When bad things happen to good people…

Posted on Monday, June 18, 2012

A recent article from Ecuador in BNAmericas entitled “Ministers meet to discuss possibility of tariff reductions for mobile services” (Sorry subscription required) made me think about the theme of unintended consequences and then about the title.

The story from the World Bank, IMF, US government etc. in the mid-90s was that privatization was the solution to Latin America’s telecom and technology woes. “The Washington Consensus” said that introducing private capital and competition would erase decades of poor service, under-investment and at times, corruption.

Frankly, with modern fixed and mobile networks, with the region being not too far off the technology curve, with mobile penetration over 100% and mobile broadband rising rapidly, it would be hard to deny that it hadn’t accomplished what it set out to do.

The problems for politicians are obvious:

  1. They don’t have the ability to directly control competitive markets
  2. Private investors do not necessarily pursue the same goals as policy makers

Smith’s invisible hand doesn’t always get to the same result that politicians and consumers (aka voters) would like to see. No matter how faithful they have been to the Washington Consensus, they still think prices are too high, the pace of technological change is too slow and economically or geographically challenged communities aren’t adequately served with world-class technology.

No matter how good they are in terms of respecting the rules of market capitalism, bad things happen.

Full Disclosure: I have done consulting work for both America Movil and CMT in Ecuador. I have advised Telefonica through my relationship with Yankee Group.

Now I suppose I should not be surprised at all with Ecuador — a founding member of ALBA —  making tentative moves towards direct intervention in telecom pricing. You don’t get inside the clubhouse without having demonstrated your anti-capitalist chops.

And in fact the article suggests some fairly mainstream solutions. The meeting itself is a kind of veiled threat: we don’t like what’s happening, we’ll intervene if we have to, of course if the operators choose to take action themselves in a spontaneous gesture of competitive fervor, then we’ll lower our weapons. This tool has been used by center-left to center-right governments all over the developed world.

There was also an allusion to the introduction of new competitors — a classic capitalist solution that (unfortunately for the orthodox followers of Milton Friedman) has never worked in Latin America because the combined  might of America Movil and Telefonica normally scares rational competitors away. Ecuador tried the state-owned champion technique with CMT. It has 2% market share in mobile after nearly 10 years in the market.

The fact is that Adam Smith and Milton Friedman never promised fair outcomes, just economically efficient outcomes. They never promised that the favelas of Rio or a village of 100 people at the source of the Amazon River would have world-class mobile broadband, just that capital would be invested where it made the most sense for the economy as a whole.

And in terms of prices, they never promised that all consumers would be able to afford mobile broadband service, just that the market would settle at a price that maximized everyone’s utility: buyers would pay a price at which investors were prepared to invest.

Perhaps they didn’t anticipate that consumers would rise up and inspire their political leaders to say “We should pay less no matter what the investors say”.

I think a lot about the prices of foie gras poelé in four-star restaurants, Johnny Walker Black Label, fine Cuban cigars, BMW automobiles and Business Class airline tickets. I do have expensive tastes but I wonder why it is no congressman or senator is complaining about those prices. Many people would be so much happier if the prices of these items were considerably lower, especially congressmen and senators who seem to like such things and more importantly from a personal point of view, I would be so much happier!

So why are airlines free to charge whatever they please for a bit more leg room / shoulder space but national legislatures get bent out of shape over the price of mobile broadband?

Why is Johnny Walker Black Label a luxury good subject to market forces whereas mobile broadband is not?

The essence is that Johnny Walker Black Label and BMWs are considered non-essential but mobile broadband is not. Affordable access to Johnny Walker Black Label is not presumed to improve GDP/capita, lower unemployment and improve income distribution. Mobile broadband is presumed to do all these things: just listen to Diego Molano, Colombia’s Minister of Information and Communication Technology and you will be convinced. Like water, electricity and milk, mobile phone services including broadband have become public goods to which all citizens deserve affordable access.

Mobile operators are victims of their own success. By getting penetration up to nearly 100%, mobile services have become such a part of the fabric of society that the concept of NOT having service becomes like a human rights violation. Affordable access to all citizens becomes the design criteria, not — as it was at the beginning of mobile voice services — a lucky by-product of free market forces. Thus when investors decide they can’t afford to go to that last village at the source of the Amazon River, governments step in.

Governments are in the business of assuring that bad things do not happen to good people like those Amazon villagers.

In some sense, the “Washington Consensus” has not broken down. It worked too well. It took a  telecom services industry that was just for businesses and the very top of the economic pyramid, and made it such an inseparable part of the fabric of society that citizens / voters / consumers demand intervention.

Bottom Line: We have entered into a new phase of economic activity: competitively provided public services. The challenge will be how to maintain investor interest when governments are managing outcomes.

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