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Volume 24, Number 1
January 2004

Iraq's Phone Monopolists
D.W. MacKenzie

With the passage of time, the nature of post-Saddam Iraq becomes clearer, as does the Bush administration's lack of commitment to free-market principles. One example of this exists in the new Iraqi communications industry. The Iraqi communications ministry, headed by Haider Jawad al-Aubadi, has granted licenses to three mobile phone companies in Iraq. Asia Cell consortium will supply mobile phone services in northern Iraq. Orascom and Atheer Tel will supply these services in central and southern Iraq respectively.

These companies bid for licenses from the Iraqi Ministry of Communications, paying $5 million and posting $30 million in bonds for two-year licenses. Thirty-five companies made more than 100 bids for these licenses. This bidding for licenses does, of course, represent competition among rivals to service customers. There are, however, several questions we should ask. Is competition for licenses a necessary part of servicing Iraqi consumers? Might there be some other reason for licensing other than to service Iraqi consumers?

Some would no doubt argue that we need government to provide, or at least regulate the supply of infrastructure. Some goods, like roads, security, communications, and sanitation are public goods or natural monopolies. The government must play a role in the efficient supply of these goods because markets fail to deliver them efficiently. A private communications industry might never emerge or result in monopolization.

Minister al-Aubadi indicated that this might be the case in recent statements: "This is an important day for Iraq. Iraq badly needs the mobile system to enhance the security of the country." Further, "I see communications, though part of the service sector, as of paramount importance to consolidate security and boost economic activity. . . . The top priority of my ministry is to restore telephone communications and reconstruct the ravaged telephone exchanges so that the network is open and ready within a month or two."

The idea that mobile phone services are a public good that requires public supply is clearly false. Over the summer Batelco spent $5 million setting up a mobile phone system in Baghdad. This company did this in the midst of continued violence and without any formal licenses or permission by US-led authorities. Those who run this company recognized a profit opportunity and acted upon it, despite some risks.

Given the recent war in Iraq, it might have seemed that the greatest threat to this venture was from terrorism or civil unrest. The real danger to it proved to be political, as the Baghdad market for mobile phones has now been assigned to a regional monopoly. The authorities ordered Batelco to cease its operations in Baghdad.

Iraqis also have other options for communicating. Internet cafes have sprung up all over Baghdad. This all happened over the summer even though the regulatory authority over communications in Iraq only came into effect in early September 2003.

Since the private sector does not need licenses to supply a modern communications system, what purposes do these licenses serve? Some might argue that competition over communications services could be chaotic. Private businesses might interfere with each other's efforts to service customers. Such problems have existed in the past. In America, the Federal Radio Commission (the forerunner of the FCC) was legislated into existence during the early days of radio to regulate the use of radio waves.

Economist Ronald Coase examined this episode in early US radio and found that private companies faced some problems in competing over the use of radio waves, but were sorting these problems out themselves. As Coase explained, there are transaction costs in private markets. Costs to negotiate and enforce contracts lead to some problems in defining and enforcing property rights among private interests. This can cause private interests to interfere with each other's efforts to supply services to customers.

However, private institutions emerge to reduce transaction costs and solve these problems. Coase found that private interests were managing to develop business practices that enabled private radio stations to provide services to customers. These solutions were not perfect, but public regulation does not bring about perfection either.

The same logic applies to Iraq today. Private industry was already delivering communications services to Iraq before the Iraqi Communications Ministry began to limit market entry in this industry. Given the short time before authorities came on the scene, one could hardly argue that private industry had been given enough time to show how well it could work. The fact that private industry emerged so quickly in postwar Iraq indicates that this industry might have been highly competitive, and consequently relatively efficient in servicing customers.

As for the true purpose of this licensing, it has limited competition. Now that there are three regional legal monopolists, these firms are in a position to charge prices above competitive levels. This will likely result in a loss to Iraqi consumers, as monopolists clearly gain at the expense of the public that they serve. (Monopolistic pricing does not always result in large losses to consumers.)

However, there is something else to keep in mind. There is a real cost from competition for licenses. Businesses that lobby for these licenses must expend resources in doing so. Also, the money spent on licenses will go to political elites, who may provide little more than the "service" of granting permission to private industry to sell communications services. Increased profits to the winning firms will therefore be partially dissipated by their expenditures on lobbying. When you add in the cost of resources expended by the firms that lost in their bids for licenses, these costs mount.

Competition over political privileges wastes resources. Not only do government monopoly privileges result in high prices for consumers, they also result in investment in unproductive activities. These costs will accrue over time as mobile phone companies in Iraq renew their licenses, as required by political elites.

The new Iraq will have a modern phone system for the first time, but it will be controlled by an old-fashioned, rent-seeking, regulatory system. The politicization of communications in Iraq is a bad sign for the future of this country because its miserable past also resulted from political forces. Under Saddam Hussein, the government controlled most of industry. This resulted in widespread poverty and horrific tyranny. A democratic Iraq may avoid the tyrannical oppression of the old regime, but when has a democratic regulatory state ever delivered economic efficiency?

Examples of regulatory authority being subverted to serve narrow business interests abound because narrow interests have an edge in all political processes. The Bush administration has demonstrated a proclivity for favoring special interests over free competition in this, and many other instances.

President Bush has declared his intention for a Marshall Plan for Iraq. His actual plans for Iraq are quite different. The Marshall Plan entailed some token spending on "rebuilding" West Germany, and left the actual reconstruction of West Germany to private interests in a largely competitive environment. The principal fault in West Germany's development was in leaving too large a role for the public sector. Bush intends to spend large amounts of American taxpayer money while he helps the Iraqis to commit similar kinds of errors.

Iraq's new mobile phone monopolists will, it seems, be a part of business as usual in Iraq. The new regime in Iraq is well on its way to restricting competition in communications, and will likely do so in many other areas of the Iraqi economy. While it is always possible for things to change in Iraq, it will become more difficult for this to happen as special interests become more entrenched with the newly emerging regime.

Of course, the nature of this regime is still unknown. Hopefully, there will emerge within a new Iraqi leadership some who learned a lesson from the past abuses of the Baathist regime of Hussein. One thing is certain. The Iraqis will learn little of the merits of free markets from President George Bush.

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D.W. MacKenzie teaches economics at Ramapo College (dmackenz_2000@yahoo .com).

Further reading: Mancur Olson, The Logic of Collective Action (Harvard University Press, 1965); R.H. Coase, "The Federal Communications Commission," Journal of Law and Economics (1959); H.C. Wallich, The Mainsprings of the German Revival (Greenwood Publishing, 1976); Jude Blanchette, "The Failure of the Social Market."

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