raul katz - presentation americas society
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Economic Impact of Broadband and
barriers to Bridging the Digital Divide
Opportunities and Challenges for Latin Americain the New Global Technology Environment
Miami, FloridaDecember 2, 2010
Dr. Ral L. Katz, Adjunct Professor, Division ofFinance and Economics, and Director, BusinessStrategy Research, Columbia Institute of Tele-
information
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Broadband has multiple economic impacts
Broadbanddeployment
Directbenefits
Investment ininfrastructuredeployment
Residentialpenetration
Consumersurplus
Householdincome
Businesspenetration
Total factorproductivity Contribution
to GDPgrowth andemployment
BROADBAND ECONOMIC IMPACT
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Research on the economic impact of broadband focuses on threeareas
Broadbanddeployment
Directbenefits
Investment ininfrastructure
deployment
Residentialpenetration
Consumersurplus
Householdincome
Businesspenetration
Total factorproductivity Contribution
to GDPgrowth andemployment
BROADBAND ECONOMIC IMPACT
Contribution to employmentand output of broadband
deployment
Impact ofexternalities
Creation ofconsumer surplus
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Infrastructure effects: Three types of network construction effectsexist
Consumer durables
Retail trade
Consumer services
Employment and productiongenerated by householdspending based on the incomeearned from the direct andindirect effects
Induced jobs and output
Metal products workers
Electrical equipment workers
Professional Services
Employment and productiongenerated by indirect spending(or businesses buying andselling to each other in supportof direct spending)
Indirect jobs and output
Telecommunications technicians
Construction workers
Civil and RF engineers
Employment and economicproduction generated in theshort term in the course ofdeployment of network facilities
Direct jobs and output
EMPLOYMENT EXAMPLESDESCRIPTIONEFFECT
4
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Infrastructure effects: Estimates from several countries indicate thatnetwork construction effects and multipliers are significant
3.602.58229,475165,81563,660$ 10,000Atkinson (ITIF)
AUSTRALIA
UNITEDKINGDOM
GERMANY
SWITZERLAND
UNITEDSTATES
COUNTRY
Government
Liebenau (LSE)
Katz (Columbia)
Katz (Columbia)
Katz (Columbia)
RESEARCHER/ INSTITUTION
3.421.83127,80059,50031,00037,300$ 6,390
~200,000$ 31,340
2.76211,000134,50076,500$ 7,463
1.94
N.A.
TYPEII (**)
1.45
1.38
TYPEI (*)
MULTIPLIERS
TOTALINDUCEDINDIRECTDIRECT
542,000
~110,000
135,000
N.A.
126,000
~30,000
281,000$ 47,660
~80,000~$ 10,000
NETWORK DEPLOYMENT JOBSESTIMATE
STIMULUSINVEST.
(US$
million)
5
(*) (Direct + indirect)/direct(**) (Direct + indirect + induced)/direct
NETWORK CONSTRUCTION EFFECTS OF BROADBAND
Sources: Katz, R. and Suter, S. (2009). Estimating the economic impact of the US broadband stimulus plan, ColumbiaInstitute for Tele-Information working paper; Katz, R., P. Zenhusern, S. Suter, P. Mahler and S. Vaterlaus (2008).Economic Modeling of the Investment in FTTHin Switzerland, unpublished report; Libenau, J., Atkinson, R. (2009) The UKsdigital road to recovery. LSE and ITIF; Australian government. Katz, R., S. Vaterlaus, P. Zenhusern, S. Suter and P. Mahler(2009). The Impact of Broadband on Jobs and the German Economy; Columbia Institute for tele-Information working paper
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Network effects: The externalities derived from broadband aresignificantly higher
Outsourcing of services
Virtual call centers
Core economic developmentclusters
Attract employment from other regions as
a result of the ability to processinformation and provide services remotely
Value chain
recomposition
New applications and services(telemedicine, Internet search, e-commerce, online education, VODand social networking)
New forms of commerce andfinancial intermediation
Acceleration of innovation resulting fromthe introduction of new broadband-enabled applications and services
Innovation
Marketing of excess inventories
Optimization of supply chains
Improvement of productivity as a resultof the adoption of more efficient businessprocesses enabled by broadband
Productivity
EMPLOYMENT EXAMPLESDESCRIPTIONEFFECT
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Network effects: Research to date confirms the contribution to GDPgrowth but the amount of impact varies widely
1.38
1.21
1.50
0.900.85 0.82
0.670.61
0.230.14
0.08
0.26 0.240.16
0.08 0.09
0.31
0.17
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Low-Med.Incom
e
High
Incom
e
OECD
-High
OECD
-Low
UK
US
France
German
y
OECD
-High
OECD
-Med
.
OECD
-Low
Germany-Hig
h
Germany-Lo
w
L.Am
ericaBraz
il
Chile
India
Malays
ia
RESEARCH EVIDENCE OF BROADBAND IMPACT ON GDP GROWTH
Contribution toGDP growth of10% increase in
broadbandpenetration
KatzKou-
troumpis
Waver-manCzernichQiang
World Bank U. Munich LECG U. ColumbiaImperial C.
RESEARCHER/INSTITUTION
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Network effects: However, these estimates are consistent withgrowing evidence of increasing returns to broadband penetration
0
0.005
0.01
0.015
0.02
0.025
7%
14%
16%
17%
21%
22%
22%
24%
25%
30%
33%
Broadband Penetration (2007)
CountryAv
erage%
ImpactofBBon
growth
0
0.0005
0.001
0.0015
0.002
0.0025
0.003
0.0035
0.004
0.0045
Clusterav
erageimpactongrowth
Source: adapted from Koutroumpis (2009)
Low penetrationGreece, Portugal, Italy,New Zealand, Austria,Hungary, Spain, IrelandAverage contribution toGDP growth: 0.008
Medium penetrationGermany, France, Japan, Belgium, UK,Australia, US, Canada, LuxemburgAverage contribution to GDP growth: 0.014
High penetrationDenmark, Norway,Netherlands, Sweden,SwitzerlandAverage contributionto GDP growth: 0.023
INCREASING BROADBAND IMPACT ON GDP GROWTH
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Network effects: The contribution of broadband externalities toemployment comprises three simultaneous effects
Incrementalbroadband
penetration
e-business
impact on firmproductivity
Macro-
economicproductivity
Impact on
employment
Enhancedinnovation
Impact onemployment
Outsourcing of
services
Displacement to
service sector
Impact onemployment
+
+
+
+
+ +
+
-/+
-
-
Note: This causality chain was adapted from a model originally developed by Fornefeld et al., 2008 in a report for theEuropean Commission
+
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Network effects: These effects result in different output andemployment impact depending on broadband penetration
T+1 T+2 T+3 T+4
EconomicImpac
tHI
LO
GDP
Employment
T+1 T+2 T+3 T+4
EconomicImpac
tHI
LO
GDP
Employment
High Broadband Penetration Regions Low Broadband Penetration Regions
High economic growth initially,diminishing over time (supply shockeffect) New Economic Growth (innovation, newservices)
High stable economic growth (catch upeffect)Capital/labor substitution limits employmentgrowth (productivity effect)
Increase inBB
penetration
Increase inBB
penetration
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Consumer surplus: utility gain of broadband that can be purchasedat a price lower than what consumers are willing to pay
Benefits that broadbandtechnology (DSL, cablemodem, Fttx) yields in
relation to dial-up
Price declines as a resultof competition,
technology trends, andproductivity gains
Benefits derived fromincreased broadband
penetration (access tonew services and
information)
Consumer surplus=
Willingness to Pay-
Price of service
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Consumer surplus: this approach can be used either historically orforward-looking
Katz et al. (2008) comparative analysis of
consumer surplus to be generated in
Switzerland by alternative fiber deployment
strategies: consumer surplus is
maximized in competitive models that
promote infrastructure basedcompetition
Greenstein and McDevitt (2010)
comparative analysis of consumer value
generated by broadband diffusion in China,
Mexico, Spain, Canada and the United
Kingdom: scale of value creation is
proportionate to deployment
Crandall and Jackson (2001) analysis of
consumer surplus generated by broadband
adoption in the United States
Greenstein and McDevitt (2009) analysis of
broadband bonus in the United States
FORWARD-LOOKINGHISTORICAL STUDIES
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In Latin America, we estimate that a 10% increase in broadbandpenetration will contribute to 0.16% in GDP growth
Coefficient Standard error T-statistic P > [t]
Change in Broadbandpenetration
0.0158715 0.0080104 1.98 0.054
Per cpita GDP -0.0006957 0.0001806 -3.85 0.000
Investment/GDP -0.0471624 0.1689699 -0.28 0.782
Level of tertiary education 0.2139614 0.1108325 1.93 0.060Population Growth -0.4469177 1.40418 -0.32 0.752
Globalization index -0.0653024 0.1929498 -0.34 0.737
Constant 13.02883 12.04659 1.08 0.286
Number of observations = 49F(4, 14) = 7.18Prob > F = 0.0000R2 = 0.3814Root MSE = 7.024
CONTRIBUTION OF BROADBAND TO GDP GROWTH IN LATINAMERICA
Source: Katz, R. (2010). The impact of broadband on the economy:Research to date and policy issues. International Telecommunication Union,Discussion paper presented at the Global Symposium for Regulators inDakar, Senegal
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Broadband has also contributed to job creation in Latin America
0.038
0.070
0.033 0.029
Mxico Brasil Colombia Argentina
BROADBAND CONTRIBUTION TO REDUCTION OF
UNEMPLOYMENT IN LATIN AMERICA
(Effect of 10 percent increase in broadband penetration)
Sources: Katz (2011) Impacto economico de la banda ancha en Mexico, Anuario AMIPCI; Katz (2011) La Banda Ancha: UnObjetivo Irrenunciable Para Brasil, AHCIET; Katz (2010). "La contribucin de la banda ancha al desarrollo econmico", V. Jordn,W. Peres y H. Galperin (eds.), Acelerando la revolucin digital: banda ancha para Amrica Latina y el Caribe, Comisin Econmicapara Amrica Latina y el Caribe (CEPAL) / Dilogo Regional sobre Sociedad de la Informacin (DIRSI), Santiago de Chile
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The importance of economic effects of broadband points to thecriticality of a policy tool kit aimed at maximizing adoption
National broadband plans outline coverage and service targets, assign spectrum tomaximize the impact of wireless broadband, focus on demand stimulation, definecompetition policy, and tackle any potential supply obstacles
Articulate a vision and create awareness within polity and civil society
Coordinate policies and involvement from public and private sector
Develop state policies
Build ownership and accountability at the highest level of government
Competition policies aimed at stimulating private sector investment and innovation arecritical
At the same time, governments should acknowledge that they will need to intervene
Address any market failures through universal service funds Alleviate investment constraints to stimulate private sector flows
Potential entry as an investor of last resort
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A broadband policy should also address the demand gap: why arethere households that could buy broadband but do not?
BROADBAND DEMAND GAP
31 %62 %92 %United States
32 %68 %100 %United Kingdom
11 %89 %100 %Sweden
32 %61 %93 %Spain
7 %93 %100 %Republic of Korea40 %55 %95 %Italy
17 %83 %100 %Israel
40 %58 %98 %Germany
23 %77 %100 %France
20 %76 %96 %Denmark
20 %69 %89 %Australia
DemandGap
Householdsconnected
Householdspassed (*)Country
(*) Note: Household passed is defined as a residence where the broadbandnetwork is deployed; this differs from connected, which means the residenceis linked to the network for provisioning the service.
Sources: Analysis by the author, based on data from EU; FCC; BMWi;OECD; PTS - Sweden; and Israel Minister of Communication.
REASONS FOR NOT ACCESSING TO
THE INTERNET AT ALL
16 %22 %Easy to use (difficulty seniorcitizen physical handicap)
14 %16 %Service availability
28 %15 %Price (the cost of broadbandis too high, does not have acomputer)
60 %45 %Relevant ( lack of interest,busy doing other tasks, otherreasons)
UnitedKingdom
UnitedStates
Percentage ofanswers
Reasons
Sources: Horrigan, J. (2009); Ofcom (2008)
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It is imperative that fiscal policies affecting broadband adoption becoordinated with national objectives
Source: Adapted from Katz et al. (2010c)
0
5
10
15
20
25
30
35
40
45
50
1 3 5 7 911
13
15
17
19
21
23
25
27
29
31
33
35
37
39
41
43
45
47
49
51
Taxasaprop
ortionofTCMO
Mexico
TAX PERCENTAGE OF TOTAL COST OFOWNERSHIP OF MOBILE SERVICES
Malaysia
Brazil
South Africa
Zambia
Turkey
Tanzania
Argentina
Tunisia
Taxation has a negativeimpact on deployment ofmobile broadband: there is anegative relation betweenmobile taxes and 3G
handset penetration If taxes limit adoption of
wireless broadband, theyultimately affect economicgrowth
Country Distribution
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It is also important to build the data monitoring mechanismsnecessary to build evidence-based policies
An imperfectly informed regulator is constrained in his choice of the most appropriateapproaches to overseeing the ICT sector
Governments cannot formulate correct public ICT policies
Under conditions of limited data on ICT impact, governments in developing countries tendto imitate/copy the policy and regulatory models of developed countries
Common cases of mis-information due to the lack of data
The Solow paradox: is broadband affecting productivity?
Size of the broadband supply gap in the United States: 20 million households or 10million households?
Reasons explaining the broadband demand gap: why do some countries have low
broadband penetration?
Broadband and job creation: does broadband contribute to employment?
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ICT data is the required basis for conducting rigorous policy cost-benefit analysis
Cost-benefit analysis feeding regulatory decisions requires accurate data
Limited data introduces considerable noise in the analytical process
Considering the amount of investment in ICT, and their economic impact, the amount
of data and analysis leading to decisions is typically sub-optimal
In our view, given the little data sometimes policy makers have about economic impactof ICT, this is not an issue of how to optimize regulation under imperfect information,
but how do we gain a better understanding of these effects
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Lack of impact data results in defining policy targets withoutunderlying rigorous analysis: example of broadband speeds
TARGETS OF COVERAGE AND DOWNLOAD SPEED FOR NATIONAL BROADBAND PLANS
COUNTRY Coverage Targets (as apercent of households)
Speed Targets (as a percent ofhouseholds)
United States 100 % (2012) 4 Mbps (100%) (2012) 50 Mbps
Germany 100 % (2014) 1 Mbps (100%) (2014) 50 Mbps (75%) (2014)
Singapore 100 % (2012) 100 Mbps (95%) (2012)
Australia 100 % (2012) 12 Mbps (100%) (2012)
United Kingdom 100 % (2012) 2 Mbps (100%) (2012)
Malaysia 75 % (2010) (33%) 50-100 Mbps (42%) 1.5 Mbps
Brazil 50% hogares urbanos y 25%hogares rurales 75% (512-784 kbps)
European Union 100 % (2013) 30 Mbps (100%) (2020) 100 Mbps (50%) (2020)
Sources: National Broadband Plans
2020
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Coverage and service targets need to be defined on the basis ofrigorous analysis of level of investment and social and economicreturns
Coverage and servicetargets
Existing
infrastructure
Infrastructuregap
Modernization ofexisting lines to deliver
target service levels Deployment of new
lines to achievecoverage targets
Required technology byzone
Cost per line
Total investmentrequirement
Consumersurplus
Economicbenefits
Construction effect(multipliers)
Contribution to GDPgrowth
Job creation Spill over effects
(innovation, newbusiness creation)
Access to publicservices and
information Savings in transport
time Health and education
services
RETURN ON INVESTMENT
2121
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For example, in Latin America investment needs to be conducted infour areas
PARAMETER CHARACTERISTICS NUMBER OFLINES
COST PERLINE
ESTIMATEDCOST
Modernization ofinstalled lines
Increase installed linecapacity
Latam:13,639,000 (*)
US $ 300 Latam: US $4,092 M
Demand stimulation
programs
Subsidies and digital
literacy programs
Demand gap to be
estimated
?
Deployment toachieve penetrationcommensurate toeconomic
development
Deployment andbroadband adoption
Latam:17,342,000
US $ 450 Latam:US $7,803 M
Deployment to reachunserved populations
Infrastructure deploymentprogram
Supply gap to beestimated
US: $ 3,357/line
Germany: $1,265/line
?
2222
LATIN AMERICA: INVESTMENT REQUIREMENTS TO REACH
UNIVERSAL BROADBAND PENETRATION
(*) Calculated for Argentina, Brazil, Chile, Per y Venezuela
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In summary
Research evidence is consistently pointing to the positive economic of broadband
Data analysis also indicates that economic impact increases with broadbandpenetration
Economic impact varies by region indicating that broadband deployment needs to becarefully coordinated with economic development policies (training, firm relocation,etc.) to maximize impact
Broadband policies are critical to maximize the economic impact of technology
(national broadband plans, competition policies, demand stimulation, alignment oftaxation with development and technology objectives)
Policy development needs to be based on rigorous economic analysis which requiresan important effort in data generation
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