Sunday, July 10, 2005

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The real digital divide

A common lament among development activists is that regions like Africa are held back by the digital divide -- these places have less access to the Internet.

However, the Economist runs a good story on the information technology that would benefit poor African countries the most:

All eyes are on what governments can do to end poverty, with aid, debt relief and trade top of the agenda at this week's G8 summit. But what about the role that business can play—and, in particular, technology firms? It is increasingly clear that, when it comes to bridging the “digital divide” between rich and poor, the mobile phone, not the personal computer, has the most potential. “Emerging markets will be wireless-centric, not PC-centric,” says C. K. Prahalad, a management scholar and author of “The Fortune at the Bottom of the Pyramid”, a book that highlights the collective purchasing power of the world's 4 billion poorest people and urges firms to try to profit from it.

Mobile phones have become indispensable in the rich world. But they are even more useful in the developing world, where the availability of other forms of communication—roads, postal systems or fixed-line phones—is often limited. Phones let fishermen and farmers check prices in different markets before selling produce, make it easier for people to find work, allow quick and easy transfers of funds and boost entrepreneurship. Phones can be shared by a village. Pre-paid calling plans reduce the need for a bank account or credit check. A recent study by London Business School [Sponsored by Vodaphone--DD] found that, in a typical developing country, a rise of ten mobile phones per 100 people boosts GDP growth by 0.6 percentage points. Mobile phones are, in short, a classic example of technology that helps people help themselves.

But despite rapid subscriber growth in much of the developing world, only a small proportion of people—around 5% in both India and sub-Saharan Africa—have their own mobile phones. Why? The price of handsets is the “biggest obstacle” to broader adoption, says Alan Knott-Craig, boss of Vodacom, which runs networks in five African countries. Azmi Mikati of Investcom, which runs networks in Africa and the Middle East, estimates that the number of users would double in those markets if the cheapest handset cost $30 instead of $60.

The good news is that firms like Motorola have a huge incentive to expand to this market, and are in the process of creating low-cost handsets.

The bad news is that developing countries themselves might block further expansion of cell phone usage:

Lower prices will make a second barrier ever more apparent: high taxes and duties imposed by many governments on handsets and services, often just as growth in the sector starts to take off. “It does seem strange for countries to say that telephone access is a public-policy goal, and then put special or punitive taxes on telecoms operators and users,” says Charles Kenny, an economist at the World Bank. “It's a case of sin taxes on a blessed product.”

In Turkey, new subscribers must pay a special tax of 20 new liras ($15) for a connection. A sales tax of 18%, plus a special communications tax of 25%, is added to all mobile bills. Uganda has just imposed a 10% tax on mobile phones. In Afghanistan, telecoms taxes account for 14% of government revenue, says Mr Kenny. In Bangladesh, the government has just imposed a tax of 900 taka ($14) on all new connections, in addition to an import duty of 300 taka levied on all imported handsets.

In big markets, such as Brazil, handset-makers have set up local factories to avoid import duties. That will not pay in smaller, poorer places. To avoid taxes and duties, many mobile operators in sub-Saharan Africa do not supply handsets, but rely on customers to get them on the black market, says Mark Burk of Informa, a research firm.

Yet there is anecdotal evidence that reducing taxes on handsets can boost government revenues. People would rather pay a small tax on a legal handset than no tax on a smuggled one that cannot be returned if it goes wrong. There are some hopeful signs: India cut its import duty on handsets to 5% last year and plans to scrap it altogether. Mauritius recently cut its taxes on handsets to boost adoption.

One reason left unmentioned in the Economist piece why some governments might impose high barriers to cell phone usage -- cell phones increase the costs of repression. A newtork of opposition activists armed with cell phones and text messaging capability can more easily coordinate political action against a repressive government.

posted by Dan on 07.10.05 at 09:47 AM


China Flexes Economic Muscle Throughout Burgeoning Africa: "Chinese companies have become a dominant force, building highways and bridges, power stations, mobile-phone networks, schools and pharmaceutical plants. More recently, they have begun exploring for oil and building at least one Ethiopian military installation." [cf.]

posted by: georgio on 07.10.05 at 09:47 AM [permalink]

Mobile phones for people in the burgeoning African nations will boost GNP in measureable amounts? How does that translate to 100,000,000 in the U.S.? Every person over the age of 10 probably has one. Our nation must be on the verge of super wealth. You must be talking about mobile phones in the hands of the select people who have anything of consequence to sell or trade, especially the ones who might project their trade internationally. I suspect that the vast majority of mobile phone use will always be dedicated in inane conversation with friends by the vast majority of people who have nothing to enrich the nation with through cellular phone use. Of course, this does enrich the people involved in the business of selling units and privileged air waves for their use.

posted by: Marcell on 07.10.05 at 09:47 AM [permalink]

My guess is your suggestion attributes too much rationality to governments. I'd suspect that African governments are often starved for reliable revenue. So when they have the opportunity to collect a tax through the cellular service provider the temptation is irresistible, particularly when the tax clearly falls on the more prosperous portion of their population.

posted by: Bill Harshaw on 07.10.05 at 09:47 AM [permalink]

Another reason governments would want to impose taxes on mobile phones is that they represent competition for the state-owned telephone monopoly.

posted by: Bob McGrew on 07.10.05 at 09:47 AM [permalink]

" a rise of ten mobile phones per 100 people boosts GDP growth by 0.6 percentage points"

The classic question of causality. Which causes which or maybe they both are caused by a third factor?

I think it would be interesting to look at income levels of mobile phone owners. do the rich get it? (that would suggest gdp increase causes increase in # of mobiles)

OR do the poor get it? That would suggest the Economist's theory is right and the economy benefits from better communication...

Also, your last argument seems a bit weak. Here's why: If government is repressive then it can monitor phone calls for keywords. Since repressive governments tend to be the ones from countries with lower income levels there are fewer mobile phone owners to monitor.

just my $0.02

posted by: Anonym on 07.10.05 at 09:47 AM [permalink]

Marcell..the US doesn't provide a good comparison because just about everybody in the US already *had* a landline phone. The situation in much of Africa is like what things would be in the U.S. if there were almost no phones at all, not just no cell phones...indeed, it is probably similar to what the situation in the US would be if even the *telegraph* wasn't available.

posted by: David Foster on 07.10.05 at 09:47 AM [permalink]

If the cost of handsets are the biggest obstacle to entry, why don't service providers follow the American model and subsidize the cost of handsets?

If people can pay for the monthly service, it makes sense to provide them with phones. They need not offer all the bells and whistles, but just a basic cell phone with texting capability.

posted by: Kelly K on 07.10.05 at 09:47 AM [permalink]

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