Telecommunications liberalization and regulatory governance: lessons from Latin America

The role of the state changed in Latin American and Caribbean countries bet ween 1985 and 1995 as eight regulatory commissions were created (for the 19 countries in our regional sample). This institutional innovation was part of the liberalization process that has permeated the hemisphere. This study examines the determinants of telephone lines per capita, using economic, i nstitutional and regulatory variables. Lacking information on total investm ent, we use lines as a proxy for telecommunications investment. The economi c variables have the expected impacts. Gross domestic product (GDP) per cap ita affects investment in a positive way: telecommunications services are i ncome-elastic. Openness (exports plus imports as a percentage of GDP) captu res significant external links which require telecommunications to coordina te the production and delivery of goods and services. This variable had a p ositive (but not statistically significant) impact. Similarly, greater popu lation density was a significant determinant of lines per capita for this p articular sample of countries (reflecting lower cost of service for urban a reas). Building on the work of Levy and Spiller (Regulations, Institutions, and Commitment: Comparative Studies of Telecommunications, Cambridge Unive rsity Press, New York, 1996), we introduce institutional indices to capture the effects of political democracy, economic freedom, and a sound regulato ry framework. The latter captures the degree of independence of the regulat ory body, enforcement powers, neutrality, and mechanisms for resolving conf licts. It might be viewed as a proxy for serious reform initiatives (includ ing reduction of entry barriers and privatization). The regulatory framewor k and freedom factors have significant positive impacts on telephone lines per capita. Another important explanatory variable is the number of cellula r phones per capita. The positive impact is consistent with cellular being a complement for fixed line telephony. Alternatively, the positive impact c ould reflect a "competition effect" whereby competitive entrants in a liber alized sector stimulate improved performance (and additional investment) by incumbent wire-line firms. (C) 2000 Elsevier Science Ltd. All rights reser ved.