By Joseph E. Stiglitz* Senior Vice President and Chief Economist, The World Bank, Beijing, China, July 25, 1999
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It is a special pleasure for me to be here to address you today and to participate in the series of lectures organized by the Research Center for Regulation and Competition. We are helping to establish centers around the world to promote an understanding of competition and regulatory policy, and this is the first center in Asia (the other centers are in Argentina and Cote d’Ivoire).  We are very pleased to jointly sponsor the center with the Institute of Quantitative and Technical Economics of the Chinese Academy of Social Sciences.

The establishment of these centers, and the welcoming reception they have received, itself represents a major advance:  There is a growing recognition of the importance of competition for the success of market economies, and of the need for government action, both to maintain competition and to regulate industries where competition remains limited.  We have moved beyond the deregulation ideology of the 1980s.  To be sure, there were extensive abuses of government’s regulatory powers.  There were, and there remain, many instances were government regulation, rather than enhancing the market performance, contributed to economic inefficiency.  But we have also learned that inadequate regulation presents equal, and in some cases, even greater dangers.  One of the lessons emerging for instance, from the East Asia crisis is that badly designed financial sector liberalization can have an enormous cost.  But the problems involve more than just financial crises.  In some of the countries of Eastern Europe and the former Soviet Union, we have learned that without adequate capital market regulation, capital markets do not serve to mobilize capital, distribute risk, allocate scarce capital to its most efficient uses and ensure that those entrusted with capital use it well.  Rather, capital markets have become a forum for private rent seeking, with adverse effects as great as any seen in the arena of public rent seeking.  In the area of telecommunications, upon which I shall focus today, we have seen examples where privatization has not delivered its promises--and in some cases, telecommunications access in certain vital areas has actually been reduced. 

Competition and regulatory policy are vital for a market economy.  The fundamental theorems of welfare economics, the results that establish sufficient conditions for the efficiency of a market economy, assume that both private property and competitive markets exist within the economy.  Many countries—especially developing and transition economies—lack both.  Until recently however, emphasis was placed almost exclusively on creating private property and on privatizing public assets.  A well-designed privatization, where a good regulatory framework already exists, can raise enormous revenue as it increases services and lowers prices.  Brazil recently obtained $19 billion after a careful preparation of its privatization and significant progress in the definition of its regulatory regime. The low revenues obtained from the partial privatization in Russia demonstrate how poorly designed privatizations can turn over valuable national assets to the private sector for a fraction of their potential value.   In some countries, privatization has been followed by increases in the scope of telephone coverage and reductions in price.  In other countries, the experience of privatization has been more disappointing. 

What explains the differential effects of privatization?  In my remarks today, I am going to argue that competition should be the single most important principle for telecommunications reform and that it can play a critical (and until recently, unappreciated) role in sectors previously thought of as natural monopolies.  Competition provides the incentive for greater investment while it expands service, enhances efficiency and lowers prices.  Technological advances have extended the potential for competition.  In too many countries however, exclusive contracts and other, less obvious barriers to entry continue to support a single private or public monopolist.  But even once these barriers are swept away, regulation will still be necessary to ensure competition.

* I am indebted to Antonio Estache of the World Bank Institute and to Xinzhu Zhang of the Research Center for Regulation and Competition, Chinese Academy of Sciences for their assistance on this paper.  Responsibility for errors remains with the author.

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