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Small Entrepreneurs in Developing Countries, Mobile Phones Can Be Path Out of Poverty

Author: Terra Lawson-Remer, Fellow for Civil Society, Markets, and Democracy
April 22, 2009
Huffington Post

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At the G20 meeting last month the international community pledged 1.1 trillion to combat the global economic crisis, but the intended beneficiaries of economic development initiatives have a better idea: they're buying mobile phones.

In Fiji, mobile phones now allow any small scale subsistence fisherman with a boat to turn himself into a successful surf or dive trip operator, breaking a monopoly once held by high-end resorts with communications infrastructure. Tourists can ring individual boatmen - whether the boatman is in his village or out at sea fishing - whenever transport is needed. And text messaging is virtually free. This means that valuable seafood catches don't rot. Last month I was spearfishing with a skillful local Fijian who caught more than he and his family could possibly eat in a week, but he didn't have a freezer. The solution? He texted his relatives in a village a few hours away, asking them to pick-up some of the fish. (The relatives had an icebox.)

Throughout most of the global south, particularly in rural areas, the penetration of telephone landlines is limited. For example, in India only 3.5% of rural residents are on the grid.

Limited communication makes commerce extremely difficult for small aspiring entrepreneurs: after all, when potential customers have no way to reach you, business is quite slow indeed. But installing landlines is expensive (often impossible in remote areas) and can take months or years. Mobile phones, on the other hand, are spreading faster among average Indonesians, Fijians, Indians, and Kenyans than the latest ring tone in a high school cafeteria. The number of mobile phone subscribers has tripled in developing countries over the last five years, according to UNCTAD (Information Economy Report, 2007.)

A rigorous study released earlier this year by the Indian Council for Research on International Economic Relations (ICRIER) found that Indian states with 10% higher mobile phone penetration enjoy an annual average growth rate 1.2% higher than those with a lower mobile phone density. This implies that if the state of Bihar had the same mobile penetration rate as Punjab, then Bihar's growth rate would be 4% higher.

Kenya remains on the brink of political implosion since election related violence last year, but Safaricom Kenya could teach the U.S. a few lessons about affordable and efficient mobile phone service. Last year I walked into a supermarket in Karen, a neighborhood on the outskirts of Nairobi, to inquire where I might purchase a cell phone. Ten minutes later I walked out with a brand-new Nokia. The cost - including an hour of local outgoing calls, free incoming calls from anywhere in the world, and virtually free text messaging - was US$50. No yearly contract, no monthly charges, no minimum minutes per call, and most importantly, no waiting, hassle, or credit checks. I was ready to join Safaricom's advertising staff.

Safaricom recently introduced a new service that allows users to transfer money by text message. The recipient just visits a Safaricom agent and provides a PIN code to withdraw the cash. High costs and even higher bank account eligibility requirements have historically barred the vast majority of Kenyans from access to the formal banking system, but text message money transfer serves essentially like an ATM account. And now workers in cities can send cash home to relatives in rural areas without risking robbery on arduous bus trips, and engage in long distance trades that woul have been too risky before. The affordability and availability of mobile phone service means that 54% of Kenyan adults now have access to a mobile phone.

In Indonesia, a country of 250 million people, there are 110 million mobile phone subscribers. Bali is now full of independent taxi drivers whose mobile phones allow them to make arrangements directly with customers; and individual motorbike owners can rent their bikes straight to tourists. An inexpensive new 'handphone', as Indonesians call them, costs US$35, approximately three to four weeks average wages. Not an insignificant sum. Still, the number of subscribers is increasing at the rapid rate of 10% a year, putting Indonesia on track to have complete market saturation (like most of Europe) within the next ten years. And the first purchase when people take-out microcredit loans? Often a handphone.

Instead of funding more oil pipelines that bring dubious economic benefits to the majority of a countries' population, we should be expanding mobile network coverage to poor and remote regions, and getting handphones into the hands of those who need them most but can afford them least.

Expanding network coverage requires holding spectrum auctions, so that the mobile providers who can do the best job for the least cost win out. Auctions also give cash strapped governments a source of revenue, and prevent businesses from paying-off corrupt politicians in exchange for sweetheat deals. The tighter the spectrum squeeze the more broadcasting towers required (driving costs higher), so companies should implement pricing policies that encourage text messaging, which uses miniscule amounts of bandwidth. And taxing profits rather than revenues will promote network expansion to low population density rural areas where the fixed cost of building enough broadcast stations is high.

It may even make sense to give phones away to households who could not afford them otherwise, or to heavily subsidize phone purchases. Making inexpensive mobile phones available to the poor is a three run triple.

First, the really poor, living on a dollar or two a day, don't have the capital to buy a phone even at today's bargain prices. If mobile phones are to be a rung on the ladder out of poverty, the bottom billion needs a boost to get a toehold on that first rung. Second, network effects magnify the economic growth impact of mobile phones when penetration exceeds a critical mass of 25%, and free phone giveaways could dramatically increase teledensity in areas yet to reach this threshold level. And third, increasing the number of subscribers raises profitability for phone companies, so will promote network expansion in regions where it wouldn't pencil otherwise.

Of course, mobile phones are no panacea. They cannot cure malaria, fix broken education systems, or end rampant corruption. These are large challenges that require collective, coordinated responses by governments and the international community. But mobile phones are already doing what economic development practitioners of all ideological persuasions are continuously championing: they are breaking the economic stranglehold of elites with access to capital, and giving poor entrepreneurs a chance to build their own businesses and be their own bosses. It appears that the best seed yet of 'grassroots development' may be a mobile phone chip.

This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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