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OECD is too polite in discussion of termination rates for international calls

OECD has done a good analysis of the wrong-headedness of raising international voice call termination rates, and indeed of having international termination rates.

Outside the OECD countries, the price has been dropping too, accompanied by a huge increase in traffic. Calls from the United States to India increased eight fold over 2003-2011 for example. But not everybody has benefited. Despite a massive increase in the number of telephones in Africa, international calls to that continent from the United States remained stagnant during this same period.

A new OECD report International Traffic Termination looks at one aspect of why some consumers are losing out: the termination charges imposed on calls coming into a country. The report finds empirical evidence that imposing mandatory higher charges for the completion (termination) of international inbound traffic suppresses demand. Moreover, governments that impose higher termination charges do not see their revenues increase proportionately. Traffic into Pakistan for example has plummeted over the past two years following the creation of a cartel for international telephone calls.

But what they do not discuss is the political economy of international termination markets.

The point is that international termination policies are not governed by the need to optimize government revenues; they are driven by the need to optimize private, off-the-books revenue of the grey marketeers, some of which also lands in the laps of the people who make the policies.

Contrary to what the OECD reports, it is not true that the number of calls into Africa are static. The number of “legal” calls terminating in African countries is static. There is massive growth in the bypass markets.

There are two forms of bypass.

First, is when one makes a Skype (or other similar) call into a country. If the call terminates on a phone, Skype has to pay a termination fee to the telco owning that phone number. This is not bypass. If the call terminates on a computer (Skype-to-Skype), that is bypass. No termination charges are paid; no additional taxes collected. But this requires the in-country computer to be at the end of a broadband connection. That means Skype to Skype calls drive up demand for broadband. Companies gain revenue; government gains taxes. No way to police this form of bypass; no reason to actually.

Second is the evil bypass. Here, the international calls (millions of minutes) land in the country and are disguised as local calls. Where the difference between international termination and local termination is significant, there is a lot of money to be made. Of that money, some is used to bribe those who can detect the activity. Some goes to the decision makers who keep the differential termination rates in place, creating the rent seeking opportunity. The rent is earned in foreign currency and is located outside. This, then, makes possible additional businesses such as Hawala and various forms of under and over invoicing for traded goods and services.

In the end, the money comes into the country as black money. It corrupts the entire political system. But since the political system is dependent on the black money, the policies persist.

Some countries have addressed the problem. Others have gone backwards, like Pakistan under the PPP. The only good thing is that as broadband becomes more common, the number of calls made over conventional methods will decline as everyone switches to Skype equivalents.

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