Telecommunications and Economic Development

The thesis examines the relationship between telecommunications development and economic activity of nations. The findings confirm the previously established hypothesis that the causality of the relationship between these two factors exists in both directions. That is the development of economic activity at any point in time influences the development in telecommunications at a later point in time- and the development in telecommunications at any point in time also influences the economic activity at a later point in time. The major economic principle behind such significant correlation of telecommunications and economic development is that telecommunications helps reduce the transaction cost in different sectors of the economy thereby inducing better efficiency. Also, it influences the economy through the positive effects of network externalities, reduction in information costs, and facilitating the effective and timely coordination among agents. Higher economic growth, on the other hand, places more demand on the existing and newer telecommunications services inducing the development of the sector while the economic growth itself make the necessary investment resources available.In the present study, a crosssectional regression analysis reveals that the relationship between telecommunications and economic growth is highly significant for both the developed and the developing countries alike. Telecommunications development measured in number of telephone mainlines per hundred inhabitants are found to significantly effect GDP, overall exports, exports of services, and labor productivity measured in real GDP per worker. Many nations are recognizing the increasing importance of telecommunications to economic development. Efforts to reform their telecommunications include deregulation and liberalization strategies to create a suitable environment for the expansion and modernization of the telecommunications system. While substantial progress had been made in this regard, especially in the OECD countries, most of the lesser developed countries (LDCs) are left behind in their effort of modernization and expansion of the telecommunications infrastructure. One possible reason for the under investment in the telecommunications sector in LDCs is that investment in this sector has to compete with other infrastructure - e.g., education, energy, roads and bridges, and other physical infrastructures which are also vital for economic development. In the present study, a cross sectional study of the nations suggests that telecommunications and energy are the most influential infrastructures for economic development. However, the number of telephones per 100 inhabitants is more influential over per capita energy consumption in spurring economic growth when these two variables are compared for policy implications.Most state owned telecommunications systems in developing countries will require restructuring in the form of ownership structure to make them suitable for foreign and private capital investments. This study reveals that a scarcity of capital resources in the state owned monopoly is the major impediment in the expansion and modernization of telecommunications infrastructure of the lesser developed nations. Privatization and liberalization may be the strategic choice in this regard.