Broadband Marxism

Bridging the digital divide will require poor nations to reverse the privatization of their telecommunications networks.

Politicians and economists in developing countries searching for new technologies to create jobs and spur economic growth need look no further than their desks. The most vital technology for sparking development is a familiar and unglamorous one: the telephone. In many poor nations, telephone service is available only in large cities -- at a price few can afford -- and the more widely available mobile phone service remains expensive. As a result, at least 1.5 million villages in poor nations lack basic telephone service. Guatemala has just 65 telephones for every 1,000 people; Pakistan, 23; Nigeria, 5; and Burma, 4. By comparison, the United States has 667 telephones per 1,000 people. Manhattan alone boasts more telephone lines than all of Africa.

During the 1990s economic boom, many developing nations invested in laying fiber-optic lines, building satellite relay stations, and connecting to transoceanic cable -- the high-capacity "backbone" elements of telephone networks that transport data. So why does the 128-year-old telephone remain out of reach for more than 3 billion people? In part, because the cost of bridging the "last mile" from national network to local customer vastly exceeds potential returns in countries such as Colombia, where annual per capita spending on telecommunications is just $231 (in the United States, it’s $2,924).

Two new technologies offer a potentially quick solution: wireless-fidelity networks (Wi-Fi) and voice calling over the Internet (VoIP). Wi-Fi uses small, low-power antennas to carry voice and data communications between a backbone and users at schools, businesses, and households, all without laying a single wire, greatly reducing the cost of traversing the last mile. Laying land lines can cost up to $300 per foot. Wi-Fi hardware is fitted to existing structures for about $10,000 per base station -- a reasonable sum, considering that one Wi-Fi station can provide access to thousands of residences within two miles and that the antennas that attach to customers’ homes cost less than $100.

VoIP technology sends telephone calls over the Internet inexpensively by transforming people's voices into data "packets." Conventional phone service requires an open line at either end of a call -- an expensive service, not least because every conversation pause wastes bandwidth. By chopping words and pauses into tiny packages that are routed through the least congested part of the Internet, computers make VoIP calls much cheaper. In the United States today, a phone call using VoIP service costs less than half of a call made using traditional telephony; these savings can be duplicated in developing countries.

Together, Wi-Fi and VoIP can make telephone service affordable and accessible in poor countries. But for developing nations to benefit, their governments must rethink who owns the telecommunications networks. Put simply, it's a bad idea to have a monopoly, whether government or private, both control the network backbone and provide retail services to consumers. Such arrangements lead to higher prices and less competitive services.

Consider Telkom, the owner and operator of South Africa's telephone network, a formerly state-owned monopoly that was privatized between 1997 and 2003. Despite enjoying an advanced network backbone, Telkom does not offer basic telephone service to a majority of South Africans. Because it depends on revenues from phone calls, Telkom has little incentive to offer cheap VoIP service. South African law dictates that only Telkom and "under-serviced area licensees" (small firms in rural areas) are allowed to offer VoIP, yet the government has not approved a single under-serviced area licensee. So today, for a variety of regulatory reasons, only Telkom can provide VoIP. For competitive reasons, it does not.

Developing countries can break such strangleholds by renationalizing their network backbones, liberating them from the retail business of servicing consumers. Although state monopolies provided infamously poor service, running a network core is easier than providing retail services. State-owned network backbones can operate on a non-profit basis, providing access to private companies that compete to service local customers in villages and towns. It's not that the ordinary bias favoring private ownership and free markets is misguided. Nor are telecommunications networks too critical a public service to be left to free markets. Rather, networks in developing countries have never been subject to real competition. Ironically, a publicly owned backbone would level the playing field and increase competition among retail providers, leading to innovative services at lower prices.

One model for success can be found in Utah, where authorities in Salt Lake City and 17 surrounding towns have formed the Utah Telecommunications Open Infrastructure Agency (utopia), building a high-speed network for 250,000 households and 35,000 businesses. The government owns the backbone, but does not sell Internet or VoIP service directly to customers. Instead, utopia is open to anyone wishing to sell broadband service.

Can the same model work in the developing world, where money and accountability are more elusive? Yes, for two reasons. First, Wi-Fi and VoIP flip the traditional telecommunications model on its head. The network backbone has only one objective (delivering data via a small set of universal procedures), leaving governments with a simpler job. Delivering local service is harder. Traditional telecommunications models are the opposite: The telephone is simple; the circuit-switched network is complex. And while a private monopolist has every incentive to charge an exorbitant price and increase profits at the expense of consumers, a public monopoly lacks that impulse. Nonetheless, to ensure that consumers benefit, an independent, nonprofit organization could jointly administer the backbone network with a government agency. To increase efficiency, the daily operations of the backbone could be leased to a private entity.

Such renationalization of network backbones would be expensive for developing countries, but the costs are not insurmountable. Governments could buy back network backbones using long-term debt funded by revenues flowing from the operating lease. A properly structured public debt issuance would assuage foreign investors' fears of a broader nationalization campaign.

In developing countries, telecommunications lead to more jobs, improved health care, and higher levels of education. The renationalization of telecommunications backbones is analogous to the state-funded building of roads. Roads and highways increase a nation's wealth by enabling commerce. In poor nations, the same can be true of the information superhighway, if politicians choose technology over ideology.


Bush Throws a Party

How does U.S. President George W. Bush's preelection spending binge stack up against history?

Any alert voter can see that U.S. President George W. Bush is engineering a remarkable election-time economic boom. But before high-minded economists and commentators start crying foul, just how excessive is the Bush business cycle? How will this president’s economic pursuit of electoral success stack up against the standard for largesse set by U.S. President Richard Nixon back in 1971-72, or against the free-spending ways of politicians in the rest of the world, for that matter?

The objective of electoral economic engineering is to get votes. So, judge first which end-of-first-term U.S. president pandered more to the elderly, who vote in greater proportion than any other demographic group. In late 2003, Bush pushed through a spectacular increase in old-age benefits, offering huge subsidies for the purchase of prescription drugs. Of course, in 1972, Nixon really swung for the fences by hiking Social Security benefits some 20 percent. Comparing the costs of the two policies is difficult, since it hinges on the role of drugs in future medical treatments, but my personal estimate is that the annual price tags are roughly equal. The advantage goes to Nixon, because he began indexing Social Security benefits to inflation at the same time.

Presidents seeking a preelection boost can also run big deficits to increase domestic demand. Bush's high spending results from homeland security and "Iraqistan," whereas Nixon experienced the mother of all financial pits: Vietnam. Both presidents slashed taxes before their reelection campaigns (although Nixon recognized that the economy would pay for his profligacy later). The Nixon budget deficit in 1971 and 1972 was around 2 percent of gross domestic product (GDP); Bush's deficit exceeded 4 percent in 2003 and will likely reach 4 percent again in 2004. Advantage: Bush.

Exporters in Bush's economy are also benefiting from a sharp depreciation of the U.S. dollar, as they did under Nixon in 1972. The ultimate decline of the dollar will likely be far more spectacular under Bush than under Nixon. But whereas the movements may have been smaller under Nixon, they were much more traumatic, because in the early 1970s, exchange rates weren't supposed to move at all! The dollar depreciation only followed the complete collapse of the long-standing Bretton Woods system of fixed exchange. So call it a tie: Bush for size of exchange-rate moves, Nixon for drama and trauma.

Next, consider monetary policy. In theory, the U.S. Federal Reserve is independent of the executive branch. But just listen to the 1972 White House tapes of Nixon's blistering exchanges with then Federal Reserve Board Chairman Arthur Burns. Historians can debate whether Nixon intimidated Burns or if the chairman simply succumbed to faulty economics. Regardless, Burns certainly delivered the goods. In the run-up to the 1972 election, he printed money like it was going out of style, wreaking havoc with global price stability and exacerbating worldwide inflation.

Bush can't beat that. True, Bush is the beneficiary of an extremely aggressive monetary policy, with interest rates reaching 45-year lows in 2003. And yes, if rates remain too low for too long, inflation could heat up after the election. But even in a worst-case scenario, inflation is unlikely to reach the double-digit levels of the 1970s anytime soon. While Burns's monetary policy was atrocious, current Fed Chairman Alan Greenspan's hardly threatens a reckless inflation binge. Advantage: Nixon.

Overall winner: Nixon -- although Bush has eight months left.

Does all this election-year economic engineering pay? In the short run, yes, because voters sure like a booming economy and a free-spending government at election time. They don't seem to question why anyone should reward a politician for artificially boosting an economy before elections, even if doing so produces serious long-term problems. Perhaps, like moviegoers who expect to be emotionally manipulated, voters just enjoy an election-year high.

Of course, U.S. presidents are hardly the only or the best practitioners of electoral economics. Mexico, for example, boasts a history of political business cycles that make the United States look fiscally Puritan. Mexican Presidents José López Portillo in 1982 and Carlos Salinas de Gortari in 1994 set benchmarks that few have surpassed. Former Russian President Boris Yeltsin gave away the country's natural resource base (under the guise of "privatization") to ensure his reelection in 1996, a problem the country is still painfully sorting through today. In Italy, every prime minister seems to produce a fiscal splurge come election time -- and Italy has a lot of elections. But then, a country does not achieve one of the world's highest debt-to-GDP ratios (more than 100 percent) without effort.

Occasionally, politicians resist temptation. In 1979, U.S. President Jimmy Carter replaced his spectacularly ineffectual Fed Chairman William Miller with the tough-minded Paul Volcker, who over the next five years reversed the inflation damage Burns and Nixon had wrought. In appointing Volcker, Carter did his nation a great service, yet probably sealed his fate as a one-term chief executive. But Carter was the exception. According to the diaries of former British Chancellor of the Exchequer Nigel Lawson, even a budget hawk such as former British Prime Minister Margaret Thatcher pushed for looser macroeconomic policy during reelection campaigns.

U.S. voters will be more influenced by a robust economy than by commentators who cannot imagine that Bush would ever do anything right when it comes to economic policy. Believe me, as chief economist of the International Monetary Fund from 2001 to 2003, I worried greatly about the U.S. fiscal and trade deficits, and I still do. But so far, the U.S. recovery has been downright impressive -- even if it is on cue for the U.S. election. The economic pickup in the United States also helps the global economy, fueling growth in Asia and even in Europe.

Assuming Bush doesn't try to outdo Nixon's political business-cycle record, the aftermath of the Bush binge won't be as bad as the one after Nixon in 1972, which included inflation and a decade of anemic growth. And while no one should relish the prospect of an economic hangover in 2005 and beyond, we should at least recognize a good party when we see one.