1988.
2 ITI in collaboration with ATE Liverpool had manufactured telephone
instruments since 1948.
270
deals took place. Private manufacturers in India were asked to sign
agreements with these manufacturers and were subsequently licensed by the
government for a given amount of production capacity. ITX itself opted
for the Face technology even before the market was liberalized3 and most
private manufacturers are licensed to produce either Siemens' or
Ericsson's phones. The foreign manufacturers were besieged with proposals
by Indian manufacturers for technology tie-ups. Thus from the 12 to 15
proposals that Ericsson received, it chose six. Siemens opted for 10.
The government itself licensed 51 manufacturers originally of which only
14 were around in 1990.
What happened to 37 manufacturers who were originally licensed but were
not in the market three years later? By 1990 there was too much licensed
and production overcapacity in the telephone market and most of those who
were originally licensed could not stay in the market. The CPE market in
India represents about 19 percent of the total equipment market and less
than 5 percent of the total telecommunications market. It depends on the
total switching capacity and the number of dels installed (and to a
limited extent the number of PBXs). The total licensed capacity in 1989
was more than 9 million phones with private sector accounting for about 4
million, public sector for 2 million and joint sector for the rest.4 As
against thiB, the demand for telephones before 1990 was always below one
million per year, while the total market for telephone instruments grew
by more than 7.5 percent annually during the Seventh Plan period (crossing
the Rs 1 billion mark in 1987), the period also marked a decline in the
number of producers who were still in the market a mere three years after
3 This is hardly surprising given that Alcatel was also the
collaborator for producing the large switches. In theory, the government
collaborates with the producer who offers technology producer at the least
cost but the Face agreement reflects more than just this. Even if Alcatel
offered the technology at competitive prices, it must also have done so
with regard to its market access for digital switches.
4 source: Independent. Feb. 2, 1990.
271
production started. one study shows that 7 companies (excluding ITI)
accounted for more than Rs 700 million in sales in 1989-90. Of these,
two companies accounted for more than 50 percent of the total market
share.5
clearly the number of DELs have not kept pace with the capacity of
telephone manufacturers, one also wonders why the state licensed this
excess capacity when by its own Seventh Plan estimates only 1.3 million
dels were expected to be installed. There are four major buyers of
telephone instruments: the DoT, MTNL, the Department of Electronics and
EAPBX manufacturers6. The biggest buyers are DoT and MTNL who still
supply the first instrument to the user and account for nearly 90 percent
of the market. By 1990, ITI was also expected to start producing its
telephone instruments and private manufacturers were not hopeful of ever
beating ITl's bids made to DoT.7
The political economy of protected market stands out as the villain for
the excess capacity and the failure of the number of manufacturing units
in telephones during this period. The state with its ambitious
telecommunications plans extending to the year 2,000 virtually guaranteed
a market for private manufacturers and even obtained the transfer of
5 source: Economic Times. July 30, 1990. The two companies are: Tata
Telecom and Bharti Telecom, both getting the technology from Siemens. The
two were largely responsible for the increase in profit margins from 5.4
percent in 1988-89 to 9.9 in 1989-90 among the seven companies. The two
companies had a diversified portfolio in telecommunications manufacturing,
including supply of components for dedicated networks. Relevant to the
discuBBion here iB that both were also EAPBX manufacturers and were able
to use their own telephone instruments for these.
6 in 1986, 36 manufacturers opted for c-DoT's 128 line EAPBX
technology. There were about 1,000 EAPBXs operating in India by 1990.
7 The bidding is done by the manufacturers after the government
publicly asks for these by means of tenders. The government chooses the
lowest cost bid. In practice, there is a considerable corruption. The
position of the private manufacturers reflects the fear that DoT and ITI
would act collusively to keep private manufacturers out.
272
technology for them from Siemens and Ericsson. The small firms which
obtained the licenses for manufacture did little by way of market research
on their own and were totally dependent on the government to market their
telephones. The licensed overcapacity reflects inflated estimates by the
government of this market.
According to pitroda, outright corruption also played a big role in the
telephone market's overcapacity.8 He notes that state subsidies attract
small producers to the telephone manufacturing market and that for every
rupee that the Bmall manufacturers invest, the government provides five
rupees of subsidy. Thus, many manufacturers come into the market without
ever intending to produce anything. Because of these subsidies "they have
made their money even before they produce one telephone."’ By 1990,
trade media noted that only established business houses (for example,
Tatas) had the willingness (given the widespread corruption among many
small manufacturers) and the ability (given overcapacity) to survive. An
Indian Express commentary sums up the market status: The "rush of
entrepreneurs to enter the newly opened field led to installation of
excessive capacity. In fact, hord mentality is a major scourge for the
Indian industrial world: whenever any profitable area is discovered,
entrepreneurs simultaneously rush to enter that field... .Several
industries including cement, mini-Bteel, tyres, polyester staple fibre
etc. have gone through this rigmarole.” [emphasis mine] However, the
'hord mentality' could be attributed to the comfort of protected markets
created for the benefit of Indian private capital, on the positive side,
it reveals the fact that private industry is in want of investment
opportunities and can mobilize significant finance capital on their own if
government run industries are liberalized.
8 Interview.
’ Pitroda. Quoted from interview.
273
By 1990 , the telephone manufacturers were trying to survive in the market
with strategies reminiscent of the heydays of the isi era. When it came
to sta'to procurement, some of them acted in collusion presenting
identical bids at extremely low prices (if the cartel was not inclusive of
all firms) and extremely high prices (for an all inclusive cartel).1 0 In
trying -to break up this cartel, MTNL went so far as to place an order with
a company outside of the cartel even though its bid was higher." in
1989, ttflNIi had resorted to placing orders with the cartel at Rs 680 per
instrument even though the identical bid had been Rs 750.
By 1989, the manufacturers also started asking the government for support
(export subsidies, market searches, etc.) in exporting telephones, while
two companies managed to get export orders for a few specialized products,
India becoming a telephone exporter is a distant possibility. It would be
competing with the TNEs which supplied the technology to India in the
first place. The whole idea of exporting telephones is further
reminiaoent of Bhagwati and Deeai's 'cynical' summation of India's export
policy that "India should produce whatever it can, and export whatever it
produces . "I 2
1 0 This would mean that if the bids are accepted, the cartel would
divide the share among themselves edging others out of the market. The
strategy is questionable. At such low prices, the firms may or may not
recover their average costs and the marginal costs might be higher than
marginal revenue. The only advantage would be survival in the market, in
the hope of capturing larger market Bhares at higher prices later. Firms
are tenacious about staying in the market because if they leave they not
only losa their fixed costs but there are limited investment opportunities
in other areas. By 1990, the price of phones had already fallen to about
Rs 600 per instrument from a high of 1200 in 1987.
1 1 This happened in December 1990 when a cartel of companies made
identical bids of Rs 495 each for an order of 50,000 telephones. MTNL
decided to order it from a company with a bid of Rs 595 but one which was
outside of the cartel. The company awarded the contract had actually
broken av/ay from the cartel, otherwise the award would have had to go the
cartel.
1 2 phagwati and Desai, 1970: 466.
274
A few manufacturers plagiarized the foreign telephone model and offered it
at extremely low prices instead of acquiring the technology from any of
the three TNEs. Those holding licenses to the foreign technology were
threatened by these low prices and even a leading manufacturer like Bharti
Telecom acknowledged in 1990 that it was soon going to launch an
'indigenous technology' phone which would be cheaper by 100 rupees.1 3
while only a few medium and large scale firms were expected to survive in
the telephone instruments market, there was better hope for these
survivors in the 8th and 9th plan periods. The expected market for CPE as
a whole in 1990-95 was expected to be Rs. 14 billion from 1990-95 (Rs 2.8
billion a year) and Rs 26 billion (about Rs. 5 billion a year) from 1995-
2000 (See Table 7:2). But the plan did not even start until 1992.
Moreover, no consensus had emerged by early 1991 on the choice of digital
switches.
The Transmission Market and Private Manufacturing:
Partial liberalization took place in the transmission market in 1987. The
private sector was allowed to manufacture cables upto a 120 channel
capacity. There does not seem to be much of a conflict between DoT and
private manufacturers in the transmission components sector. The public
sector corporation Hindustan Cables Limited (HCL) has never been directly
controlled by Dot and the entry of private manufacturers offered no threat
to DoT's monopoly over equipment manufacture. Meanwhile, HCL caters to a
number of markets other than telecommunications and did not directly feel
1 3 Pressures by domestic manufacturers who can disassemble foreign
technology and offer it at low prices accounts for the militant stance
adopted by policy makers from countries like India in negotiating
intellectual property rights. The other classic case of not respecting
international patents in a modern industry are a few manufacturers in the
software industry who have copied and sold international software products
at extremely low prices. One of the three things U.S. Trade Negotiator's
Office placed India on a watch for while invoking super 301 in 1989 was
India's lack of protection for intellectual property rights. (The others
were restrictions on foreign direct investment and the government monopoly
in the insurance industry).
275
threatened by the manufacturers allowed in the telecommunications cables
market. ITI did enter the transmission market during the Seventh Plan by
beginning to manufacture fibre optic cables. HCL, however, retained 70
percent of the share of the transmission market. But as with telephones,
there was excess capacity in transmission equipment by the end of the
seventh plan. In 1989, the Telecommunications commission asked MTNL to
review its plans to import cables as it noted that HCL was running at 60
percent of its capacity.1 4
Cases of cartelization and excess capacity (and corruption thereof) in the
transmission equipment market exist. A controversy came about in October
1988 when it was found that the DoT office in Calcutta placed a large
order for cables with a 'cartel' of 20 manufacturers even though the
lowest bid came from three others outside of the cartel. Questions about
possible bribery were raised in the Indian Parliament but nothing could be
resolved even though it was still being raised in the print media. It
seems to have been forgotten later with the v.p. Singh administration when
other important controversies and allegations took over. There are so
many charges of corruption and rampant bribery of public officials in
media that if the issues are not reBolved immediately, they are soon
eclipsed by those more current and bigger. The judicial system is
overburdened with these complaintB and takeB years to reach a judgement.
The Switching Market and Private Capitali
The switching market was liberalized in 1988 to allow private sector to
manufacture switches upto 2,000 lines developed by C-DoT, representing
about 25 percent of the total switching market. The total market was
1 4 There was another reason. It was part of Telecommunications
Commission's efforts to renegotiate the $350 million World Bank loan
(noted in chapter 5), a part of which would have gone toward importing
cables.
276
expected to be Rs. 35 billion between 1990-95 (Rs. 7 billion a year) and
Rs 73 billion between 1995-2000 (about Rs. 15 billion a year).
The decision to liberalize the market came at Pitroda's behest with DoT
given the authority to invite bids and license potential manufacturers.
Again, the story is familiar. DoT prevented the entry of private
manufacturers (some of whom were already manufacturing EAPBXs developed by
c-DoT) and preserved the ITI monopoly. ITI was already producing the RAX
(Rural Automatic Exchange varying from 12B to 512 lines) switches in two
units in a limited capacity and was expected to set up two more units. By
late 1988, when all trials on the RAX were complete and it was ready to be
manufactured by the private sector, the dot came up with a regulation that
made it almost impossible for any private manufacturer to enter the
market, dot invited bids from private manufacturers but noted that apart
from supplying the switches, the manufacturer must also supply the power
and transmission units which go with it.1 5 In the past, not even ITI
supplied these accessories when supplying any switches. The DoT worked
through its procurement wing, 'the telecom stores' with a vast procurement
network, to acquire the accessories, calling the move "sinister" on DoT's
part, the leading financial newspaper noted that "the sudden insistence on
every telephone exchange maker should also produce this transmission
equipment, cannot be of good intentions. The intention of the Dot is that
nobody, except the ITI, should have the chance to deliver the RAXs."1 *
The Dot decision led to a fall in the supply of RAXs and their
installment.1 7
1 5 These include the battery, float rectifier, main distribution
frame, cables and other accessories.
1 6 Quoted from Economic Times. February 5, 1989.
1 7 one of the objectives of the Seventh Plan was to install one RAX
a day in different parts of the country. 1,000 RAXb (manufactured by ITI
and 11 private manufacturers) were installed by 1990.
277
The private manufacturers protested against the dot move to keep them out
of RAX manufacturing but the issue could not be resolved until after the
appointment of the Telecommunications Commission. DoT's decision was
reversed in November 1989 but only after the Dot secured itself the right
to manufacture these RAXs at four units spread out over the country,
subsequently, 10 manufacturers were selected to supply 100 RAXs each for
the 512 port switch.
The next move by the Telecommunications commission in August 1989 is
perhaps the most important in trying to break up the DoT-iTX monopoly. It
was decided that the large digital switches developed by c-DoT (known as
MAX or Main Automatic Exchange with 16,000 lines) would be licensed out to
private manufacturers. Each of the private manufacturers would have a
licensed capacity of 500,000 lines. How did the DoT react to this? It
got back at Pitroda and C-DoT when the V.P. Singh administration came to
power. Pitroda's role in the making of telecommunications policy was
marginalized until he resigned as the chairman of the Telecommunications
Commission. c-dot was folded up by late 1990 and merged with the
Telecommunications Research center [TRC] which had always been the R&D
wing of dot. The new institution which emerged from the merger is called
the Telecommunications Engineering Center.
The singh government fell in November 1990 but the Chandra Shekhar
government was not able to take any concrete decision on the issue of
switching equipment as fresh elections were inevitable. The Congress-I
administration under Rao was eager to have Pitroda back. He was appointed
the Technology Advisor to prime Minister Rao in late August 1991.
Although C-DoT, or TEC, its parent, may no longer be in a position to
develop large switches (bigger than 16,000 lines) in a short period of
time, it is unlikely that ITI would be allowed to go in for the Alcatel
technology either. The future winner might be AT & T which has been eager
278
to get into this market since 1985 and cultivated a good relationship with
Pitroda, C-DoT and the Telecommunications commission since its inception,
(unlike Alcatel which aggressively criticized it).1 8 In the meantime, max
is now being manufactured by the private sector.
Import Policy and Foreign Manufacturers:
The liberalization program in telecommunications under the Rajiv Gandhi
administration was focused upon breaking up the dot monopoly and slowly
opening equipment manufacturing opportunities to the private sector. Even
though just about every technology being manufactured indigenously
required either foreign collaboration, technology transfer or imported
components1 9 , a concerted effort toward developing an import policy did
not develop until 1989. A 19 89 study noted that "though not a direct
market for imported products, India has been a market for import licenses
[in telecommunications]." Between 1976 and 1985 alone, even before the
thrust given to the telecommunications sector, there were 113 foreign
collaborations in various aspects of manufacturing. Imports of
telecommunications equipment constituted 25 percent of the initial outlay
of the Seventh plan.2 0 The Telecommunications commission noted in 1990
that imports had cost about Rs 3 billion annually over the seventh Plan
period.
1 8 The strange alliance between DoT and Alcatel was a direct result
of the DoT-ITl combine fear of losing their monopoly. It is interesting
that apart from Alcatel, none of the other major TNEs (AT&T, Ericsson,
Siemens) seemed to align themselves with the dot. Alcatel is reported to
have hired a French public relations firm for $5 million to convince the
V. P. Singh government that c-DoT could not possibly develop a large
switch like the MAX when it was still in the R&D stage.
1 9 This includes C-DoT's EAPBX, rax and MAX for which 25 percent of
the components are imported.
2 0 source: Business standard. May 15, 1989. The article summarizes
a study by the news reporting organization 'Press Trust of India' on the
issue.
279
The basic tenet of the import policy drafted by the Telecommunications
Commission in August 1989 was to streamline the process of imports by
setting up an organization in 1990 to be known as the Components Bank
with branch offices in Delhi and Bengalore. The Components Bank would
identify areas in which there is no indigenous production and then act
as the intermediary between foreign manufacturers and domestic ones.
Technology transfer would play a big role in procuring the technology.
While streamlining technology imports, the Telecommunications Commission
also hoped that th® proposed bank would reduce imports by identifying
sources of indigenous production and thus reduce imports in areas where
domestic technology is available.
The Components Bank proposal was never fully realized after the
Telecommunications Commission lost much of its power under the Singh
administration. ouly a few foreign manufacturers seemed show a strong
interest in the proposal anyway. The idea of the bank was also a direct
result of the efforts by the Telecommunications Commission to renegotiate
the $350 million World Bank loan as also lay grounds for future
multilateral assistance. In a position paper that the World Bank
prepared laying the grounds for future negotiations and development
assistance, the author wrote:
While it would appear that there is a strong case
for bulk buying of component imports to reap the
economies of scale therein, it is not clear to me
why this should be the sole prerogative of the
public sector to establish. If the Telecom
Component bank is to be financially self
sustaining it could quite possibly be owned by the
full range of manufacturing units in the
country... .
In addition/ for any Component Bank framework, it
would be vital, in our view, that individual
manufacturers, of whatever size, would be able to
purchase the same, standardized components
directly from a supplier if they so wished.2 1
2 1 Robinson, J990: 4.
280
The World Bank's position is hardly surprising given that each successive
attempt by the Indian government to license imports (as would have been
the case with the Components Bank) has resulted in inefficiencies, excess
capacities and rent-seeking. It is also related to the overall World
Bank objective of liberalizing the Indian economy.2 2
Until 1991, the process of economic reform and liberalization of the
telecommunications sector was a process internal to India. It introduced
partial but highly regulated competition which while breaking the DoT
monopoly over manufacturing, awarded the protected market to private
capital and kept foreign competition out. It was India's growing foreign
debt which acted as the final straw in breaking the strong hold of vested
interests in India as it negotiated with the IMF for a $2 billion
loan.2 3 The elimination of most import licensing schemes and allowing
foreign equity to hold 51 percent of the shares by the Rao administration
is bound to result in direct investment by TNEs.
The biggest winner from the Rao reform package might be AT&T which has
the second biggest market presence in India after Alcatel. AT&T played
a waiting game in India since the mid-80s when it identified the Indian
market as one of the "strategic countries with many areas of mutual
2 2 The same paper opens with the contention that "any Bank
involvement in Telecom manufacturing will have to be consistent with our
objectives for the entire industrial sector. In this we would wish to
see an industrial base that is competitive in both quality and price, by
world standards, and that is able to export or compete effectively, with
potential imports. This can only be achieved by a progressive reform of
the variety of policies that distort relative prices and lead to highly
inefficient and inappropriate resource allocation." [ibid, pp 1-2)
2 3 The World Development Report 1992 provides a few ominous
indicators for 1990 when it stood at $70.1 billion. It was 25 percent
of India's GNP and the total debt service as a percentage of exports of
goods and services was 28.8 percent. Interest payments as a percentage
of exports of goods and services were 15.9 percent in 1989. World Bank,
1992:258 and 264.
281
Scbenefit" for both India and AT&T.2 4 AT&T evinced strong interest in
India's software market and wants to make India one of its sourcing
markets. AT&T officials argue that Indian software firms lack a clear
understanding of the global software markets (calculated by AT&T to be
around $150 billion by 1994) and cannot become global players without
first becoming strong domestic players. AT&T identifies three problems
in which it is willing to help: "(a) information management and movement
infrastructure at internationally competitive prices, (b) the
availability of quality inputs in a predictable manner, and (c) work
culture and discipline." Not surprisingly, as part of its strategy in
India, it captured the data communications market with its software
operating system UNIX which it licensed to both the public and private
sectors.2 5 The other areas in which AT&T licensed its technology are
transmission equipment (HCL) and fibre optics (ITI).
AT&T's long run strategy is geared toward capturing a sizable chunk of
the large switching market. AT&T is interested in supplying these
switches for big Indian cities (it has the capacity of supplying switches
which can handle traffic upto 100,000 lines). As early as 1986, AT&T
(along with its Dutch partner Phillips) offered to supply components for
C-DoT technologies and later even praised C-DoT for developing the RAX.
2 4 AT&T regional vice-president in Delhi quoted in Economic Times.
November 9, 1990. Compared to Alcatel's aggressive business strategy,
AT &T has followed a far more conservative business strategy. Pitroda
himself notes that "the best way to run India's telecommunications would
be to turn it over to AT&T and the worst would be to try to do everything
ourselves." He notes that his stance is to strike middle ground and use
India's human resources ("talent" as he calls it) effectively.
2 5 Aronson and Cowhey [1988: 209] note that in the emerging battle
over global ISDN standards, the most likely winners would be UNIX along
with standards developed by CCITT. UNIX allows for integrating multiple
users doing multiple tasks while CCITT's 'Open System Interconnection'
(OSI) is broader allowing for equipment from various vendors to
communicate with each other. As India's dedicated networks market
grows, UNIX is bound to be the software system chosen and might bring
AT&T into future development of an ISDN in India.
282
But AT&T's entry into the switching market was virtually blocked by DoT's
tilt toward Alcatel and the Gandhi administration's eggs in the C-DoT
basket. The present Congress-I administration, with Pitroda leading the
telecommunications reform, is unlikely to opt for Alcatel technology.
Conclusion
The politics of industrial organization or industry structure become
apparent in this chapter. It shows the influence of political variables
in determining the market size, number of firms and the dynamics of
competition. This chapter also shows how narrow interest groups can
create markets when interacting with a non-passive political actor, the
flip-side of Olson's argument.
283
PART IX: CONCLUSIONS
CHOICE OF TELECOHHUNXCATIONS POLICY, REGULATIONS
AND INDUSTRY STRUCTURE
The telecommunications provider's monopoly in India is breaking up as
private manufacturers contest or enter the equipment market and as the
services provider, the DOT, comes under increasing pressure to become more
responsive to user needs. on the manufacturing side, the market is
completely liberalized for the domestic private sector and the present Rao
administration's liberalization makes foreign direct investment a fait
accompli.
On the Bervice provision side, measures to become more responsive to user
needs led to reorganization of the telecommunications structures in Bombay
and New Delhi (MTNL) and India's overseas carrier (now known as VSNL).
The two corporations remain para-statal (public sector) entities but
divorced from a government department, the move opens the way for more
management oriented techniques and a customer oriented culture.
The DoT continues to resist these changes but corporatization as para-
statal enterprises may lie in the future for the department itself as the
Indian state moves toward greater liberalization with the Rao
administration. By 1995, it seemed that corporatization was in the
horizon. Privatization of a services was also on the planning charts for
rural areaB. Lastly, value added services are now deregulated. The
cellular services market is privatized. It received a bumpy start and the
state was accused of preferential treatment and nepotism in awarding
licenses in 1993. Even though their provision remains contingent upon
(and thus limited by) the availability and quality of leased lines from
the DoT, the move itself is consistent with the global trend toward
liberalizing value added services. Table PIX:1 summarizes and compares
284
theBe revisions in the structure of the telecommunications sector in India
for 1985 and 1993.
At this stage, it might be useful to state a few preliminary observations
about the explanatory variables of this dissertation.
Chapters 4 and 5 show that economic conditions constrained the set of
available choices for the Indian telecommunications sector. Taken
together they provide the evidence for proposition 1 of this dissertation.
First, the shortcomings of the ISI strategy for the economy as a whole and
specifically within telecommunications argued for administrative reform
and liberalization of controls in the sector, second, as India tries to
re-enter global markets after nearly five decades of ISI, the provision of
an adequate telecommunications infrastructure is a virtual necessity for
it to exploit its comparative advantage. Thus for example, it may be
argued that the ability of the Indian software industry in capturing a
large share of the world software market is limited by the inadequate
telecommunications services provided to the industry. This point will be
taken up further in chapter 6 which specifically examines the impact of
telecommunications on development in large developing countries, including
India.
Third, large users in the services sector have emerged as key players in
telecommunications reform both domestically and for international
services. The implications of the services sector go beyond
telecommunications, with a 6.3 percent growth rate between 1980-92, the
service sector now accounts for 40 percent of the GDP in India in 1992 (up
from 33 percent in 1970) and is one of the fastest moving sectors in the
economy.1 while the literature on telecommunications and development does
account for the growing role of the services sector in developing
1 World Bank, 1994: 164-166.
285
TABLE PII:1
TELECOMMUNICATIONS MARKET STRUCTURE IN INDIA
| 1985 1993
SERVICES:
Basic DoT Provided DoT, MTNL, VSNL
Value Added Not provided Deregulated
partially
Cellular, Paging Not provided Privatized
LEASED LINE CIRCUITS:
Shared use\resale sometimes sometimes
Interconnection with public
network
Not allowed Not allowed
Interconnection with
international networks
Limited Still limited
but being
liberalized
EQUIPMENT MANUFACTURING:
Telephones Liberalized Liberalized
Other CPE Partially
liberalized
Liberalized
Switching Partially
liberalized
Liberalized
Transmission Partially
liberalized
Liberalized
Other Components Partially
liberalized
Liberalized
Key:
Partially Liberalized: Government regulations affect
private sector participation and/or foreign direct
investment not allowed.
Liberalized: Very few government regulations, foreign direct
investment allowed or expected to be allowed.
286
countries to some extent, the literature by other social scientists needs
to include services among its formulations which are mostly limited to
agricultural and industrialization strategies. without including the
services sector, we can only partly account for the thrust given to high-
tech sectors like telecommunications and software etc. in the developing
countries.
Economic factors mostly account for the need to make telecommunications a
development priority, political variables (state structure and the nature
of user groups and social coalition interaction) account for the timing
and the pace of particular choices being made in the telecommunications
sector in India. The timing and pace is distinguished at two levels in
the dissertation. At one level, pressures from individual clubs are
examined. At a macro level, pressures from a multi-club coalition
(sometimes in tandem with other sectors of the economy or society) are
taken as a problem of collective action.
The external pressures on the Indian state for revisions in the policies,
regulatory framework and structure of the telecommunications sector come
from private sector in equipment manufacturing and large and urban users
in telecommunication services. While the state is responding to these
pressures, it is nowhere close to fulfilling telecommunications demand.
The evidence in chapter 6 shows unfulfilled priorities, shortages, poor
quality of service, financial drawbacks and a neglect of demand
conditions. The state's motives in supplying the club good do not
coincide with those of the demandeurs (proposition 2). Within the state,
bureaucratic and political interests making for intra and inter
departmental rivalry have shaped many of the decisions in the
telecommunications sector. Thus, many large users like railways etc. with
access to the state's decision making elite have been able to secure
dedicated networks for themselves. within DoT itself, the
287
telecommunications bureaucracy's resistance to change and its interest in
preserving its monopoly have slowed down or reshaped many of the emerging
policies.
The case of dedicated networks and equipment market liberalization show
that those with access to the decision-making structure will get these
services first (proposition 4A). The over-emphasis on rural
telecommunications coupled with DoT's penchant for the same (something it
uses to maintain its power and siphon revenues form MTNL and VSNL etc)
reflects state's own priorities (proposition 4B). Even when the Indian
state attempts to play a catalytic role, it is derailed by its struggle to
survive, bureaucratic pressures and the power of vested interests
(proposition 3 does not hold in India's case). The state also used any
number of arguments to restrict the supply of telecommunications services
(proposition 6). For example, the rise of agrarian interests does account
for some of the pro-rural strategies of the Indian state, but it is not
clear if provision of telecommunications services are high among the list
of demands of rural voters. While there is no doubt that
telecommunications services can impact the development process
significantly in rural areas (see chapter 2), this dissertation also
suggests that the Indian state at times has used the 'telephones to the
village' theme to deflect from its inability to provide these services in
urban areas. The dot uses the rural users theme to increasingly siphon
off revenues from MTNL and VSNL. There is as yet no clear indication that
the Indian state has reached a consensus on how to divide revenues between
rural and urban users. similarly, Dot's need to cross-subsidize rural
PSTNs were not matched by a strong commitment toward modernizing and
expanding the infrastructure for urban and large users.
Even as the telecommunication sector is marked by slow growth and
bureaucratic delays, efforts by groups mentioned above did introduce a
288
slow move toward market reform (proposition 5) belying Olson's belief that
exclusive groups will always create non-market privileges for themselves.
However, this is mostly due to the fact that it is a move from a non-
market to a market environment whereas Olson's analysis take to be a given
as a point of departure.
The difficulty of collective action ensures that clubs (user groups) in
this dissertation seldom come together to champion their cause
collectively ( proposition 7). Thus the reform process is mostly piecemeal
and slow. However, external pressures on the state (large and urban
users, export lobbies, private manufacturing, rise of agrarian interests
etc.) have weakened the unified sense of purpose which gave the state the
commanding heights role in the economy in the 1950s. In the long-run
pressures from Indian industry and the worsening economic conditions led
to the whole-scale reorganization of the Indian economy in 1991 in which
the telecommunications sector was included (proposition 0). Specifically,
the equipment market was further liberalized and value-added services were
opened for competition. In 1993, specialized services such as cellular and
paging were privatized. Again, the biggest beneficiaries were those with
direct access to the instruments of power.
As noted in proposition 9, ideas and technology, the short-run atleast are
unable to explain policy outcomes by themselves. ThuB, the rationale for
India pursuing a market-oriented strategy has to be first located in the
shortcomings of the prior development strategy giving the variable an
auxiliary status in this dissertation. On the other hand, the ideational
influences model purports that developing countries are pursuing market-
oriented policies because the power of neo-classical economists within the
state's decision-making elite has increased. This gives ideas independent
causation. similarly, modern technology in telecommunications has
weakened, if not completely broken down, the natural monopoly argument
289
which made for non-contestability and assured vertical integration in the
telecommunications market2. The first challenge to the natural monopoly
arguments came from the effective entry of private manufacturers in the
equipment market and large users in data networking. The equipment market
now stands liberalized and value added services deregulated. While
technology is not the only variable which explains these changes, nowhere
along the way was DoT able to use the natural monopoly argument to defend
itself.
overall, while the Indian state attempted to frame a comprehensive
information policy, it met some of the same obstacles as noted above in
the supply of telecommunications services. This resulted in piecemeal
modernization as far as information policy is concerned (proposition 12)
and a demand oriented policy in a few circumstances only (proposition 10).
This left out many of the groups with the highest demand for
telecommunications services (large users, exporters, urban consumers).
The emerging regulatory structure (the Telecommunications Commission)
possesses few powers independent of the policy-making authorities and in
the beginning was resented by the Dot which wanted to limit its power.
The Dot continued to maintain a stronghold over regulatory issues which
often times put it at odds with UBer demands [proposition 11]. By 1993,
however, the Telecommunication commission was beginning to come into its
own and reducing the power of the Dot.
Finally (as noted in proposition 8), the reform process in
telecommunications is itself part of two larger reform processes in India,
one of these is taking to free India from the burdens of the state-led ISI
strategy or the state's role in economic affairs which began in 1947. The
other is taking India along decentralization of power and control in
national politics and policy-making. The process of centralized control
2 see chapter 2 for an explanation of these theses.
started when the East India Company set up its troops and commercial
offices in India and led finally to direct British government control
after 1858. The story of telecommunications in India is inextricably tied
to this process of control and now its emerging decentralization; just as
it is tied to the decreasing role of the state in the Indian economy.
291
PART III
CHAPTER 9
TELECOMMUNICATIONS AND DEVELOPMENT
This dissertation develops three themes. First, it explains the demand
and the supply of telecommunications and related institutional
arrangements in developing countries. To do so, it synthesizes club
goods, new institutional political economy and collective action
literatures, second, it makes preliminary observations about the likely
beneficiaries from the revisions in the telecommunications sector. Third,
it combines these themes to speak of catalytic versus dysfunctional
states. The purpose of this chapter is to recapitulate these three themes
in light of the propositions given in chapter 1 and also to give
theoretical implications of the analysis for the political economy of
development in general. It begins by recapitulating the motivations for
group demands, their redressal through state instruments, and the pace and
scope of these changes. The final sub-Bection returns to broad themes of
development which provide the overall context or the dissertation.
The underlying current in this dissertation of tying in micro-level club
demands with macro-societal processes follows Kindleberger' s reservations
about thiB oft-ignored element in research. He writes that an adequate
theory of group behavior "muBt include not only criteria for
differentiating the responses of national groups as a unit but also a
system of analysis for interrelationships among the Bub groups within the
larger unit....In the main, social psychologists, sociologists,
anthropologists, and so on, have concentrated their attention on the
relation of the individual to the group, or the relative neglect of the
structure of the very large group (the nation) and of functional groups
within it."1
1 Kindleberger, 1978: 30-33.
292
It may help to explain the other major contribution of this research at
the outset. It has sought to bridge the gap between the political economy
of policy choice and its link with development. Host works on
infrastructural provision and development tend to take the infrastructure
as given and then explore the linkages with development. While important
exercises in themselves, they miss the whole spectrum of why a pro
development infrastructure emerges in one circumstance and not in another.
Exploring the why and how of infrastructural provision, if generalized,
may be at the crux of understanding why a few countries are able to
develop faster than others.
A brief comparison with another work may be useful here. Fishlow argued
that an extensive railroad infrastructure existed in the U.S. south but it
failed to produce industrialization as expected because it did not feed
into the existing linkages in the ante-bellum Southern economy.2 On the
other hand, in the U.S. West it tied in with the agricultural economy and
produced high growth rates. If this dissertation's framework were to be
applied to Fishlow's examples, it will explore why railways as a
collective good got supplied and demanded the way it did in the South and
not in the West. This may then help to explain how best to avoid the
infrastructural mistakes of the South or emulate those of the West instead
of just promoting the latter as an ideal infrastructure.
Club Goods a Collective Action
Telecommunications is a club good. This is because it is possible to
exclude users from its benefits by imposing a cost and, for the most part,
its consumption does not detract from the consumption of the same by
otherB (simultaneously or later) although network congestion at a certain
level of usage begins to occur. Thus, unlike pure public goods it is not
2 Fishlow: 1965. See pp. 306-311 for a summary of this argument.
293
entirely non-excludable and when consumed jointly it can result in
congestion.3
The club goods character of telecommunications brings out three typical
features: the heterogeneity of user group populations; the multi-product
nature of telecommunications; and the problem of increasing returns to
scale which make general equilibrium situations hard to obtain. These
three factors call for institutional intervention, a role typically played
by the state in the past.
The dissertation shows that the motivating influences for group demand and
state supply are different. Whereas, user group demands are located in
the economic situation of countries, states are motivated by their desire
for survival and legitimacy. Production interests tend to be more
important than consumer interests for most I>DC states because of the
former's direct access and support for the state and also because of their
organizational strength. There are several variations. The Singapore
state stays legitimate by not letting domestic capital become far too
strong and gives importance to foreign capital. The Korean state has
supported domestic capital without letting its conglomerates, the chaebol,
get too strong. The latter started supplying service sot middle income
groups as it tried to stay legitimate after Park chung Hee's death in 1979
A classic club goods analysis shows that both membership and provision
conditions must be met simultaneously to obtain pareto optimal solutions.
In cases where the state supplies the club good in questions, this iB
seldom the case. This theme will be taken up again later.
3 The terminology employed is that of Nabli and Nugent, 1989:81.
Jointly consumable goods with no congestion are also sometimes called
"non-rival" goods [Sandler, 1992:6],
294
Demands made by individual user groups or clubs are only one way for the
latter to get their demands met. At a macro level, the clubs can form
coalitions among themselves or with other societal actors to try to
transform the supply structure in their favor. However, as proposition
seven shows, it is easier for cluba to get the club good provided by the
state than to transform Its supply structure altogether. Efforts to
transform the supply structure are weak because: (1) such efforts at the
club level may be insufficient to alter existing rules and Institutions,
or (ii) incentives for this club to be part of a larger coalition within
the telecommunications sector or other sectors may be lacking.
The last proposition accounts partly for the haphazard nature of
telecommunications reform in developing countries. It may explain why
certain groups are able to get their demands met partially through state
instruments without joining together to overhaul the entire supply
structure. For example, large users along China's east coast especially
high-growth area such as Guangdong and Fujian were able to obtain a fair
amount of spohisticated telecommunication services without ever trying or
being able to displace state monopoly in telecommunications.
At a macro-level, the provision of telecommunications services and related
institutional arrangements is a problem of collective action. At present,
collective action activity seeks to move the telecommunication supply
structure toward market oriented agencies. The problem is compounded by
two factors in the context of developing countries. First, we cannot
assume that once demandeurs are able to overcome their problems of
collective action, the good will be provided through the agency of the
state because the latter may or may not be receptive to such demands.
Collective action analysis lacks a theory of state decision-making
structure as it exists in developing countries and this dissertation
attempts to fill this need.
295
In developed countries, many of the collective action problems involving
economic actors are about the need for the state to solve collective
action problems given market failure. It is the opposite in developing
countries. Many of the collective action problems involve reducing or
redefining the state's role in economic activities and the interest group
activity which may or may not be able to effect this.
INCENTIVES FOR GROUP DEMANDS:
Economic, technological and ideational factors impose varying degrees of
costs and benefits upon users, and telecommunication providers and
manufacturers for group demands. This dissertation begins by showing the
motives for club demands at the micro-level and multi-club or inter
industry demands at the macro-level. The steps are recapitulated below in
light of the dissertation's propositions.
Large users are at the forefront of telecommunications revolution among
developing countries for a number of reasons:
1> Being small in number, perhaps the smallest user group in
telecommunications, it is comparatively easier for them to come together
to demand telecommunication services.
2> Being one of the most productive groups in any country, the extant
telecommunications infrastructure, if inefficient, imposes the highest
costs on this group.
3> The group has the ability to provide an alternative to dominant
provider's (usually state's) failure in the provision of telecommunication
services. Thus, cellular phones, direct satellite links, dedicated
networks are examples of alternative networks owned, operated and used by
large users in many developing countries. In general, large users possess
the resources to take advantage of technologies which have broken down the
natural monopoly argument in telecommunications. Exclusionary costs when
the services are provided as such are high and the telecommunication
296
service in question approaches the character of a club good.4
4> The threat posed by large users, in terms of their ability to bypass
the extant infrastructure, can itself be an incentive for the dominant
providers to start providing new and enhanced services.
These collective strengths of large users make them one of the first
beneficiaries of telecommunications reform. However, even among them,
those with greater access to the state decision-making structure (many of
them state departments themselves) gain more than others.
on the other hand, residential users are large and heterogenous in their
number and are unable to get their demands met easily. Many of these
users have been on waiting lists for telephones for a number of years in
developing countries and, arguably, their problems may even predate those
of large users. However, because of their collective action problems,
they are able to effect few outcomes in their favor through market or non-
market means (an exception to this rule is when the state is predisposed
to meeting their demands. This is discussed later).
Finally, whereas, telecommunications services are important in varying
degrees to all members in a group of large users, they may not rank high
in the lists of priorities of potential urban and rural residential users
most of whom are unlikely to be even registered for a telephone. Host
consumers in developing countries can not afford a telephone.
Other user groups fall somewhere between the low cost of demands met for
large users and the high costs for residential users. For example,
potential telecommunication service providers and manufacturers of
telecommunications equipment face fewer collective action problems than
4 The concept of club goods was originally developed by Buchanan:
1965. It allows members to share costs, minimize externalities and
exclude others from its benefits.
297
residential users. As a group they have employed the breakdown of natural
monopoly arguments in their favor the most to gain access to turf formerly
controlled by tbs dominant provider. They would also be the most likely
to employ market liberalization arguments on their behalf. Finally, the
redressal of these demands may not result in pareto-optimal outcomes.
Many of these groups seek market regulation favors which tend to benefit
them as a group (for example, licenses, quotas, subsidies etc.) and
exclude others.
The dissertation confirms the validity of the first proposition. Economic
necessity means that demand for telecommunication services increases as
developing countries expand into international and domestic markets and
carry out economic reforms. The severity of the economic crisis does,
however, determine the intensity of interest group pressures (proposition
one).
This explains why countries with the most inefficient telecommunications
infrastructure in Africa have been unable to move toward any kind of
significant revisions. It explains the existence of cellular phone
networks in countries like Zaire and Egypt. it would also seem that
whereas the severity of the economic crisis prompted Mexico toward Telemx
privatization, the motive for deregulation in South Korea was large user
demands and itB export dependence. The discussion also provides part of
the answer for why certain groups obtain services and market access better
than others (access to state decision-making structure explains the story
fully).
Proposition eight states that a multi-club coalition leads to demands for
transforming the existing policies, regulatory framework and services if
these groups are able to overcome their problems of collective action,
[proposition eight A] Given the ability of user a and manufacturers to
298
overcome problems of collective action, the beneficiaries of the revision
package will be those groups with greater access to the decision-making
structure of developing country states and those benefitting from the
state's inclination toward introducing these changes depending on its
maintenance of legitimacy [Proposition eight B].
Another incentive for group demands is provided by available ideas and
technology. However, it is shown in this dissertation that market
liberalization ideas and technologies which broke down the natural
monopoly argument in telecommunications have been around for a long time.
Their diffusion and adoption by human actors is important if we are to
understand their impact. Thus ideas and technology are treated as
auxiliary variables and not independent ones, in the words of proposition
nine, available ideas and technologies reduce barriers to collective
action but, in the short run at least, they are unable to explain policy
outcomes by themselves.
History is replete with references to technological innovations 'whose
time had not yet come.'s Particular technologies and ideas, therefore,
may make it easier for a group of individuals to make demands but by
themselves they explain nothing. As two authors recently stated,
"technology is organization specific"6 or in the words of cippolla, "it is
one thing to lead a horse to water; it is quite another to make it
drink."7
1 Water mill revolutionized agriculture and manufacture in medieval
times. However, Cippolla [1980: 167] writes: "The Romans were aware of
the water mill, but they built relatively few of them and continued to
make far wider use of mills employing animal and human powers." in a few
cases, a conscious decision was made by Roman emperors, for example
Vespasian, not to displace human labor with machines so the latter could
make a living. Thus, the ultimate decision for the use of technology was
based on cost-effectiveness and employment opportunities.
6. Nelson, Richard R. and Gavin Wright, Dec. 1992: 1961.
7 Cippolla, 1980: 190.
299
The ninth proposition is stated here only in the context of the short-run.
over the long-run, perhaps spanning centuries, there are several accounts
of how technology and ideas can be the ultimate cauBal variables. Thus,
"the rationality principle and the Faustian spirit of mastery”8 or the
"disposition”9 of western European peoples are often taken to be reasons
for European ascendance to economic power.1 0 I have no quarrel with these
analyses in the context of this dissertation. My task was modest.
Furthermore, even Landes has to take into account production patterns and
demand factors to explain his specific cases in the short-run.1 1
The two propositions above help to explain why 'the telecommunications
revolution' began to take place in the late 70s and early 80s in the
developing countries. This is the time when the crisis of the inward
oriented strategies in developing countries reached a pinnacle resulting
in a severe debt crisis in many of them. Private industry had gone
through a long gestation period and felt locked out of many opportunities
which the government controlled, with growing global interdependence,
technological and ideational diffusion had picked up speed.1 2 The time
was ripe for production interests to demand better telecommunications
8 Landes, 1969: 32
9 Cippolla, 1980: 191.
1 0 For a discussion of the 'enlightenment' versus 'adversary culture'
or 'disillusionment' ideas of links between technology and progress in
U.S. history, see: Marx, Leo. "Does Improved Technology Mean Progress?” in
Albert H. Teich. ed. 1990.
1 1 For a brilliant analysis of how free trade ideas worked themselves
through the political system in Britain and later Europe see:
Kindleberger, Charles. "The Rise of Free Trade in Western Europe, 1820-
1875.” in Kindleberger: 1978. He notes in conclusion: ”Manchester and the
English political economists persuaded Britain, which persuaded Europe —
by precept and example” [p. 65}.
1 2 A recent Burvey of the riBe and fall of American technological
leadership concluded that since the 1950s the technological "convergence
model looks more and more plausible. In our view, it is the
internationalization of trade, business, and generic technology and the
growing commonality of the economic environments of firms in different
nations that have made it so.” Nelson and Wright, Dec. 1992: 1961.
300
services. These groups headed the telecommunications revolution in
developing countries. The most successful countries were those in which
the state played a dirigiste role in tandem with group demands. For those
countries which had shifted to an export oriented strategy, provision of
an adequate telecommunications infrastructure was even more of a necessity
both for their exporters as well as for transnational enterprises seeking
to do business in these countries.
State Decision-making Structural
"Artifacts have politics" wrote Langdon winner. The politics can only be
more intense when technological needs are expressed through interest
groups and social coalitions impacting on governments. Kindleberger has
alternatively called these "the relationships between economic interest
and political power."1 3
Demand does not create its own supply. This is especially true when the
state is supplying the good in question. Users must be able to prevail
over states to get their demands met. "The lobbying organization must
besides agreeing on its own policies, go through the compromises and
procedures needed to change government policy."1 4 An example would
illustrate this.
Less developed countries usually have better international services than
they have domestic ones. This is mainly due to the access of exporters,
trans-national enterprises and multilateral institutions to the decision
making structure of developing country governments. Exporters, tend to do
better than large users (although a few large users are also exporters),
even though their numbers may be high. But even if large in number they
1 3 Kindleberger, 1978: 41.
1 4 Olson, 1982: 57.
301
-tend to be well-organized as interest groups historically. They may have
a history of state lobbying for export related favors and they are most
likely to employ ideational arguments (a pro-liberalization argument, for
example) to hold their numbers together and also to lobby the government.
With the globalization of world markets and the attendant competition and
division of labor, an inefficient telecommunications infrastructure
imposes high costs on their productive activities. Being the highest
foreign exchange earners, they occupy a privileged position with state
decision-makers. state decision-makers, in turn, also may be courting
transnational enterprises which place high priority on
telecommunications.1 5 They may also be under pressure from multi-lateral
institutions to improve their international telecommunications services
which may come appended with loans and grants from these institutions.1 6
The predominance of export interests over those of any other economic
interest explains the availability of sophisticated telecommunications
services along China's coast, particularly Gungdong and Fujian which are
tied up with Bong Kong and Taiwan. In the context of this dissertation,
it explains Singapore's international telecommunication ties. It explains
the relative efficiency of Brazil, Indonesia and India, all of whom have
separate providers for international services, partly due to the legacy of
colonial and semi-colonial (in Brazil's case) legacies and partly due to
the continued importance of export and import interests.
Large users with access to the decision-making structure are likely to get
telecommunications services earlier than others. This explains why
government large users, who were the first to receive dedicated networks,
1 5 "You can't develop a market economy and attract foreign investors,"
said a prominent reformer in Czechoslovakia, "if you can't get a telephone
call through or receive a fax." Quoted in Crawford, 1991: 1.
1 6 one of the priority items for the European Bank of Reconstruction
and Development [EBRD] for Eastern Europe is telecommunications.
302
have done better than private large users in India. it also explains why
large manufacturing coalitions, with or without foreign interests,
involved are able to get market regulations and access in their favor.
This was the case in Mexico, Brazil, Korea, Indonesia and India.
The last decade has, however, seen a change in he supply of
telecommunication services to various groups. States which had been able
to marginalize social groups now find themselves in an increasingly
tenable situation vis-a-vis their legitimacy. Thus, the South Korean
state has experienced everything from student riots to trade union strikes
and middle-class dissatisfaction. No longer able to marginalize these
groups, the states have tried to appease these groups through various
mechanisms. Provision of telecommunication services may be understood in
this regard. similar unrest with long-dominant state decision-making
instruments and office holders may be seen is states as diverse as
Singapore and Mexico.
The discussion confirms proposition two: when the club good la supplied
by a central authority such as the state, it may not result in pareto
optimality if the state's interest and motive behind supplying the good do
not coincide with the demandeurs.
STRUGGLE FOR LEGITIMACY:
Obviously, states do not exist to provide telephones and even when they do
they are likely to be motivated by factors other than the provision of
telephone service. Ab apparent as it might be, however, it is often
overlooked in the telecommunications literature. It is for this reason
that this dissertation places club demands within the larger back drop of
social coalitions. After all, state monopoly in telecommunications was
itself part of a larger strategy of inward oriented development in which
the state played a dominant role in many developing countries. Even among
303
countries which followed an export-oriented strategy, their colonial
experience assured that the state would play a dominant role in the
economy, whether in the choice of an initial inward oriented strategy or
in regulating foreign capital or influences.1 7 Moves away from this
strategy are, likewise, part of an emerging social coalition in developing
countries which includes private domestic and international business,
parts of the middle class and the services sector.
States are revenue and power maximizers.1 8 They may or may not provide
telecommunication services because it increases or decreases (as the case
may be) their power or revenues. Provision of telecommunication services
to residential users explains this point. It was noted that as a whole
this group was often at the lower wrung of state priorities, in a few
cases, however, this group or a sub-part of it has done well because
providing services to it enlarges the state's base of social support.
This was the case in providing services to rural ethnic Malays in Malaysia
and to urban middle-incoms consumers in Korea. in India, a pro-rural
strategy is essential for any party to come to power and this guided Rajiv
Gandhi administration' s (and subsequent ones') commitment of resources to
rural telecommunications projects after it was made a development
priority, in India, the state also uses a pro-rural rhetoric to deflect
the demands of urban groups. In many African countries and the former
Soviet union, it was in the decision-making elite's interests not to
supply information diffusion technologies (including telephones, fax
1 7 Walden and Rosenfeld: 1990, Haggard: 1985.
1 8 Most economists' models of state [For example, North: 1981] take
the state as a revenue maximizer which trades services (property rights)
in exchange for revenues. See, for example, North: 1981. Providing
property rights nationally and internationally in exchange for more power
is missed by these authors.
304
machines etc.) to consumers because exchanges of information could
destabilize the regime in power.1 9
The discussion leads us to an understanding of proposition six. sub-
optimality of supply by states takes one of the following forms: (A)
States can muster any number of arguments ranging from resource
constraints (material, financial, human) to an outright rejection of
telecommunications as a development strategy to restrict membership and
provision. (B) Levels of cross-subsidization among services, often quite
high, reflect the differential treatment accorded by the state to
different user groups.
CATALYTIC VERSUS DYSFUNCTIONAL STATES:
The ultimate argument of this dissertation is stated in terms of catalytic
versus dysfunctional states. It may help to recall these the two
propositions here. Proposition three deals with the catalytic state. A
catalytic state will not only meet user demands but also play a dlrlgiste
role in shaping future preferences. A catalytic state is one which can
both maneuver and be responsible Proposition describes the dysfunctional
state. Dysfunctional states will do one of the following things: A) supply
services to those with the most access to its decision-making procedures
(special interest driven state). B) Not supply services to any groups or
all to those bodies which help it dominate (predatory state).
The Indian state's ability to act as catalytic state after Indian
independence declined along with the failure of the inward-oriented
development strategy that India adopted after independence, slow economic
growth also atrophied the ranks of the wide social coalition which gave
the Indian state the commanding heights role in the economy. It was shown
1 9 see, Beniger 1986: 20-22 for a synopsis of the pre-Gorbachev
elite's reluctance to allow diffusion of information technologies in the
former Soviet union.
305
that beginning with the late-60s the Indian state oscillated between
special interests driven and acting predatorily inorder to maintain its
legitimacy. The fallout for telecommunications follows this pattern.
When the Indian state attempted to play a catalytic role after the late
60s, it was derailed by its struggles to survive, bureaucratic pressures
and the power of vested interests. Telecommunication shortages,
unfulfilled priorities, poor quality of service, financial drawbacks and
neglect of demand conditions all reflect the dysfunction in the Indian
state. The state's motives in supplying the club good seldom coincided
with those od the demandeurs. The case of dedicated networks also showed
that those with access to the decision-making structure were also able to
obtain these services first. The over-emphasis on rural
telecommunications, on the other hand, reflects state's own priorities and
not demand conditions.
Examples of catalytic states are few and hard to find in LDCs and NlCs.
Even those I call catalytic must be qualified. Singapore an South Korea
both acted responsibly and maneuvered against being captured by singular
pressures but only at the sake of marginalizing groupB in society.
Singapore marginalized labor, consumers and domestic capital. South Korea
marginalized agriculture, labor and foreign capital. Similarly, Malaysian
state shields itself carefully from undue influences by domestically
powerful Chinese capitalists, labor while meting the demands of and
inviting foreign capital. All these states, however, have designed their
telecommunications polices around the areas of high demand and tied them
in specifically with long-run information policies.
Pace and Scope of Telecosmiunications Reform
ThiB dissertation reflects the emerging consensus among academic and
policy-making communities that the question is no longer whether or not
there will be market liberalization and competition in national
306
telecommunication markets. "The main issue of concern, over which rousing
battles can still be waged, is how to get there [competition], how fast to
move, and what, if anything, will remain as a 'residual' of natural
monopoly."2 0 The powerful questions being asked now have to do with the
pace, scope and effectiveness of this reform.
The pace of Reforms of telecommunications is determined by the intensity
of user group pressures and the inclination of the state to meet these
demands or supply telecommunications services of its own accord. We also
need to distinguish between demands made at the individual user group/club
level, the interaction among these groups and their association with
groups outside of telecommunications.
on the other hand, the state may be hit by an economic crisis so big that
it literally breaks the back of entrenched interests from the past. This
was the case with Mexico's telecommunications reform program. To be sure,
the reform process started much before the debt crisis and continues ten
years after Mexico initially decided to renege on its debt payments.
Mexican entry into the GATT preceded the crisis, privatization of Telmex
came eight years later while the NAFTA negotiations ended in 1993. Its
economic crisis following the peso devaluation in December 1994 and the
struggles that the ruling party PRI faces at present reveal the fragility
of the reform process which comes in a shot-gun manner as opposed to being
a result of economic pressures diffused through groups in society and
eventually redressed by the state. At present, the Mexican state's, and
consequently PRI strategy, in economic affairs is part of its need to
realign itB bases of Bupport.
2 0 Noll, Roger G. "The Future of Telecommunications Regulation." in
Noam, Eli. ed., 1983: 42.
307
SCOPE OF REFORM:
Consistent with the discussion above, the scope of reforms will be
determined by the same factors as those which determine the pace of
reform. A few additional points may be made here.
1. undue influence of a few interests groups or the disinclination of the
state to introduce effective telecommunication reform gives us the picture
of dysfunctional state. For example, fragmentation of the decision-making
structure and the power of entrenched interest groups has resulted in
piecemeal modernization of the information sector of developing countries
such as India and Indonesia. The catalytic state, on the other hand, is
marked by a ability of the state to play a dirigiste ole while also
meeting demands from many producer groups. The cohesiveness of the
decision-making structure, organization strength of national and/or
international business interests and their access to the state resulted in
overall industrial policy modernization in France, Korea and Singapore.
In many ways, the slowness of a similar reform process in the united
States and the national debate over whether or not the U.S.
telecommunications infrastructure allows it to be competitive is a
reflection of the fragmentation of the decision-making structure of U.S.
information policy and the coalitions which underlie this.2 1 I will
return to the point of framing a national information policy and its
relation with development in the next section.
2. An independent regulatory body emerges in those countries in which the
reform coalition is not outmatched by the entrenched coalition. This did
not happen in Britain until Thatcher came to power. A regulatory body may
also emerge where the government decision-making structure must maintain
a precarious balance between the various groups in the society. This that
the government decision-making structure is not overrun by any one group.
2 1 For the debate on telecommunications infrastructure and
competitiveness, see Aronson: 1992 and NTIA: 1991. Aronson: 1991 and
Aronson & Cowhey:1989 are also useful for getting an understanding of the
many actors involved in U.S. (and international) telecommunications.
308
This was the case with Malaysia, such regulatory frameworks do not accord
any particular favors upon any one particular production interest. Semi
independent regulatory frameworks and government ministries as regulators
in countries such as India, Indonesia, Brazil etc. are fraught with rent-
seeking activity. Many studies remain equivocal about the possibility and
the need for an independent regulatory framework. The evidence in this
dissertation attests to the difficulties in providing an independent
regulatory structure but does confirm proposition eleven. A regulatory
structure whose decision-making processes are not captured by state or a
few interest group pressures will benefit end users more than one which
reflects these Interests.
EFFECTIVENESS OF REFORMS:
Data presented in this dissertation shows that in every case where the
market was liberalized to admit more than one producer or service
provider, it resulted in rent-seeking activity. However, it also resulted
in enhanced production and increased supply of the quantity and quality of
telecommunication services. This was also the case when the rules
surrounding monopoly provider were relaxed to allow decentralization,
devolution, corporatization or competition etc. In more formal terms,
while the emerging telecommunications sector may not be pareto optimal, it
is definitely a more pareto superior outcome than the prior structure
afforded.2 2
2 2 Empirical evidence which both supports and partly diBconfirms the
efficiency enhancing aspects of increased competition in the U.S.
telecommunications market is presented in three papers in American
Economic Review: May 1993 under the title "The Breaking Up of AT&T and
Changes in Telecommunications Regulation: Hhat are the Lessons?" Hausman
et. al show that reduction of cross-subsidies produced more efficiency and
did not lead to a decline in penetration rates as expected. Taylor and
Taylor argue that while long-distance prices have fallen by about 50
percent since AT&T divestiture, this happened due to the reduction of
accesB charges paid by inter-state telecom carriers rather than increased
competition. Braeutigam and Panzar show that price-cap regulation being
now adopted by regulators is more efficient than rate of return
regulation, the latter often associated with the famous Averch-Johnson
thesis.
309
Most of the reforms processes in developing countries originated as
exclusive interest groups or clubs demanded change againBt entrenched
bureaucracies and governments. Wide social coalitions which support this
reform process may not have yet emerged. This runs counter to one of
Olson's key 'implications' which sates that, "[0]n balance, special
interest organizations and collusions reduce efficiency and aggregate
income in the societies in which they operate and make political life more
divisive."a As this dissertation shows, this conclusion only holds where
a democratic and/or pareto-efficient market exists. Proposition five
states that, in a non-democratlc and/or non-pareto efficient market
aetting, exclusive interest groups may lead to market oriented reform
Instead of creation of non-market special privileges. For example, the
actions of large users of telecommunications services in developing
countries to wrest control of the equipment and cellular markets resulted
in competitive markets for their provision (proposition five).
Olson's proposition holds in countries with well developed
representational governmental institutions which when they reflect the
interests of wider encompassing organizations are more efficiency
producing. In cases of autocracy, non-representational and/or non-
democratic state structures, actions by narrow interest groups can create
markets and produce efficiency even if in the short run they make
political life more divisive. This can result in positive rent-Beeking
activity.
Negative rent-seeking activities will include fixing of market shares,
quotas, licenses, subsidies and import tariffs etc. such activities are
a rational and dominant Btrategy for interest groups because it makes the
good (property rights) as excludable as possible and the interest groups
do not have to pay for the externalities.
2 3 Olson, 1982: Ch. 3.
310
This dissertation has not employed a formal method to measure the level of
rent-seeking in the telecommunications sector. However, while the
evidence is descriptive and anecdotal, it definitely points to reduced
levels of rent-seeking activity as a result of interest group activity.
I have also examined the distributive impact of telecommunication policies
in grew at detail but the evidence presented shows why specific policies
come about and who the likely beneficiaries are. The analysis suggests
the need for differentiated and micro-level analysis to examine the
distributive impact of telecommunication development polices. Even the
preliminary evidence presented here contradicts a few of the main findings
associated with the distributive impact of many of the LDCs development
policies, in India's case, the urban bias of telecommunications polices
which benefit large users must be weighed against the state's need to
maintain its legitimacy in the rural areas. Local or large capital does
not always win either. Telecommunication polices benefit foreign capital
in Malaysia, China and Singapore. it benefits local capital in South
Korea.
IMPLICATIONS FOR POLITICAL ECONOMY OF REFORM:
The 1991 World Development Report notes that in the transition to a market
economy the three central issues are the sequencing of market reforms,
political opposition to the reform process and the technical expertise of
the country in implementing the reforms process.2 4 This dissertation
shows the interconnections between the three issues by using a single
theoretical framework which combines them. The questions surrounding
market liberalization and the political economy of sectoral change have
all been explained using club goods, new institutional political economy
and collective action frameworks here. The framework offers a way of
analyzing not just the pace and content of these revisions but also
affixing the role of various agencies involved.
2 4 World Bank, 1991:144-145
311
Specific contributions of the project to analyzing the political economy
of reform process are briefly restated:
1. The country's economic structure, available ideas and technology act as
incentives or disincentives for invidual or collective group action.
2. Group activity has to be referenced with wider social coalitions in the
country to get a complete picture of policy choice.
3. Club goods and collective action analyses need a model of state
decision-making structure which helps to show the maneuverability and
responsibility of the state vis-a-vis user pressures and its own
preferences.
4. Interest group activity in non-democratic countries can result in
positive rent-seeking which may create markets rather than displacing
them.
LEAPFROGGING DEVELOPMENT
Leapfrogging development is taken to mean either an accelerated pace of
development or skipping over the stages of growth. Hill the provision of
a modern telecommunications infrastructure result in leapfrogging
development? The preliminary answer given in this dissertation is that it
depends on two things:
1. The degree to which the state is able to meet the needB and demands of
producer groupB in society.
2. The interconnection of telecommunication policies with the wider
framework of information policies designed by the state to tap into the
linkages within the economy.
Each of these issues are summarized below but before doing so, a brief
incursion into the underlying rationale for 'leapfrogging development' is
needed.
312
LEAPFROGGING RATIONALE:
The Idea that a particular technological and/or infrastructural path can
help developing countries accelerate their pace of development or hop-skip
the stages of development has strong intellectual foundations. During the
1940s and 1950s, a time dubbed by Hirschman as an eminently exciting era
in development economics, several deux ex machine were suggested to
deliver development. while they differed in substance, most of them
seemed to converge on the giant magnitude of effort required. Thus,
Gerschenkron emphasized "great spurt", Rostov "take-off", Liebenstein
"critical minimum effort", Rosenstein-Rodan "big push" etc.
The credit for emphasizing the positive effects of infrastructural
development goes to Hirschman who argued that social overhead capital
(like provision of infrastructure) undertaken by government can break down
the costs of, and therefore lead to, directly productive activities such
as production of consumer goods.2 3 Infrastructural facilities are an
input item for production of other goods and thus Hirschman emphasized
providing those infrastructural facilities which had high forward
linkages. in other words, demand or the need for infrastructure is
important to determine the variety and extent of infrastructural
provision. Fishlow's analysis of the spread of railroads in the American
economy remains one of the best empirical examples of the effects of such
infrastructural provision.
If infrastructural provision did not take place adequately in developing
countries in the past, it was because development plans (which seldom met
their goals) did not reflect the embedded political and economic
institutions in developing countries which determined the whys and hows of
this infrastructural provision, and secondly, they may have been pushed in
directions where the demand or the need for them was low. Developing
countries stand on the precipice of committing such a fallacy with
2 3 Hirschman: 1958.
313
telecommunications provision, too. Many of hem are undertaking
telecommunications programs with little reference to user demands.
DEMAND PULI, DEVELOPMENT
This dissertation has shown that two types of user groups are most likely
to benefit from revisions taking place in the telecommunications sectors
of developing countries. These are:
1. User groups with access to the decision-making structure of their
state.
2. user groups which fit in the grand plan of the state's sources of
regime support, translated into enhanced revenues or power maximization.
If the outcome of the two demands yields thee following scenario, it is
least likely to produce development: most of the resources are allocated
to providing services to inefficient government ministries and rural
consumers (no matter how high the marginal return from the cost of one
phone call from a rural area), the continuation of telecommunication
providers as cash cows, and entrenched interests within telecommunication
bureaucracies which act against making the sector more efficient.
Indonesia, Brazil and India used to be close approximations of this
scenario. In moving toward a more efficient scenario, India is making
rapid progress, Brazil is encumbered by over arching political battles and
Indonesia is the farthest behind.
The most productive scenario for telecommunications is the following:
telecommunications services are provided to exporters, transnational
enterprises, large userB which are productive, and urban residential
consumers. The latter group's marginal benefits may be smaller than those
of rural ones but they generate higher marginal revenues for telecom
providers and feed in to the economies of scale of the network. Korea and
Singapore approximate this scenario.
314
The preliminary observations made about the nature and extent of
telecommunications service provision in developing countries leads us to
support the following proposition:
The link between telecommunications and development Is stronger when
telecommunications services meet demand than when they try to create or
anticipate demand (proposition 10) .
A rigorous test of this proposition is lacking here, such a test would
use the technological coefficients derived from input-output tables of
individual countries for the effects of telecommunications investments.2 6
Alternatively, an analytical test Buch as those of FiBhlow's would look at
the reduced costs of economic activity, creation of markets, substitution
of telecommunications with other inputs and the resource demands generated
by telecommunications activity itself. It is suggested in this
dissertation that these tests be further differentiated to account for the
several user groups in the economy (see chapter 2).
INFORMATION POLICY
Countries examined in this dissertation which made the most rapid strides
in telecommunication service provision are those which formulated
comprehensive information policies. This includes France, Japan, Korea
and Singapore. It can be seen that even those countries which had made
rapid strides in telecommunications services may be now turning toward
formulating information policies. This is the case with the United
states.2 7
2 6 See DRI/McGraw Hill: 1991 and Saunders et al. 1983: Ch.5.
2 7 The growing support for such a policy in the U.S. is revealed in
the following statement: "Alarmed that public infrastructure fell from 2.3
percent of the gross domestic product two decades ago to just 1.3 percent
in the 1980s, Business Week now supports the establishment of an explicit
U.S. industrial policy even though it might be labeled as a growth policy
or a technology policy" Aronson, 1992: 59.
315
At one level, such a policy is deemed a necessity for late-
industrializers • Gerschenkron had noted the importance of "special
institutional factors" and the "coerciveness and comprehensiveness of
those factors" as supplied through state instruments as essential
conditions for late-industrializers to undertake a "great spurt.”3 1
Several points are important here:
1. The need for an information policy recognizes the importance of
information as more than just an infrastructural item. The consumption of
information is quite unlike the transportation of goods and services
across railroads or the provision of other infrastructural items. In the
words of Daniel Bell, "information differs from electricity in the obvious
sense that people react to information, and the enlargement of scale ties
the entire world together more quickly, and creates more volatile
situations, than at any other time in human history."2 9 An information
policy establishes the basis for a telecommunication-led information
revolution.
2. The information policy reflects the underlying capital, manufacturing,
R&D and human resources of the country in question, such was the case
with the sequencing strategy which Korea adopted as opposed to India and
Brazil which did not particularly reference their strategies with the
underlying structures.
3. Information policy in the countries studied provided overall guidance
and indications for the economy. It did not provide a rationale for state
intervention to solve collective action dilemmas.
4. Information polices in as much as they create markets, reduce
hierarchies and institute overall rational control of political-economic
2 8 Gerschenkron, 1962: 353-354. The need for such a policy in a
country like the United States would turn Gerschenkron-like thinking on
its head.
2 9 Bell, Daniel. "Introduction" in Nora and Mine, 1980. p. viii.
316
fores in society must be thus understood within the Weberian context of a
modern society.
The preceding analysis and its discussion in the dissertation highlights
the final proposition of this dissertation. Revisions in the
telecommunications sector will have greater impact on development if they
are accompanied by formulation of a comprehensive information policy
drawing upon the backward and forward linkages in the economy (proposition
12).
POSTSCRIPT
An analysis which shows policy outcomes as resulting from the complex
configuration of economic, political, social, technological and ideational
influences may leave no room for producing future changes in policy. In
other words, if a country needs to change its development strategy what
does it do? This dissertation does not provide a complete answer but it
is implicit in its model of collective action.
Factors which shape interest group demands and the state response to them
have been mentioned. in both cases there is room to maneuver. The
state's maneuverability comes from its relative autonomy, the consensus
within its ranks on its policies and the resources that it commands.
Interest group maneuverability comes from the variety of economic,
technological and ideational influences that can be employed to Bhape its
activities. This means that actors are shaped by influences larger and
far more encompassing than advise provided by social scientists. However,
such 'advise' would find a better fit if we understand the underlying
institutional framework for policy choice. Gourevitch sums up the issue
best:
Policies require politics. Politicians have goals
and look for policies that suit them; societal
317
actors have goals and look for the policies that
suits them, stitching these elements together is
the task of politics, the creative construction of
choices of value and the authority to realize those
choices, or 'the authoritative allocation of value'
in David Easton's apt formulation. To understand
those linkages requires the analyst to work from
both ends of the chain, to examine both politicians
seeking to construct coalitions, and actors seeking
benefits.3 0
The political economy of development when it identifies human actors
yields both their "interests" and "passions" which must be overcome and
tamed to "slay the dragon of backwardness"3 1 They bring to fore the true
meaning of the quote from Ladv chatterlev's Lover offered at the beginning
of this dissertation. A general reading of the quote conveys a sense of
the remarkable ingenuity of technological progress. A closer inspection
reveals the importance of "the souls in Plato riding up to heaven in a
two-horse chariot."3 2
Plato tells us that the white steed is "guided by the word of command and
by reason" whereas the black steed is "hardly obedient to whips and
spurs."3 3 It is the charioteer's task to move the horses forward. We are
still trying to find out the exact nature and designs of the charioteer.
Only then will the chariot leapfrog toward heaven.
3 0 Gourevitch, 1986: 239.
3 1 The phrases are from Hirschman's famous essay titled "The Rise and
Decline of Development Economics” [1983:387-388]
3 2 Lawrence, 1959: 167.
3 3 Quoted from Plato's Phaedrua.
318
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