Trevor Allen with Silvia Prina, Dept. of Economics

Macroeconomic Effects of Cell Phones in the Developing World

The project will estimate the macro-economic effects, in terms of annual GDP growth, of mobile-phone penetration in developing countries. Telecommunications networks can have various beneficial effects on economic efficiency, such as easy dissemination of price information and reduced risk in transferring remittances. Fixed land-line telecom networks have been very slow to expand in poorer nations, whereas mobile-phone usage has grown rapidly in the past decade. The work will be based on a 2005 article by Waverman, Fuss, & Meschi in which a 10% increase in mobile penetration was found to cause a 0.59% increase in economic growth. However, the paper’s methodology casts doubt on the results. Waverman et al. used the generalized-method-of-movements (GMM) econometric model, utilizing lagged land-line penetration as an instrument variable (IV) for mobile penetration. However for several analytical and mechanical reasons this approximation is inaccurate, leading to potential bias in the IV estimators; mobile phones are frequently used in developing countries as a substitute for fixed-line communication, not as a complement. This project will attempt to reduce estimator bias by adapting GMM or using different models, testing all regressors for endogeneity (two-way causality), and/or developing an alternative exogenous instrument as a proxy for mobile penetration. Depending on the availability of data, closer analysis may performed on a small number of nations as case studies representative of the developing world as a whole. If time permits, further research into the impacts on additional impacts of increased mobile-phone coverage may be explored, such as changes in foreign direct investment (FDI), remittance and migration patterns, etc.