Impact of Mobile Phone Technology on Economic Growth

Economic growth, and the variables that drive this elusive phenomenon, have long been a subject of interest for economists. In 1987, the recipient of the Economics Nobel Prize, Robert Solow said that the effect of information and communication technologies (ICTs) could be seen everywhere, except for in productivity statistics. Now, almost two decades later, economists have begun evaluating how various forms of ICT have an impact on productivity and growth.

Mobile phone technology is one such ICT that has increasingly penetrated both developing and developed countries. It is important to understand the relationship between this technology and growth so as to understand fully the determinants of growth on one hand and, on the other, to determine the volume of investment that should be allocated to this form of telecommunication infrastructure. It is also important to gauge the relationship between this new form of communication and the existing fixed phone network in order to separate the impact and make relevant policy decisions.

While fixed-line subscription worldwide accounts for 1.3 billion users, there are 5.6 billion mobile phone subscribers. The mobile phone industry accounts for 1.5% of the world’s GDP: “Mobile phone technology accounts for 60% of the revenue of the telecommunication industry with the remainder coming from fixed line network” (Vodafone, 2011).

The fixed-line network took longer to develop and penetrate than mobile phone technology, which is easier to disseminate and relatively cost-effective. The penetration of the latter has increased exponentially across countries. In addition, according to Waverman, Meschi and Fuss (2005), mobile networks cost 50% less per connection than fixed phone lines.

It is the ease, cost effectiveness and widespread penetration that have led to the substitution of fixed-line phone networks by mobile phone technology. This post debates how the mobile phone industry contributes to economic growth as a substitute for fixed phone lines.

Waverman et al. (2005) argue that mobile phones are a perfect substitute for fixed-line phone networks, based on a demand equation for mobile phones. They regressed mobile phone penetration on mobile price, fixed-line price and GDP per capita using GMM estimation. Their results are as follows:

The dependent variable in this case is average mobile penetration. The table shows that mobile penetration decreases as the price of mobile calls goes up, but is positively correlated with fixed-line price and GDP per capita. This indicates substitution between mobile phones and fixed-line phones.[1] Vehorn (1981) refers to this phenomenon as the efficiency substitution effect as fixed-line phones become an inefficient way of obtaining the same service. Hence, consumers substitute away from these towards mobile phone networks.

This conclusion has empirical support: as the figure below shows, the number of subscriptions per 100 people increases exponentially but declines for fixed-line phones. For the latter, it increases slightly until 2003, and then becomes stagnant and declines.

Sridhar and Sridhar (2007) support this empirical result by explaining that the role of landline services in the communication and telecom sector has diminished and is likely to continue falling.

Waverman et al. (2005) estimate an output equation with capital, labour and mobile penetration as the independent variables. They report that a unit increase in mobile penetration increases output by 0.075. They also find that, for an average country with a mobile penetration of 7.84 mobile phones per 100 people in 2002, a doubling of mobile penetration would imply that output increases by 10%.

The graph above is based on data from Waverman et al. (2005) and shows how GDP increases with rising mobile penetration in an ‘average’ developing country. Their study also shows that the growth in developing countries stemming from mobile phone penetration is twice that of developed countries. Sridhar and Sridhar confirm this finding and suggest that mobile phone penetration has a positive impact on economic growth.

Mobile phone penetration has a significant impact on economic growth and provides a more efficient substitute for fixed phone lines. The impact of a fully penetrated economy is expected to be much higher for mobile phone technology than for fixed phone lines since mobile phones open up more avenues for economic support.

Further data and debate on the relationship between different forms of telecommunications are still emerging, but the information this technology seeks to disseminate is the lifeblood of markets. It affects growth and has significant effects on poverty, income and standards of living. It is cost-effective and convenient. Aker (2008) sums up the impact as follows: “Information wants to be free. Information wants to be expensive. Information wants to be free because it has become so cheap to distribute, copy and recombine – too cheap to meter. It wants to be expensive because it is immeasurably valuable to the recipient.”

[1] The equation is in log-log form, so the estimates are elasticities of demand.

References

Aghion, P &SN Durlauf (eds.), Handbook of economic growth,vol. 22,North Holland, Amsterdam, 2005.
Aghion, P &P Howitt, Endogenous growth theory, MIT Press, Cambridge, MA, 1997.
Aker, JC,‘Does digital divide or provide? The impact of cell phones on grain markets in Niger’, 2008, retrieved <http://www.cgdev.org/doc/events/2.12.08/Aker_Job_Market_Paper_15jan08_2.pdf>.
Aker, JC&I Mbiti,‘Mobile phones and economic development in Africa’ (Working Paper 211), Centre for Global Development,Washington, DC, 2010.

Colecchia, A &P Schreyer,‘ICT investment and economic growth in the 1990s: is the United States a unique case? a comparative study of nine OECD countries’, Review of Economic Dynamics, vol. 5, no. 2, 2002,pp. 408–442.

Esfahani, HS &MT Ramı́rez,‘Institutions, infrastructure, and economic growth’, Journal of Development Economics, vol. 70, no. 2, 2003,pp. 443–477.

Horst, H &D Miller, The cell phone: an anthropology of communication, Berg Publishers, Oxford, 2006.

Sridhar, K &V Sridhar,‘Telecommunications infrastructure and economic growth: evidence from developing countries’, Applied Econometrics and International Development, vol. 7, no. 2, 2007, 37–61.

Vagliasindi, M, I Güney &C Taubman,‘Fixed and mobile competition in transition economies’, Telecommunications Policy, vol. 30, no. 7, 2006,349–367.

Vehorn, CL,’Substitution between public and private goods: an overview of the market meeting consumer preferences’, Advances in Consumer Research, vol. 8, 1981, 523–526.

Vodafone,Vodafone annual report 2011, retrieved 21 November 2012,<http://www.vodafone.com/content/annualreport/annual_report11/index.html>.

Vourvachaki, E,‘Information and communication technologies in a multi-sector endogenous growth model’ (Working Paper 386),CERGE-EI, Prague, 2009.

Waverman, L, M Meschi &M Fuss,‘The impact of telecoms on economic growth in developing countries’, Vodafone Policy Paper Series no. 2, 2005,pp. 10–24.

The World Bank, World development indicators, retrieved 21 November 2012,<http://data.worldbank.org.proxy.lib.duke.edu/indicator/IT.CEL.SETS.P2/countries?display=graph>.

Ms. Maha Rehman is working as an Education Consultant with the World Bank. She completed her Masters in Economics from Duke University and is a LUMS alum. Maha has a keen interest in micro-econometric evaluations of human development policy issues.

Disclaimer: The views expressed here are those of the authors and do not necessarily represent the views of the Institute of Development and Economic Alternatives