MOBILE PHONES AND DEVELOPMENT

The Economist, UK, July 7, 2005

Less is more: Mobile phones can boost development in poor countries—if governments let them

IMAGINE a magical device that could boost entrepreneurship and economic activity, provide an alternative to bad roads and unreliable postal services, widen farmers' access to markets, and allow swift and secure transfers of money. Now stop imagining: the device in question is the mobile phone. Not surprisingly, people in the developing world are clamouring for them, and subscriber growth is booming. The fastest growth rates are to be found in Africa, albeit from a low base. Already, 80% of the world's population lives within range of a mobile network; but only about 25% have a mobile phone.

The primary obstacle to wider adoption is the cost of handsets. In the rich world, these typically cost around $200 (though most pay less than this thanks to subsidies from network operators), or less than 1% of the average income per person. In the developing world, in contrast, a $50 handset would account for 14% of the annual income of someone earning $1 a day. So the first step in promoting the adoption of mobile phones, say operators in developing countries, is to reduce the cost of the handsets. Several such schemes are under way: in particular, several operators in developing countries have joined together to aggregate their buying power, and Motorola, the world's second-largest handset-maker, has agreed to supply up to 6m handsets for less than $40 each (see article). There is already talk of prices falling below $30 next year.

Industry observers believe cheaper handsets could expand the market by as many as 150m new subscribers a year. As well as boosting economic development in poor countries, this will help to close the “digital divide” between the communications-rich and communications-poor. Governments, you would have thought, would be doing everything in their power to promote the spread of mobile phones.

But rather than treating mobile phones as an important tool for development, many governments see them instead as an opportunity to impose hefty taxes and milk a fast-growing industry for all it is worth. In both Turkey and Bangladesh, for example, anyone buying a new mobile phone must pay a $15 connection tax. Many countries slap large import duties on handsets and impose special taxes on subscribers and operators. In many cases, these taxes double the cost of acquiring a mobile phone. As handset prices fall, such taxes will become an ever more prominent obstacle to wider adoption.

Governments should reduce these taxes at once. Indeed, by doing so, they can both speed adoption and increase revenues. High import tariffs discourage legal imports of phones and encourage people to buy them on the black market instead. Reducing such tariffs would boost revenues as legal imports increased. Lower taxes on phone calls would encourage adoption and increase the tax base. It can be done: both Mauritius and India have recently reduced their taxes and tariffs.

Mobile phones have created more entrepreneurs in Africa in the past five years than anything else, says the boss of one pan-African operator. Promoting their spread requires no aid payments or charity handouts: handset-makers, acting in their own interest, are ready to produce low-cost phones for what they now regard as a promising new market. Mobile operators across the developing world would love to sign up millions of new customers. But if developing countries are to realise the full social and economic benefits of mobile phones, governments must ensure that their policies help, rather than hinder, the wider adoption of this miraculous technology.

Background: Mobile telecommunications

The growth in the number of mobile-phone subscribers is nothing short of spectacular. In 1990 there were just over 11m of them worldwide. Today almost 1.5 billion consumers own mobile phones of various shapes and sizes. Some see their spread as the key to bridging the digital divide and as a tool to boost development in poor countries.

But for many mobile operators the price of popularity has been high, particularly in Europe, where they racked up huge debts around the turn of the millennium while bidding wildly for third-generation (3G) licenses that were supposed to usher in the era of high-speed (and high-priced) mobile internet service. As 3G networks are switched on, consumer interest is proving to be lacklustre. Meanwhile, the leading handset makers, such as Motorola, Samsung, and even Nokia, are struggling to stay on top as markets become saturated and competition increases.

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