The Political Economy of Privatization and Competition: Cross-Country Evidence from the Telecommunications Sector

Abstract

Using a new data set of the telecommunications sector on privatization (1981-98 for 167 countries) and competition policies (1990-98 for roughly 50 countries), this Paper investigates the political economy determinants of privatization and liberalization in the telecommunications sector. Building on the framework of a generalized private interest theory, we derive hypotheses on how the characteristics of private interest groups and political structure affect policy changes in the telecommunications sector. We pay particular attention to how the effects of interest groups on policies vary from more democratic to less democratic countries. We find reasonably strong evidence in favour of the generalized interest group theory. Countries with stronger pro-reform interest groups (the financial services and the urban consumers) are more likely to reform. But countries are more likely to maintain state-owned monopolies in the sector when such a governance mode yields a higher pay-off for the governments - when the telecommunications sector has higher profitability and when the fiscal deficit is higher and cannot be more easily financed by borrowing from the financial market. Democracy appears to affect the pace of reform by magnifying the voices of interest groups and by moderating politicians' discretion. telecommunications

Keywords: Competition, democracy, political economy, political structure, privatization, special interest groups,

JEL Classification: H10, L50, L96