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TELECOMMUNICATIONS INFRASTRUCTURE AND ECONOMIC GROWTH: EVIDENCE FROM NIGERIA

BY Sheriffdeen A. TELLA, Ph.D Department of Economics, Faculty of Management Science, Olabisi Onabanjo University, PMB 2002, Ago-Iwoye Ogun State, Nigeria [email protected] and Lloyd Ahamefule AMAGHIONYEODIWE, Ph.D* Department of Economics Faculty of the Social sciences University of the West Indies, Mona Kingston 7, Jamaica. [email protected]

and Bolaji Adesola ADESOYE Department of Economics, Faculty of Management Science, Olabisi Onabanjo University, PMB 2002, Ago-Iwoye Ogun State, Nigeria [email protected]

Being a paper submitted for the UN-IDEP and AFEA joint conference on “Sector-led Growth in Africa and Implications for Development” to be held in Dakar, Senegal from November 8-11, 2007. *All correspondence to be directed to this author while copies of e-mail messages can be sent to others.

TELECOMMUNICATIONS INFRASTRUCTURE AND ECONOMIC GROWTH: EVIDENCE FROM NIGERIA

Abstract Presently, telecommunication facilities in Nigeria, first established in 1886 by the colonial administration, is undergoing very rapid change and explosive growth and it has been argued that this has economic growth potentials for the economy. As such, this study tried to investigate the simultaneous relationship between telecommunications and the economic growth in Nigeria. A system of equations that endogenize economic growth and telecom penetration as well as telecom investment was estimated. The study found that main landline and cell phone penetration had significant effects on economic growth, when we control for the effects of capital and labour. Also traditional economic factors like income and price helped explain demand for main land phones, this was not the case with respect to demand for cell phones.

1.1:

Introduction

Recently, the role of telecommunication infrastructure in enhancing economic growth has been a subject for discourse in the economic literature. Arguments are that the development of a modern nation to its full potential in contemporary world can never be attained without adequate telecommunications infrastructure. This implies that the development of telecommunication infrastructure will significantly boost economic growth and development. In fact, information tools such as telephones, personal computers, and the internet are increasingly critical to economic success and personal advancement. All these help to encourage economic growth.

For instance, Ndukwe (2004) posited that in today’s world, modern digital telecommunications networks are as necessary to economic growth and to attracting foreign investment as are programs dedicated to promoting

healthcare,

electricity,

transportation

and

agriculture.

Furthermore,

a

reliable

telecommunications networks can improve the productivity and efficiency of other sectors of the economy and enhance the quality of life generally.

Studies have also shown that there is a positive relationship between telecommunication infrastructure development and economic growth. Among these studies are International Telecommunications Union (ITU) (2003), the World Bank (2003), Sridhar and Sridhar (2003 and 2004) and Noll (2000). These studies showed that there is a direct correlation between telephone penetration and economic growth.

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All these notwithstanding, most of the values derivable from info-communications development have been concentrated in the developed countries of the world neglecting the developing and less developed countries. For instance, Africa has less than 3% of the world’s main lines although it accounts for more than 12% of the world’s population (Ndukwe, 2004) and in Nigeria the telephone density is estimated at around 5 telephones for about 100 people or five per cent. As telephones tend to be concentrated in the cities, access in rural areas is even much more limited and/or non-existent in many parts of the country. This, among others, shows that the potentials of telecommunications infrastructure development in promoting economic growth in Nigeria is being under utilized.

Specifically, telecommunication facilities in Nigeria, first established in 1886 by the colonial administration, are presently undergoing very rapid change and explosive growth and it has been argued that this has economic growth potentials for the economy. It is as a result of all these that the study tries to investigate the simultaneous relationship between telecommunications and the economic growth in Nigeria, using econometric method of analysis and secondary data for the period 1970 to 2004. The remaining part of this paper is divided into four sections starting with review of some literature in Section 2. Section 3 contains issues in telecommunication sector in Nigeria while in Section 4 we explained the methodology and carried out a quantitative analysis of relationships telecommunication and growth variables. The paper is wrapped up with a conclusion in Section 5. 2.1:

Literature Review

The positive relationship between telecommunication and economic growth is evident given the various studies that abound. For instance, Jorgenson (2001) study of the United States showed that investment in information technology (IT) contributed more than one-half of the recent increase in the US economic growth. His study was collaborated by Kraemer and Dedrick (2001) who, using data from 43 countries, upheld the view that the growth in IT investment is correlated with productivity growth. Oulton (2001) study of the United Kingdom showed that in the beginning and later part of 1990s, Information and Communication Technology’s (ICT) contribution to GDP growth was 0.36% and 0.57% respectively. For Beligium, Kegels, van Overbeke and van Zandweghe, (2002) found that the accumulation of ICT capital has a significant impact on output growth and average labor productivity growth. CEPII (2003) study on France showed that in the early 1990s to the mid 1990s, ICT’s contribution to capital growth in increased from 0.25 percent to 0.45 percent.

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In Asia, Seo and Lee, (2000) did a study on Korea and their finding showed a significant contribution from ICT investment while another study by the Australia National Office of Information in 2003, also confirmed that ICT and services have become pervasive, general-purpose enablers of economic and social transformation. They opined that given the enabling socio-economic environment, ICT would provide the platforms on which the growth in productivity, innovation and social well-being can be constructed. And using 12 Asia-Pacific countries and data from 1984 to 1990, Kraemer and Dedrick (1994) confirmed that IT investment is positively correlated with gross domestic product (GDP) and productivity growth.

Various studies have also found varying degree of ICT’s contribution to economic growth, especially with respect to developing and developed countries. These studies include Dewan and Kraemer (1998 and 2000), which using data from 36 countries for the period 1987 to 1993, stated that IT capital is positively correlated with labor productivity in developed countries but not in the developing countries; Schreyer (2000) studied the G-7 countries for the period 1990-1996, and found that IT contributed significantly to the productivity growth in all seven countries, but the magnitude differs across countries; Daveri (2000), used 18 OECD and European Union (EU) countries and data from 1992 to 1997 for his own study. He revealed that IT’s contribution to GDP growth in the 1990s for all countries studied was significant, however, the contribution in EU countries was lesser than in other industrialized countries; Pohjola (2001) studied 39 countries, using data from 1990 to 1995, and observed that IT investment shows 80% gross returns for OECD countries, but developing countries did not experience significant returns. Zhen-Wei Qiang, Pitt and Ayers (2003), in their study summarized that the various results obtained by different countries and regions on the contribution of ICT to the growth stimulate the debate over exactly how much influence ICT has on economic growth. De Long and Summers (1993) reported a strong correlation between investment and productivity growth in developing countries.

Sridhar and Sridhar (2005) warned that telecommunication infrastructure is also a little different from other infrastructure, as a determinant of economic growth because of the existence of network externalities, a phenomenon that increases the value of a service with increase in the number of users. As a result, the impact of telecom infrastructure on economic development is more pronounced as compared to other traditional infrastructure. This observable fact has been demonstrated by Kim et. al.

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(1997). They did an analysis of online service competition and found that there exists a negative network externality, which was fallout from congestion and this affects the subscription level of telecom services at the particular moment although it forces service providers and regulators to accelerate the investment in telecom infrastructure. For Norton (1992), he demonstrated that convergence could occur if developing countries could add to their stock of telephones rapidly, since they reduce transaction costs.

Garbade and Silber (1978) found that there was statistical evidence that the two innovations in communication technology (the telegraph and Trans-Atlantic cable) led to efficient market places world wide through significant and rapid narrowing on inter-market price differentials. Bayes et. al. (1999) found that that half of all telephone calls involved economic purposes such as discussing employment opportunities, prices of the commodities, land transactions, remittances and other business items. They also reported that the average prices of agricultural commodities were higher in villages with phones than in villages without phones. Leff (1984) argues that firms can also have more physically dispersed activity with increased telecom services (for instance, encourage telecommuting of their employees) and enjoy economy of scale and scope while Sridhar and Sridhar (2003) studies the impact of telecommunication infrastructure and the telecommuting it enables, on spatial dispersion of population, using data from the United States. Their result shows that technology is a complement, not a substitute, for face-to-face interaction.

In terms of methodologies used, De Long and Summers (1993) who reported a strong correlation between investment and productivity growth in developing countries used regression analysis as well as instrumental variables. Eggleston et. al. (2002) show how basic telecommunication infrastructure can create a “digital provide” by making market efficient through information dissemination to isolated and information-deprived locals and improve the living standards of the world’s poor, which in turn accelerates growth. Their analysis was based on references and examples. Also, Cronin et. al. (1993b) finds a statistically significant causal relationship between productivity growth and portion attributable to telecommunications. Their study used the Peterson Index.

Cronin et. al. (1991) used the Granger, Sims and modified Sims tests to confirm the existence of feedback process in which economic activity and growth stimulates demands for telecommunication

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services. They opined that as the economy grows, more telecommunications facilities are needed to conduct the increased business transactions. Cronin et. al. (1993a) examined this relationship at the state and sub-state levels using data from the state of Pennsylvania in the United States. Their study corroborate at both the state and county levels that telecommunication investment affects economic activity and that economic activity can affect telecommunications investment. Roller and Waverman (2001), using data for OECD countries, were the first to use simultaneous approach to incorporate both effects in the economic model in order to validate the hypothesis of reverse causality. Overall, Gupta, (2000) submitted an estimate that one percent growth in telecommunication services generates three percent growth in the economy. 3.1:

The Telecommunication Sector in Nigeria1

3.1.1: Brief History Telecommunication facilities in Nigeria were first established in 1886 by the colonial administration. At independence in 1960, with a population of roughly 40 million people, the country only had about 18,724 phone lines for use. This translated to a teledensity of about 0.5 telephone lines per 1,000 people. The telephone network consisted of 121 exchanges of which 116 were of the manual (magneto) type and only 5 were automatic.

Between 1960 and 1985, the telecommunication sector consisted of the Department of Posts and Telecommunications (P&T) in charge of the internal network and a limited liability company, the Nigerian External Telecommunication (NET) Limited, responsible for the external telecommunications services. NET provided the gateway to the outside world. The installed switching capacity at the end of 1985 was about 200,000 lines as against the planned target of about 460,000. All the exchanges were analogue. Telephone penetration remained poor equalling one telephone line to 440 inhabitants, well below the target of 1 telephone line to 100 inhabitants recommended by ITU for developing countries. At this time, the telephone system was unreliable, congested, expensive and customer unfriendly.

Arising from the foregoing, in January 1985, the erstwhile Posts and Telecommunications Department was split into Postal and Telecommunications Divisions. The latter was merged with NET to form Nigerian Telecommunications Limited (NITEL), a limited liability company. The main objective of 1

This section benefits substantially from http://www.nigeriabusinessinfo.com/telecoms080903.htm and NCC (2004 & 2005) “Trends in Telecommunication Markets in Nigeria”

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establishing NITEL was to harmonise the planning and co-ordination of the internal and external telecommunications services, rationalize investments in telecommunications development and provide accessible, efficient and affordable services. The government intended to rationalise all national telecommunications planning under one organisation.

In November 1992, the government established an independent regulator - Nigeria Communications Commission (NCC). The government mandated NCC to establish and foster an environment that will facilitate the participation of the private sector to increase and expand the extremely poor existing infrastructure. This has not been very successful, as telecommunications operates within the economic parameters that were affected by existing socioeconomic climate. In the recent past, the government has issued a new policy framework and set the following sector targets:  Increase telecommunication growth rate to an annual minimum of 13.5% such that 10% of the rural communities are served in the short term, 30% in the medium term and 60% in the long term;  Achieve a teledensity of 1.5 by 2001 by installing 1.5 million lines and 1.2 million mobile telephone lines. Install 8 million fixed lines by 2005; and  Ensure that in the medium term, telephones are within 5 kilometres walking distance in stead of the current 50 kilometres. Implementation of these programmes presents huge investment opportunities in supply of infrastructure as well as provision of services. Other opportunities include the local manufacture of equipment that the government will support in a bid to create jobs and enhance skill transfer.

In the early 2000s, the Nigerian Telecommunication Plc, (NITEL) had roughly half a million lines available to over 100 million Nigerians. NITEL, the only national carrier, had a monopoly on the sector and was synonymous with epileptic services and bad management. For instance, the total number of subscribers to telephone lines as at the end of December 1986 was put at around 230,000 while Telex subscribers were only 5,300 in number. Total installed capacity for telephone then was 320,834 and telex 11,577. The percentage utilisation for telephone therefore was 71.6 per cent while telex was approximately 45.7 per cent. However, modernity in telecommunications has provided facilities that make for new class of service, improved revenue generation with properly reviewed tariff policy. In 1996, the country has almost 1,000,000 subscribers to telephone lines all of which were handled by

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standard A antennae facing both the Indian and the Atlantic Ocean Regions installed at four (4 NO.) different geographical locations across the country. Nigeria operates a Domestic Satellite System by leasing three (3 No.) transponders from INTELSAT which are accessed by nineteen (19 No.) Standard B earth stations in some state capitals of the Federation. There is a Territorial Manager responsible for Telecommunications Administration in each state except Lagos state where because of the relatively large number of switching centres and subscribers in the metropolis, it was considered prudent to have at least two (2No.) Territorial managers. Nigeria embraced Digital Technology since the 1980s with the introduction of Digital Switches and Transmission Systems (Radio and Optic fibre) into the network. Since the beginning of the 90s, Mobile Telephone Services (Cellular), Paging and Electronic Mail have also been part of the services offered by NITEL (Nigerian Telecommunications Plc). At present, however, to a population of One hundred million (100m), the figure of more than half a million telephone lines in the country means in effect, a very low telephone density ratio; though the country has the largest number of telephones in any one country in Africa. On assumption of office on May 29, 1999 the Olusegun Obasanjo administration deregulated the telecom sector, most especially the much touted granting of licenses to GSM service providers and setting in motion the privatisation of NITEL. This proactive approach by the government to the telecom sector has had a positive significant effect on the telecom sector as well as on the citizens’ access to telephone. Currently, MTN, Celtel (then Econet Wireless Nigeria and later Vmobile), GloMobile and MTEL dominate the GSM sector.

3.1.2: Overall Sector Growth The telecommunications sector is undergoing very rapid change and explosive growth. Waiting lists for telephone lines have disappeared, while telephone tariffs for local, national and international calls are gradually ranking amongst the lowest in Africa. The liberalization of the sector and the resulting competition by private operators is bringing about very substantial benefits to subscribers in terms of much lower prices and enhanced choice. Recently, the Nigerian telecom sector received global acclaim as one of the fastest growing mobile market s in the world. Between 2000 and 2004, the total subscriber base for connected fixed and mobile lines rose at an average growth rate of 125% annually. Overall, 7,930,678 new telephone lines have been taken up since 2002, an exceptional increase of 249%.

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Figure 1: Telephone Lines in Nigeria, 2000 - 2004 12000000

Number

10000000 8000000 Mobile Lines Fixed Lines

6000000 4000000 2000000 0 2000

2001

2002

2003

2004

Year

Despite this enormous increase, the demand for more lines still persists in Nigeria, though there is a quest not just for lines but also for good quality services from the operators. This strong growth is due mainly to competition to sign up new users by the GSM operators and their fixed counterparts. Operators are currently engaged in rolling out, powering and securing their networks further into unserved or underserved parts of the country, especially rural areas.

The overall performance of the industry between 2000 and 2004 is shown in table 1 below. Table 1: Growth of the Telecommunication Sector in Nigeria Population Households Fixed Mobile Total Internet Users Internet Penetration (%) Net New Additions (Fixed) Net New Additions (Mobile) Net New Additions (Total) Teledensity (%) Fixed Growth (%) Mobile Growth (%) Total Growth (%) Growth in Internet Users (%) Teledensity Growth (%)

2000 120,000,000 12,800,524 553,374 35,000 588,374 107,194 0.1 80,058 80,058 0.49 16.9 0.0 15.7 16.7

2001 120,000,000 13,173,020 600,321 266,461 866,782 153,350 0.1 46,947 231,461 278,408 0.72 8.5 661.3 47.3 43.06 46.9

2002 120,000,000 13,545,516 702,000 1,569,050 2,271,050 420,000 0.3 101,679 1,302,589 1,404,268 1.89 16.9 488.8 162.0 173.88 162.5

Source: Nigeria Communications Commission (NCC) (2005).

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2003 120,000,000 13,893,868 888,534 3,149,472 1,038,006 1,613,258 1.3 186,534 1,580,422 1,766,956 3.36 26.6 100.7 77.8 284.11 77.8

2004 120,000,000 14,254,520 1,027,519 9,174,209 10,201,728 1,769,661 1.5 138,985 6,024,737 6,163,722 8.5 15.6 191.3 152.6 9.69 153.0

Despite, the performance of the telecom industry, the industry is still plagued with some problems. These include:  Poor public power supply;  Poor security such that infrastructures are often vandalized;  High import duty as duties on telecoms equipment ranges between 30 to 70%;  Anti-competitive practices, with some operators alleged to be forming cartels to frustrate the natural interplay of market forces;  The type and quantum of funds needed by operators to expand operations is scarce locally; and,  High operational costs. 3.1.3: Telecom Industry and the Nigerian Economy. The telecom industry, especially mobile is playing a significant role in the development of the Nigerian economy. Despite developing from a 30,000 - line subscriber base at the beginning of the millennium to 8.5 million connections at the end of 2004, GSM has contributed in many other ways to the growth of the Nigerian economy especially in the areas of employment generation, foreign Direct Investment and private investment.

In fact, GSM has emerged as an integral and essential part of the culture and life of Nigerians. It has also created countless opportunities for small and medium businesses in franchises, dealerships, retailer-ships and value added services within the GSM market. For instance, over 10,000 people are directly employed by GSM operators alone in 2003 while an estimated 1,000,000 indirect employment opportunities are created through the operation of GSM (Recharge card hawkers, Resellers, etc, including the ‘umbrella people’. Also, Over 10.5 million Nigerians now have a convenient way of communication; this development has greatly affected positively our business environment.

The NCC (2005) reports that private investment into the Nigerian telecoms sector has grown to over US$6 billion, from US$50 million in 2001, with the sector now the largest generator of Foreign Direct Investment (FDI) after the Oil and Gas Industry. For instance, in 2004, two leading private equities, ACTIS and Emerging Markets Partnership (EMP), invested USD$43.2 million through AIG African Infrastructure Fund (AAIF) into Starcomms, one of Nigeria’s leading private telecom operators. This is

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one of the most notable Foreign Direct Investments (FDI) within this period. Also, the transaction represents one of the most significant foreign direct investment deals in Nigeria.

NCC (2005) also reports that equity investments into the Information and Communications (ICT) sector constitute about 56% of total investments made by Nigerian banks under the Small and Medium Enterprises Investment Scheme (SMIEIES). The scheme provides for a setting aside of 10% of annual profit by the banks, for equity investment in small and medium businesses. An outline of sectoral investments under the programme is shown in the chart below.

Figure 2: Sectoral Distribution of SMIEIS Investments Manufacturing US$3.3m (18%)

Construction US$2.9m (16%) Agro allied US$1.9m (10%)

ICT US$10.2m (56%)

Source: Adapted from NCC (2005) Furthermore, a number of international agencies and multilateral institutions have also been investing in the Nigerian telecoms industry. These include the International Finance Corporation (IFC) - the private sector arm of the World Bank Group, which played a significant role in the US$395million syndicated loan to MTN Nigeria. IFC contributed US$100 million to the financing package, representing about a quarter of the entire deal package, and one of its largest ever investments in the telecommunications sector. IFC’s contribution to the deal was also the corporation’s second largest investment in Africa so far. Other international agencies investing locally include the Export - Import Bank of the US (US Exim Bank), African Export - Import Bank (Afrexim), African Development Bank (ADB), Development Bank of South Africa (DBSA), and DMO Germany. 11

In terms of the telecom industry and the GDP, table 2 indicates that the sectoral growth of the telecommunication component of the GDP increased from 8% to 30% between 2000 and 2004. Also, the communication sector’s contribution to the GDP increased from 0.11% to 1.14% while total telecommunication revenue constituted 3.5% in 2004, this was a sharp increase from the 0.8% that was experienced in 2000. But the total telecommunication investment and a percentage of total government revenue fell from 37.2% in 2000 to 18.1% in 2004. This diverse change can be linked to the fact that most of the licenses were granted to the GSM providers around this period. Table 2: Telecom’s Contribution to the GDP 2000 2004 Sectoral Growth of the Telecommunication Component of the GDP 8.0 30.0 Sectoral Contribution to GDP (%) by the Communication Sector2 0.11 1.14 Total Telecommunication Revenue (% of GDP) 0.8 3.5 Total Telecommunication Investment (% of Revenue) 37.2 18.1 Sources: CBN Annual Report and Statement of Accounts (Various Years) and NCC (2005). 4.0:

Empirical Support

4.1. Model Building: The study adapted the methodology used by Sridhar and Sridhar (2005). The methodology uses a system of equations method to estimate demand for and supply of telecom infrastructure, and endogenize telecom investment and the change in telecom infrastructure penetration. These equations were estimated along with the macro economy production function, using data for the period 1993 - 2004. A system of equations was estimated separately for main telephone lines, cell phones and all telephone lines which include both main lines and cellular services. Given the growth in cellular service, demand for cellular services was used in a different model specification, as part of the system of equations, to analyze comparatively the contributions of main line and cellular mobile penetration to economic growth. The Three-Stage Least Squares (3SLS) econometric method of analysis was used to estimate the system of equations.

Three equations were used,  The first considered both main telephone lines and cellular services,  The second considered only the main telephone service and  The third equation considered only the cellular mobile service. 2

As a result of inadequate data, the telecommunication could not be separated from the communication sector but the telecom sector is a significant component of the communication sector.

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In the first equation (all models), the national aggregate economic activity measured by the GDP was related to the annual real gross fixed capital formation net of telecom investment (K), total labour force (LF) and stock of telecommunications infrastructure measured in teledensity (number of telephones per 100 population) (TPEN). This is computed as the sum of main line (MTEL) and cellular (CELL) teledensity. Thus, the aggregate production function, relating total telecom service (or main lines only (second model) or cellular penetration (third model)), to national output, is specified as follows: Log (GDPt ) = a 0 + a1 log( K t ) + a 2 log( LFt ) + a 3 log(TPEN / MTEL / CELLt ) + ε 1t

(1)

It is expected that all the inputs namely capital (net of telecom), labour, telecom infrastructure have a positive effect on total national output. The choice of the independent variables excludes measures of government deficits or of trade openness, which the literature shows affect national output. This is because it is not the determinants of national output that is being estimated.

The second equation (all models) is the demand for telecom service equation. We noted that initially, the government was providing telecommunications service and there was a huge waiting list for main telephones, effective demand for telecommunications infrastructure was therefore defined as the sum of existing teledensity and waiting list for mainlines.

The demand for telecom was assumed to be a demand for a normal good or service, thus its being dependent on income and price. This demand is a function of real price of telecommunication services and real per capita GDP. In contrast to Roller and Waverman (2001) who use telephone service revenue per mainline, the monthly subscription charge as measure of telephone price was used. These charges are normally referred to as rentals, and we used the rental charges for main lines, cellular services and the average of the two in the model for total telecom penetration. Rental as a measure of telephone price were used for the following reasons:  Telephone service revenue per mainline may not be a suitable measure of telephone price if revenue does not necessarily increase or decrease with price. This itself depends on the price elasticity of demand.  Monthly rentals are normally used to recover the capital cost of providing telecom services. The user also pays for usage. Since we are interested in penetration, it is only access to telecom infrastructure, not the usage of the infrastructure itself that is of interest to us.

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The demand equation, hence, can be written as follows (note that in each specification, we replace demand for total telephone services, mainlines and cellular services and their respective prices): Log (TPENWLt ) = b0 + b1 log(GDPCAPt ) + b2 log(TELP / MLPRCE / CELLPRCEt ) + ε 2 t

( 2)

Where TPENWL is Sum of total telecom penetration (TPEN) and waiting list (WL) for main lines per

100 inhabitants; GDPCAP is Real GDP per capita; and TELP is Average of monthly subscription charges for main line (MLPRCE) and cellular service (CELLPRCE). b0 and b1 are elasticity coefficients. As in traditional microeconomics, the price elasticity of demand is expected to be negative, and the income elasticity, to be positive.

To model the supply side of telecommunications, we determine annual telecom investment (TTI) as a function of certain geographic, economic, and regulatory variables. We operationalize these factors using telecommunication service price, measured using the monthly subscription charges, and regulatory structure of the telecom industry.

In the demand equation, for mainline and cell phone specifications, the price of getting a main landline and cellular service were used respectively, as the telecom price. In the supply equation (all models), however, the average telephone (average of main and cell phone) price, in all specifications were used as determining the supply of telecom infrastructure. This is because, while price of landline/cellular service determines the demand for landline/cellular service, the supply of telecom infrastructure is more complex. Telecom infrastructure is composed of access networks (landlines and cellular access) and backbone networks that interconnect access networks. Completing a landline or a cellular call depends on the existence of interconnection across these networks. This makes it wrong or inadequate for specifications to make supply of telecom depend only on mainline price or cell phone price in any specification. This coupled with inadequate data made us use average telephone price as the appropriate price variable in the supply equation in all models. In general, price is expected to has a positive effect on supply.

Further, the supply of telecom investment depends on potential demand measured by the waiting list for main telephone lines. Next, note that given the service-price nexus in the sector (unlike road

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infrastructure, for instance), investment opportunities are lucrative, and the market structure plays an important role in determining the supply of telecom investment. The country drifted from a government monopoly operation to competition in basic and cellular mobile services. The liberalisation in telecom industry brought in both fresh domestic and foreign investment into the country.

Since the price of telephone service was used in the supply equation along with regulatory structure, it can be argued that there can be correlation between price and market structure. Competitive markets force prices to be lower compared to monopoly markets.

However, Singh (2002) stated that in economies where the regulator fixes the price of basic services, this it does to make such services affordable, and hence the evolving competition does not have an effect on price. Even in cellular service where price is market driven, imposition of high license fees and interconnection charges forces prices to settle down at cost plus profit levels and introduction of additional players does not have notable effect on service prices (see also www.itu.int)

Taking into account these considerations, the supply function is estimated as given in equation (3): Log (TTI t ) = c0 + c1WLt + c2 log(TELPt ) + ε 3t

(3)

Where TTI is Annual Telecommunications Investment; WL is Waiting List for main lines per 100 inhabitants; TELP is Average of monthly subscription charges for main line (MLPRCE) and cellular service (CELLPRCE.

Note that there is no variation in model specification for total, main or cellular service for reasons mentioned above. It is expected that the waiting line for main lines being an indicator of market demand, will have a positive impact. 4.2:

Data Source Secondary data was used for the study and these were obtained from various sources like the

Central Bank of Nigeria Annual Report and Statement of Accounts (Various Years) and The Nigerian Communication Commission (2003 and 2005); Economic and Social Context, UNDP and ICT at a Glance, The World bank (2005) and ICT sector Structure, ITU; Mobile Nigeria Forum – http://www.mobilenigeria.com;

MTN

websites

-

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http://www.mcell.co.za;

http://mtnonline.com;

http://www.ntn.co.za;

Globacom

website

–

http://www.gloworld.com;

Vmobile

website

-

http://www.vmobile-nigeria.com;

4.3:

Model Estimation and Analysis

The results of the estimation for the three specifications of system of equations, that is, the estimates of the production, demand, and supply is contained in tables 3 and 4.

Table 3 shows that with respect to estimation for all telephone lines (main lines and cell phones), the estimates indicate that capital, labour force and total telephone penetration have a significant and positive impact on economic growth proxied by the gross domestic product. Also, given that we estimated a Cobb-Douglas production function, and the fact that the sum of the coefficients is greater than one implies increasing returns to scale. This might be due to the fact that Nigeria experienced Compounded Annual Growth Rates (CAGR) of 0.80% and 3.63% respectively in her labour force and capital stock (net of telecom) while the average CAGR of mainlines and cell phones were 87.17% and 78% respectively. This may have led to increasing returns to scale in the national output of Nigeria over the period of study. The elasticities obtained for capital, and labour are respectively 0.51 and 0.56. This indicates that one percentage increase in labour and capital inputs approximately increases aggregate national output by more than 0.5 percent each (see table 3). The table also shows that a one percent increase in teledensity (total telephones per 100 population) increases national output by 0.07 percent while elasticity of 0.13 was obtained for main line teledensity. Estimates of the demand for telecom infrastructure, when we take into account all telephone lines, show that income and price play a significant role in affecting the demand for telecom infrastructure. The income elasticity of demand for telecom services is positive and having a value of 1.59, which is greater than one, indicates an elastic demand. And by implication, it means that there might be the existence of a reverse causation between telecom and economic growth. Thus, any increase in GDP translates to increase in personal disposable income, hence increase demand for telecom services. And for the price elasticity of demand, it has the expected sign (negative) and has a value of -0.29. Also, despite the small magnitude of its coefficient, estimates of the supply equation indicate that the market potential (WL) is an important determinant of investment in telecom.

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Table 3: Estimation of System of Equations: All Telephone Lines (Model 1) and Mainlines (Model 2) EQUATIONS/VARIABLES MODEL 1: ESTIMATE MODEL 2: ESTIMATE Production Function Constant Log of Capital Log of Labour Log of TPEN Log of MTEL

Dependent Variable: Log of GDP 2.14 (5.15) 0.51 (6.04)* 0.56 (6.35)* 0.07 (1.86)** -

Dependent Variable: Log of GDP 2.06 (5.43) 0.49 (7.12)* 0.46 (7.01)* 0.12 (2.01)*

Demand Equation Constant Log of GDPCAP Log of TELP Log of MLPRCE

Dependent Variable: Log of TPENWL -8.11 (-19.01) 1.59 (8.74)* -0.29 (-5.96)* -

Dependent Variable: Log of TPENWL -4.23 (-8.65) 1.39 (5.49)* -0.46 (-3.14)*

Dependent Variable: Log Supply Equation of TTI Constant 14.01 (20.01) Log of WL 0.14*10-6 (4.56)* Log of TELP 0.11 (0.92) T – Statistics is in brackets *,**,***, significant at 1%, 5% and 10% level respectively.

Dependent Variable: Log of TTI 14.14 (20.43) 0.15*10-6 (4.61)* 0.13 (1.24)***

With respect to estimation for main landlines, the demand equation for telecom shows that when it comes to main landlines, the price elasticity of demand is larger than that for total penetration. Given the fact that our price variable measures the monthly fixed connection charge for installing landline telephone service, a one percent reduction in this price can be expected to lead to a 0.46 percent increase in the demand for main telephone services. One reason for this is that basic service provided through landlines have lower rental ceilings prescribed by the regulator to make it affordable to much of the population. Even a small increase or decrease in main line price will affect telecom penetration much. On the other hand, cellular prices are market driven. Estimates of the supply of telecom infrastructure are very similar to what they were for all telephone lines. As in the supply equation for all telephone lines, the potential demand (WL) has a positive and significant influence on investment decisions, despite its small magnitude.

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With respect to estimation for cell phones, a separate system of equations was estimated, though the sample size was much smaller given the time cell phones was introduced into the Nigerian economy. The result for this estimation is contained in table 4. From the estimates of the production function, the table shows that when the contributions of capital and labour in total national output are controlled for, cell phones are the only ones that contribute significantly to economic growth. The elasticity shows that a one percent increase in cell phone penetration can cause output to increase by 3.2 percent. But it is important to note here that the populace finds cell phones to be quite inexpensive and less timeconsuming to install and also demand for mobile communication devices such as cell phones need not be always driven by economic factors. Table 4: Estimation of System of Equations: Cell Phones (Model 3) EQUATIONS/VARIABLES ESTIMATE Production Function

Dependent Variable: Log of GDP

Constant Log of Capital Log of Labour Log of CELL

10.12 (9.08) 0.54 (1.01)*** 0.59 (1.32)*** 3.19 (3.88)*

Demand Equation Constant Log of GDPCAP Log of CELLPRCE

Dependent Variable: Log of TPENWL -1.91 (-3.01) 0.02 (0.69) -0.01 (-0.94)

Supply Equation Dependent Variable: Log of TTI Constant 14.11 (9.90) Log of WL 0.19*10-6 (3.99)* Log of TELP 0.02 (0.17) T – Statistics is in brackets *,**,***, significant at 1%, 5% and 10% level respectively. Our estimate may look a little overstated but they should not be unexpected. This is due to some reasons such as the fact that cell phone penetration can lead to dramatic increases in output by reducing transaction costs, including, but not limited to, decisions relating to production of goods and services. For instance, value added services such as stock quotes and commodity prices provided by cellular service providers at affordable prices using the latest digital cellular technologies, may be expected to produce tangible economic outcomes (see Sridhar and Sridhar, 2005). Also due to changes in telecom regulation in Nigeria in the Obasanjo regime, there was a move to competitive market structure in the 18

telecom industry, the country leapfrogged into second-generation mobile cellular systems, bypassing deployment of main lines. This led to a rapid increase in cell phone penetration in Nigeria.

On the demand estimate for cell phone services, table 4 shows that income and price that explained the demand for other services (including main landlines) do not explain demand for cell phones. This is because both the price and income elasticities of demand for cell phone services were not significant at least at the conventionally accepted levels. By implication, micro, household decisions relating to cell phone services could be dependent on non-economic factors like necessity, neighbourhood or bandwagon effect. Though, these non economic factors could not be captured in our study due to unavailability of data, we found that price and income variables are not important in explaining demand for this service. On the supply equation for telecom investment when we take into account only cell phones, the market potential (WL) has a dominant positive influence on its supply. This effect is the same as what we have found with respect to all telephone lines and main telephone lines in table 3. Also, with respect to other studies in this area, our results agree with most of the reviewed studies that telecom impacts positively on economic growth. The only exception is the study by Dewan and Kraemer (1998 and 2000). Their study of 36 countries (combination of developing and developed countries) for the period 1987 to 1993, found that IT capital is positively correlated with labor productivity in developed countries but not in the developing countries.

By and large, the results indicate that inasmuch as telecom penetration affects GDP, telecom investment can impact penetration. This has implications on how Nigeria can increase their penetration with increases in telecom investment, and furthermore, how much she can expect her national output to grow. Also, wireless mobile networks contribute significantly to national output. As such, there is the need to create a conducive competitive climate for the growth of this industry segment. 5.1:

Conclusion

This study investigated the simultaneous relationship between telecommunications and the economic growth in Nigeria. A system of equations that endogenise economic growth and telecom penetration as well as telecom investment was estimated. The study found that main landline and cell phone penetration had significant effects on economic growth, when we control for the effects of capital and labour. Also traditional economic factors like income and price helped explain demand for main land

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phones, they do not explain demand for cell phones. Note that there are data limitations that could limit the value of the estimations. For instance the cell phone sample is quite small since data on cell phone related information are reliable and available only post 1992. Notwithstanding this limitation, the study not only provide an important bedrock for further research in this area for other African countries but also serves as a guide for telecommunication policy in Nigeria. References Bayes, Abdul, J. V. Braun and R. Akhter. 1999. Village pay phone and poverty reduction: Insights from a Grameen Bank initiative in Bangladesh. Center for Development Research (AEF), Universitat Bonn, Bonn, Germany, Discussion papers on development policy no. 8. Retrieved from http://www.zef.de/publications.htm. Central Bank of Nigeria, Annual Report and Statement of Accounts - http://www.cenbank.org.ng CEPII, 2003. ICT and Productivity: The Situation in France, La Lettre du No 220 February. Cronin, F.J. et. al., 1991. Telecommunications infrastructure and economic growth: An analysis of causality, Telecommunications Policy (December): 529-535. ____________, 1993a. Telecommunications infrastructure investment and economic development, Telecommunications Policy (August): 415-430. ___________, 1993b. Telecommunication and growth, Telecommunications Policy (December): 677-690. Daveri, F., 2001. Information Technology and Growth in Europe. University of Parma and IGIER, Mimeo, May. De Long, Bradford and Lawrence Summers, 1993. How Strongly do Developing Economies Benefit from equipment Investment? Journal of Monetary Economics, 32: 395-415. Dewan, S., Kraemer, K. L., 1998. International Dimensions of the Productivity Paradox. Communication Acm 41(8), 56–62. _________________, 2000. Information Technology and Productivity: Evidence from Country Level Data. Management Science 46, 548–62. Eggleston, K. R. Jensen, and R.Zeckhauser, 2002. Information and communication technologies, markets, and economic development. Department of Economics, Working Paper, Tufts University. (RePEc:tuf:tuftec:0203) Garbade, K. D. and W. L. Silber, 1978. Technology, communication and the performance of financial markets: 1840-1975. Journal of Finance, 33 (3): 819-831. Globacom website – http://www.gloworld.com

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