The prospect of a growing digital divide between poor and rich countries and hope that ICTs may present an opportunity to improve productivity and economic growth has led to a number of initiatives designed to stimulate ICT use in developing countries. While many organizations note that competition and a friendly regulatory environment may be important to ICT development, few of these initiatives and very little research has actually focused on the role
of regulation in promoting Internet use. This paper is an attempt to fill that gap. Using data from a new survey of telecommunications regulators in developing countries combined with publicly-available information from the ITU and the World Bank, I find regulation of Internet Service Providers to be correlated with worse outcomes. In particular, countries that require
ISPs to get formal approval before beginning operations have fewer Internet users and Internet hosts, while ISP price regulation is correlated with higher ISP final-user prices.
One potential concern with the analysis is whether the regulatory variables are
endogenously correlated with the dependent variables. While this is a concern in a great deal of similar work on telecommunications reforms, reverse causality is unlikely to be the case here.
First, these regulations were set largely in the early days of the technologys introduction into the country. In other words, the regulations probably came before the Internet was so ubiquitous, not the other way around. Second, the empirical results are consistent with many governments initial reaction to the Internet, which was apprehension. More repressive governments worried
about the effects of free access to information, and nearly all governments worried about the effects of Internet telephony on their incumbent telecommunications provider.12 In this light, ISP regulations were likely promulgated precisely in order to suppress Internet access, and in that light, seems to have been successful.
These results suggest that regulations on the Internet are not intended to correct market failures, and are more consistent with a capture or grabbing hand view of regulation. Price regulation correlated with higher prices is consistent with capture, and requiring formal approval for ISP operations consistent with both capture and grabbing hands. Requiring formal regulatory
approval presents a barrier to entry to new ISPs. The finding that this entry barrier is correlated with lower development of the industry is also consistent with Djankovs (2002) finding that countries with heavier entry regulations have lower quality public and private goods.
The results also suggest that a countrys regulatory approach to the Internet and ICTs can have a large impact on its ubiquity throughout the country. While the sample contains a relatively small number of countries, the results suggest that reducing entry barriers and promoting competition is likely to yield large increases in the share of developing countries populations with access to the Internet and any potential benefits that flow from such access. In
other words, removing entry barriers and promoting ISP competition may present a low-cost and non-distortionary way to boost Internet use in developing countries.
Read the full paper here.
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