Crossed wires in global telecoms

UNESCO Courier, Nov, 1998 by James Deane

Deregulation of the telecommunications market may inflict crippling costs on some of the world's poorest countries

If you have a friend in Sydney, Johannesburg or Beijing and you haven't spoken to them for a while, you will soon have to think of a better excuse than "it costs too much". Prices of international telephone calls are plummeting. Before long, making a call to the other side of the planet will cost as much as it currently costs to call your neighbour.

We are moving towards a distanceless, borderless world where you will be able to call anyone, almost anywhere for a few cents or pennies. "The death of distance as a determinant of the cost of communicating will probably be the single most important force shaping society in the first half of the next century," argues The Economist magazine.

There is a problem, though. Amidst the excitement and glamour generated by the prospects of cheap calls, mobile phones and the Internet, a quiet, poorly understood but increasingly desperate struggle is being waged by some countries to adapt to the new realities. The process of change threatens to cripple the economies of these countries, mainly the poorest on the planet. Their problem is made worse by the fact that this issue is mired in the tedious technicalities of how telephone calls are charged and accounted for.

When poverty pays dividends

One reason why international calls have been so expensive is that many countries have traditionally charged high prices for completing the calls. Make a call from Washington to Jamaica, for example, and the American telephone company has to pay the telephone company in Jamaica to connect the call, and that cost is passed on to the person making the call. The system which defines how much each company pays each other company is known as the international accounting rate system. It is the result of bilateral agreements which determine the price of the connexion and the amount (usually 50 per cent of this price) that a telephone company in country X pays to its opposite number in country Y for connecting the call (the settlement rate).

In an ideal world, every country would originate as many telephone calls as it receives. However, we live in an unequal world and because most of their citizens are poorer and have less developed telephone systems, nearly all developing countries receive more calls than they originate. Perhaps uniquely, in this instance poverty pays. Most developing countries receive much more money from international telephone traffic than they pay out.

In 1996, developing countries as a whole netted around $10 billion in foreign exchange through this system. For some least developed countries, revenue from international calls is their biggest "export" industry and their largest source of foreign exchange. "To put that into perspective," says Pekka Tarjanne, Director-General of the International Telecommunication Union (ITU), the United Nations body responsible for telecommunications, "if you add together all the lending programmes in telecommunications of all the development banks around the world, the total sum they invested during the first half of the 1990s would still amount to less than is generated in just one year [by the developing countries] under the accounting rate system."

Many developing countries have used the system to charge high prices for completing calls, arguing that they need the foreign exchange to develop their own domestic telephone systems. But now a combination of technology, power politics and the harsh competitive disciplines ushered in by the global liberalized telecommunications market place is likely to lead to a sudden and potentially catastrophic fall in these revenues, with unknown consequences for some developing economies and possibly for some richer countries as well.

"If we don't succeed in reaching an agreement [on international accounting rates], in the next few years we will see chaos and anarchy in telecommunications and many people in the developing countries will suffer tremendously," argues Pekka Tarjanne. "And so will customers in the developed world."

But the poorest countries are likely to suffer most. "The least developed countries and other low-income small economies with, say, less than one million inhabitants, are likely to be hardest hit," by reform of the system according to the International Telecommunication Union. Jamaica, for example earns around $150 million a year from international telephone calls. "Reduction in . . . rates will reduce this inflow, affecting the country's foreign exchange and balance of trade," says Cezley Sampson of the Mona Institute of Business Studies at the University of the West Indies. It will also lead to a worse telephone service in the country, according to Jamaican Ambassador Anthony Hill. "Too rapid a reduction in settlement rates will lead to substantial increases in local telephone charges leading to significant service disconnections," he says.

Why is the system falling apart? A major reason is technology. The technical costs of international telecommunications are plummeting. A single pair of optical fibres, each the thickness of a human hair, can now carry all of North America's long distance communications traffic. The capacity of networks built with these fibres is ten times that of networks built just a few years ago. That means much lower operating costs for companies - and thus the opportunity to charge much lower prices.