Document(s) 18 of 21

VISOOT PHONGSATHORN

Competition is valuable only because, and so far as, its results are unpredictable and on the whole different from those which anyone has, or could have, deliberately arrived at. Further, … the generally beneficial effects of competition must include disappointing or defeating some particular expectations or intentions.

F.A. von Hayek (1978)

A REFLECTION

The experiences recounted in this volume are very telling. Markets work. They may not work exactly the way we expect them to do. They may not work exactly the way we intend them to. They may not work the way we want them to. But they always work. And when they do not work the way we expect, the way we intend or the way we want, we conveniently claim that markets have failed. Market failure is the favorite excuse for those of us in the development profession to do something. This can also be said of those who are in the regulatory profession. It rings true far and wide throughout the various branches of government. We have been so conditioned with a vision of an ideal market, a perfectly competitive market, a market where social welfare is maximized. But is this vision a mere mirage? What do we really know about social welfare? What do we really know about what people want?

Do we know that users, even the most financially constrained among them, do not want the cheapest communications services? Telecom regulators across the globe are still busy finding ways to lower fees for low-income subscribers. But do low-income users really care? Chapter 1 of this volume reports that low-income users care more about convenience and privacy than price per se. Chapter 2 reports further that many low-income users do not even engage in short-term cost minimization. Long-term decisions on how to communicate are much more important to them than short-term cost minimization. There is no way any telecom regulator will know this ex ante because the users themselves do not do so ex ante either.

People use communications services for a variety of purposes. Some just like to talk. Some do it because it brings other benefits. Keeping in touch with relatives living abroad, as reported in Chapters 1 and 3, for instance, secures financial support in the time of need. Lancaster (1966) and Becker (1976) describe this in terms of 'household production function'.

U = u(Z₁, Z₂, … Z_n)

where,

Do we realistically believe that this calculation goes through the mind of a caller every time he or she is making a new call? This formulation is only useful to researchers making an ex post evaluation of consumer behavior. For the consumers themselves, decision making is heuristic at best (Langlois and Cosgel, 1998). Trial and error and copying are probably better descriptions. So when serving a previously unserved market, nobody knows what the consumers want, not even the consumers themselves, let alone the regulators.

So is there any role for the clueless regulator to play? Of course, there is. Telecom regulators' main tasks are to ensure that the telecom market moves ahead with as many unpredictable results as the people outside the government are willing to allow. The stress here is on people outside the government, whether they are in the business sector, the household sector or the civil sector. The market has to be driven by these people, not by the government. Subsidies are not 'smart' simply because they are competitively tendered out, as recounted in Chapters 8 and 9. People outside the government are willing to push forward the access frontier, and they do so with less efficiency-razing distortions than what the government normally creates. Examples abound, only a small number of which are recounted in this volume.¹

A GUIDING PRINCIPLE

Those of us who are working towards the ideal of universal communications services can do very well by drawing an inspiration and guidance from Ludwig Erhard. Erhard is best remembered by his courageous abolition of price controls in post-World War II Germany. For 12 years, Adolf Hitler had printed money freely, flooding the German economy with Reichsmarks in order to build his war machine. He had avoided inflation by resorting to authoritarian wage and price controls, enforced by the Gestapo. The Nazi regime was defeated, but the Nazi command economy lived on. Wage and price controls were then in the hands of the occupying military governments. Reichsmarks were aplenty. Goods were scarce, and they changed hands largely by bartering. Reichsmarks could buy nothing except for goods rationed by the military governments. The Anglo-American military government's solution to this was to replace Reichsmarks with Deutschmarks. On announcing the new currency, Erhard, the then Director for Economic Administration of the Anglo-American occupation zone, declared all decrees controlling prices invalid; much to the surprise of the Anglo-American military government. Economists had all along been advising the military government in favor of price controls. However, the American Military Governor stood behind Erhard and endorsed his declaration. That was the beginning of the German Economic Miracle.

Two months after lifting the price controls, Erhard promised prosperity for all at the Christian Democratic Union meeting. He also declared competition to be the most promising means to achieve and secure prosperity. To him, income redistribution was not a valid alternative route towards prosperity for all. He had a deep-rooted faith in human dignity. 'Freedom for the consumer and freedom to work must be explicitly recognized as inviolable basic rights by every citizen. To offend against them should be regarded as an outrage against society,' wrote Erhard (1958). 'No individual citizen must be powerful enough to suppress individual freedom, or, in the name of false freedom, to be able to limit it.'

Erhard's philosophy would later become known as Soziale Marktwirtschaft (social market economy in English). Central to Soziale Marktwirtschaft is marktkonform (Eucken, 1952; Müller-Armack, 1947, 1978; Röpke, 1937, 1942). The present day's jargon for marktkonform is 'Making Markets Work'. Whether we want to secure prosperity for all or simply deliver communications service to all, Erhard would demand that we do so by making markets work.

A TOOLBOX

Googling the term, 'Making Markets Work' leads to over 66,000 search results at the time of writing. There is no shortage of toolboxes for 'Making Markets Work'. The industry standard toolbox, if we can call economic development an industry, will contain tools aiming at reducing 'transaction costs' of doing business. How well a market works depends largely on supporting services and institutions (Figure 13.1).

Supporting services determine the 'search' costs that enable a transaction. Poor roads and traffic congestion increase 'search' costs. Lack of price reference, central registry, brokerage service, market intelligence and a whole host of information services increase 'search' costs. Inaccessibility of third-party technical and business advice also increases 'search' costs.

The term 'institution' is used here as it is used in New Institutional Economics or Transaction Cost Economics. Here it means the rules of the game, rather than an establishment, a body or an organization. It is very much the same as what is called 'market order' in the language of Soziale Marktwirtschaft. Institutions determine 'contract' costs. In any transaction where laws and regulations are not very clear or specific concerning rights and liabilities of the parties to transactions, either the parties have to spell-out their rights and liabilities in a contract or bear risks associated with the ambiguity. This adds costs to the transaction. When the attributes of the product or service being sold are not subject to an industry standard or code, the buyer and the seller will have to establish them bilaterally. This adds costs to the transaction. Informal institutions also play a large part in determining transaction costs.

Figure 13.1
How Markets Work: Institutions, Supporting Services, and the Core Market

Source: Springfield Centre².

How well a market works also depends on supply and demand themselves. It is obvious that a market cannot work as well as it can if its suppliers are constrained from improving their capabilities whether by inappropriate laws and regulations, inaccessibility to finance or anti-competitive conduct by their competitors, suppliers, or potential customers. The same can be said of consumers of intermediate products and services.

As markets are interlinked, 'Making Markets Work' toolboxes often come with tools to map these interlinked markets into a chain. This chain of interlinked markets is often called 'value chain', 'supply chain' or 'sub-sector'. As such, 'Making Markets Work' toolboxes are often labeled 'value chain analysis', 'value chain mapping', 'supply chain analysis', 'supply chain mapping', 'sub-sector analysis', and 'sub-sector mapping'. As with 'Making Markets Work', there is no shortage of articles on these toolboxes in cyberspace.

CONCLUSION

Make markets work for universal communications services, please. Do not force incumbent service providers to assume universal service obligations; they are all too eager to accept such responsibilities, as they are a good excuse to foreclose their markets. Do not throw away money subsidizing policy-driven services; chances are that we in the government do not really know what users really want. Work with the markets. Tweak the rules a bit to make it easier for providers to serve previously unserved markets. Focus on clarifying property rights, not on more command and control. Make it clearer what the rights of new-entry service providers to access dark fiber are. Make it clearer what the liabilities of the incumbent refusing to interconnect the new-entry service providers are. Investigate what services are supportive to the introduction of connectivity to the previously unconnected; if their markets are weak, find ways to strengthen them. Remember that markets are interlinked. Solutions may lie in unexpected places. Let markets lead you there.

NOTES

¹ See Chapters 1 and 2 for the role of the household sector in pushing forward the access frontier, Chapter 4 for the role of the civil sector, and Chapter 5 for the role of the business sector.

² From 'making markets work for business and income growth' training programme;
Glasgow; July 2005. The diagram has also been used in the paper: 'Comparative Approaches to Private Sector Development—a MMW perspective' (A working paper for the Employment & Income Division of SDC); Marieke de Rujter de Wildt; David Elliot; Rob Hitchins—April 2006.

REFERENCES

Becker, Gary (1976). The Economic Approach to Human Behavior. Chicago: University of Chicago Press.

Erhard, Ludwig (1958). Prosperity through Competition. London: Thames and Hudson.

Eucken, Walter (1952). Grandsätze der Wirtschaftspolitik. Tübingen: Francke und Mohr Verlag.

Lancaster, Kevin (1966). A New Approach to Consumer Theory. Journal of Political Economy, 74(2), pp. 132–157.

Langlois, Richard N. and Cosgel, Metin M. (1998). The Organisation of Consumption. In Marina Bianchi (Ed.), The Active Consumer—Novelty and Surprise in Consumer Choice (pp. 107–21). London: Routledge.

Loasby, Brian J. (1998). Cognition and Innovation. In Marina Bianchi (Ed.), The Active Consumer. London: Routledge.

Müller-Armack, Alfred (1947). Wirtschaftslenkung und Marktwirtschaft. Hamburg: Verlag für Wirtschaft und Sozialpolitik.

Müller-Armack, Alfred (1978). Social Market Economy as an Economic and Social Order. Review of Social Economy, 36(3), pp. 325–331.

Röpke, Wilhelm (1937). Die Lehre von der Wirtschaft. Vienna: Springer.

Röpke, Wilhelm (1942). Die Gesellschaftskrisis der Gegenwart. Erlenbach-Zürich: Rentsch.

Springfield Centre (2004). Making Markets Work for Business and Income Growth. Durham: mimeo.

von Hayek, Friedrich A. (1978). Competition as a Discovery Procedure. In New Studies in Philosophy, Politics, Economics and the History of Ideas. Chicago: University of Chicago Press.

Document(s) 18 of 21