Does Sequencing Matter? Regulation and Privatization in Telecommunications Reforms

The question of the most effective order of reforming state-owned industries has been hotly debated over the years. In the early 1990s, many western advisers encouraged Eastern European countries and the former Soviet Union to privatize firms quickly under the assumption that market institutions would develop once firms were privately owned. Thinking since then has emphasized the importance of establishing an institutional framework conducive to promoting competition before privatizing firms. To date there has been little empirical work informing the debate. This paper attempts to address this gap by testing the effects of the sequence of reform in telecommunications. In particular, I test the effects of establishing a regulatory authority prior to privatizing incumbent telecom firms. Consistent with current thinking, I find that countries that established separate regulatory authorities prior to privatization saw increased telecom investment, fixed telephone penetration, and cellular penetration compared to countries that did not. Moreover, I find that investors are willing to pay more for telecom firms in countries that established a regulatory authority prior to privatization. This increased willingness to pay is consistent with the hypothesis that investors require a risk premium to invest where regulatory rules remain unclear. * Development Research Group, The World Bank. Contact information: [email protected], 202-473-4412. I am grateful for useful comments from Mary Shirley, Luke Haggarty, and Lixin Colin Xu. All mistakes are my own.