Chapter 1: Introduction

1.1 Global Perspective

Telecommunication, which is an important part of infrastructure of any country, especially a developing countries like Pakistan, as it helps in speeding up the growth process. Development in the telecommunication sector helps in increasing the productivity of various industries and at the same time helps to attract further business activity by reducing transportation costs and improving the accessibility of market. Increased business activity will have a positive effect on the economy of the business by enhancing economic growth through encouraging investment.

Telecommunication infrastructure developments hold immense importance especially for assisting economic growth in less-developed region (Leapfrog development).

The telecommunication sector involves fixed telephone lines (landlines), Mobile Phones, dial-up connections and broadband.

In the First World Summit on Information Society, Professor Claus Schwab, Founder and executive Chairman of the World Economic Forum pointed out that ICT can assist developing countries by accelerating their development process. By the end of 2013, there will be an estimated 6.8 billion mobile cellular subscriptions, according to International Telecommunication Union (ITU).

The Information and Communication Technology (ICT) distribution has grown worldwide over the period of some year which can be seen in the Figure given below.

Information and Communication Technology distribution has continued to grow worldwide. Mobile-cellular penetration has reached 96 % by end of 2013. Mobile broadband on the other hand continues to grow strongly at an average of 40% annually between 2010 and 2013. Fixed-broadband is growing comparatively slowly at a rate of around 10% compound annual growth rate (CAGR). Internet access in household has accelerated for the past three years especially in the developing countries with a penetration rate of 40% globally by the end of 2013. (Measuring the Information Society Journal 2013)

As can be the figure above taken from ITU 2013, there has been a steep rise in the growth of mobile broadband and a widespread service provision of mobile and its infrastructure. It is expected that mobile broadband will be equally available as the mobile (cellular) telephony services in the coming years as the trend shows. The percentage of the population of the world that is covered by 3G technologies (which is required to be referred as mobile broadband and high speed internet connectivity) is about 50% by the end of 2012. Mobile-broadband subscriptions were estimated to be around 2 billion till the end of 2013 and global penetration rate were to be around 30% with the developing countries having greater penetration rate then developed countries.

There has been an almost average 40% annual increase in the mobile broadband availability around the world since 2007 making it one of the fastest growing markets in the world. This growth has been phenomenal not only in the developed countries but also the developing countries of the world. (Measuring the Information Society Journal 2013)

As can be seen even in one of the least developed countries of the world Africa the penetration rates have raised to almost 11% by the end of 2013. The differences in the penetration rate still remain vast between developed and developing countries with the developed countries having a penetration rate of almost 75%. These differences in mobile penetration rates greatly affect the economic growth rates of the countries. (Measuring the Information Society Journal 2013)

Fixed Broadband also continues to grow, but slower than mobile broadband at a growth rate of approximately 10% average annual growth between 2010 and 2013. The growth has been slower in developed countries as compared to developing countries over the past three years. Developing countries growth rate is still in double digits as can be seen in the figure above.

The fixed-network infrastructure in developed countries is far more advanced than that in developing countries. Thus it is costly to setup fixed- network infrastructure in developing countries as there are fewer existing networks or high-speed technologies to do so. There is a huge divide between developed and developing countries. It is estimated by the end of 2013, fixed(wired)- broadband penetration will reach approximately 10% globally, 27% in developed countries and 6% in developing countries. (Measuring the Information Society Journal 2013)

1.2 History

Studies with primary focus on telecommunication infrastructures contribution towards economic output started in the 1960’s. Since then many economists have tried to show this relationship through their respective researches. This sector has undergone a lot of drastic changes since the 1980’s. During this time those countries that had already developed were trying to sustain their development in telecommunication and the developing countries also started to their telecommunication infrastructure after realizing its importance in economic development. (Ding, L 2006)

The telecommunication industry has seen a lot of changes in the structure as initially before 1990’s there were only a limited fixed line services being provided but later evolved with the introduction of internet connections with pay phone card services/ dial up connections being the first internet providers. The industry evolved further with the introduction of mobile phones (cellular services) in the late 1990’s to early 2000’s.

1.3 Telecommunication in Pakistan

1.3.1 Landline

At the time of independence, Pakistan inherited only 14,000 land lines. Now, there are over 94 million mobile phone connections in the country. The huge growth in Pakistan’s telecom sector is characteristic of many developing countries.

1.3.2 Mobile Phones

During the 1990’s, Instaphone and Paktel were the first ones to introduce mobile communication in Pakistan. Mobilink joined this market later in 1998. These three companies offered AMPS services before switching to GSM in the early 2000s.Ufone later joined in the market.

1.3.3 Internet

Since the early 1900s, internet access has been available in Pakistan. Initially PTCL started in 1995 by offering access via the nationwide local call network. Even by 2006 internet penetration was still extremely low. PTCL has started providing free dial-up internet service to all its existing landline users. Wireless broadband internet has been started by theWLL (Wireless Local Loop) Networks in major cities of Pakistan.

1.3.4 Broadband Internet Access

In 1995, broadband service was first provided in Pakistan by Telstra (Australian Telecom Company). The first official cable internet service was launched in 2000 by World Call under the brand name of GO4B. In 2002, the first DSL service in Pakistan was launched by Micro Net in Islamabad/Rawalpindi. Till 2007 users of the broadband were restricted to Islamabad, Karachi and Lahore.

1.4 ICT Development Index

The ICT Development Index (IDI) is defined as a compound index by ITU (International Telecommunication Union), which combines 11 indicators into one standard measure that serves to monitor and compare developments in information and communication technology (ICT) across countries. The IDI was developed by ITU in 2008 and first presented in the 2009 edition of Measuring the Information Society (ITU, 2009a).

According to the ITU, the world’s least connected countries (LCCs) group includes 39 countries with low IDI values in 2012. It divides a total of 157 countries into four groups (high, upper, medium and low). These LCCs are characterized by limited ICT access of basic voice and low-speed data services. While a number of LCCs have reached relatively high levels of mobile-cellular penetration, more advanced ICT services, including broadband Internet access, remain very limited. In the majority of LCCs, Internet access is limited, hardly ever high-speed, very expensive, and used by only a small percentage of the population.

In Pakistan, less than one of ten people use the Internet. The LCCs also tend to have very low fixed- and mobile-broadband penetration levels, and most only launched and commercialized 3G mobile-broadband networks relatively late. The LCCs include many of the world’s least developed countries (LDCs), and the majority is in Africa. However, they also include a number of highly populated countries that are not LDCs, including India, Nigeria and Pakistan, and they represent a total population of 2.4 billion, which is more than one-third of the world’s total (2012) population.

These are the countries that could greatly benefits from better access to and usage of ICTs, including in areas such as health, education and employment. Most of the countries on the list of LCCs are also those that are lagging behind with respect to the Millennium Development Goals (MDGs). Thus there is a need to give special attention to these countries and to adapt economic policies which would assist them to make the most of ICTs required to help foster development and achieve the MDGs.

According to the ICT Development Index, Pakistan held the 129 ranking in 2012 which shows that Pakistan is lagging behind many of the more developing countries like India at a 121 Rank and China at a rank of 78 in relation to it ICT development levels, which are important for any country to help develop.

1.5 Network Readiness Index

Networked Readiness index (NRI) measures the ability of a country to take advantage of the opportunities of advances in Information and Communications Technology (ICT). This list is published annually. It is used to help assist in understanding the impact on competitiveness of a country by ICT.

The NRI is an amalgamation of three components: the ICT environment offered by a given country (market, political, regulatory, and infrastructure environment), the readiness of the country’s main stakeholders (individuals, businesses, and governments) to use it, and the usage of ICT amongst these stakeholders.

Pakistan’s rating according to this index has fallen from 102 in 2012 to 105 in 2013. In comparison to other developed and developing countries included the figure Pakistan has one of lowest Network readiness value.

According to the Networked Readiness Index (NRI) published by the World Economic Forum (2003), developing countries continue to lag far behind developed countries. Thus, the Network Readiness level of a country can greatly affect its ability to compete globally, in this increasingly competitive world.

Telecommunication and its extension broad brand penetration has been increasing for the past decade or so, depending to the capabilities of countries. This increased penetration eventually leads to lesser entry barriers and higher market transparency which in turn leads to increased productivity of labor and market competiveness and ultimately economic growth.

Source: Global Information Technology Report 2013

Figure 1.The Network Readiness Index 2013

Rationale

Telecommunication development has a monumental effect on the economic growth levels of a country. Telecommunication development has risen in importance since the world has become more globally competitive over time. The study would help the economic policy makers and the government to decide how much investment should be made or should be encouraged to assist in increasing the economic levels of the country.

Chapter 2

Literature Review

According to a recent study by Atif, Endres and MacDonald (2012) broadband penetration has had a positive impact on economic growth of a country. They used both a static fixed effects model and a basic linear dynamic model to assist them in analyzing the effects of broadband penetration on the output per capita. The data was collected from 31 OECD countries over the period 1998-2010.

The study by Imran and Niazi (2011) investment in telecommunication has a significant effect on growth. Initially determinants of Total Factor product (TFP) are presented using the growth accounting framework and then the growth regression analysis is used to measure the impact of infrastructure variables individually. The data was collected from Pakistan for the period 1975-76 to 2012-2011.

The study of K.M. Vu (2011), shows that Information and communication technology has a causal link on growth. It uses three tests to prove that communication is an integral source of growth. The second test uses the traditional cross-country regression method to identify a strong association between ITC penetration and growth. The Generalized Method of moment (GMM) to better understand the link. The data used in the paper was collected from 102 countries for the 10-year period 1996-2005.

The study of K.M. Vu (2011), shows that Information and communication technology has a causal link on growth. It uses three tests to prove that communication is an integral source of growth. The second test uses the traditional cross-country regression method to identify a strong association between ITC penetration and growth. The Generalized Method of moment (GMM) to better understand the link. The data used in the paper was collected from 102 countries for the 10-year period 1996-2005.

According to a later study of Czernich, Falck, Kretschmer and Woessmann (2009), introduction and circulation of broadband has led to a great impact on the growth in GDP per capita. This study uses instrumental-variable approach using annual data collected from a panel of OECD countries for the period 1996-2007.

According to another study by K.S. Sridhar and V. Sridhar (2009) main landlines and cell phone penetration have significant effects on the level of economic growth. In this study an estimate of demand and supply of telecom infrastructure was used in addition to telecom investment and the telephone penetration and macro economy production function. The data for this was gathered from 63 developing countries for the period 1990-2001. It was also found out as a result of this study that an increase in GDP further leads to increases in personal disposable income and ultimately increased demand for telephone services; hence a healthy cycle continues that helps in overall development of an economy.

The study by Koutroumpis (2009) shows a strong causal link between broadband and economic growth and there are increasing returns to broadband telecommunication investments. It uses a macroeconomic production function with a microeconomic model for broadband investment to estimate how investment in broadband infrastructure impacted economic growth of a total of 22 OECD countries during the period 2002-2007.

The study by Koutroumpis (2009) shows a strong causal link between broadband and economic growth and there are increasing returns to broadband telecommunication investments. It uses a macroeconomic production function with a microeconomic model for broadband investment to estimate how investment in broadband infrastructure impacted economic growth of a total of 22 OECD countries during the period 2002-2007.

According to the report by Calderón and Servén (2008), increased volume of infrastructure stock and an improved quality of infrastructure services has a positive effect on the long-term growth rate of a country. A comparative cross-regional perspective was used in the research; this empirical research used both the quantity and quality of infrastructure services. The data used was collected from 97 countries for the period 1960-2005.

The study conducted by Zahra, Azim and Mahmood (2008) used the cross-sectional growth framework in examining the determinants of economic growth, followed by a Solow-type equation with a set of variables reflecting the differences in the steady-state equilibrium. This is to test the convergence hypothesis and the endogenous growth theory. The data used was collected from 24 countries comprising of low income, middle income and high income to be a good representation.

According to a study by Ding and Haynes (2006) differences in telecommunications infrastructure are integral reasons for the variations in the level of economic growth in China’s provinces. This relationship was investigated using the fixed effects model for a set of other variables including initial economic condition, fixed investment, employment, population growth, foreign direct investment (FDI). The dataset used was collected from 29 regions of China for a 17-year period (1986-2002).

Another study by Waverman, Meschi and Fuss (2005) measured the contribution of telecommunication to growth by the boost it provides to the long-term growth rate. In the study, a three–equation modification of the Roeller-Waverman Approach (Output, Demand and Investment Equations) was used and the equations estimated using the Generalized Method of Moments (GMM) method. The data used was from 38 developing countries for the period 1996-2003.

According to a earlier study was by Calderón and Servén (2004), which used regression to find the relationship between the variables Growth and Infrastructure. The data used was cross country time-series taken from 121 countries for the period 1960-2000. According to this study, the volume of infrastructure stock especially telecommunication has a significantly positive effect on long-run economic growth.