Mobile phones, tax and development

mobile_tax.gifThis week’s Economist reports an interesting study into the taxation of mobile phones. Not surprisingly, developing countries with high mobile taxes generally have far fewer mobile phones per person than those with low taxes.

This is important because there is good evidence that access to mobile phones is good for development. 

Easy! we all cry out in unison. Developing countries should stop being so short sighted and abolish the tax on mobile phones. Doh!

Indeed they should. But if you are the Finance Minister in a very poor country, this is easier said than done.  In Bangladesh, health expenditure per person per year is just $11, and primary education just $34 per person per year.  You need the money to expand those services. People with mobile phones clearly have more money than most.

Finance Ministers know that if they abolish the tax on mobile phones, there will be more usage, more business, and more taxes coming in. Well perhaps: but when will that revenue arrive?  How are you going to manage in the meantime?  Many developing countries cannot afford to borrow to see them through until the revenues pick up.

Mobile phones are just one example. The economies of many developing countries would benefit hugely if they could abolish import tariffs, for example on computers and cars; liberalise state telephone companies and other state companies; remove user fees on key government services; and so on.  But in poor countries with only a small formal economy, these taxes and charges are major sources of revenue for the government which pay for essential public services.

This seems to me a good example of how aid donors might help developing countries to carry out reforms. The rich countries could provide fixed term funding to finance the fiscal costs to developing country governments of sensible tax and policy reforms that will boost the supply side of the economy, to see the government through during the dip in revenues that they will inevitably experience and can ill afford.   The aid could be calibrated to replace the revenues forgone as a result of the reform, and taper off over time as the revenue benefits of the supply side reforms begin to materialize.  Donors would thereby provide bridging finance for reform, and share some of the risk that the revenues do not materialize.   For this to work, the bridging funds would have to be predictable, guaranteed for as long as the reforms are sustained, and unhypothecated and untied. 

Hat tip: John Naughton

7 thoughts on “Mobile phones, tax and development”

  1. Finance Ministers know that if they abolish the tax on mobile phones, there will be more usage, more business, and more taxes coming in.

    If I actually believed that this were true, that all Finance Ministers knew this, I’d be a lot happier. Are you really suggesting that every person in such a post worldwide (Gordon Brown?) knows in his bones that supply side reforms are the solution and that it is only the difficulty of getting from here to there that prevents it?

    Owen replies: I can’t say that all do. But most do, yes.

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  3. Tim asks:

    They can simply sell off their State owned monopolies and use that to plug the revenue gap until the supply side reforms increase revenue in the longer term. Why not? After all, we did.

    At least three reasons, Tim:

    1. The State-owned telephone monopolies bring in both government revenues (sometimes a substantial share of Government revenue) and scarce foreign currency (for terminating incoming international calls). Selling the golden goose for a one-off lump-sum payment is not attractive if you are going to have bills to pay next year.

    2. The monopolies are profitable while they are just that: monopolies. What we need is more competition, not (just) a change of ownership. It is not clear that they would have market value if they were sold off into a liberalized market. The lump sum for a sale into a competitive market would be lower than the value of the expected future revenues of the monopoly.

    3. We sold our telecomms company only after we had achieved universal access. As far as I know, no country has sold its phone business before achieving close to universal access (I’d be interested to know if there are any examples of this). I personally would go ahead and sell anyway, and impose a universal access obligation on the buyer; but it is politically much harder to do.

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  5. “This week’s Economist reports an interesting study into the taxation of mobile phones. Not surprisingly, developing countries with high mobile taxes generally have far fewer mobile phones per person than those with low taxes.”

    Equally unsurprisingly (but perhaps less newsworthily), the same study finds that the level of GDP per capita in a country is by far the most important determinant of mobile penetration. Unfortunately, the poorer countries who will then tend to have lower levels of mobile penetration will also tend to be more dependent on the revenues from taxing mobiles. So I’d agree with your prescription of funding short-term revenue shortfalls with aid, with the proviso that this aid is targeted at the countries who really need it rather than at those with the juiciest telecoms markets.

  6. Owen,
    1) Foreign currency…with a floating exchange rate does it matter whether the Govt owns the company or not?

    2) Selling before universal access? I can’t think of any (other than SA perhaps)in Africa with anything close to universal access to mobiles yet at least half of them have competetive markets.

    Owen replies: Tim – on universal access – my instinct is no doubt the same as yours: competitive firms are more likely to offer affordable telephone access than state monopolies, so if we care about increasing access, we should deregulate and liberalise, and we’ll get an expansion of access as we have seen with mobile phones.

    But the politics of this can be very difficult. Indeed, I suspect that in some countries (though I have nothing to base this on) competitive mobile phone markets are politically acceptable precisely because governments retain a policy commitment to universal access for fixed line telephony.

    My point is only that the politics of deregulation, competition and commercialisation are very different in an environment without universal access than it was when we did it (let us not forget how recent that was) when pretty much every household that wanted it had access to a phone line.

    On foreign currency: rational or not, many governments are reluctant to give up important sources of foriegn currency and to have to buy it on foreign exchanges themselves, especially when currency markets are thin and volatile.

  7. I’ve commented over at Tim’s blog on this, but basically here in SA the privately driven market in mobile telephony is far outstripping the quasi-state monopoly (semi privatised) can manage in terms of access.

    Unfortunately mobiles don’t yet provide cheap access to the internet etc. which would significantly help education in the poorest areas (they’d get to read all these blogs for one thing).

    Strangely the second licence for a fixed system has yet to be taken up. Seems like private enterprise doesn’t see much of a future for landline services here.

    RM

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