It has been hailed as the development tool of the century. It has revolutionized business in Africa and Asia and has allowed the poor to cross countless institutional hurdles. And despite a paucity of electricity, infrastructure, and support services, the people of the developing world have embraced it with open arms. It is the cell phone, and it is changing the reality of economic opportunity. With cell phone technology it is possible for health-care workers in rural Africa to summon ambulances to remote clinics. It is possible for one woman on the Congo River, completely illiterate and lacking electricity, to operate a successful food distribution business that connects with restaurants in distant cities and towns. It is possible for migrant workers without a reliable postal service to send messages in a matter of minutes.

Even more promising, there is increasing evidence that cell phones really do make developing nations better off by boosting overall economic performance. According to the Financial Times, studies show that a 1 percent increase in mobile diffusion “increases GDP per capita from US$124 to US$164 in the developing world.” Moreover, the size and cost of mobile equipment has decreased in recent years, such that the adoption barrier has declined dramatically and mobile technology has become easier to integrate. However, despite the recognized benefits of cell phone diffusion, only a small number of people in the developing world—indeed, only 5 percent of the population in India and sub-Saharan Africa—own cell phones. Why has the developing world failed to adopt the technology more widely?

The greatest barrier to mobile integration is excessive regulation and taxation. A cross-country analysis of the developing world conducted in 2005 by the Global System for Mobile Communications Association (GSMA) shows that, even after controlling for GDP per capita, a 10 percent decrease in the average annual cost of mobile services (taxes included) would increase mobile diffusion by 5 percent. In other words, in developing countries where mobile services are heavily regulated, and therefore more costly, cell phones are significantly less accessible to the population. Excessive taxation and costly regulation not only cause inefficiencies that distort the market for mobile services but also halt the spread of cell phones to the people whom the technology would benefit most.

Undermining Growth

Why is the mobile telecommunications industry so heavily regulated? Due to the economic promise and positive social externalities of cell phones, many governments in the developing world have begun to conceive of cell phone networks as a public utility with social benefits—much like water, electricity, or fixed landlines. Many of these governments have instituted regulatory safeguards—just as they would for public utilities—to prevent private firms from gaining unfair advantages and benefiting from frenzied demand for the new technology. Because many mobile providers in the developing world are foreign firms or are backed by foreign interests, governments fear that their countries will not benefit from the immediate financial gains of new mobile technology and that the money will flow right back to developed nations. Moreover, as economist Howard Gruber has reasoned, mobile technology in some countries has faced stringent regulation because of the competition it brings against fixed landlines, most of which are owned by the government itself.

Of course, some degree of government regulation is necessary to manage competitive resources in the mobile telecommunications industry. As per international law, governments maintain full control over radio frequencies and reserve the right to assign and price frequency license fees. Such regulatory control is beneficial for two primary reasons. First, as radio waves become increasingly congested, a central authority is needed to allot and oversee frequency usage. Second, fees can serve as reimbursements for the cost of making particular radio frequencies available, which may involve removing the previous user and making arrangements with the international community to avoid frequency overlap.

Excessive regulation, on the other hand, includes heavy import duties on cell phones, overpriced and arbitrary license fees, service activation fees, and special communications taxes. Over the past five years, governments in the developing world have imposed new varieties of taxation that are commonly introduced during the critical introductory stage of mobile technology. Today, according to the GSMA, the average variable tax on cell phone services in the developing world is 17 percent—with some taxes as high as 25 percent per annum—and the average tax (including import duties) on a physical handset is 31 percent. In fact, in one-third of the developing world, taxes represent more than 20 percent of the total cost of owning and using a mobile phone. In these countries, the average mobile phone user pays more than US$40 a year in taxes on handsets and mobile services, with some users paying annual cell phone taxes as high as US$179.

When analyzed on an individual country basis, the statistics appear even bleaker. In the Democratic Republic of Congo, subscribers pay a 33 percent tax on a new mobile phone. In Ghana the tax rate is 32.5 percent; in Syria it is 45.6 percent. Turkish cell phone subscribers are required to pay a monthly sales tax of 18 percent along with a special communications tax of 25 percent. Additionally, they are charged a special tax of 20 lira (US$15) above and beyond the price of each new mobile connection. In Uganda a 10 percent special tax has been levied on the purchase of each mobile phone, beyond the 27 percent that Ugandans must already pay in import tariffs because few reliable phones are produced domestically. And in Afghanistan, according the Economist, taxes on private telecommunications providers account for 14 percent of all government revenue.

The heavy taxes levied are even further exacerbated by license conditions that inadvertently support monopolistic market structures. In China the need to obtain complex licenses and expensive permits impedes market access to new mobile service providers. Successful entrance into the Chinese mobile service market can take one to two years of waiting for license review, along with a hefty amount of bribery. Economic researcher Alec van Gelder has found Ethiopian regulation to be so stiff that a single communications operator has developed a complete monopoly over service, with little incentive to improve the service or decrease the consumer price. As a result, it costs nearly US$100 to subscribe to the cell phone service in Ethiopia, where the average person earns US$700 a year. Accordingly, for every 1000 people in Ethiopia, only one has a mobile phone, whereas in neighboring Kenya and Uganda, 50 and 30 people, respectively, per thousand are phone owners.