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emails-9.1

CHAOS OR ORDER:
DESIGNING TELECOMMUNICATIONS POLICY
FOR NATIONAL DEVELOPMENT

By
Zongqlng Zhou

A THESIS

Submitted to
Michigan State University
in partial fulfillment of the requiremente for the degree of

MASTER OF ARTS
Department of Telecommunication
1990

ABSTRACT
CHAOS OR ORDER

DESIGNING TELECOMMUNICATIONS POLICY
FOR NATIONAL DEVELOPMENT

BY
Zongqing Zhou

Telecommunications has traditionally' been 'viewed as the
quintessential public ‘utility; Social, political and. military
sensitivity combined with economies of scale have put the
telecommunications sector in a highly-regulated or direct
government controlled environment. Beginning from the 19705,
however, policymaking for telecommunications has shifted from this
early paradigm to a more economic-oriented model, namely,
competition and marketplace.

The policy change is the result of a telecommunications
technological revolution and the increasing significance of the
telecommunications sector in the overall national economic system.

The purpose of this paper is to develop a theoretical
framework to account for this trend of restructuring. Comparisons
are made between the United Statesiand.Japan in order to shed light
on the developing countries in their effort to design a national

telecommunications policy for national development.

Copyright by
ZONGQING ZHOU

1990

ACKNOWLEDGEMENTS

I most graciously thank Dr. Bradley S. Greenberg, Dr. Joseph
Straubhaar, and Dr. Thomas Muth of Michigan State University for

their valuable insight and helpful suggestions in the process of

writing this paper.

iv

LIST OF FIGURES .

'LIST or TABLES . .

CHAPTERS
I. Introduction
II.

Economic Development

LIST OF REFERENCES.

TABLE OF CONTENTS

Telecommunications and National

III. Characterizing Telecommunications
Technological Development

IV. Theoretical Foundation

V. The Experience In The United States
From "Paradox” To "Plenty".

.VI. Japan:

VII. Implications For China
And Other Developing Countries

VIII. Conclusion. . . . . .

From ”Consensus” To "Consensus"

vi

vii

13

19

28
38

46
56
59

LIST OF FIGURES

Figure 1: Continuum of Market Structure Models. . . . . . . . 2
Figure 2: Telecommunication Revolution and the Abundance of

Applications . . . . . . . . . . . . . . . . . . . . 4
Figure 3: Economic Salience and the Restructuring

of the Telecommunications Sector . . . . . . . . . . 12
Figure 4: Technology Advancement and the Restructuring‘ of the

Telecommunications Sector . . . . . . . . . . . . .‘ 18
Figure 5: Major Driving Forces of the Restructuring of

of the Telecommunications Sector . . . . . . . . . . 19
Figure 6: Forms of Government for Processing Social Claims

in Developed Capitalist Societies. . . . . . . . . . 21
Figure 7: Relationship Between Restructuring

‘ and Major Driving Forces. . . . . . . . . . . . . . 25

Figure 8: Telecommunications Hierarchy . . . . . . . . . . . . 49

vi

Table 1:

Table 2:

LIST OF TABLES

The 'Three Generations" of

TeleCommunications Services .

Economic Priority Cities

Zones and Regions . . . . . .

vii

15

55

 

I. Introduction

Telecommunications has traditionally been viewed as the
quintessential public utility. Social, political and military
sensitivity combined with economies of scale have put the
telecommunications sector in a highly-regulated or direct
government controlled environment. Telecommunications was
believed to be a natural monopoly, an essential public good that
government should provide in a noncommercial mode. Social,
political and cultural considerations have been the key variables
in making the national telecommunications policy.

However, beginning from the 19703, policymaking for telecom-
munications has seen a general trend in favor of economic con-
siderations, namely, competition and marketplace, although the
exact form of competition and marketplace varies from country to
country.

This trend is reflected in the worldwide restructuring of
the telecommunications sector, from the United States to Western
Europe, from the developed countries to the developing countries,
from the democratic world to the authoritarian nations. The
restructuring is undertaken on a continuum of policy choices and
under different names in accordance with the various contexts in
which they are formed. In the United states, it took the form of
deregulation and divestiture; in Japan and the United Kingdom, it
was privatization; in Europe, liberalization and competitive
challenges; in China as well as other developing countries,

decentralization and/or privatization. In 1983 and 1985, the

2
0.8. Department of Commerce conducted two telecommunications
policy studies in 27 countries, both developed and developing,

predicting that the trend would be toward liberalization, as

Figure 1 shows.

GM GM (PC) GC RM RC LE FE
...................................................... >
Private sector participation increases
...................................................... >
Government or public administration decreases
------------------------------------------------------ > |
Market or competitive access increases
------------_-----------_--_-I ........................ ,>

Figure 1: Continuum of Market Structure Models

Code:

GM = Government Monopoly (Government Ministry or
Department)

GM (PC) = Government Monopoly (Public Corporation)
GC = Government Competition

RC Regulated Competition

RM Regulated Monopoly
LE = Liberalized Entry

FE a Free Entry (Ideal Market Structure for Reference

Only)

3

This liberalization, however, has been realized through different
measures in different, countries. In Japan, it was done by
privatizing Nippon Telegraph and Telephone Public Corporation in
April 1, 1985 (Mutoh, 1989). In China, beginning in 1984, the
decision-making power has been decentralized from the Central
Ministry of Posts and Telecommunications to the provincial
telecommunications administrations (Telecommunications in Ten
Countries, 1985). In Britain, by 1984, liberalization in the form

of privatization and market competition was firmly establishedoby
the government (Jonscher, 1985). In West Germany, a 198? ”soft
deregulation” led to the reorganization of the traditional postal
services and telecommunications into two separate autonomous
companies: 'yellowpost' and telecommunications. In addition, for
all kinds of telecommunications services and user equipment
private companies will be free to compete with the Deutsche
Bundespost (DBP) (Esser, 1988). Similar liberalization actions
are taking place in other Western European countries (see Western
European Politics, Special Issue, 1988).

This raises the intriguing question of whether the changes
are a bandwagon effect felt by respective governments in power or
go deeper and reflect a more fundamental change. Indeed, this
restructuring of the telecommunications sector is the result of
the telecommunications technological revolution and the
increasing significance of the telecommunications sector in the
overall national economic system. The former has made available

an abundance of application choices , ease of entry and network

4
options (see Figure 2) while the latter has created a dilemma for
policy-makers in their effort to balance national political
agenda with the increasing salience of the telecommunications

sector in the national economic system.

Pre-l970: Separate technologies and functions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technologies - Functions
| Computers 1 t: i Information _j
i ‘ Processing 1
Transmissioni ‘ -
links and -—- —>- Communication
- Switches _ «+
Post-1970: Three technologies (and industries)
compete for enhanced communication functions
Technologies Functions
' Computers and T» j :: Information I
_ intelligent terminals ‘\\\\\\‘~" rocessing _
’ Value added A ___ TEnhanced ‘J

 

 

 

 

 

 

 

i links and :t- communication
i switches

. systems [communication
rTransmissionJ / iBasic 1
Figure 2: Telecommunication Revolution and the Abundance of

Applications

Source: Adapted from Charles Jonscher, "Telecommunications

Liberalization in the United Kingdom", 1985.

As Timothy Nulty and Eric Schneidewind (1989) point out:

5
Governments thus face a complex dilemma: in order to respond
to the growing technical and economic pressures, they must
give their telecommunications entities greater autonomy and
commercial orientation. But important national, social,
political, and economic interests will be jeopardized by the
move to more commercial modes - of providing

telecommunications services. (p. 30)

The salience of the telecommunications sector, which is the
backbone of an information society, was brought out
quantitatively by the American scholar Marc Porat in 1977. In his
report to the Department of Commerce entitled ”The Information
Economy: Definition and Measurement,” Porat showed that in the
United States, by 1980 more people were engaged in information
work than in any other kind of work. This shift of production
activities conveys both economic and political implications. The
economic implication is that the development of information
technologies will determine the economic future of a nation, and
as Dordick (1986) observes: ”Somehow, being an information

society has become a matter of national prestige” (p. 12).

This new context and dilemma call for‘ reassessment of the
policy choices if development and economic efficiency in the
telecommunications sector are to be brought into full play. It is
in this light that a cross-country comparison becomes meaningful

and relevant, especially to the developing countries where the

6
pressures for change are further complicated by the special
problems of developing economies.

The purpose,of this paper is thus to develop a theoretical
framework to account for the trend of restructuring the telecom-
munications sector by analyzing the internal factors. and the
external forces which contribute to the change. The internal
factors refer to the technological characteristics of: the
telecommunications development such as networking and its
organizational structure. The external forces refer to the
social, political, economic and other societal environments in
which the internal factors are shaped, constrained or boosted.
Compa‘isons between Uapan and the United States will be made to
investigate the relevance of the approach. The implications
resulting from the .analysis and comparison will be applied to
developing countries with particular reference to China.()

II. Telecommunications and National Economic Development

The first hypothesis in the paper is {hat as the
telecommunications industry bgcomes increasingly integrated into
the national economic system, the policy-making will be more
economy-and-market-driven than otherwise. .

Since the 1950s, modernization specialists like Lerner

c‘lSSB), Pool (1977), Hudson (1984) and Hornik (1988) popularized
the rationale for the diffusion of communications technology as

a correlate to economic development. However, these scholars

were more interested in using communications technology for

7
facilitating social change, promoting education and political
participation rather than viewing communications technology as a
productivity tool and facility. In the meantime, scholars such as
Fritz Machlup (1962), Daniel Bell (1973), and Marc Uri Porat
(1977) pioneered the study and conceptualization of the
-"information society" under different terminologies. The basic
proposition underlying these studies was that the United States
had entered an age of the "knowledge” or "information” production
economy which would "play critical roles in future economic
growth" (Porat,1978,p.78). By 1980, about 48 percent of the U.S.
work force were engaged in some kinds of information activities
and as early as in 1967, already 25 percent of GNP was bound up
with the information activities (ibid.). In Japan, a 1970 report
by the Research Institute of Telecommunications and Economics
(RITE) predicted that because of the differences in the rate of
growth in johoka index that Japan would surpass U.K. before 1970
to become the second most ”informationalized” society in the
World (Ito, 1981). In this coming information society, the
importance of the telecommunications sector is increasingly
prominent, as the 1978 White Paper on Communications observed

that in Japan,

"the demand for information provided by mass media, which
are one-way communication, has become stagnant and the
demand for information provided by personal

telecommunication media, which are characterized by two-way

8
communication, has drastically increased. This is the basic
pattern in our country's johoka in recent years, and this
trend can be seen in both business circles and private lives

(ibid., p. 30).

This vision of the coming of an information society has an
enormous impact on the political agenda-setting of each nation,
especially on the developed countries. As early as 1969, the
Organization for Economic Cooperation and Development emphasized
the importance of information technologies and raised
telecommunications as a "policy topic for Europe" (Kleinsteuber,
1986. p. 191). Rosa Fregoso (1988) reported that on January 18,
1984, Spain's economic future was officially linked with
information technologies by the adoption of the Plan .Electronico
e Informatico. The Plan is said to be a blueprint for the
"informatization" of Spanish industry (ibid.). In 1978, an
official British paper notes that ” It is the view of the United
Kingdom that information processing and handling in all its
aspects is now the critical technology for advanced industrial
countries” (quoted by Schiller, 1981, p. 7). In Japan, Yujiro
Hayashi used the term "johoka shakai (informational society)”
for the first time in his book gghgka_§hakgi published in 1969
(Ito, 1981). The Research Institute of Telecommunications and
Economics in Tokyo published a report in 1970, quantifying the
degree of johoka and claiming that Japan had moved to third in

the world after the United States and the United Kingdom on the

9
index of johoka (Ibid.). In a research report initiated by the
Japanese government in 1969, it declared that "From now on, it
can be said that information will play the crucial role in social
and economic development" (quoted by Ito, 1981, p. 22). It also
predicted that the Three Western Countries, France, 0.x. and West
Germany would become information society by the year 2000.

Don Lamberton (1986), in his article entitled "Australian
Regulatory Policy" , demonstrates the close link between the
increasing role of the information sector in the national
economic system and the telecommunications policy-making in
Australia. Australia, according to him, is ranked third in
terms of information intensiveness only behind Canada and the
United States. He shows that the share of information labor in
the economically active population in Australia increased from
39.4% in 1971 to 41.5% in 1981. The United States had reached
41.1% as early as 1971, but the Canadian percentage was only
slightly higher at 39.9% in 1971. The Australia information
policy emerged as a composite of policies dealing with the role
of government in assessing and responding to the increasing
importance of the information sector in the national economic
system (ibid.).

The impact, however, does not limit to the developed
countries. The developing countries, in their effort to catch up
with the Western developed countries, saw a new opportunity in
the coming information society. Information technologies can be

developed and utilized to quicken the pace of economic

10

development. In the Philippines, for example, the government gave
assurances of economic growth opportunities to the business
community through a rapidly expanded and integrated local,
domestic long-distance and international communication structure
that will be interconnected as part of the Global
Telecommunications Network (G. Sussman, 1982). In the People's
Republic of China, the "four modernizations" drive emphasized the
urgent task of developing and updating the telecommunications
sector at the recognition that ”overall economic growth cannot be
sustained unless the economy's supporting structures, including
telecommunications, grow at an even greater rate" (Lerner, 1987,
p. 33). I

This information-based economy triggers the phenomenal
growth of user demand for telecommunications. By its very
nature, the demand for telecommunications requires that the
telecommunications providers provide not only inexpensive but
also fast, efficient services and options. Furthermore, unlike
consumers of traditional industrial commodities,
telecommunications users involve big government organizations,
large companies and multinational corporations with enormous
financial and political clout. Large multinational corporations
based in the United States are prominently represented in
organizations of users such as the International
Telecommunications Users Group (INTUG) (Bruce, 1989). These
entities make extensive use of telecommunications and demand

products and services tailored to their special needs with regard

11

to price, efficiencies, and quality of service. This is
especially the case in information-intensive industries such as
transportation, travel, banking, and investment. These service
industries reach customers through telecommunications networks
linking heir offices, airline/hotel/car reservations, automatic
teller machines, or computerized cash registers. Significantly,
industrial companies are now entering these service-oriented
areas: General Electric derives about one-third of its revenue,
and Westinghouse about one-half, from service-based businesses
(Geller, 1989). General Motors has committed billions of dollars
to incorporating the telecommunications and computer networking
expertise of Electronic Data Systems and Hughes Aircraft Company
into its manufacturing and marketing structure (ibid.). One
characteristic of the telecommunications users is that they are,
in many cases, both users and providers. They will join their
forces to put pressure on both the government and the
telecommunications entities to restructure the telecommunications
sector to meet their communications purposes.

Thus, the economic significance of telecommunications both
as a productivity tool and facility in the overall national
economic system, coupled with the increasing demand for fast,
efficient and non-expensive services, has put enormous pressures
on the government to reevaluate its policy in telecommunications
sector, in this case, the restructuring of the'
telecommunications sector. The above discussion can be

summarized in Figure 3.

12

 

Information-based economy
(Information production and distribution;

Telecommunications as a productivity tool)

(For inexpensive, fast,

 

 

 

 

Growth of demand

efficient and optional services)

 

 

 

 

I

 

Government actions

(Reassessment of economic role of

 

 

telecommunications)

 

 

i

IPressures on telecommunications sector and the government]

(to develop new technologies and network options)

I

Result

 

 

(Diversification and specialization of services:

 

 

restructuring of the telecommunications sector)

 

Figure 3: Economic Salience and the Restructuring of the

Telecommunications Sector

To meet these pressures and promote the rapid development

of the teleCommunications sector, national policymakers find

13
themselves increasingly forced to resort to economic measures.

These measures may include:

1. To give the telecommunications entities more power and
freedom to plan and develop new technologies.
Decentralization is often the result of this action. China
is an example.

2. To privatize the national public telecommunications entities
to pool private money and to introduce competition into the
sector. The United Kingdom and Japan fall into this
category.

3. To break the "natural monopoly' by allowing the entrance of
different competitors, making the telecommunications sector
a marketplace. The United States fits into this category.

4. To allow private telecommunications entities to exist
alongside the public telecommunications entity to create
incentives for competition. West Germany can be taken as a

good example.

III. Characterizing Telecommunications Technological Development

The significance of the economic role of telecommunications
in the national economic system was not fully realized until the
technology revolution was triggered by the convergence of
telecommunications and information technologies. The entry of
computer intelligence into the network and terminals since the

late 1970s (Ungerer, 1987) has led to a fundamental change in

14

communications. Semiconductors and satellites together make
possible this revolution. At the same time, they have created a
new architecture for communications, an architecture made
possible by innovative devices that provide entree to the network
architecture, or terminals. The implications of this convergence
are twofold: the creation of a network marketplace and the-
explosion of services (Ungerer, 1987).

In many ways, the development of network technology is the
history of the advancement of the switching technology. Early in
the history of telephone exchange, the growth of the telephone
system had been hindered by the switchboard problem (Mueller,
1989). This is due to the fact that, as the number of the
subscribers to a telephone system increases, the number of
possible connections among them grows much faster--—roughly as
the square of the number of subscribers (Ibid.). Consequently,
switchboards became increasingly expensive to construct, and the
operations needed to make connections became increasingly complex
and slow as more people joined the exchange.

This challenged both the traffic engineering scientists as
to the capacity of the switchboard and the managers for dealing
with the increasing complexity of organizational operations
(Ibid). The development of automatic switching technology and
ultimately the digitalization of the switching process solved the
first dilemma and has given rise to the proliferation of various
kinds of services and application opportunities. Table 1

summarizes the service explosion of telecommunications.

Table l: The 'Three Generations'

Traditional services

(first generation)

Current basic
telecommunications
infrastructure

Telephony

Telex, teletex
Low-speed data
Mobile telephony
Low-speed
Facsimile

Over-the-air
radio

Over-the-air
and cable TV

15

New services

of Telecommunications Services

Advanced services

(second generation) (third generation)

Enhancement of
basic
telecommunications
infrastructure

Integrated basic
services with
some speed
enhancement
(ISDN)

Digitized voice
Textfax
Audiographic
Teleconferencing
Electronic mail
Wider availability
of mobile
telephony

Higher resolution
videotex

Multichannel
cable TV

Direct
broadcasting by
satellite (DBS)

New
telecommunications
infrastructure

Videotelephony
Video-
conferencing
Bulk document
transfer
High-speed

color facsimile,
High-speed data
On-line graphic
design

Remote

printing and
publishing
Dynamic computer
load-sharing

High definition
television
(HDTV)

Source : Adapted from Herbert Ungerer, Telecommunications in

EUZQQB ,

Thus, the solution

opportunities of

entry and

p. 38.

organizational

to the switching problem has created both new

complexity, which

become two key variables in facilitating policy changes in the

telecommunications sector.

I

16

The scenario of the network marketplace is made even more
complex by the full introduction of new broadband transmission
technologies, namely, microwave, fibre optics and satellites.
These new means of transmission of information open up a whole
range of network alternatives to the traditional public wire
network. MCI, -for instance, is a microwave network operator and
US Sprint boasts of being a fibre optics network. It was
reported that there were over 400 companies in U.S. offering long
distance telephone service (Harris, 1985). In the same light,
without satellites, the boundaries of telecommunications might
not have spread so widely. The satellite has freed us from the
constraints of distance and has made communications networks
simpler and , consequently, cheaper.

The emergence of intelligent terminals which have also
been made possible by the same semiconductor chip, largely
expands the power of the networks. A terminal is any device
capable of sending and/or receiving information over a
communications channel (Dordick, 1986). Intelligent terminals
are those that can perform a variety of functions, including the
storing and organizing of information for transmission on the
network. This is important because, for some of the more
specialized communications functions such as private lines that
interconnect geographically dispersed offices of large firms or
systems likely to be used for data and video, intelligence is
often required and designed into terminals to ensure that network

protocols are followed.

17

Together, the network marketplace, satellites and
intelligent terminals have transformed the telecommunications
infrastructure. Large distributed networks of computers,
software, terminals, and databases have thus been created and
provided the ideal productivity facilities. New services can be
manufactured by providing added value-to existing services, which
in turn means easy entry into the telecommunications sector.
Suppliers can specialize in processes and products in which they
have a competitive edge, and there is even room for the small
producer or cottage industry to custom tailor services to an
individual user's specifications.

Telecommunications has not only become the cornerstone of
the information society, but also a productivity tool and
facility in the national economic system as well as in the world
economy (Tehranian, 1988). The potential profitability coupled
with the relative ease of entry into the sector, especially in
the enhanced telecommunications services, began to draw resources
from both inside and- outside of the sector to challenge the
monopolistic control of the sector. New entrants and vendors
from various economic background constitute a strong pressure for

sharing the opportunity. As Geller (1989) points out:

Some, using microwave initially, wanted to compete in the
area of toll services. Others wanted to interconnect new
products to the telephone network for their value-added

services... Some entrants were small, but many were large

18
companies (for example, International Business Machines, or

IBM). They formed a powerful coalition for change... (p.
79).

The above analysis can be summarized in Figure 4.

 

Fundamentals of modern telecommunications

(semiconductor chip, satellites, intelligent terminals)

1 _-

Télecommunications revolution

 

(the integration of computing with telecommunications:

'.-. ”—fl

 

intelligent networks and terminals)

I

Network marketplace

(network as a productivity tool and facility, value-added

 

”WM

services)

9
v

I

Ease of entry

 

(interest groups demand a share of the potential profits;

 

 

redistribution of power and wealth)

 

Figure 4: Technology Advancement and the Restructuring of the

Telecommunications Sector

Together, the economic salience of the telecommunications

sector in the national economic system and the revolution of the

19
telecommunications technology create enormous pressures for the
restructuring of the telecommunications sector, which is more
economic-and-market-oriented than otherwise.
Figure 5 further summarizes the analysis in the above two

sections.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telecommunications Vision of information-
revolution based economy

Network marketplace Rise of demand for

(ease of entry; telecommunications
productivity and services

profitability)

Demand for redistributio ‘Pressures on the old ‘-
of power and wealth telecommunications system

to provide fast, efficient
and cheap services

 

 

]
"T ....... _--__1.._..____,__

:Organizational incompetence and complexity;

i- i

Restructuring of telecommunications sector
(privatization, deregulation, decentralization or a
mixture of measures)

 

 

 

Figure 5: Major Driving Forces of the Restructuring of the

Telecommunications Sector

IV. Theoretical Foundation

20

There are currently several theories to account for the
making of national telecommunications policy. One theory draws
from the statist theory of political science. The statist
theory focuses on the state as a decision-making entity to
pursue its own objectives by allocating power within .the
society. I-Some of the most important objectives are national
wealth, distributional equity and the objectives related to
power, security and stability (Katzenstein, 1977). Applying this
theory to telecommunications policy analysis, the statist theory
sees a close relationship between the telecommunications sector
I and the purpose of the state. Policy will be made in favor of
those social groups and telecommunications developments that are
viewed as essential to the maintenance of state power, national
wealth and internal stability. Telecommunications is an
important sector to the state in maintaining social cohesion,
national security, and the economic system. The state will
promote the development of the industry as long as it meets the
purpose of the state (Noll,1985).

A more direct approach to the relationships between state
theory and telecommunications policy was done by Vincent Mosco
(1988). In the capitalist societies, according to him, forms of
governance depend on the ways or modes with which an individual
state processes its social claims or demands. The relationships

among these forms and modes are reproduced in Figure 6.

21

REPRESENTATION

(Wide Incorporation)

 

 

Regulation M Corporatism
MARKET SOCIAL CONTROL
(Indirect) (direct)
Competition Expert boards
4
EXPERTISE

(Narrow Incorporation)

Figure 6: Forms of Governance For Processing Social Claims In

Developed Capitalist Societies

Representation is a mode of settling social claims that
incorporates a wide range of social representations. The market
is a social system that is subject to monetary calculation for
dealing with social claims. Expertise, in Mosco's words, "has
the value of drawing on socially sanctioned views of what
constitutes correct information, knowledge, and truth” (9. 109).
This mode of resolving social claims relies on the select few,

highly trained individuals who can claim expert status to reduce

22
the social claims. Finally, social control seeks social
consensus over the cultural values and norms that govern daily
lives of the people.

These four modes combine to provide four fundamental forms
of governance in developed capital societies: regulation, private
competition, expert boards, and corporatism. In this view, the
state is still a separate entity which functions as an
intermediator for settling different social claims. Three
perspectives are identified as to how telecommunications policy
was made based on this axial principle. They are pluralist,
managerial and class perspectives.

The pluralist analysis of the restructuring of the
telecommunications sector points to the shift in political
values from the public interest to the competing private
interests of different social groups. Competition and market
structure are used to meet these diverse interests and social
claims. The United States has been cited as a typical example.
It is said that there is no planning process nor a centralized
forum for decisions: the strongest and most persuasive voice
prevails (Branscomb, 1983). The policy-making process is thus a
game for those who learn the rules (231329232, February 10, 1986.
p. 68).

The managerial perspective, on the other hand, emphasize the
need of the state to manage the growing complexity brought about
by technological change and the division of labor (Mosco, 1988).

As has been discussed in the previous section, the blurring of

23

the computer technology and telecommunications and the
proliferation of services resulting from this convergence are
responsible for this complexity. The inability on the part of
the state organizations to deal with this rapid and complex
changing arena leads to the reliance on the market or competitive
forces to settle these new social demands, while at the same time
trying to retain as much as possible their administrative power
(Ito, 1985). This inability is reflected in several ways.
First, claims from different social groups are too strong that
any decision on the part of the governance may be considered
biased and thus triggers possible social instability. Second,
the government finds it increasingly hard to allocate financial
resources to different social claims because of the limitation of
available money. Third, the government is eager to shift the
social responsibility to other social groups to avoid direct
conflict with the people it governs.

The class perspective sees the state as an entity supporting
the capital accumulation and expansion. Its basic assumption is
that there are inherent conflicts of class interests in the
social system. One of the major functions of the state is to
regulate conflicts between capital and labor, and ensure that the
national capital grows in the world market. In the light of this
view, the restructuring of the telecommunications sector is a
fundamental attempt by the state to readjust the conflicts and
redistribute the capital among the social classes. The

divestiture of AT&T resulted in eliminating thousands of jobs and

24
released ATaT from its responsibility for various social
obligations, which in turn paved the way for capital accumulation
and expansion in the world market (Mosco, 1988). As David Heald
(1988) also points out that in privatizing British Telecom, the
British government seeks to "weaken trade unions by avoiding the
obligation placed upon public bodies” (p. 31).

These perspectives are self-contained and can claim to shed
light on the process of telecommunications policy making. It is
thus not appropriate to say that one perspective is better than
another. Indeed, varied as they are under different terminologies
and with different foci, they share two basic assumptions. One
is that technology advancement leads to a multitude of serviCes
(or complexity of organization) and ease of entry which in turn
invite various social groups to claim a share of the resources.
The restructuring of the telecommunications sector is an attempt
on the state side to settle these new conflicts or claims. The
second is that telecommunications has achieved such an economic
significance in the national economic system or capital
accumulation and expansion that other social values are
sacrificed or compromised in favor of economic measures to ensure
that the sector is developed and promoted. Figure 7 shows the
axial relationship between these two factors and degree of
restructuring the telecommunications sector.

This figure shows that the degree and speed of the
restructuring of the telecommunications sector is contingent on

the degree of economic salience and the status of technological

25

 

 

economic A . restructuring
signi- : (policy options)
ficance
on political .-
agenda technological complexity

organizational complexity

Figure 7: Relationship Between Restructuring

and Major Driving Forces

advandcement in individual countries. The more significant the
telecommunications sector in the economic system and the more
advanced the technology. the more rapid the speed of the
restructuring of the sector should be. In this light, the United
States, Japan as well as other developed countries should be in
the forefront of the restructuring.

This axial relationship can be further combined to produce
various models of policy orientations. If the economic salience
of the telecommunications sector is high on the national
political agenda and the technology is abundant with increasing
organizational complexity, a competition or market-oriented model
is most likely to occur. The United States, Japan and other
advanced countries at present would be best classified in this
category. If the economic salience of the telecommunications
sector is high on the national political agenda, but the

technology resources are limited and the organization is

26

relatively simple, a monopoly or centralized model would be most
likely to result. Most developing countries with a sense of
"catching-up" and in their early stages of telecommunications
development would fit into this category. If the economic
salience of telecommunications sector slips on the political
agenda (as when the sector is fully integrated into the national
economic system and stabilized), but the technology keeps
changing, a relatively free competition can be expected. In real
life, however, there is no perfect model. Models vary according
to the relative position these two factors are located on the
two axes. Furthermore, there is a limit as to how far these two
axes can go. In the competition model, once the issue of
telecommunications significance is settled, technology change
becomes an important determinant. If the technology keeps
changing at a pace that permits resources to continue to be
abundant, competition will serve both the government and the
competitors. If, on the other hand, when competition outpaces
the advancement of the technology, merger will result and
government intervention, e.g. regulation, will be called for,
more often than not, by the competitors themselves. As Myers
(1985) points out, in the United States, the fierce competition
brought about by deregulations and divestiture of AT&T has
resulted in a lot of mergers.

Noll (1985), who uses an eclectic approach to synthesize
various theories, comes to the following conclusions which are

important and relevant to the above analysis:

27

l. The speed of the restructuring of the telecommunications
sector should be greater in nations with relatively advanced
sectors that make extensive use of the telecommunications
system.

2. The speed of the restructuring of the telecommunications
sector should be more rapid in countries in which the
performance of the industry is least efficient, thereby
imposing the greatest cost to users.

3. The speed of the restructuring of the telecommunications
sector should occur more rapidly in countries in which
reorganization to improve the performance of the domestic

economy is, in some form, a salient political issue.

In summary, there are two hypotheses discussed so far. One
is that the increasing economic salience of the
telecommunications sector in the national economic system leads
to the reconsideration of the traditional role of the sector and
as a result policy-making is more and more driven by economic and
market factors rather than cultural and social values. The
second is that the telecommunications technological revolution
makes the resources abundant and profitable, which triggers
enormous social claims both in the quality and quantity of the
telecommunications services and in the business demand for a
share of the profit. These two hypotheses are generally
supported by communications scientists in analyzing the changing

scenarios of telecommunications policy in each individual country

28
(Slade and Barchak, 1989; Ito, 1986; Heald, 1988; Charles
Jonscher, 1986; Fregoso, 1988; Geller, 1989) and in searching for
major driving forces behind the scene of the worldwide
restructuring of telecommunications sector (Bruce, 1989; Nulty,

1989).

V. The Experience in the United States: From “Paradox“ to Plenty
In the United States, regulatory policy in
telecommunications has paralleled assessment of the role _of
telecommunications in the overall social system.
Telecommunications, both broadcasting and telephone industries,
have been historically heavily regulated on the theory of public
interest and universal access. The concept of public interest
and universal access touches on both social and political
sensitivity and economic domain. This means that different
interpretations of these two concepts would result in different
economic consequences. As Victor E. Ferrall convincingly
demonstrates that, even though broadcasting has been deregulated
more because of (or in the name of) its social impact than its
economic feasibility and performance, each change or deletion of
the rules resulted in altering economic relations among segments
of the television industry and its users (Ferrall, 1989). For
example, radio and television programming have been directly and
indirectly regulated by the FCC to require the licensees to
render the best practicable service to the community they reached

(ibid.). The lifting of program requirements by the Fowler

29

commission has had the indirect but significant economic effect
of increasing the amount of commercial time available for sale.
This lifting has been done, it was argued, in the interest of the
public, as Chairman Fowler put it: "If we let the industries
operate with fidelity to the markets they want to serve, the
public is better off" (quoted by Ferrall, Jr., 1989, p. 19)

In a sense, the battle between regulation and deregulation was
the result of different interpretations of these two concepts: in
what way can these two goals be fulfilled, competition ,or
monopoly?

This generalization, of course, is too simplistic. In
broadcasting, the deregulation initiatives beginning from 1981 by
the Fowler Commission encouraged, facilitated, and accelerated
new entry into broadcasting markets, particularly by individuals
with little or no prior experience. " Fowler", Ferrall observes,
”was passionately supported in his deregulatory crusade by
station operators, particularly small radio station operators who
saw an opportunity to escape the oppressive FCC yoke" (p.16).

The pressure for deregulation did not, by any means, come
from only the traditional broadcasting industry. New means of
delivering broadcasting signals became available as early as the
19405 when cable TV was introduced simply as a way to improve
television reception. Now, television signals can be carried
through cable, microwave, satellite or a mixture of them. These
new ways of delivery lead to services like subscription

television (STV), MMDS ("Wireless cable”), direct satellite

30

broadcasting (DES), and cable TV. Some of these services have
been in the market for quite a while, and did not seem to
constitute an economic threat to the traditional television
industry separately. However, cable has seen a steady growth
since its appearance in the 19403 and took a leap in 1975 when
Home Box Office revolutionized the cable industry. by beaming
television signals through the RCA-launched satellite (Singleton,
1983). Beginning from 1981, cable had become a direct competitor
of the three national television networks in the sale of national
advertising time and of local stations in the sale of local
advertising time. In 1988, it is estimated that the sale of
advertising time of cable and systems reached $1.45 billion,
nearly six percent of projected television advertising sales
(Ferrall, 1989).

This creates an interesting phenomenon. Within the industry
itself, pressure for deregulation comes largely from "outsiders”
who saw broadcasting as a profitable business and wished to
enter, and from small station operators who considered themselves
bound and disadvantaged by the old regulations. On the other
hand, because of the competition from outside the traditional
television industry that has been made possible by the new
technologies, the traditional television industry as a whole felt
that they would be competing on an unfair ground if they were
regulated while the competitors such as cable were not. The
pressures for change were thus both from the television industry

itself and from the outside competition.

31

The electronic services, including telegraph and telephone,
began in an unfettered marketplace and only through market
competition did the monopoly service of Western Union become
established in telegraphy as ATaT became dominant in telephony
(Branscomb, 1983). Interestingly enough, it was monopolization
that led to both state and federal regulation.

The telephone industry in the United States was governed by
Title II of the Communication Act of 1934. The underlying
philosophy of the 1934 Act was to make available as far.as
possible to' all the people in the United States, rapid,
efficient, nationwide, and worldwide wire and radio
communications for the defense and safety of life and property.

According to the FCC:

The necessary attributes of a so-called natural monopoly
which ordinarily attends efficient and economical telephone
service... and the public interest in the...development
of...effective and economical communication facilities
are...factors which disclose the underlying character of
this business as an essential public utility (quoted by_

Weinhaus and Oettinger,1988, p.11).

The social and political overtone was obvious in these
goals. This was largely to be expected. Telecommunications was,
and indeed, has been, and will be an important means of social

control and organization. During World War I, the federal

32
government nationalized the telephone industry apparently
because of its importance for the national defense and security
(Branscomb, 1983). In fact, in order to mobilize the total
wireless resources of the country for war, the Navy took over all
U.S. wireless stations (Head and sterling, 1987).

In addition, telephone exchange can be said to represent
radical rearrangement of social space and relationships. It is
not only a science of technology but also a science of social
organization. It has been claimed that AT&T probably has more
daily dealings with United States citizens than the United States
government itself (Brooks, 1975).

It was in this environment that AT&T was able to maintain
its monopoly status with government consent since 1913.
Competition, the main tenet of the American economic system, was
believed not to fit the case of telecommunications because it
would result in confusion and waste (see Brooks, 1975). It would
be a confusion because the goal of universal access would be
threatened. It was the government's goal to let every American
home have access to the telephone service and keep the rate at
an affordable level for every American home. The telephone rate,
local and long-distance, rose less than 20 percent between 1960
and 1974, while the consumer price index of all goods and
services was rising almost 70 percent (ibid.). The cross-subsidy
practice of long-distance services was enforced by policy in
1943 to avoid cream-skimming (the practice of concentrating

resources on profitable sectors of the market) of telephone

 

33

services. The divestiture of AT&T ended the cross-subsidy
practice, which was at the expense of the socially disadvantaged
and a victory of the larger users. Furthermore, competition
means giving more decision-making power to the competing
entities and losing some of the political control of the
entities. It would be-a-waste because the resources were still
limited and did not allow more than one telephone entity to
operate in a competition mode. In fact, competition in the
telephone industry existed as early as 1878, two years after
Alexander Graham Bell obtained his first telephone patent. By the
early 1900s there already were 3200 Bell exchanges and 6600
independent exchanges (Weinhaus and Oettinger, 1988). Competition
was fierce. This competition, according to John Brooks (1975),
resulted in "wasteful duplication” and "public inconvenience” (p.
108) because two or three telephone systems would operate
simultaneously in a single town or city (ibid.).

In a word, telecommunications was so important to the
national security, stability, and economic feasibility (economies
of scale and scope) that the United States produced what John
Brooks (1975) called the AT&T "paradox" : a monopoly in a
competitive economy. This paradox was said to be due to the
”particular nature " of telephone services (Sobel,1982; Brooks,
1975; Nulty, 1989). What was the particular nature of the
telephone industry 2 It was particular because of its social
impact (Pool, 1977; Marvin, 1988). These social effects encompass

every facet of human behavior and are complicated by being in

34

diametrically opposite directions. For example, with the
telephone came relatively sudden and largely unanticipated
possibilities of mixing heterogeneous social worlds. The phone
also permits outsiders to cross boundaries of race, gender, and
class without penalty (Marvin, 1988). The phone invades our
privacy with its ring, but it protects our privacy by allowing us
to transact affairs from the fastness of our home (Pool, 1977).
The telephone contributed considerably to urban sprawl and the
mass migration to suburbia. It also helped create the congested
downtowns from which people are now fleeing (ibid.).

It is particular because of the enormous investment in
building a national public network and therefore the importance
of economies of scale and scope; because of its strategic
significance in national security and capitalist expansion in the
world market (Schiller, 1981). In the word of AT&T Chairman H.I.

Romnes in 1971, AT&T has

...responsibility to the nation at large: first, to take
scrupulous account of the consequences of what we do on the
general economy; second, to respond to the nation's needs
whenever and wherever our skills are truly needed; and
third, to give our wholehearted support to the great goals
our country has set of itself : a growing economy, a decent
order in our society, the freedom and scope for every
individual to fulfil his personal capacities. and an

environment that will sustain the continuing enhancement of

35
the quality of our national life (quoted by Schlesinger et

al'l 1987’ p. 13).

By the 1970s, however, these original goals and social
obligations began to face challenge and erosion. New
technologies of transmission, increasing sophistication of
customer premises equipment, dramatic growth in the volume of
business, and availability of competitive services and products
outside the Bell System and the increasing international
competition all challenged the monopolistic status of AT&T and
the belief that telecommunications is a natural monopoly.

In customer premises equipment, the distinction between the
previously separate functions of data transmission and data
processing, i.e., between telephones and computers, was blurring.
What was essentially a digital computer sat at either end of a
telephone call. A so-called smart telephone sold now uses the
digital technologies for both information transmission and
information processing.

In the local exchange, PBXs and advanced switching systems
removed switching from the central office to customer premises
and began eroding business boundaries between customer premises
equipment and the local exchange. The growing demand for
distributed data processing and data communications has fueled
competitions for vendors of telecommunications systems. The
third generations PBXs are capable of switching large amounts of

simultaneous voice/data transmission and the fourth generation

36

PBXs can support internal image and video transmission. The trend
toward shared databases and distributed processing has positioned
the PBX the center of telecommunications. There are about
240,000 PBXs installed in the United States today, and the market
has been growing at a rate of about 15 percent compounded each
~-year ($3.4 billion in 1985) (Geller, 1989). Additionally the
local network's natural monopoly was challenged as citizens band
(CB) radio and pocket page services were able to bypass the local
loop, thus invalidating natural monopoly justifications.

In the long-distance exchange, ATaT's monopoly was
challenged by other carriers' long-distance microwave radio
transmission and fiber optics networks.

The new technologies combined with the rising consumer
demand attracted the attention of the entrepreneurs in other
industries. Some of the largest U.S. corporations-~IBM, Xerox,
Exxon, RCA, and others--which traditionally served different
markets from ATST's, began to encroach on the company's
territory. The financial stakes were enormous; by the mid-1970s
industry revenues were pushing $40 billion domestically, and some
forecasts predicted annual revenues of $250 billion by 1985. The
market for hardware was also growing rapidly. In 1973 total
expenditures for electronic equipment in the industry exceeded
$12 billion and were growing at about 9 percent per annum
(Schlesinger et al., 1987). Technological and market pressures
had combined to change the government's historic belief that

telecommunications was a natural monopoly.

37

At the same time, the abundance of the resources posed
organizational and managerial problem. This can be understood
from two aspects. On one hand, the increased sophistication and
complexity of the network and diversification and specialization
of the equipment and services demanded correspondingly increased
levels of technical-4expertise and administration. These
problems meant the cost and efficiency of running the
telecommunications business by a monopoly were put into serious
question. First of all, as Mueller (1989) pointed out in his
article on the early telephone switching problem, telephone
exchanges could become more expensive to run (per subscriber) as
the number of subscribers rose. In modern telecommunications,
telephones, computer terminals and other forms of electronic
equipment may well continue to fall in cost. But the fusion of
voice, data, and video communications brought about by the
convergence of the technologies will pose both organizational and
managerial problems, and thus will not likely follow the same
pattern.

Second, this organizational and managerial problem directly
threatens the efficiency of the monopolistic performance and as a
result endangers the fulfillment of the social pledges. For
example, social discontent would arise if the monopoly did not
meet the public expectation of low prices and good services.

As Mueller (1989) writes, ”The linkage of growth with rate
increases strongly affected the political climate in which

telephone companies operated. Politicians and the public who had

38

difficulty understanding why growth did not bring lower cost came
to embrace competition, municipal rate regulation or both"
(p. 558). One of the reasons that the nationalization of the
U.S. telephone and telegraph mentioned above did not live long
was that the government was unable to meet its promise of keeping
a low rate. The public outcry was so great that less than a year
later Congress proposed the immediate return of telegraph and
telephone services to their private owners (Branscomb, 1983).

The American experience, from the ”paradox" to the current
plenty, is thus an outcome of the balance among the

technological, political, social and economic forces.

VI. Japan: From "consensus“ to “consensus”

In Japan, the telephone industry began as a government
monopoly. The reasons for this monopoly, according to Ito(1986)
were three:

1. Preservation of communications secrecy by military, police,
and other government agencies was deemed important.

2. Under private management, investment would be made only in
urban areas, and diffusion to rural areas would be delayed.

3. Telephones in most foreign countries (except the United

States) were operated under a government monopoly.

These reasons show that social and political priorities were the
salient features in making telecommunications policy at the time.
Like in the U.S., public interest and universal access (reason

2.) were chief goals. Unlike the U.S., however, which was born

39

with a democratic government and embraced the religion of
competition, Japan has had a long tradition of emperors and
government ownership. Viewed in this way, government control of
the telecommunications sector was more to be expected than in the
U.S. Additionally, compared with the U.S., Japan is a small
country which has every reason to be very sensitive to national
sovereignty, security, and social stability and harmony (reason
1.).

These social objectives were reflected as early as 1898 when
Japan began research on wireless communication. It happened
during the Meiji Era when Japan was moving ambitiously to
construct a modern state. There was a national consensus for
achieving the goal outlined by the popular slogan, "A prosperous
nation with a strong defense" (50 Years of Japanese Broadcasting,
1977). It was no wonder that the Japanese Navy took a strong
interest in wireless communication. In fact, it was recorded that
the decisive victory in the famed Battle of Tsushima was due to a
wireless message from a patrol ship which had spotted Russia's
great Baltic Fleet armada in the seas off Kyushu (ibid.). In this
environment, Western culture and technology were received with
enthusiasm. The ultimate aim was to reach parity with such
countries as Britain, France, Germany and America (ibid.),
although debate over Westernisation versus traditionalism was
later to become an issue in Japanese history (Elzinga and
Jamison, 1986). Nevertheless, the foreign influence on domestic

affairs could not be denied (reason 3.).

40

After War World I, the Japanese private industry took a hand
in this emerging new technological field. Under the Wireless
Telegraph ‘Law enacted in 1915, anyone who had obtained
government clearance could transmit and receive radio signal
(Ito, 1986). As competition became fierce, the Japanese
government saw a need to regulate and to be put in control of
radio broadcasting. This plan was further facilitated by a
devastating earthquake that took 150,000 lives. Rumors and
confusion following the earthquake were later attributed to a
lack of genuine information and complete disruption of standard
communication services (50 Years of Japanese Broadcasting,
1977). After the earthquake, later in December, 1923, the
Ministry of Communications promulgated ”Regulations on Private
Radio-Telephone Broadcasting Facilities", which 'clarified
official government concepts on the sociological impact of radio'
(ibid., p. 15). The government would have run radio
broadcasting as a public entity but for one reason: lack of
financial investment. It was thus decided that a government-
regulated corporation should be established. In November, 1924,
the first broadcasting company in Japan, Tokyo Broadcasting
Station was born (ibid.). For the first time in Japanese
telecommunications policymaking, economic considerations made
its trace in the process.

World War II destroyed almost all of the Japanese
telecommunications infrastructure. The reconstruction of the

telecommunications facilities became one of the salient issues on

41
the Japanese political agenda (Ito, 1985). To achieve this urgent
goal, several steps were taken. First, to ensure organizational
efficiency, the Ministry of Communications was divided in 1949
into two separate Ministries: the Ministry of Postal Services and
the Ministry of Telecommunications.

In 1952, the Nippon Telegraph and Telephone Public
Corporation (NTT) was established and operated as a monopolistic
public corporation that provided Japan's domestic
telecommunications services. NTT took over responsibility from
the government for providing the telecommunications services
needed for the postwar economic reconstruction. In addition,
like AT&T in the United States, NTT had public responsibility for
providing "telephone communication throughout Japan immediately
upon -dia1ing ” and "telephone installation immediately upon
request” (Uehara, 1989).

As in the United States, in the late 1960s, the integration
of telecommunications with data processing brought about a
revolution both in services provided and social demand. Various
kinds of new telecommunications media, such as data and facsimile
communications, began to make their way into the society.
Specifically, the Japanese computer industry saw the integration
as a good opportunity to expand their territory because the
integration entailed the integration of products and services as
well as the telecommunications and information technologies. In
1971, a major change in telecommunications policy took place in

the area of data transmission. The 1971 amendments to the

42
Public Telecommunication Law allowed the use of leased lines for
computer time-sharing .connections and for certain other data
applications on a share-use basis (Kalba, 1988). The desire of
the computer industry to enter the field was thus a strong
variable in restructuring the Japanese telecommunications sector.

Moreover, because of the abundant resources resulting from
the convergence of the telecommunications technology and
computing technology, interest groups other than the computer
industry sought to enter this potential profitable market. For
instance, on the supply side, the list of suppliers include
traditional suppliers such as NTT, Fujitsu, Hitachi, NEC, Oki,
new entrants from the electronics industry such as Matsuchita,
Mitsubishi Electric, Ricoh, Sony, Toshiba, specialized
telecommunications equipment companies such as Anritsu, Iwatsu,
Nitsuko, Tamura and satellite communications companies. In
addition, there are other joint-ventures with the U.S. and other
Western countries , even entities from the public sector such as
Japan National railways, Japan Public Highway Corp and various
participants from valued-added networks and resellers (Kalba,
1988).

These quantum advances in technologies were coupled with the
broadly publicized vision of the coming of the Johoka Shakai in
Japan (See Ito, 1981). The increasing importance of the
telecommunications sector in the future economic system, both
domestic and international, challenged the traditional concept

about the role of telecommunications. Cultural and social

43
objectives are still important considerations in making
telecommunication policy but are no longer the major
considerations. Ito (1986) vividly describes the battle between
the ”communications policy" and "industrial policy” in Japan. The

former is represented by communications scientists in the

Ministry of Posts and Telecommunications (MPT) and the latter by” ,

the economists in the Ministry of International Trade and
Industry (MITI). The deregulation and privatization of the
telecommunications sector in Japan is seen as a victory for MITI
in its battle with the MPT. In other words, the economists in
MITI have made the government and the public believe that
telecommunications has such an important economic value in the
national development that it cannot afford not to subject it to
economic rules. They argue that only by competition will
resources best be allocated; each business entity will be most
efficient and the telecommunications industry will be best
organized (Ito, 1986)

It is thus again a national consensus or, in Kas Kalba's
term, "the confluence of forces” that facilitated the policy
change. These forces "in favor of a more open and more
diversified telecommunications market in Japan outweighed those
in favor of maintaining the status quo" (ibid. p.96).

As in the United States, the policy changes in the
telecommunications sector were undertaken in the name of public
interest, namely, ”improving customer services through more

effective management" (Uehara, 1989, p. 67). Efficiency to serve

44
the public clearly stands out here as an argument for
restructuring the sector by introducing competition and
privatization. There seems to be an inherent relationship between
the two: competition and privatization. However, as David Heald
(1988) points out in discussing the privatization of the British
Telecom that "Indeed, if the twin propositions about efficiency
are accepted unreservedly (i.e. private enterprises are
inherently more efficient and competition breeds efficiency), the
public non-market sector ought to be at the center of enthusiasm
for privatizing..." (p. 32). But the nature of the
telecommunications sector is different from other traditional
public sectors. It is technology-sensitive; it combines both
social and economic roles into one fabric. It follows that if
the technology changes and the balance of social and economic
roles of the sector change, the pressures for policy change are
to be expected. Once the policy change is initiated, it will in

turn, further facilitate changes in technology and the balance

of social, political and economic forces. In this sense,
efficiency is being used as an excuse to conceal more
fundamental changes in the relationship between the

telecommunications sector and the society as a whole. Indeed, in
the first year after the breakup of AT&T, there was confusion
over the question: why a system that had worked so well had to be
changed (Maremont, 1984).

The privatization of the Japanese telecommunications sector

is therefore a consensus of the government, the entrepreneurs,

45

the big users and the general consumers. This, of course, does
not mean that everyone is happy about the privatization. The
nature of telecommunications dictates that its social and
political implications are never to be ignored. For example,
the privatization of NTT met with resistance from the labor union
which was fearful of a labor cut at NTT. Their fear was
justified since in the 1985 fiscal year, NTT decreased its total
number of personnel by about 10,000 persons, and in the 1986
fiscal year, it achieved a further decrease of 6,000. There was
also political concern that the privatization and the resulting
competition would lead to cream-skimming practices at the expense
of the residential users (Kalba, 1988). There is also
institutional conflict between MPT and MITI about the central
role that they will play in the telecommunications sector (Kalba,
ibid. ; Ito, 1986). The balance of the forces, however, is toward
the change. On the part of the government, the privatization
fulfilled three major objectives:

1. To shift the responsibility of allocating profit and
resources to the private sectors and the competitors and at
the same time to promote the development of the sector,
while maintaining its necessary political and regulatory
control. .

2. A related objective is to shift the pressures of meeting the
public demand for the telecommunications services to the
enterprises involved and to avoid the direct tension between

the government and the public.

46
3. The privatizing of NTT, whose stock is being sold to the
public, gives the government financial benefit to support
other social and political objectives and at the same time
relieves the budgetary burden on the part of the government

to promote sector development.
On the industries' side, telecommunications represents the
future of the national economy and is thus a sector that they
need to gain a foothold. For the traditional telecommunications
entities, they do not want to be confined to the plain old
telephone services (POTs), privatization would release them from
old regulatory restrictions and enable them to compete in the
more promising enhanced service area. On the consumers' part,
especially for big users, competition means more choices,
flexibility and more bargaining leverage. For entrepreneurs,
deregulation provides them opportunity to enter this profitable

sector and to compete on a more fare ground.

VII. Implications for China and other developing countries
The government and the telecommunications entities of the
developing countries are facing complications in addition to
those being felt throughout the industrialized countries:
1. The United States and Japan ( and other industrialized
countries) built their basic national networks during the
era of relatively unchallenged monopoly control, a period

without a counterpart in developing countries.

47
2. The enormous amount of capital .to build the national
networks. In the North America and Japan, the capital plant
of the public networks is worth roughly a trillion U.S.
dollars (Nulty,1989).
3. The new pressures to be competitive reached U.S. and Japan

only after universal national networks had been built. -1

In China, telecommunications, both broadcasting and POTs,
has traditionally been regarded as a power extension of the
Chinese Communist Party. It was natural that the Party and its
government exercised tight control of the telecommunications
sector. The development of telecommunications is thus closely
linked with the political climate over time. Up to 1978 when the
ambitious "four modernizations" drive began, telecommunications
.underwent very little progress due to political upheavals such as
the Cultural Revolution. For instance, in 1979, there were only
eight million black—and-white TV sets nationwide, compared to the
startling figure of one hundred million (including 25% color
sets) in 1988 (Thirty Years of CCTV--From 1958-1988). Telephone
penetration was 0.1 per one hundred persons in 1979, and rose to
0.6 in 1988 (Paxton, 1988).

The "four modernizations" drive is the result of recognition
from the government that economic success is a vital (element
determining political survival. Like Japan after war World II,
China after the Cultural Revolution faced the urgent task of

economic recovery. Telecommunications is believed to occupy a

48
central position in this economic reform. As Lerner (1987)

observes:

The goal for telecommunications policy in China is to
stimulate growth in the telecommunications sector which
exceeds growth required for overall "national recovery."
This policy recognizes that overall economic growth cannot
be sustained unless the economy's supporting structures,
including telecommunications, grow at an even greater rate

(p. 33).

With this recognition, the development of telecommunicatiOns
has been put on the top list of political agenda. Advertising,
which has been regarded as Western "rotten" consumerism, was
introduced in 1979 in broadcasting to promote commercialization
of goods and services. The introduction of advertising was seen
as a natural result of the new economic policy, namely,
introducing marketplace economy into the economic structure and
decentralizing the administration and management. Moreover, the
rising demand for the expansion of broadcasting came at the time
when the government budget was tight. The introduction of
advertising released part of the government obligation on
financial matters.

Similarly, the Chinese government regarded the development
of a telephone infrastructure as an essential element of her

modernization drive. The development of telephone infrastructure

49
has therefore been prioritized by those Special Economic Zones as
a way to keep and attract foreign investment and promote other
sector development (Lerner, 1987). While China's telephone
industry still emphasizes central planning and management,
considerable power has been delegated to the local authorities as
a result of the- decentralization reform. These provincial,
metropolitan authorities have been given more freedom to plan,
develop, regulate and operate the telephone service
(Telecommunications Policies in Ten Countries, 1985). Figure 8
(see Lerner, 1987, p. 33) shows the hierarchial structure of the

Ministry of Posts and Telecommunications.

 

[Central Ministry of Posts and Telecommunicationsi]

 

 

 

[Provincial Telephone Authority]

 

 

lCity Telephone Authority]

41

1!own/Village*_]

 

 

 

* Jurisdiction for rural telecommunications varies by region.

Figure 8: Telecommunications Hierarchy in China

The decentralization is intended to give the local authorities

more freedom and flexibility to pool whatever capital they can

50

obtain to boost the development of telecommunications. Each
Chinese province has its own Posts and Telecommunications
organization and offices. The decentralization, combined with
the MPT's limited ability to finance the local authorities,
reduced considerably the MPT's control over the local Posts and
Telecommunications Authorities. Moreover, MPT has no control
over the other private and governmental organizations who are
free to plan, acquire and operate their own private dedicated or
switched systems independently of the MPT and its systems
(Lerner, 1987). These governmental ministries and private
organizations are impatient about the slow construction in Posts
and Telecommunications and began to develop their “own
communications facilities to satisfy their individual needs.
These include the Ministry of Water Resources and Electric
Power, Ministry of Railroads, Ministry of Petroleum, the
People's Liberation Army, the Broadcasting and Television
Ministry (Telecommunications Policies in Ten Countries, 1985).
This resulted in a variety of diversified systems, nonuniform
technical standards, overlapping use of frequency bands,
uncoordinated management policies, as well as the criss-cross of
underground pipes and cables, randomly installed telephone pipes,
and interfering air waves. Consequently, the quality of
communications is adversely affected.

These problems in China raised important questions for other
developing countries since they share the same task of building

the national telecommunications infrastructure in order to boost

the

51

development of other economic sectors. In their effort to

promote telecommunications development, China and the developing

countries face the following paradoxes and dilemma:

1.

On the one hand, telecommunications entities in developing
countries face the enormous task of building and upgrading
the national network. The capital needed for this task_is
similarly tremendous. On the other hand, there is a need to
respond more quickly to the rapid technological changes in
other enhanced telecommunications systems. In addition,
there are pressures from other governmental ministries and
large private business users for more efficient, fast and
non-expensive services. All this leads to streng
pressures for decentralization and liberalization in the
telecommunications sector. The result is the potential
diseconomies of proliferating and fragmented systems, and
loss of revenue for the MPT to cross-subsidize extension of
the basic network. Loss of revenues from large customers
looms even larger as a problem than it does in
industrialized countries because the proportion of total
traffic concentrated in such customers is greater.

It is very difficult for telecommunications entities in
developing countries, in their current form and condition,
to provide the services large customers need and demand. If
telecommunications entities and governments respond to the
dilemma by forbidding alternative systems without being able

to provide the services themselves, the customers--- and

52
ultimately the country---will suffer.

3. Because of the budget problems in China and other developing
countries, the urgency to boost the telecommunications
development will orient the government toward a competitive
and market-driven policy. But a purely market-driven system
of allocation will tend to produce a system that
concentrates disproportionately in the main cities and on
the largest and wealthiest customers. This concentration
causes political problems and can impede the realization .of
important development goals, such as the decentralization of

economic activity and the development of rural areas.

In view of these facts, it makes sense for developing
countries to evolve toward a telecommunications sector that
includes both a publicly owned, pervasive network providing basic
services and one or more privately owned installations or
restricted networks that provide highly sophisticated facilities
and transmission to high-volume business customers. There are
important legitimate reasons for public ownership of a switched
network in a developing country setting. Traditional government
priorities such as security, emergency preparedness, and economic
development will still have a great influence on the location
and capacity of a telecommunications system. These priorities
can dictate a system radically different from a network designed
to maximize profit. The scope of a government network must

encompass every population center and geographic area of a

53
country, not just densely populated areas or industrial
facilities.

There are equally compelling reasons for the existence of
private owned telecommunications facilities or networks of
restricted scope. A limited number of highly sophisticated
large-volume enterprises can use the latest communications
technology. These enterprises usually have the financial and
political strength to demand frequent replacement of dedicated
transmission equipment and equipment on customers' premises -as
technology advances.

A telecommunications system combining public and private

facilities can realize the following benefits:

1. Capital costs of the public system would be reduced by
avoiding widespread installation of technology that is used
by only a few customers; they would also be reduced by using
switching and transmission capacity made available when
business customers leave the public network to be served
privately.

2. Access to state-of-the-art communications facilities
provided by responsive profit-oriented operating entities at
market process offers strong incentive for foreign
investment in new business of industries.

3. The risks of premature obsolescence or price cutting in the
equipment or transmission facilities provided to high-volume

customers are borne by private capital.

54
4. Rapid and unpredictable fluctuations in the demand for
sophisticated high-volume telecommunications services need

not be anticipated in national budget planning.

These benefits can only be fully realized, however, when
privatization is both economically and politically feasible.
In countries, where privatization of the telecommunications
entities is currently not politically feasible, other forms of
restructuring can be implemented. China, for example, can choose
decentralization of finance and management authority to the lOCal
government. These local telecommunications administrations will
then function as relatively independent organizations with ‘the
central MPT coordinating and supervising the technical standards.
These local administrations will be required to be responsible
for putting the universal access as their first priority. After
this, they are free to plan and develop other advanced
telecommunications technologies. This implies that a limited
competition between the local telecommunications administrations
is possible

The current telecommunications policy in China seems to head
toward this direction. Those provinces and cities that have more
financial resources are developing at a much faster speed than
those that do not. For example, many new services and facilities
are available now only in the more prosperous cities and Special
Economic Zones (see Table 2) (Lerner, 1987, p.139). Cities such

as Beijing, Shanghai, Guangzhou and Shenzhen all have telex,

55
facsimile and data communications. Some, like Beijing, have
cellular radiotelephone.
Table 2 : ECONOMIC PRIORITY CITIES,

ZONES AND REGIONS

Municipalities: Beijing
shanghai
Tianjin -
Special Economic Zones: Zhuhai
Shenzhen
Xiamen
Shantou
Coastal Cities: Dalian Shanghai
Qinghuangdao Ningbo
Tianjin Wenzhou
Yantai Fuzhou
Qingdao Guangzhou
Lianyungang Zhanjiang
Nantong Beihai
Coastal Regions: Long River Delta

Pearl River Delta
Xiamen-Zhangjian-
Chuanzhou Delta

China and other developing countries do have some
opportunities not enjoyed by the industrialized countries. The
experiences in the industrialized countries provides options of
making telecommunications policy. This, however, does not mean
that policymakers are forced to select any particular option or
model. The choices are no‘ longer limited to a monopoly
environment and unrestrained competition in all facets of the
telecommunications industry. In addition, new technologies
provide an opportunity to leapfrog over some of the most

expensive and difficult phases of telecommunications development.

56
Advanced radio and satellite technologies, for example, can
temporarily or permanently forestall the need to hard-wire remote
rural areas. The developing countries can also bypass the
expense of phasing out the established electromechanical systems
and go directly to such digital systems as Integrated Services

Digital Network (ISDN).

VIII. Conclusion

Virtually all telecommunications reforms being considered by
governments around the world involve some reduction in the
monopoly control of the traditional telecommunications entity and
some increase in the influence of market forces over operations
and investment in the sector. This similarity does not reflect
any common ideology; governments of all political inclinations
are examining very similar reforms. Rather, the resemblances
have to do with the nature of the technical, economic, and
political forces bearing down on the sector. The market
orientation of the telecommunications sector can be increased by
allowing new entrants into the sector, by changing the way in
which the existing entities operate, or by doing both.

Despite the increasing pressure for more commercial modes of
behavior, however, telecommunications remains an important public
good with powerful social and political implications that cannot
be ignored and cannot be entirely subjected to market forces.

In the traditional telecommunications sector, most policy issues

were internalized within the telecommunications entity. The

57
monopoly provider, often explicitly a part of the political
process as a ministry of government, had the capacity both to
make the necessary tradeoffs, so that social and political
considerations were balanced with economic efficiency, and to
make its decisions stick through legal market powers.

These ”traditional mechanisms for balancing conflicting
interests are losing force. The pressures of the new environment,
moreover, are reducing the power (political, legal, and market)
of the established telecommunications entities and forcing them
to give greater weight to economic considerations and less to
political and social considerations.

In a world that change is accelerating with great force,
however, it is increasing difficult to predict and plan. The
cycle of change has become shorter and shorter. This sensitivity
of change and unpredictability characterizes the field of
electronic technology. Policy-making becomes more difficult and
at the same time assumes vital importance. It took the FCC some
fifty years to realize that deregulation might be better for the
telecommunications sector development. There is an old Chinese
philosophy which says: "After a long reunion comes separation;
after a long separation comes reunion. This is the law of cycle.”
In this view, Mainland China and Taiwan will be reunited and so
will the two Koreas and the two Germanies. In the same light, the
Soviet bloc will depart from each other and become independent
from Soviet control. Applied to the telecommunications

industry, because long-time monopoly may result in bureaucracy,

58
non-innovativeness and inefficiency, competition has to be
introduced to break the monopoly and to stimulate the vigor and
vitality within the status quo. On the other hand, competition
may result in the waste of resources, time and money, abuse of
public interest, and tension between the competitors that
eventually will lead to compromise, cooperation or mergers.

In "order” is embedded the chaotic elements and from ”chaos”
the "order" is born. The art of making a national
telecommunications policy is the art of preventing ”chaos" while
creating a new "order" and/or creating a new "order" without

producing ”chaos”.

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