Telecom Traffic and Investment in Developing Countries : The Effects of International Settlement Rate Reductions

In 1997 the U.S. Federal Communications Commission ordered sharp reductions in international settlement rates (bilaterally negotiated rates for telecom traffic between pairs of countries) for telecom traffic between the United States and the rest of the world. Even the very poorest countries, with the least developed telecommunications networks, must slash rates for traffic to the United States by 2003. Will this, by reducing telecom revenues in developing countries, reduce investments in those countries' telecom sectors?Developing countries, which received about $35 billion in net settlement payments from U.S. telecom carriers between 1985 and 1998, were upset by the FCC's decision to slash rates, because lower rates mean lower payments. They claim that the payments help finance telecom investment, and that the FCC's decision will therefore harm their telecom sectors. Wallsten uses a panel data set for 178 countries from 1985 to 1998 to test how changes in settlement rates affect telecom traffic and investment. He finds that rates are significantly negatively correlated with traffic, with the greatest effects in the poorest countries. In other words, reduced settlement rates spur telecom traffic from developing countries to the United States.And while there is a statistically significant correlation between settlement payments and telecom revenues in developing countries, he finds no correlation between the payments and the number of telephone mainlines or imports of telecommunications equipment. In short, there is no evidence that the payments are invested in telecom networks.This paper - a product of Regulation and Competition Policy, Development Research Group - is part of a larger effort in the group to examine the effects of privatization and liberalization in infrastructure in the developing world