ICT and Development (Part 2)

Rambling on about transaction costs from the last post.

Transaction costs are all over the place. When I travel to talk with someone, the cost of the travel in terms of time and money is the transaction cost of the talk. I could use the phone to have a talk. That reduces the transaction cost of having the talk. Telephones are a lower cost substitute for transportation in this case. This is one way that information and communications technologies reduce transaction costs. It is cheaper to move electrons than to move molecules.

All technological progress is an attempt to reduce costs and reducing transaction costs presents great opportunities since transaction costs account for a very large share of the total costs of stuff.

Now turning to the issue of developing countries and the use of ICT, the matter central to our discussion. Developing countries are resource constrained and therefore reducing transaction costs is a great way to stretch resources. Instead of a costly bus ride, use the phone. Ironically, it is often the case that in developing countries bus rides are cheaper than phone calls — because phone calls are senselessly priced too high leading to efficiency losses.

A high-quality always-on widely available affordable communications network is an absolutely essential part of the infrastructure for any economy, especially a developing one. Since this requires significant fixed costs and since there are immense positive externalities (network and consumption externalities), the market will underprovide communications networks. Therefore, the provision of a communications network should be subsidized for achieving the socially optimal solution. Conversely, taxing the provision of a communicatins network would have negative consequences. And that is what short-sighted money-grubbing developing country policy makers do: they tax the sector instead of subsidizing it.

India is poor because of the totally insane public policies. Heavily taxing communications technology is perhaps one of the most eggregious example of such brain dead policies. For many decades, the government of India in its infinite wisdom considered phones to be a luxury and priced it out of the reach of nearly 100% of the population. That is why the department of telecommunications was able to install on an average half a million phones a year for about 40 years of its existence. Now we add half a million phones in a week.

We will continue to explore the use of ICT for development in the future.