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Article Excerpt
Abstract
The accounting rate system currently in place is used to reimburse telephone companies around the world for terminating calls originating in foreign countries. Increased competition in more liberalized countries has led to imbalances between traffic originating in these countries and traffic coming in from less liberalized countries, leading to huge settlement payments being made to less liberalized countries. Some variation in accounting rates across countries can be explained by traditional factors such as the actual cost of terminating calls. Our results suggest that accounting rates are also significantly affected by non-traditional factors such as the extent of government regulation, the level of corruption, and the like. These findings support the need for consideration of these factors in reforming the accounting rate system currently in place. (JEL L96)
"High settlement rates are a product of oligopolistic cooperation in a market with little transparency and anti-competitive regulation in the majority of nations" [Cowhey, 1998; p. 908].
Introduction
For the past 40 years, international telecommunications collection rates (1) in most countries in the world have fallen significantly. For example, in the U.S., the average collection rate (price) of an international telephone call to 39 reported countries decreased from $0.75 in 1990 to $0.50 in 2000 (2). The average revenue per minute to U.S. carriers from international calls also decreased from $3.11 in 1964 to $0.53 in 1999 [Federal Communications Commission, 2001]. However, this fall in collection rates has not kept pace with the reduction in cost of providing international telecommunications services [Cave and Michie, 1991]. The cost of providing telecommunications services has decreased significantly in all countries due to technological improvements. Yet, the savings that resulted from this decrease in costs have not been fully passed along, in the form of reduced collection rates, to consumers of international telecommunications services. The reason for this incongruence between the fall in collection rates and the reduction in the cost of providing international telecommunications services lies in the accounting rate (3) system that telecommunications carriers use to reimburse each other [Cave and Donnelly, 1996].
Briefly, the accounting rate system works as follows. When an international call is made, the call is jointly carried by the telephone company in the country where the call originates and by the telephone company in the country where the call is terminated. The collection rates are paid by consumers to the company in the country where the call originates. However, a payment is also due to the telephone company that terminates the call. This payment, made by the telephone company originating the call, is based on the accounting rate that is negotiated between countries. A particular country (say, the U.S.) will have a different negotiated rate with every other country. If the call volume from the U.S. to another country (say, the UK) balances out (that is, the incoming and outgoing minutes of calls to and from the UK are the same), then there is no payment due to either country. If the minutes do not balance (if, for example, the volume of calls from the U.S. to the UK is higher than the volume of calls in the opposite direction), then a settlement payment is due to the telephone company in the UK for having to terminate more traffic originating in the U.S. This settlement payment is calculated by multiplying the net difference in call volume by one-half of the accounting rate [Cairncross, 1997].
Hence, collection rates are significantly impacted by the level of accounting rates negotiated between countries. These accounting rates, in turn, are significantly impacted by a variety of factors, leading to significant variation (4) across countries. Although some of this variation can be explained by the usual traditional factors such as the cost of providing the telephone service and the distance between two countries, these factors by themselves do not fully explain the variation in accounting rates. We argue that nontraditional factors such as the extent of government regulation, the level of corruption, the extent of willingness of governments to move towards pro-competitive market environments, and the level of economic freedom also have a significant impact on accounting rates. In fact, regulatory authorities in many countries have kept accounting rates at artificially high levels, leading to higher inflow of settlement payments to these countries. In 2002, the U.S. made settlement payments of approximately U.S. $3 billion to other countries [Federal Communications Commission, 2004]. Therefore, the accounting rate system, as it currently stands, impacts the consumer welfare of citizens in countries that have a substantial outflow of settlement payments.
This paper seeks to comprehensively evaluate the impact of both traditional and nontraditional determinants of accounting rates in international telephone service. The next section reviews the literature pertaining to the accounting rate system. Therein, the background of the international telecommunications market and possible reasons for the relatively high accounting rates are discussed. This is followed by sections that present the empirical model and results of data analysis. The final section offers policy recommendations.
Review of the Literature
Background
The international long-distance telephone market has evolved along with the development of an interconnected world. This evolution, a result of migration and multi-country business ties, has become an indispensable factor of the world economy [Hackl and Westlund, 1995]. The demand for long-distance phone calls has increased, and advances in technology have enabled the cost of providing telecommunications service to decrease dramatically.
The international telecommunications market can be dichotomized into competitive countries with high per capita income and non-competitive countries with low per capita income (5). Countries in the first group--for example, United States, Canada, United Kingdom, and Australia--tend to be more developed and generally are members of the Organisation for Economic Co-operation and Development (OECD). Policy makers in these countries are relatively more committed to World Trade Organization (WTO) agreements. The markup on international telecommunications service in these countries is also significantly lower than that in countries with lower per-capita income and less-competitive pricing. Countries in the second group--for example India, China, and Vietnam--tend to be either underdeveloped or developing and are generally not OECD members. Policy makers in these countries are less committed to promoting a competitive international telecommunications sector. The market structure of the telecommunications sector tends to be monopolistic or oligopolistic in nature [Bragga et al., 1998]. The markup on international telecommunications service is also significantly higher than that in more competitive countries. There are a few exceptions. Mexico, for example, is a relatively low-income country but has a competitive accounting rate; Israel is a high income, non-OECD country, but has a relatively high accounting rate. Figure 1 shows accounting rates between the U.S. and countries that belong to the low-income group or are non-OECD members for years 1995 and 2003. Figure 2 shows accounting rates, for years 1995 and 2003, between the U.S. and countries that belong to the high-income group and are OECD members.
Within the last few years, international calling from the U.S. to other countries has increased significantly, leading to a large imbalance between outgoing and incoming calls. Hakim and Lu [1993] concluded that the imbalance has largely been attributable to the structure of international accounting rate arrangements. Some, however,...
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