Liberalization and Regulation of the Telecommunications Sector in Transition Countries

The economic and regulatory dynamics in the telecommunications sector is the subject of this study. Telecommunications are increasingly recognized as a key component in the infrastructure of economic development (Saunders et al. 1994, p. 3). The link between telecommunications infrastructure investment and economic performance is well established empirically and is significantly positive (Röller and Wavermann 2001, p. 921).

The telecommunications market as a very dynamic market depends on both innovations and investment in technologies, products and services. A high degree of innovation is the main characteristic of the telecommunications industry and ICT sector, respectively (OECD 2007a, p. 79, 2006, p. 14). The development of new technologies is emerging at a rapid pace. As a result, a high level of investment is required to maintain a modern state of the telecommunications sector.

The telecommunications industry is in a state of transformation and becoming ever more complex. Fast changes in the communication landscape, resulting from technological change and the development of new services, are affecting the core business of telecommunication operators. The industry is to refocus on emerging higher value-added services, which often require significant investment in new network technologies, and balancing this against shareholders' focus on shorter-term performance (OECD 2007a, p. 18).

All of these trends have an enormous impact on the regulatory implications in the telecommunications industry. In this chapter, the general structure and technological developments in the telecommunications industry worldwide is presented. Then attention is directed to the current state of telecommunications around the world. The reforming processes and their reasons are presented. Furthermore, the WTO agreements on telecommunications, as the main international regulatory framework in this sector, are described. The most interesting examples of sector reforming around the world are explained. In Sect. 2.3, the historical development of telecommunications regulation in the centrally planned system is presented, giving an idea, where the liberalization processes in the transition countries were started. Then the focus is shifted to the Russian telecommunications sector, which is of special interest in this research, and an in depth analysis of the current state takes place.

The telecommunications sector, as many other network infrastructure sectors, is characterized by two sub-parts: telecommunications network infrastructure and telecommunications network services, which complement each other. In the following part of this study, the special characteristics of the network infrastructure sector, especially the telecommunications sector, are considered from a theoretical perspective.

The most fundamental economic characteristics of the telecommunications sector are network effects (e.g. Liebowitz and Margolis 2002, p. 77; Shy 1999, p. 4). The value of telecommunications networks increases as the number of subscribers grows. A positive external effect is created each time a new subscriber is connected to a network, because the telephones of existing subscribers increase in value as the potential number of subscribers grows (Saunders et al. 1994, p. 271). Liebowitz and Margolis (2002, p. 77) insist that network effects should not be interpreted as network externalities unless the participants in the market fail to internalize these effects. Network effects raise two concerns in terms of the outcome in the conditions of decentralized decision making of laissez-faire markets (Liebowitz and Margolis 2002, p. 77). The first focuses on the sizes of networks. Potential market failures can arise if network participants do not capture the benefits that their participation confers on others. The second arises because scale economies may result in the survival of only one network among the conceivable alternatives, which in turn may prevent decentralized individual choices from being properly counted in the market.

Regulation is very often associated with the post-privatization control of utilities. However, regulation has been practiced in many countries for many decades, e.g. in Britain since the Tudor and Stuart period at least.

Based on Baldwin and Cave (1999, p. 223), three phases involved in the transition process from monopoly to fully competitive markets can be primarily differentiated (see Fig. 4.1). In phase one, pre-competitive markets, competition is emerging, and regulation can be used to prevent any firm monopolizing a distribution network, giving an advantage to an affiliated supplier over any others or disclosing the access for market newcomers. Price regulation of suppliers (endcustomer prices) as well as of monopoly distribution elements (access prices) are used to protect end-consumers as well as newcomers; and sector-specific measures, covering such matters as service standards, are again necessary to protect consumers. In phase two, emerging competitive markets, price regulation can be withdrawn from fully competitive parts of the market (but retained for monopoly network provision) and firms allowed to compete. As competition increases, there may be a regulatory retreat from detailed prescriptive controls over such matters as service standards and growing reliance on market pressure to protect consumers. In phase three, fully competitive markets, economic regulation becomes largely unnecessary and general competition laws can be used to secure the operation of the market. The need to regulate becomes confined to the use of special rules to ensure such matters as the compatibility of networks and the ability of consumers to purchase from a range of suppliers. Limited social objectives (such as universal service) can be achieved through special arrangements which are designed to avoid distorting competition.

5.1 Modeling the Linkages Between the Economic Development and the Telecommunications Infrastructure in Transition Countries

In this section, the author investigates empirically the relationship between economic development and telecommunications in transition countries. After an introduction in the main hypotheses, explaining the role of telecommunications in economic development, main directions in economic growth theory as well as recent empirical studies on the link between economic growth and telecommunications (including studies dealing with infrastructure and ICTs) are reviewed. The data correlations and analysis of the main statistics are followed in Sect. 5.1.2. In Sect. 5.1.3, the model, investigating the causal relationship between economic development and telecommunications in transition economies, is built. Finally, the results of estimations are presented and the main conclusions are drawn.

It is widely accepted that telecommunications as a part of infrastructure as well as a component of information communications technologies (ICTs) are essential to countries’ economic development. Obviously, investing in telecommunications infrastructure does itself stimulate economic growth because its products (like cable, switches) lead to increases in the demand for the goods and services used in their production. However, the economic returns on telecommunications infrastructure investment are much greater than the returns on just the telecommunications investment itself, because telecommunications are connected to other sectors of the economy through back-up and forward-linkages, having spillover effects on these sectors and creating externalities (Röller and Waverman 1996, p. 364; Welfens and Graack 1997, p. 208).

The aim of this research was to investigate the role of telecommunications sector in transition countries, to find out its special features and based on these, to suggest adequate strategies for the future development of this sector. The empirical investigations focus on the whole group of transition countries. With respect to key policy issues, Russia has been a special focus.

The investigation of the telecommunications sector in transition countries cannot be considered without knowing the historical developments on the central-planned economy. Here telecommunications were considered as a non-profit-oriented production process aiming to support the socio-economic superstructures. The stateowned telecommunications industry was characterized by very poor performance and high access deficit. As result, the starting point for the reforming processes in transition countries was a public monopoly with quite poor performance but it was under other circumstances as in the market economy.