Dec 22, 2010

Cell phones in Africa: Why did governments let this happen?

Bad governments hold on to power not only by controlling fake elections but also the market. Family ties with the few monopolists and threats to defiant businesses allow governments to maintain the business status quo they benefit from. Competition is held in check. And when a foreign company finally manages to set up shop, government officials are quick to throw a monkey wrench into it. This is one major reason why development doesn’t happen in many African countries and beyond.

Yet a few companies have managed to penetrate markets controlled by anti-development leaders. Coca-cola is one example. Another is cell phones. Cell phones are now everywhere in Africa. Prices are lower and coverage better than in Canada. Why did governments let this happen?

Governments can benefit from more business as it generates tax revenues. In the Central African Republic, 40% of tax revenues apparently come from Orange, a French cell phone company. The government surely benefits from these revenues. And so does everyone else (Aker and Mbiti 2010). But in Bihar, India’s poorest state, a "property developer laments how crooked officials in his state prefer “taxing” inputs—the first investments made—to demanding a share in the output of an enterprise, a practice he says is more common in Bengal" (Economist, 4 Nov 2010). If corruption is there to stay, the latter type would at least allow for some competing businesses to flourish.

Development can happen but businesses, and above all foreign companies, must learn how to convince bad governments that they will enjoy the future tax revenues more than the monopolistic rents.

2 comments:

Dany Jaimovich - Bakary Baludin said...

First of all. I see Coca-Cola usually as part of the problem more than the solution. The local branches in developing countries do what they have to do to produce: bribe, horrible working conditions, en even killing (see this: http://www.imdb.com/title/tt1339641/). So I will never put Coca-Cola together with cell phones (in top of that, what poor countries need is drinkable water, not a black sweet liquid)
The story of mobile phones is different. It is something that is manly beneficial (of course there may be some costs, particularly for those not having cell phone, and also in terms of losing some of the beauties of traditional life versus a lot of bad things of the global village, including the music...), and the Aker and Mbiti 2010 is very clear about this.
But I agree that the fact that mobile companies managed to rapidly entre the African market is remarkable. The point is that Governments and, particularly, medium and low rank officials profit from extracting the rents of local entrepreneurs, but with big transnational companies is different. It is difficult for them to impose enough corruption burdens to avoid competitors to entry. Maybe the first companies bribed to entry, a low cost compared with a huge market to gain. Then other firms came and competition started, even local competitors .

Natascha said...

It seems that cell phone companies demonstrated to the world that the African market is marketable. The cell phone markets I know do all have multiple competitors. Moreover, the different enterprises do not only compete with one single standard offer but have a variety of complex and customer matched products. Often even remote places have cell phone coverage.

Huge gains are possible because fees for telephone calls are almost perfectly divisible. Thus, once the cell phone is purchased, which can be done at a relatively low rate at the black market, even the poorest can use this medium of communication.

It is a known fact that many a mickle makes a muckle. Put differently, all these tiny fees charged for calls add up to sizable revenues for the cell phone companies. What is the lesson that can be learned? First, the cell phone market is an African success story. Second, similar products that create a huge demand across social groups and have low sunk cost can be launched in Africa under similar market conditions as cell phones. Yet, it remains to study the mechanisms of these "sub-markets" and to draw more general lessons for market entry and competition in other sectors.