Regulating Telecommunications in Developing Countries: Outcomes, Incentives, and Commitment

October 1995 The private sector invests heavily in infrastructure, makes reasonable returns, and improves productivity when regulators reduce the firm?s information advantage, induce the firm (through pricing) to operate efficiently, and institute safeguarding mechanisms to protect the firm against expropriation of assets or quasi-rents. In response to the recent wave of privatizing and regulating monopolies in developing countries, Galal and Nauriyal evaluate the impact of different regulatory schemes on private sector behavior in the telecommunications sector in seven countries. They find that regulation is most effective --- meaning, it results in substantial investment by the private sector, reasonable returns on this investment, and greater productivity --- where the government/regulators reduce the firm's information advantage, induce the firm (through pricing) to operate efficiently, and institute safeguarding mechanisms to protect the firm against expropriation of assets or quasi-rents. Conversely, where the government/regulators fail to resolve information, incentive, and commitment problems, private sector returns are relatively high, and investment and productivity are relatively low. This paper --- a product of the Finance and Private Sector Development Division, Policy Research Department --- is part of a larger effort in the department to investigate the influence of institutions on policy outcomes.