ICT and Development

Atanu has written three posts as part of a series [1 2 3]. Key points:

What exactly is the role of ICT in any economy? The answer can be succinctly stated as: It reduces transaction costs.

What, you may ask, is transaction costs? The answer is this: pretty much everything is transaction costs, with a little bit of physical stuff thrown in.

Transaction costs are ubiquitous. Consider what happens in any organization, say a car manufacturing firm. Cars are produced by people using machines to transform steel and other stuff. If you add up the costs — labor, material, and machines — the car would not cost all that much. But when you add the fact that there are other people employed by the car firm who have nothing to do with the manufacturing of cars, you realize that they represent transaction costs. For instance, you have managers, and accountants, and secretaries, and human resources divisions, … the list goes on. They all represent transaction costs. And the greater the transaction costs, the higher the cost of production. Why do firms exist? Because they reduce transaction costs.

Ultimately, one can explain pretty much all organizations as an attempt to systematically reduce transaction costs. Economies of scale, scope, and agglomeration themselves arise from the reduction of transaction costs.

Turning to the issue of developing countries and the use of ICT, the matter central to our discussion. Developing countries are resource constrained and therefore reducing transaction costs is a great way to stretch resources.

A high-quality always-on widely available affordable communications network is an absolutely essential part of the infrastructure for any economy, especially a developing one. Since this requires significant fixed costs and since there are immense positive externalities (network and consumption externalities), the market will underprovide communications networks. Therefore, the provision of a communications network should be subsidized for achieving the socially optimal solution. Conversely, taxing the provision of a communicatins network would have negative consequences. And that is what short-sighted money-grubbing developing country policy makers do: they tax the sector instead of subsidizing it.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.