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Magic Phones
Robert Katz, 15 May 07
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An article in this week's Economist (subscription or free day-pass needed) profiles a soon-to-be-published paper by Harvard's Robert Jensen that demonstrates mobile phones' positive relationship to economic growth. This is related to another paper, profiled here back in 2005, by London Business School's Len Waverman.

In both papers, econometric analysis of time-series data is used to demonstrate a statistically significant relationship between mobile phone adoption/penetration and economic growth. The new paper, The Digital Provide: Information (technology), market performance and welfare in the South Indian fisheries sector, uses micro data from fish markets in the Kerala state of India starting in 1997. I won't re-write what the Economist has to say, but rather quote:

As phone coverage spread between 1997 and 2000, fishermen started to buy phones and use them to call coastal markets while still at sea. (The area of coverage reaches 20-25km off the coast.) Instead of selling their fish at beach auctions, the fishermen would call around to find the best price. Dividing the coast into three regions, Mr Jensen found that the proportion of fishermen who ventured beyond their home markets to sell their catches jumped from zero to around 35% as soon as coverage became available in each region. At that point, no fish were wasted and the variation in prices fell dramatically. By the end of the study coverage was available in all three regions. Waste had been eliminated and the “law of one price”—the idea that in an efficient market identical goods should cost the same—had come into effect, in the form of a single rate for sardines along the coast.

This more efficient market benefited everyone. Fishermen's profits rose by 8% on average and consumer prices fell by 4% on average. Higher profits meant the phones typically paid for themselves within two months. And the benefits are enduring, rather than one-off. All of this, says Mr Jensen, shows the importance of the free flow of information to ensure that markets work efficiently. "Information makes markets work, and markets improve welfare," he concludes.

Pretty compelling. A refresher on the 2005 paper, The Impact of Telecoms on Economic Growth in Developing Countries, Africa: The Impact of Mobile Phones - the authors found that developing countries adding 10 mobile phones per 100 people would see a 0.6% increase in GDP per capita annually. It's an astonishing statistic, and one that has been proven robust in a second study.

What's the point? Markets work, but you need information to achieve equilibrium. And the best provider of information isn't always the well-intentioned government, nor the similarly well-intentioned development agency. People provide information - and they'll pay for it. The Economist gets a bit pithy at the end, glossing over the governance issues at play: "All governments have to do is issue licences to operators, establish a clear and transparent regulatory framework and then wait for the phones to work their economic magic." Easier said than done. Don't let them fool you - it's just not easy. But mobile phones have been a runaway success story over the last 10 years, and that's hard to argue - especially with the wealth of new data out there.

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