The telecommunications sector has been a dynamic force in globalization. It is certainly a driving factor in the economy of the late 20^th and 21^st centuries. As new technologies enable people to interconnect with the rest of the world and businesses conduct their multinational transactions 24 hours a day, telecommunications is there to provide that service. Although this is true for the developed world, telecommunications infrastructure becomes a problem in the developing world.

Both developed and developing countries have gone through privatizing processes in their telecommunications sector in order to improve service and interconnectability. Though developing countries might have different reasons for privatization, such as erasing external debts and hopes for obtaining more FDI, the improvement in service might simultaneously help bring them into the global economy. This is true for the region of Latin America where countries are looking to see where they can fit in the new economy. Since it is known that a more efficient infrastructure is important, Latin American countries have looked privatize their State Owned Enterprises (SOEs) following suite of several developed countries.

This paper will first look at the theory of privatization and the different factors that are involved in the process. In the next section, the telecommunications industry will be examined as it is in Latin America and how it’s role has changed since new technologies have been introduced in the globalized economy. It will take special interest in mobile telephony segment and its ever-increasing role.

In the third section privatization of telecommunications Latin America will be studied and its characteristics. Two cases, those of Mexico and Brazil, will be examined regarding their economic factors, political factors and their style and process of reform. Finally, a comparison of the two countries methods of divestiture will made along with the amount of modernization that had occurred as a result of privatization in the last section.

"Privatization is defined as the transfer of assets and service functions from the public to the private sector" (Manzetti 1999, 1). In the early 1990s, The Economist, a prominent magazine, described privatization as the ‘sale of the Century…a policy that in 1980 seemed adventurous to some and unworkable to everybody else… is now economic orthodoxy worldwide’ (Manzetti 1999, 1). Privatization has been the most controversial policy issue dominating the political agenda of many countries around the world for nearly a decade, and by the mid- 1990’s it was progressively gaining momentum. A pro-privatization consensus was consolidated among the industrialized countries and, by the late 1980’s, most of the OECD countries had committed to privatization to some degree. In these countries, many argued that public ownership had created shortcomings in efficiency and investments since these firms operated out of reach from the market and too much government intervention. When this trend began in the developing world in the early 1980’s, the enterprises selected for divestiture were typically small and operated in competitive markets. Firms of this description had fallen into government hands for a variety of historical or accidental reasons, and there was no compelling reason for state ownership of movie theaters, bakeries, restaurants, or factories that produced simple manufactured goods (Ramamurti 1996, 1). "The academic foundation for these beliefs was the school of the ‘new political economy’ that based its assumptions on neo-classical microeconomics." (Clifton 2000, 120). There has seemed to be a common drive to implement privatization in developing countries, however individual governments have pursued privatization policies in diverse styles, at different paces, and with distinct objectives.

There are no hard and fast rules about how rapidly a privatization program should take place, however there is a consensus that it should not be so fast that firms are not restructured prior to the sale. Nor should it be so slow that potential investors perceive the government as indecisive and decide simply to invest elsewhere (Clifton 2000, 121). As for the design of a privatization program some advisers including the World Bank, recommend that small and medium sized companies should be sold first, so that the government can gain experience in selling, and avoid making mistakes when it comes to privatizing the large companies. Until about 1987, despite any rhetoric to the contrary, the privatization trend in developing countries was confined to small firms of this sort in the periphery of the public sector (Ramamurti 1996, 1). Some governments became more ambitious, including the outright sale of large state-owned enterprises that dominated their markets, however few governments actually transferred control of those firms to the private sector. Even Chile initially privatized small firms returning them to their former owners, which were earlier nationalized. Only Britain had privatized large enterprises, such as telephones, gas airline, and road transportation companies by 1987 (Ramamurti 1996 1). Privatization usually provokes opposition from parts of society, this is seen usually from workers and unions, since it is often accompanied by the cutting back on the workforce in attempts to streamline the company.

There are three broad categories that are separate yet are intertwined that define why a government might privatize (or not) a SOE. These factors are political, macroeconomic, and microeconomic circumstances that each country must take into account in order to achieve the right privatization goals they would need. "Governments must balance political and economic considerations at home with the external pressure placed upon them by international agencies and institutions which may attach new loans to commitments to privatize." (Clifton 2000, 123).

There are two major arguments for the microeconomics approach. First, efficiency was a very important factor for states to nationalize the many phone companies in the past. "During periods of disturbances to the international economic system, such as the world wars, severe recessions, oil shocks, and debt crises, developing countries found themselves cut off from physical and financial capital" (Molano 1997, 9). Foreign ownership only increased the problem at those times. In order to make a smoother and more efficient method to their telecommunications operation, many countries decided to nationalize their telephone companies. Of course, political considerations had to be taken into account, but efficiency was used as the principal argument.

The second microeconomic effect was the radical changes that began to occur in telecommunications technology during the 1970s and 1980s, changes that reduced the economies of scale of the years earlier. To further this, the use of computer technology allowed the explosion of high-margin information services that could be implemented by telephone companies. During harsh times and changing technologies, developing countries lacked the capital resources and the expertise to implement these crucial changes that could help revitalize the economy. At the same time, from the developed world, major telephone companies where looking elsewhere to buy franchises. This created high demand for SOE’s.

Much microeconomic literature has focused on the inefficiencies of SOE’s and the role of the state. Some authors argued that studies of privatization programs should be performed only through microeconomic analyses of the divested firms (Molano 1997, 9). While others argued that the evolution of the SOE’s hindered competition and encouraged inefficient operations. Yet another author, Beca (1991), offered another argument. He suggested that it should be a comparative basis, examining the companies history, its performance, investment, and technology (Molano 1997, 10).

Therefore, micro level literature on privatization suggested two things. It argued analysis should be at the firm level. Secondly, efficiency was a criterion used to evaluate a candidate for privatization and lastly it suggested a format to examine the industry on a comparative basis.

"The consensus among most researchers working on company-level issues is that the macroeconomic impact of privatization should be realized by the increased efficiency of the firms sold" (Molano 1997, 10). Fortunately, not all social scientists researching the course of privatization are in accord with this assumption.

One group that studied the budgetary dynamics and how it effects the privatization argued that there was a strong link between privatization and fiscal performance in developing countries (Molano 1997, 11). This group lead by Vernon, argued that countries selected target companies for privatization based on the price those companies would command on the international market (Molano 1997, 11). While others suggested that the fiscal debt was actually caused by the SOE’s inefficient ways and large borrowing causing financial crisis in many developing countries.

Lastly, another argument from a group of researchers examined the role of the international financial lending agencies, especially the multilateral ones. Several authors have argued that debtor nations adopted privatization programs to demonstrate their commitment to stabilization programs. Several authors have even gone to say that agencies such as World Bank IMF and the Interamerican Development Bank, used various methods to pressure developing countries to sell their SOE’s (Molano 1997, 12). The mechanism used by them would be through conditionality clauses that stressed privatization.

Political Approach

Most scholars have argued that privatization is a mostly economic issue. "However, no matter how sophisticated economic analyses may be, they have been unable to explain why for most of the 1970s and 1980s privatization, while making perfect economic sense in many countries failed to occur" (Manzetti 1999, 1). This is because the problem is from another source. Financial institutions, practitioners, and economists agree that probably the one of the most important issues of privatization is the political one. Manzetti stated that according to an investment report of a very respected financial institution, the real issue is that the decision to privatize is a political one. Adding to that the report stated ‘In all cases, the world of politics and, more importantly, the ability to deal with it, has played a crucial role’ (Manzetti 1999, 1). Carlos Montoya, the architect of the Peruvian state divestiture program, said that privatization was essentially a political issue; which requires a clear political plan and a strong presidential leadership. Manzetti included that a Brazilian economist, who worked on the programs under the Sarney and Collor administrations, mentioned similar statements by admitting that the decision to privatize rests ultimately upon political calculations, as politicians are the ultimate decision makers. Even the World Bank, in a recent cross-national study surveying the success and failure of privatization in Eastern Europe, Asia, Africa, and Latin America, claimed that factors other than economic efficiency, most important of these being politics, determine the nature, pace, and extent of state-owned enterprises reform (Manzetti 1999, 3).

Political science literature has attempted to identify which factors have been critical in inducing Latin American leaders to adopt privatization policies in recent years. Some argue the importance of international processes in creating conditions for external pressure, while others argue the tendency of many countries to use policies that were successful in other countries. Another theory is to underscore the power of neoconservative ideas, within which privatization is used as a means to reconfigure political alliances and to reduce the role of politics in shaping economic decisions. While others hypothesize that privatization can and is used as a strategy to privilege the goals of some socioeconomic groups at the expense of others (Manzetti 1999, 3).

As with economic theories, political scientists do not agree on which factors lead to privatization for various reasons. One reason is that privatization is a complex policy and includes various types of asset and function transfers from the public to the private sector. Secondly, privatization’s goals have shifted over time. Third, privatization is a policy that has occurred under widely different political regimes around the world.

Though there are political and economic factors that lead policy makers to opt for privatization, there are also many barriers that have slowed the process to privatization. If barriers to privatization in general were substantial, then the barriers to privatizing large firms with high market power seemed even greater. Countries differed in size and in the composition of their SOEs, but in most countries a dozen or so large firms that dominated their markets were often thought of as natural monopolies or strategic monopolies. Such enterprises were telephone companies, electric utilities, the airlines, railroads, heavy industries, and natural resource firms. The problem facing the policy makers in developing countries was answering this question: To whom could the government sell such firms? Local buyers lacked the funds to buy them and, in many cases, lacked the expertise to manage them. On the other hand, foreign buyers might have both the expertise and the capital, but the sale of a "strategic" firm with high rents to foreigners seemed unlikely (Ramamurti 1996, 2). After all, in many instances, especially in Latin America, governments had taken over firms in these sectors because foreign ownership had been considered unacceptable or undesirable. Adding to this would be the joint opposition to privatization from workers, union leaders, government officials, and other current beneficiaries to be stronger and better organized in cases of large SOEs.

Where privatization would succeed it would be held in check by regulation. In comparative efficiency studies private enterprises seemed superior to public enterprises in competitive markets, but in noncompetitive markets, governments gained more from injecting competition into the sector or improving the incentive effects of regulatory policies than by privatizing ownership.

Telecommunications are increasingly recognized as a key component in the infrastructure of economic development, yet telecommunications services in most developing countries continue to fall far short of the needs of the people. The result is that development is constrained significantly throughout these economies. In fact the imbalance between telecommunications development in industrial and developing countries was the focus of global attention in the 1985 Maitland Commission report, which noted that "in most developing countries, the telecommunications systems is not adequate even to sustain essential services." (Saunders 1994, 3) The developing countries have about 75 percent of the world’s population and 16 percent of its product, but only 12 percent of the total numbers of telephone main lines. (Saunders 1994, 4) Of the more that 435 million lines in existence in 1988, about 50 million were in the developing countries of Africa Asia and Latin America, while 386 million were in the industrial and NIC countries of North America, Europe, Asia, and Oceania.

Telephone density also varies widely among and within developing countries. "A ratio exists between countries such as Argentina and Uruguay which have more than 10 main lines per 100 persons, and countries such as the Central African Republic, Ethiopia, Madagascar, Nigeria, and Tanzania, which have just 0.1 to 0.2 lines per 100 persons" (Saunders, 5). Also, in third world countries, telephones are concentrated in a few large cities, and much of the population lives in areas with little or no service. The difference being demonstrated by the telephone density of industrial countries that is fairly uniform across each country whereas in developing countries telephone density is several times greater in the main cities than in provincial towns and rural areas.

Lack of demand does not explain the historically low level of investment in the telecommunications sector in most developing countries. In the third world demand for telephone and more advanced services typically far exceeds the supply, and the number of unmet applications for telephone connections often exceeds the number of existing lines. In fact, new applicants frequently wait two to five years and sometimes more than ten to obtain service (Saunders 1994, 9). Also, applicants are rarely accepted in areas where service is neither available nor even planned in the near future.

Technology has always been the underlying driving force behind the evolution of the telecommunications sector. It has also created the excitement of globalization where countries could cut costs across many sectors with the new telecom technologies. Developing countries could also see these new technologies such as satellite, digital, and cellular technologies actually "leapfrog" to more physical capital-intensive landlines in areas that are difficult to penetrate or where congestion is common. Sharp changes in telecommunication technology began to occur in the 1970’s and 1980’s with the development of digital electronics, the increasing application of computer technologies to telecommunications, and the development of very wide band systems. This lowered equipment costs, increased the capacity of individual units, improved reliability, and lowered the amount of power used. Innovations, especially in microwave, satellite, and fiber-optic systems, have dramatically reduced the unit costs of medium and long distance transmission (Saunders 1994, 38).

The costs of switching equipment declined from an average of $300-400 per connected line in the early 1970’s to $200-300 per line in the late 1980’s (Saunders, 40). Thus real cost per line was cut in half each decade. By the early 1980’s, digital long distance telephone exchanges were available at about half or less the price of analog units with similar capabilities. Towards the end of that decade the global production of analog switching equipment had been largely phased out.

In the 1990’s telecommunications and globalization were buzzwords. The spectacular development of this sector in the 1990’s reflects the best and worst of globalization. "On the positive side, there are the impressive benefits that this process can yield, such as the way it has turned telecommunications into a powerful engine of growth, largely because of the enormous amounts of FDI this industry has received" (Calderon, 173). During the years 1990-2000 the number of telephone lines increased from 520 million to 970 million, international traffic rose from 33 billion minutes to 110 billion minutes, and the number of mobile telephone subscribers increased form 11 million to 650 million (Calderon 2001, 173).

Outside the industry, too, actual benefits are significant. Modernization of telecommunications can lead to major improvements in the systemic competitiveness of Latin American countries and enable them to integrate more rapidly and effectively into the international economy. Developments like these have created hopes that the large gaps separating developed and developing countries may be narrowed. Though the gap still is large, there is progress being made. According to 1999 data, developed countries telephone density ranges from 38.1% to 64.5% for main lines and from 21.9% to 44.9% in the case of mobile telephones, while in developing countries range 2.4% to 7.6% for main lines and from 1% to 8.1% for mobile telephones (Calderon 2001, 174). Mobile telephony is growing rapidly in both MDC’s and LDC’s. However, the difference is that in the former it supplements fixed line connections while in the latter it is steadily taking the place of fixed lines.

However, some recent developments have shown negative sides to globalization in regards to telecommunications. This is associated with financial instability and risk-taking by economic agents and governments. Similar to what happened to the "dot coms", some of the largest transnational telecommunications companies have lost more than 50% of their value (Deutshe Telekom, British Telecom, AT&T, and World Com) (Calderon 2001 174).

Three main aspects of globalization process of telecommunications will be covered in this section. These three aspects are technology change (which will be discussed in this section), increased competition and transnationalization of the largest companies.

"Telecommunications industry is clearly identified with the "new economy" as it played an important role in modernizing and boosting the world economy towards the end of the twentieth century" (Calderon 2001, 175). Petrazzini (1996) discovered that traditional services are experiencing modest growth when compared with new services, such as those specializing in Internet access, call-back services, wireless and mobile services.

The Internet’s rapid growth now challenges dominant methods of handling network design, protocols, pricing, regulation, and content. Telecommunications companies underestimated the Internet’s ability to chip away at their business (Petrazzini 1996, 20). New technologies have given PC’s and the Internet the ability to enter voice communication. New software, some with free services and others, who charge monthly membership fees, allow PC-to-PC and net-to-phone capabilities. The services are not as perfect as regular line connections, but they do provide an alternative and the technology is continually improving. Though it is universally available to the whole world, much of the world’s population does not have access to computers for it to actually become a major threat to basic connection yet.

Call-Back services were spawned because of the gap between public owned telecommunications costs and rates used by competitive international telecommunications services. Introduced in 1990, the call-back system works by routing calls through another "mediating" country (usually the United States), and calls are charged as if they originated in the mediating country (Petrazzini 1995, 22). The call-back service created by competition, cut by half or more the long-distance and international service charges users pay in some SOE dominated markets and uncovers the arbitrarily high prices in that segment of the market. Call-back services have captured large shares of many developing country markets. For example, Argentina’s international services operator, has lost more than 30 percent of the international service market to call-back operators (Petrazzini 1995, 22). The call-back service has prompted competition of international services in many countries and the service will diminish considerably when domestic operators cut their prices.

Mobile service has been the most visible change in telecommunications industry, almost everywhere you go someone is talking on a cell phone. Mobile telephony is reaching its third generation technology in a period of 10 years. The first generation is analog, which can only transmit voice and not data. Second generation, which we are currently utilizing, is capable of transmitting both voice and text over digital networks. The third generation, the next stage in the development of mobile networks, will overcome the bandwidth constraints of GSM and other digital mobile networks. There are currently three competing technologies trying to reach the 3G level. These include GSM (global system for mobile communications), TDMA (time division multiple access) and CDMA (code division multiple access). The main difference between these lie in the fact that GSM is an integrated cellular system while the other two are techniques for sending multiple signals down a single line simultaneously (Calderon 2001, 177). GSM has its advantages for its geographic reach yet it is much more expensive than the other two alternatives and its speeds are not as fast. TDMA is historically important because it provided the easiest transition from analog to digital, this gives it a lot of popularity among the providers making it the dominant technology in North America and Latin America. CDMA, according to some is the better technology of the three because it would be cheaper to implement, have greater capacity and a simpler route to 3G technology (Calderon 2001 181). By late 2000 there were 637 million digital operating technology subscribers in all. The GSM option accounted for 69.1% TDMA for 10% and CDMA for 12.9% of all subscribers world wide (Calderon 2001, 181). The GSM system is dominating in Europe and Asia while in North America and Latin America, TDMA and CDMA are the strongest options. "Competition among telecommunications companies, both in the race towards 3G and in the struggle to establish the different mobile telephony technologies, could drive the industry towards levels of risk and uncertainty that would threaten the stability of the world economy"(Calderon 2001, 182). That is why it has been important that a multilateral international institution be set up to channel this competition towards compatibility in order to bring greater benefits to users. The importance of these cellular technologies is that they are entering the Latin American market much faster than new mainlines installed. Greater bandwidth for mobile and cellular telephones further enhances substitutability that they have on fixed telephone lines. Furthermore, the competition that is already available in most of the Latin American Countries since they were generally the first to be open to competition during the privatization programs there. This competition usually adds to better service and lower prices. The number of cellular users in Latin America has jumped from 100,000 users in 1990 to 39 million in 1999. This makes one for every four telephone users in Latin America a cell phone subscriber. Paraguay and Venezuela are the only countries in the region to show a higher ratio of mobile phone subscribers than fixed line subscribers.

The telecommunication industry is being restructured in most countries as part of a process of major economic reform. The idea that telecommunication services are not just a social service and a necessary cost of doing business, but rather a valuable economic resource, is only beginning to be recognized. Traditionally, telecommunication development was seen as a consequence of general economic development, but now it is being recognized as an integral part of economic development in both developed and developing countries and, therefore, worthy of more serious attention from policymakers. Privatization has been seen as a solution to problems of efficiency, investment, technological upgrading, and new service development in developed countries. Its success has led to widespread acceptance of a view that privatization is the solution to the problems of telecommunication reform in developing countries like those in Latin America. However conditions in developing countries are very different and require more examination. Since the privatization policies pursued differed in pace and style between developing countries Latin America’s countries would also differ. "In Argentina, privatization was pursued at a rapid rate once President Menem assumed office in 1989 and, largely due to this speed, there was insufficient time to restructure Argentine companies prior to privatization" (Clifton 2000, 121). Taking a much more cautious approach was the Brazilian government in order to achieve different objectives and to learn from others’ approaches. Which companies came to invest in the telecommunications companies also differed in location and type of service they would provide in a consortium of other international companies.

In the region, two waves of telecommunications industry FDI can be identified. The owners of the telecommunications companies that came to invest in the newly privatized telecom sectors in Latin America were European. The most prominent operator being Telefónica de España that invested largely in Argentina, Brazil and Peru. Another prominent operator is Telecom Italia that has entered Brazil. At this first wave they started out in fixed line telephony then expanded their presence in three ways: by entering other segments (mobile, Internet, data); by taking full ownership of local affiliates that they did not control outright: and by moving into other markets, particularly Brazil (Calderon 2001, 225). The second wave of international operators that came to invest in Latin American markets were those that wished to enter with new digital and cellular technologies only (which has seemed to be the hot topic in the region). "Vodafone’s entry into the Verizon Wireless venture (with the recently merged Bell Atlantic and GTE) seems to give a certain logic to GTE’s holdings in Latin America (which works with CDMA technology), considering Vodafone’s involvement with Iusacell (Mexico), a mobile telephony company controlled by Verizon." (Calderon 2001, 225). SBC in partnership with Telmex and Bell Canada International have created Telecom Americas with the very purpose of integrating their Latin American platforms, especially in mobile telephony, on the basis of TDMA technology (Calderon 2001, 225). This suggests that Latin America could have another chance to channel telecommunications sector investments towards objectives that accord with their own national priorities.

The International Telecommunications Union (ITU) put together a report that concluded that to achieve effective privatization there must be effective separation of the basic functions of policymaking, operational management, and regulation. In many cases some variables have been separated but not all three together. Therefore, not all the important goals of that country were achieved in a successful divestiture. Latin America is very similar in this aspect yet each country has different goals, methods, and histories in the evolution of their telecommunications industry.

Although each country has made the reform process to accommodate its own political, economic, and cultural circumstances, three themes emerge from analyses. "The exalting of telecom sector reorganization to the powerful dynamic of economic reform programs, the lack of universal service, and the inadequacy of current regulatory mechanisms to police a competitive environment of private telecom operators" (Noam 1998, xxvii). Throughout Latin America, economic reform was the basic policy platform that the telecom sector reform was launched. With this interrelationship, it contributed to the apparent irreversibility of telecom reform and the momentum driving continual change. Economic crises of the 1980’s varied though they had a similar impact of causing governments to run out of credit sources to finance state operations including its SOE’s. State owned telcos may have been sources of revenue for the state but in order to pay off debts governments chose to sell their monopoly telecommunications operators that promised high bounty. Governments also received political credits from bringing in foreign investors (Noam 1998, xxvii). Noam and his contributors argued that reform had less to do with remaking the sector than to do with lack of cash to fund the government functions and the demands of creditors and potential lenders. While Molano (1997), demonstrated more empirical data that political factors where the case of reform in Latin America.

Secondly, the descriptions of outdated, inadequate telecom facilities, with low teledensities in each of the countries of Latin America, show the need for basic telephony. Not only did large users stand to benefit from liberalization, but the promise that privatization of state owned telecommunications companies would make it possible to have access to a telephone service, created pressure from residential and small business users.

Lastly, the lack of regulation of private telecommunication operations in Latin American countries is a common concern among many authors. Governments have promised to regulate telecom in order to achieve certain benchmarks of quality to improve modernization yet little has been done. Thus, there were cases in which service prices remained high (Argentina), or controversy arose over the justification for the high price paid to support the dominant national operator (Mexico) or investment declined because of declining rates (Chile) (Calderon 2001, 198). The switch from a public to private monopoly doesn’t necessarily mean better service or improvement it may merely be that the enterprise might become more efficient in its costs.

However during the years that most privatization has taken place in Latin America (1990 – 1999) the telecommunications industry made considerable progress in the main countries of the region. "In almost all of them, the number of main and residential lines per 100 inhabitants doubled over the period, while in the case of Chile it almost tripled" (Calderon 2001, 187). The regional average of teledensity of Latin America is 7.19 per 100 persons however this figure is not a good indicator for each country because of the concentration of basic telephone services (two-thirds) are located in Argentina, Brazil, and Mexico (Noam 1998, xi). Mainly because these nations are the largest economies in Latin America and they receive more FDI than other nations in the region. However, since they show different processes and evolutions of privatization of telecommunications in Latin America, they can be analyzed to show general outcomes of the region.

Mexico’s network has been in the hands of several ownership arrangements since its inception in 1878. The history Mexican telecommunications can be divided into four phases (Cho 1998, 116). It was foreign owned until 1950 when the government began to Mexicanize the company. The second phase, which is called the period of Mexicanization lasted from 1950 to 1972. In 1972, the government controlled Telmex until 1990 when it passed to a trust of Mexican and foreign investors. The forth period, which represents 1991 to the present, depicts the current private ownership. The Mexican policy towards foreign investment has turned 180 degrees from the time of New International Economic Order (NIEO) platform, which placed emphasis on national ownership to that of administration of Salinas and De La Madrid (Chavolla 1997, 150). According to Chavolla (1997), under these administrations, Mexico led the way for relaxing foreign direct investment restrictions and as a surprise to many, led the way within North America with respect to telecommunications. "While Canada and the United States have limited foreign investment to 20 and 25 percent (in indirect investment in a parent or holding company), respectively, Mexico has set the limit at 49 percent for basic telephone services and has no restrictions on enhanced services"(Chavolla 1997, 151).

However what makes this case interesting is that Mexico was the first to demonstrate that giant state firms could be privatized in a developing country. Of course, Argentina’s privatization program was paralleled to that of Mexico’s and even more ambitious in scope, however Mexico’s state firms were larger in size and were privatized with more sophistication (Ramamurti 1996, 72). At the heart of this privatization plan set by President Carlos Salinas de Gortari was the giant telephone monopoly Telmex which consequently sold for 6 billion dollars, four times the amount raised by his predecessor that privatized 723 companies.

This case will look at why and how privatization of telecommunications took place in Mexico, as for the outcomes of this historical process will be covered in the last section.

Many factors have influenced the changes in Mexico’s policies towards telecommunications since the mid- 1980s, not the least of which are external forces (Griffith 1998, 174). Mexico’s adherence to the GATT in August 1986 put pressure on them as with the rest of the members, for free trade in services within GATT motivated price restructuring for telephone service and allowed entry of alternative international carriers in 1989. By doing this, SECOFI, the Secretariat of Trade and Industry made it easier to import information technology and enhanced Mexico’s competitiveness even before NAFTA (Griffith 1998, 174). According to Ramamurti (1996), the most important factor was Salina’s conviction that Mexico had to transform itself from an inward-looking, state-dominated protected economy to an outward-looking, privatized, open economy that would take advantage of its location next to a large, rich neighbor. Mexico’s most significant economic policy decision of the 20^th century has been to set up a regional trade agreement with the United States and Canada. NAFTA as it is called is a model agreement for opening of trade in services and its substantial contribution to competitiveness in North America. Adherence to the policies of NAFTA would require Mexico to lift restrictions on competition and foreign ownership of services. Looking at Salinas’s actions before and during the privatization process, one could tell that his agenda was broader than the mere privatization of Telmex because he was making sweeping reforms in trade, FDI, and industrial policies. The choice of using Telmex as the number one signal to the world that Mexico was changing to fit that outward looking, open economy image is based on the fact that the company was big enough to call international attention, and that it was a fairly profitable company (Ramamurti 1996, 77). One person that was aware of the advantages of the privatization of Telmex was Salinas, as he was the government director on the board of Telmex during Miguel de la Madrid administration.

Another factor that probably got Salinas to privatize was the desire to reduce even further the government’s budget deficit, which had fallen from 17 percent of GDP in 1982 to 10 percent in 1988 (Ramamurti 1996, 78). "The government didn’t believe that it could finance the $2-2.5 billion per year that Telmex was estimated to need to expand the system at the projected rate of 12 percent per year, nor, did it believe Telmex could raise that kind of money internally or on its own credit" (Ramamurti 1996, 78). But why would the government want to sell a profitable company to receive a large one-time cash sum?

Telmex was profitable from a bookkeeping perspective because of the monopolistic market structure, which enabled it to keep rates high for international long distance service, despite its low productivity. "With respect to allocative efficiency, the monopolistic situation of Telmex enabled it charge long distance rates that were much higher than the marginal cost and the international rate." (Sanchez 1993, 151).

Source: Sanchez, 1993, 153.

As receipts grew, the subsidization of local service increased. To correct this situation, in 1986-90 the real prices for basic rent and measured service were raised 113.5 percent and 1,240 percent, respectively, and international long distance rates were lowered. Domestic long distance rates kept increasing in real terms, moving even farther from their marginal costs.

Cho (1998) hypothesized that the change in attitude towards telecommunications and privatization precipitated from the 1985 earthquake in Mexico City. The devastating 8.1 earthquake literally cut Mexico City’s communications with the rest of the world for several days and it took weeks for repairs to be made. Petrazzini and Cho both agree that the earthquake made a turning point of technical modernization of Telmex. "The most important aspect of the earthquake in relation to the Telmex privatization seems to be the way the accident could have affected the power-elite groups’ perception of the role of telecommunications and the importance of modernized telecommunications." (Cho 1998, 142). The discussion set by Cho doesn’t mean that an earthquake was the sole reason of privatization of Telmex, "however it can be easily suspected that the power and need of modernized telecommunications became deeply ingrained in the minds of Mexican power elite groups as well as those of the public." (Cho 1998, 143). The official record backs his theory: "the call for modernization has been the single most important factor in bringing telecommunications into the forefront of policy attention in Mexico since the late 1980s." (Griffith 1998, 166). President Salinas de Gortari stated in his 1988 presidential campaign "telecommunications will become the cornerstone of the program to modernize Mexico’s economy."(Griffith 1998, 166). The valid argument from the government was privatizing Telmex would allow it to expand faster while modernizing its network and services to include high-speed data transmissions, fiber-optic links, and digital overlay networks (Ramamurti 1996, 78).

What even furthered this call for modernization were the demands from users of Telmex’s services. Users provided aggressive campaigns for change in the telecommunications system in the late 1980s. "Their role as key players in defining policy was unprecedented; previously their interests usually had been subordinated to those of government agencies, the telephone workers’ union, and the service and equipment providers." (Griffith 1998, 174). For example, Pemex was allowed to set up its own private network. This, like other users along with various governmental secretariats, exerted pressure on the government to acknowledge the priority that was needed for modernizing the country’s telecommunications.

Selling any state enterprise involves two challenges, freeing it from the existing beneficiaries and getting private buyers to purchase the firm (Ramamurti 1996, 79). The biggest resistance to privatization in a state enterprise comes from its workers and unions. Those of Telmex were no exception, since they were among the best paid in Mexico. The telephone workers union (STRM) of Mexico put a great deal of influence on the ways the company worked but President Salinas with his knowledge of the company also knew how to earn the support of the workers. He used a carrot-and-stick approach. The carrot was promising that no worker would lose his or her job as a result to privatization. The stick was veiled threat that if the STRM didn’t go along with the policy, than Telmex would be privatized anyway, without protecting the workers based on earlier labor problems in other big SOEs (Ramamurti 1996, 80).

The second barrier that had to be overcome was to entice private buyers. This took most of the privatizers’ time, to make Telmex look profitable to investors. To begin with Telmex was a attractive company, it was run fairly well and profitable. Forecasts showed 12 percent growth for 5 years, while it had 1 million on a waiting list for main line services (Ramamurti 1996, 83). However efforts were made to make more attractive. The government raised prices sharply before privatization making profits increase every year from 1987 ‘til privatization took place. Secondly, they gave prospective buyers Telmex at a continued monopoly status in national and international long-distance for a period of six years (Ramamurti 1996, 84).

To fulfill the privatization objectives, they had to restructure Telmex’s capital and reorganize a few financial transactions (Sanchez,1993, 154-155).

Source: Data from Sanchez (1993) and Chavolla (1997)

"At the beginning of 1990, the government owned 56 percent of Telmex’s total equity, representing the totality of Telmex’s AA shares, while the remaining 44 percent, in the form of A shares, was owned by domestic and foreign private investors" (Chavolla 1997, 154). Five percent of the AA shares were exchanged for A shares, so that by June 1990 government owned AA shares were 51 percent and A shares were 49 percent (Sanchez 1993, 155). Next, a new series of stocks was released based from the capitalization of profits accrued in the first quarter of 1990. These new shares were called L series shares where for each A or AA share, 1.5 L shares were created. Therefore, the 51 percent of AA shares were once again changed to 20.4 percent of the new total equity. "With this restructuring, government owned all of the AA shares before privatization and 2 percent and 33.5 percent of the capital stock in series A and series L shares, respectively."(Sanchez 1993, 155).

As for the financial reorganization, the level of liquidity was increased; the company’s collection policy improved, and most of its liabilities were converted to long-term liabilities. Also Telmex’s debt with foreign banks was partially bought by the government. Then later repurchased the liabilities after obtaining $473.5 million in future income and selling $150 million in bonds, after all was done Telmex reduced liabilities and earned a profit of $200 million (Sanchez 1993, 156). On December 13, 1990, Telmex was sold to a trust comprising Grupo Carso a local conglomerate, and two foreign telephone companies, SBC International and a subsidiary of France Telecom bidding a total of 1.757 billion dollars (Calderon 2001, 191). "The consortium paid $609.8 million above the December 1988 market value of Telmex" (Chavolla 1997, 157).

In a second phase of privatizing Telmex, the government sold 1.745 million L shares or 16.5 percent of the company making an additional $2.27 billion from the sale (Petrazzini 1995, 121). In May of 1992 another 500 million L shares were sold, making $1.35 billion and on completion of these two sales the government only held 4.8 percent of Telmex.

By the third phase of privatizing in April 1995, the government owned 0 percent of the shares and Telmex employees held only 0.6 percent of shares. On January 1, 2001 the holders of L shares may be exchanged for one AA share, provided that the holder or purchaser is a Mexican or a trust with a majority of Mexican participation, among other restrictions (Chavolla 1997, 157).

In October 1990, the Reglamento de Telecomunicaciones (Telecommunications Regulation) and Telmex’s Concession Title (the legal document that specifies the terms of the company’s monopoly status) was modified in December of that year. (Chavolla 1997, 151). According to the new Concession Title, Telmex would have monopoly control over basic local telephone service until 2026 and over long distance services through 1996. The Concession also required that telephone service reach several expansion and quality goals by 1994. It required the new owners of Telmex to provide basic service in all communities with more than 500 inhabitants, automatic switching services for all communities with more than 5000 inhabitants, and two pay phones per 1000 persons.(Griffith 1998, 179). As for the quality goals, faulty line percentage had to decrease from 1.5 to .5 by 1994.(Chavolla1997, 153). Along with time required to repair faulty lines had to be shortened. Telmex is allowed to offer additional services such as cellular, radiotelephony, and to manufacture telecom, computer, and electronics equipment. As for cellular telephony, competition was allowed back when privatization occurred. However Telmex would have to relinquish its monopoly right on long distance service in 1997. By setting up a concession along with a regulating body the newly privatized company could not enjoy total monopoly status without meeting several criterion.

Privatization has been a hot topic in Brazil since the early 1980s. Two programs 1979 and 1981 had been initiated but both failed to produce any divestitures. In fact only 38 SOEs were sold from 1981 to 1989, none of which were symbolic big cases. "As the end of the 1980s approached, however, pressure began to increase the pace of privatization in Brazil grew" (Molano1997, 21). Until the mid-1990s, Brazil’s attempts to modernize and change telecommunications differed from those in other Latin American countries. In 1995, the new Cardoso government began transforming telecommunications, beginning with the removal of the legal monopoly of the Telebras companies. The first priority of the government was to liberalize cellular telephony, satellite telecommunications, data transmission, and value-added service so that these new technologies could bring better service to Brazil.

In November 1995, the government proposed a "minimum law" that was approved by both houses of the Brazilian Congress in 1996. This law regulated those four services and that privatization was not going to be a short-term objective like many other Latin America countries, except for cellular on the A-band. What has made the privatization process of Brazil different than other developing countries is two things, first privatization took place later than other telecoms, second the government was seeking and facilitating competition rather than a straight exchange of public to private monopoly (Wohlers 2000, 251).

Privatization in Brazil started later and has been a drawn out process in comparison to other processes. "Despite the strong economic pressures to privatize the firm, the government could not amass the political power to sell the company" (Molano 1997, 39). This is especially true for countries that are generalized to follow strong executive roles. Factors that kept Brazil from privatizing earlier are attributed to the long lasting military government (1964-1985) followed by weak executive power, and a new Constitution that was implemented soon after the new democracy was set up. This new Constitution set up in 1988, adopted exclusively public-controlled models for basic telecommunications operations including telephony, telegrahy, data transmission, and the other public services in this area (Article 21, subsection XI) (Wohlers 2000, 253). This meant that the recovery and modernization of the system continued to be carried out by a public monopoly, while other nations in the region were privatizing.

After two decades of military control the original political parties were rendered to a very weak state. After democracy was restored "For the most part, the political party system and the Congress were only hollow institutions with few links to traditional social bases." (Molano 1997, 40). Molano even cited that the Brazilian legislature was weakened in relation to the executive and that parties never adequately framed and represented the interest groups. The two presidencies during the late 1980s of Sarney and Collor show how weak political power was to implement privatization. Sarney’s two failed Cruzado plans only deepened the economic chaos but also strengthened the perception of the presidency and its ability to set policies. When Collor administration entered office in 1990 despite strong party support ran an aggressive and controversial program of policy reforms. "Collor realized that without the necessary congressional support to pass these programs, he would have to move fast" (Molano 1997, 43). Taking a different approach, Collor used decrees rather than introducing bills to pass new laws and even reissued decrees when Congress rejected them, a serious violation of the Constitution. This merely eroded the political support from Congress for Collor and his plans to privatize SOEs including Telebras and on September 29, 1992 he was impeached (Molano 1997, 44).

"The Cardoso government ushered in a redefinition of the institutional organization of Brazilian telecommunications centering on opening the market and implementing privatization" (Wohlers 2000, 254). Cardoso’s team put forth an amendment to the 1988 Constitution abolishing the state monopoly of telecommunications, which later was passed in 1996 in the lower house. However as a sort of loophole was interpreted as a "flexibilization" of the telecommunications monopoly, distinguishing it from a privatization of Telebras. (Wohlers 2000, 254).

A year later the General Telecommunications act was passed, opening the way to restructring and privatization of the Telebras system and creating the National Agency of Telecommunications (Anatel) (Calderon 2001, 194). When July 1998 rolled around privatization of Telebras began. When deciding how the sector was going to be reorganized, Brazil looked to experience of others in the region and decided that Universalization as with the immediate introduction of competition were stressed.

Subsequently and still prior to 1998 privatization, Telebras was broken into 12 independent companies: three local fixed line companies (Telesp, Tele Centro Sul and Tele Norte Leste), eight band A cellular mobile telephony businesses, and one long-distance company (Embratel) (Calderon 2001, 194). Most of the preliminary competition came from the many cellular companies that were made available. Between 1997 and 1998 10 B band cellular licenses were auctioned off for 10 different geographical regions and therefore could compete with the A-band companies.

In 1999, known as the Brazilian duopoly model, four basic telephony licenses were auctioned off to "mirror" the four basic telephony companies privatized earlier (Calderon 2001, 154). The three local mirrors (Vesper, Megatel, Global Village Telecom,) and one long-distance (Intelig) along with the original four could not compete outside their region creating duopolies in every region, except for the mobile companies (Wohlers 2000, 2). However the landline companies do not compete with the mobile companies so that the smaller mobile companies can achieve growth. This is extremely important when mobile phones are seen as substitutes of landlines and can take pressure away from the pent-up demand for landlines. From the end of 2001 restrictions will be taken away as to the number of licenses for the provision of basic telephony (Calderon 2001, 194). The total sell of basic telephony, cellular bands A and B reached a total of $26.655 billion (Calderon 2001, 195).

The last sales were for nine PCS mobile telephone companies at three different bands C, D, and E in 2001 where only licenses were sold in D and E for $1.32 billion. According to Anatel, full competition will initiate in January of 2002, which lets all carriers that want to extend their coverage outside their original areas were invited to submit proposals in July of 2001. Anatel also has promised a debate to release 3G technology as which will be reserved for a C-band license.

The importance of mobile segment is that it actually encourages more competition between fixed and mobile telephony, actually changing duopoly to four operators in one area. In Brazil where fixed line is an imperfect substitute for mobile, it is not expected that mobile subscribers will disconnect their mobile access to replace with a fixed line, especially when incomes are too low to justify two lines, they will more than likely keep the mobile access (Wohlers 2000, 4).

The Brazilian approach to privatization did start a lot later than most developing countries and especially for the larger Latin American countries. However the late start, Brazil did implement an innovative model undertaken in four steps to encourage competition and universality among providers, than to rush a privatization attempt.

The purpose of Mexico’s privatization program of telecommunications was to modernize its infrastructure and Brazil’s program was to modernize the infrastructure and improve quality of service by increasing competition in the process. Modernization and expanding service were several goals that Latin American countries wished to achieve through the privatization of their telecommunications companies. However was there any improvement from due to privatization? This chapter will look at the outcomes of privatization in Mexico and Brazil and if they achieved the goals they had set.

Modernization and progress can be assessed by looking at the increase in lines per hundred people and increase in additional lines and network along with digitalization of the system. There are also other indicators of performance in the telecommunications sector such as faults per 100 main lines, improved service, decrease in connection prices, and increased access through alternative sources such as cellular telephony.

Telmex has experienced more capital spending after its privatization, which has speeded the modernization of telecommunications in Mexico. Larger profits have also been seen after privatization occurred. For example in 1989 Telmex invested less than $500 million whereas in 1991 the year after privatization, investment was $2.75 billion. (Griffith 1998, 180). In fact the first six years after privatization, 1991-96, the total was $12 billion, including $1.3 billion for telephone equipment, $2.7billion for transmission equipment, $3.9 billion for switches and power equipment, and 3.7 billion for outside plant. (Griffith 1998, 180). Those investments were implemented in order to help satisfy some of the backorders for new service at the time of privatization and otherwise meet the requirements of the concession. Though more money had been invested for expansion and modernization since privatization, Telmex was able to achieve and even surpass the main performance criteria established by the Concession Title with 10.4 percent less than the $7.7 billion investment that had been planned for 1991-94. (Cho 1998, 198).

Telmex between 1991-96 spent $12 billion laying more than 18,000 miles of fiber-optic cable, increasing the number of telephone lines in the country by 66 percent, from 5.3 million lines to 8.8 million. (Griffith 1998, 180). However Telmex’s new foreign owners reduced cable-laying process costs by 48 percent by providing expertise in fiber optics. "By 1994, three years after privatization, Telmex had fulfilled and in some cases surpassed several of the goals in the Concession Title, particularly those related to network expansion and rural telephony" (Chavolla 1997, 158). The chart below demonstrates the growth in teledensity before and after privatization. According to the data taken, in the years 1987-1990 teledensity experienced 21% growth.

Source: Cofetel 2002 & Sanchez 1993.

While data after privatization and peso crisis of 1995 shows growth between 1997-June of 2001was 25% in teledensity. Service was expanded to 25,000 small towns and boosted the extent of the network’s digitalization from 30 to 90 percent. (Griffith 1998, 180). According to Cervantes (1999), since 1990 there has been an improvement in response time of two years to an average of 27 days to have a line put in. Pay-phone density has also increased to 3.3 per thousand inhabitants in 1999 which is 7 times greater than that of 1990.(Cervantes 1999, 3).

One goal that was not met during the first three years after privatization was quality of service. Although strides were made to improve service by opening 36 maintenance center, which reduced the wait time for connections and time required repairing faulty lines, "disruptions continued because of the obsolescence of a great portion of the company’s outside plant."(Chavolla 1997, 158). Service quality continued to draw complaints, particularly in Mexico City. "In 1992, Telmex averaged a million customer complaints per month." (Cho 1998, 200). For example, targets for calls answered by an operator in less than ten seconds were not met in 1991 and 1992, and neither was the target for reducing faulty lines, which caused Telmex to pay rebates to some customers in 1992.(Chavolla 1997, 158).

As for increased earnings, revenue in pesos increased over 115 percent from 1990 to 1993. "Helped by tariff schedules designed to allow it to generate cash for improving and expanding the system, in 1993 the company had a $2.7 billion net profit on $7.9 billion in revenue." (Griffith 1998, 180). As a result of privatization, both the government and the investors gained. The government made billions off the sale of its holdings in Telmex and in 1993 continued to make revenue in the form of telephone tax, income tax, value-added tax, and dividend withholding tax that amounted to 1.75 billion, estimated to be an increase over revenues before privatization.(Cho 1998, 201). As for the investors, they benefited from the sharp increase in stock prices after privatization.

The outcome of Telmex’s privatization has been largely positive. Investors and the government made substantial profits. The consumer clearly benefited from expanded service even though quality of service still remained poor. Another benefit that the consumer gains will come from the introduction of competition as it has already begun in cellular telephony and long-distance service in 1997. Telmex created more labor productivity as a result of privatization and was able to introduce modern technology more readily than before due to more foreign investment. Thus Mexico has and is continuing to accomplish its main objective to modernize the telecommunications sector and in turn modernizing Mexico.

Brazil conceived and is implementing an original approach to ensure a smooth transition from an infrastructure of state-owned monopolies to a market that will be fully open to competition in January of 2002. Because the late start and longer process in privatization and liberalization of its telecommunications sector, only time will tell how well its program is affecting expansion, service and modernization. However, progress has been made since privatization and implementation of competition in Brazil. Brazil’s method of privatization has proved affective because it’s objective of moving more rapidly into competition.

Strong growth has occurred in accessibility to telephones. For fixed lines, the number has increased from 1995 onward. The number of fixed lines in 1995 grew by 10.5%, 12.5% in 1996, and 14.1% in 1997, the year of privatization. The sharper increase occurs after the first phase of privatization and liberalization, for example 17.6% in 1998, 25.5% in 1999 and 39.9% in 2000 (Calderon 2001, 196). In 1998 fixed line connection was 11.48 per 100 inhabitants while in January of 2002 saw 21.93 fixed lines per 100 inhabitants. For public phones the numbers increased by 13.25% in 1998 and 25.6% in 1999. However the most growth has been seen in the mobile sector where competition was introduced first. Growth was 65.8% in 1997, 61.9% in 1998, 104% in 1999, and 52.2% 2000.(Calderon 2001, 196). These numbers demonstrate great efforts in expansion of services to the Brazilian population.

As for service, Charges for residential connections in Brazil decreased considerably. For example, in 1995 connection price was $1215 and in 1998 it dropped to $43 dollars. Business connections fared the same as residential connection charges. However, service still lacks as a fault per 100 mainlines have not improved much. Another problem with Brazil’s model of privatization is interconnection, since the government did not provide a framework for efficient and predictable interconnection charges between the competing companies.

Brazil set up a duopoly model to promote competition, however it is unlikely that it will be by any means a traditional duopoly model and may be better equipped to compete than many other countries because technology has changed the rules of competition. Fixed line telephones faces effective competition from the mobile sector.

The government made a hefty profit from the privatization of Telebras and the auctioning of multiple licenses as noted before. Competition has improved prices and expansion of telephone services. Though Brazil still has much to improve, it has made advancements since privatization occurred. The real test of the Brazilian approach will be in 2002 and 2003 once the markets fully open.

Latin America has witnessed its telecommunications companies undergo privatization processes during the decade of the 1990’s. For various economic, political, and social factors, countries have chosen to privatize their companies based on the specific needs of their countries. However Latin American countries have privatized their countries based on their specific needs. Whether it be crunching a governmental debt, modernizing the economy, or hopes to integrate into the global economy, the Latin American region has effectively and sometimes ineffectively privatized their telecommunication sectors.

There is not one perfect way to privatize these once thought strategic companies. However, privatization should not be so fast that a regulatory body cannot be set up, or that the company doesn’t have time to restructure properly. On the other hand privatization shouldn’t be too slow that it can’t command a great sum from investors.

Large European public owned companies were the first to invest in the newly privatized telecommunications companies of Latin America. Where as later investors in Latin America would tend to be a consortium of public/private international and local companies looking to invest mostly in mobile services and other additional services.

At any rate these foreign investors were able to improve the efficiency of the privatized telecommunication sectors of Latin America. Both Mexico and Brazil were able to expand and modernize their telecommunications sectors through their own distinct privatization processes. Mexico was able to command a high price for Telmex at privatization and even doing so in a short period of time. Brazil, on the other hand, taking a more cautious approach, took longer to privatize, but was able to make a huge profit on it’s sale of Telebras and other telecommunications licenses. So far both have achieved most of their goals except those dealing with quality of service. Telmex’s pricing is still distorted due to its exclusivity however it has improved somewhat from the public model.

I believe the Brazilian model will prove more efficient than that of Mexico because competition stressed rather than trying to make a single company competitive at an international level. Competition usually leads to better prices and services, and the former has been the case for Brazil, however the real outcomes are to realized within the next coming two to three years.

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