The measurement of regulator independence in practice: Latin America and the Caribbean

Electronic copy available at: http://ssrn.com/abstract=2398519 1 The measurement of regulator independence in practice: Latin America and the Caribbean Miguel Angel Montoya Tecnológico de Monterrey Campus Guadalajara, Graduate School of Business. General Ramón Corona 2514, Zapopan Jal. México. Phone: +(52) 33 3669 3000 ext. 3700 E-mail: [email protected] Francesc Trillas Departament d’Economia Aplicada, Facultat d’Economia i Empresa Campus de Bellaterra de la UAB 08193 Bellaterra, Barcelona, Sapain Phone: +(34) 935814576 E-mail: Fra[email protected] Working Paper Series Centro Asia Pacifico Electronic copy available at: https://ssrn.com/abstract=2398519Electronic copy available at: https://ssrn.com/abstract=2398519 Electronic copy available at: http://ssrn.com/abstract=2398519 2 The measurement of regulator independence in practice: Latin America and the Caribbean Abstract We present case studies of the evolution of regulatory independence in practice for 23 Latin American and Caribbean countries in the telecommunications industry. Based on these studies, we construct two realistic indices of regulatory independence, which improve upon the measures of independence that have been used so far in the empirical regulation literature. We show that legal indices may give a partially distorted picture of the commitment ability of institutions and of the impact of independence on network penetration. Key Words: regulation, independence, strategic delegation, telecommunications. JEL Classification Numbers: L51 Electronic copy available at: https://ssrn.com/abstract=2398519Electronic copy available at: https://ssrn.com/abstract=2398519 3 1. Introduction Institutions matter in any field of economic policy. For example, the econometric treatment of the effects of good institutions on macroeconomic performance is a very active field of research, and is increasingly inspiring empirical research in microeconomic policies. Credible commitments are seen as one of the few recommendations that survive after many studies, although the recommendation leaves broad space to fill in the details. Levy and Spiller (1996) stress this point for the case of the regulation of privatized utilities. The analysis of the independence of regulatory agencies is part of this increasing interest on the institutions of economic policy. Independence is seen in the economics literature as a way to strategically delegate into an agent (the regulator) who is more reluctant than a representative government to expropriate specific investments. An independent regulatory agency is also seen as a way to attract professional experts and to stabilize policies in the presence of political volatility (see Evans et al., 2007). Even do the telecommunications sector, given that among all the utility sectors it is the one less prone to regulatory opportunism, given that assets are not as long lived. Work on the measurement of Telecommunications Regulatory Agencies (TRA) independence has tended to analyze legal or de jure independence but not independence in practice or de facto independence. Most, but not all, of the work on legal independence, has used dichotomous dummy variables, and these, as Estache et al. (2006, 12) point out, “may not capture the degree of independence”. Others use indices reporting about the legal framework: whether there is primary legislation requiring an independent regulator, how is it funded, to whom should he or she report, etc. 1 . By independence in practice or de facto independence we mean what actually happens en la relación real de las institutions con el resto del gobierno, and which could be measured (at least in part). In this paper, we report a first attempt to measure independence in practice (for telecommunications regulators in Latin America and the Caribbean), by undertaking case studies which show regulators’ turnover ratio and allow us to quantify their vulnerability. The empirical methodology draws from the literature on Central Bank Independence. In the rest of this paper, in Section 2 we present some background on the independence debate and regulatory reform in Latin America. In Section 3 we present case studies on 23 countries and build on these to construct indices of independence in practice. In Section 4 we present some basic, illustrative econometrics to put our measures to work. And finally we conclude in Section 5. 1 Stern and Cubbin (2003), Pargal (2003), Edwards and Wavermann (2006), Gual and Trillas (2004 and 2006) and Montoya and Trillas (2007) are representative of this line of research and acknowledge the need for indices of independence in practice. See also Gutierrez (2003a), Ros (1999 and 2003), Viani (2006), Wallsten (2003), Ai et al. (2004) and Fink et al. (2002). Electronic copy available at: https://ssrn.com/abstract=2398519Electronic copy available at: https://ssrn.com/abstract=2398519 4 2. Background The independence issue and the research agenda in regulation and monetary policy In infrastructure industries, the importance of institutions is mainly driven by the sunk nature of the investments needed, which is the source of a time inconsistency problem, highlighted by Levy and Spiller (1996), Shirley et al. (2000), Noll (2000), Noll and Shirley (2002), Gutiérrez (2003a), Levine et al. (2005) and Newbery (2000), among others. Many countries face major difficulties in inducing sufficient investment to meet demand at an acceptable cost. Hence, the role of the regulatory institutions is crucial in providing the credibility that will support the necessary investment flows. Falta completer más del hold up problem. The following picture of an extensive form game summarizes with the simplest of models the time inconsistency problem in regulation that gives rise to the “independence” solution: In the game described in the picture, first a firm makes a decision on whether to undertake a specific investment (for example, a fibre optic network) or not, and next the regulator, if the firm has invested, decides whether to fix a price that remunerates the investment, or to expropriate this investment (zero price). The payoff of the firm is P-I, whereas the payoff of the (consumer welfare maximizing) regulator is 2I-P Agregar más explicación. By backwards induction, if the firm has invested (I=1), the regulator will rationally fix P=0, and, anticipating this, the firm will not invest (I=0). Hence, in a subgame perfect equilibrium, there is no investment. More realistic settings would include many other real world details, but if there is no commitment and assets are sunk, underinvestment would remain a serious concern, perhaps in the form of bad maintenance or use of inefficient technologies. The expropriation of the quasi-rents derived from specific investment may not necessarily take the form of too low prices (revisar), but it can take other forms, such as F R I=1 I=0 P=1+ε P=0 (ε,1-ε) (-1,2) (0,0) Electronic copy available at: https://ssrn.com/abstract=2398519Electronic copy available at: https://ssrn.com/abstract=2398519 5 unexpected investment requirements, costly unanticipated quality improvements, or requirements to hire inefficient staff. Policy makers may follow this path and still benefit from the (already in place) investments. Ex ante, however, investors will anticipate this, and investment levels will be sub-optimal. The opportunity cost of reneging will depend on country characteristics, such as the institutional endowment, the degree of income inequality, or the nature of fiscal systems. In countries with skewed income distributions, governments pay a political price in terms of not satisfying the median (relatively poor) voter if they do not renege on promises made to remunerate specific investments. The problem may be alleviated by long term contracts, repeated interactions, reputational mechanisms or institutions that make credible that the P=0 path will not be taken. Historically, public ownership (the state internalizing the firm’s problem) has been a way to alleviate time inconsistency, but in the recent decades policy makers in many countries recognized that the costs of public ownership in terms of public funds and inefficient practices outweighed its benefits. Thus, the solution of privatizing and strategically delegating into a independent regulator, in a similar way as governments delegate into an inflation-averse central banker (see Levine et al., 2005). The need for experts in technologically complex sectors and the wish to give certainty in politically volatile regions reinforce the argument of independence. However, it is not axiomatic that independence will automatically yield good investment results, as there are other mechanisms to achieve commitment, to attract experts, and to avoid political volatility (revisar). For example, it is widely recognized that Chile has achieved a high degree of commitment in privatizing utilities through a very detailed and difficult to change legislation. It is an empirical question whether Chile is an exception that can be explained by a very specific political and institutional system that makes policy reversal very difficult, or whether it is an example that can be generalized. One problem of course is that independence does not solve, but it relocates, the commitment problem, which transforms itself into one of the government credibly committing not to undermine the independence of the regulator, which many countries have found very difficult, as we show below in Section 3. Then a potential measure of independence in practice is for how long do politicians respect the period in office of appointed regulators. And this is the research strategy we follow below. The measurement of independence in practice for Central Banks is quite developed in the literature. 2 In a definition of Central Bank independence, Walsh (2005, 10) states that “legal measures of Central Bank independence may not reflect the relationship between the Central Bank and the government that actually exist in practice.” Hence, it is important to develop indices of independence in practice. Commitment is actually more difficult to achieve in regulation than in monetary policy, given that slow asset depreciation and slow demand growth increase the length of the period during which governments have the temptation to renege on previous regulatory promises (see Levine et al., 2005). 3 2 See Eijffinger and De Haan (1996), De Haan and Kooi (2000) and Arnone, Laurens and Segalotto (2006). 3 Another difference with monetary policy is that the task of central bankers is more predictable and focused than the multi-dimensional job of a regulator. Electronic copy available at: https://ssrn.com/abstract=2398519Electronic copy available at: https://ssrn.com/abstract=2398519 6 As a proxy for independence in practice Cukierman (1992) uses the average time (or turnover ratio) in the position of Central Bank governor or chairman. As an example of the empirical literature on Central Bank independence, Cukierman clarifies that there is no obvious measure of actual (in practice) independence as opposed to legal Central Bank independence. He points out that this is not because it is not important, but “because it is difficult to find a group of systematic measures of actual independence when this diverges from legal independence” (383). He finds that the measure of legal independence and the turnover rate of the Central Bank governor differ by a larger amount in developing rather than in developed countries. A independent regulator is generally associated with attempts to reform regulation. Wallsten (2001, 8) argues that having a separate regulator is a sign of how willing a country is to reform regulation. There are at least ten studies about telecommunications regulation which measure legal (de jure) independence of the regulatory agency; five of them use dichotomous variables and the others use indices, but none of them measures independence in practice. In most (but not all) cases the measures that have been used so far have a positive impact on some performance measures (typically, network penetration, see Table 1). Table 1. Studies on Telecommunications Regulation and Telecommunications Regulatory Authorities (TRAs) Study Type Characteistics Data Sources Result Bortolotti et al. (2002) D Date in which the agency starts operating ITU The creation of TRA is non-significant in most estimations Edwards and Waverman (2005) I Twelve-component index EC and other TRA’ independence is significant by itself and interacting with privatization Fink et al. (2002) D Whether country has a separate regulatory agency or otherwise ITU Significant in most estimations Gual and Trillas (2004) I Nine-component index ITU, OECD, and others Legal TRA is nonsignificant. Gutiérrez (2003a) I Four-dimension index of regulatory governance Own research Positive and significant (at 1% level) in teledensity and efficiency (at 10% level) Electronic copy available at: https://ssrn.com/abstract=2398519Electronic copy available at: https://ssrn.com/abstract=2398519 7 Henisz et al. (2005) I Four dimension index ITU Deregulation is robust and significant Pargal (2003) I Six-dimension index Guasch (2001) TRA independence gives mixed results depending on the dimension Ros (2003) D Whether there is a separate agency ITU Positive and significant at 10% level for expansion and at 1% level for efficiency. Wallsten (2001) D Whether the country’s agency is Ander the control of a Ministry. ITU Non-significante at 1% and not always at 5% Wallsten (2003) D Whether the agency was established before privatization. ITU Positive and significant in three different regressions. D Whether the Regulatory agency states that it is independent relative to politicians. ITU Negative and significant at 5% D: Dummy; I: Índex The literature points out that it is difficult 4 , for developing countries, to find credible (and consistent over time) alternatives to an independent regulatory agency. Edwards and Waverman (2005, 25) argue, independence is more than a group of formal institutional rules; it also has important informal aspect which usually depends on centuries of legal and political traditions, cultural norms and individuals. We therefore think that more emphasis should be put on de facto regulatory independence. Edwards and Waverman (2005) suggest that there seems to be a negative correlation between formal (de jure) regulatory independence and independence in practice (de facto), because in those countries with weak informal mechanisms to ensure Regulatory independence, these are compensated with strong formal arrangements in order to persuade potential investors that there is no regulatory bias. 5 The drawback of legal indices or dichotomous variables which measure Regulatory independence is that they only reflect the state of legislation and events and politicians may leave the law aside. 6 An implication of this is that inferences derived 4 See Gutierrez (2003a) and Levine et al. (2005) 5 However, they do not measure empirically the practice of independence in their work. 6 An illustrative example of the problems of appointment, continuity and independence of commissioners in a regulatory agency is the regulation of electricity in India, where laws establish that commissioners’ appointments must be for 5 years with a compulsory retirement age of 62. Most commissioners are Electronic copy available at: https://ssrn.com/abstract=2398519Electronic copy available at: https://ssrn.com/abstract=2398519 8 from such data sets for telecommunications, electricity and other industries can give distorted pictures about the real effect of regulatory governance, as Stern and Cubbin (2003, 22) point out. Thus there is the need to enlarge the data bases to develop empirical work which test the effects of a well functioning regulatory regime using data about the process or practice of regulation, for example, as stated by Levine, et al. (2005, 469), by measuring “the percentage of commissioners or directors of regulatory agencies who end their term prematurely.” The empirical evidence on the effectiveness of Central Bank Independence support this notion. Pargal (2003) also points out, when explaining the limitations of his research, that lack of data made impossible to assess the importance of aspects of independence such as security and duration of the contract of the regulator. 7 2.2. Regulatory Reform in Latin America and the Caribbean Since the 1990s institutional reforms began in many countries, especially in Latin America. Many started by opening up infrastructure public monopolies to private investment. Some followed by a reluctant introduction of competition. Liberalization was accompanied by government regulation, be it through direct ministerial regulation or through a separate regulatory agency. 8 In the infrastructure sectors, private investment has increased the most in the telecommunications sector, and the Latin America and Caribbean region is the one that most private resources has attracted, with a peak in 1997. 9 In the subsequent years, however, private investment declined, reflecting according to some (see Easterly and Serven, 2003) the difficulties of creating regulatory safeguards to specific private quasirents in a context of acute social problems in increasingly democratic societies. This has coincided with major technological changes in telecommunications, eliminating the natural monopoly in many segments. Of the 23 Telecommunications Regulatory Authorities (TRAs) analyzed in this paper, 17 were created between 1977 and 1996; the remaining 6 since 1997. Para ilustrar lo anterior, Table 2 shows tour groups of indicators and indices for 23 countries of Latin America and the Caribbean: (i) Economic, (ii) Political, and (iii) Telecommunications performance. They are for the period 1990-2004 and for a subdivision of the period (1990-1996 and 1997-2004). En la dimensión macroeconomica de las politicas encontramos que los Economic indicators show that growth of income in the region has been moderate, being the figures for the second half of the period better than the first. The degree of trade openness has almost not varied for the 15 years of the sample. appointed around 60 years old, so that they can only stay in their jobs for 2 or 3 years, according to Stern and Cubbin (2003, 18). 7 See also Wallsten (2003) or Estache et al. (2006). 8 Some of the studies that analyze the process of institutional reforms are Gómez-Ibañez (2003), Eastely and Serven (2003), Kessides (2004), and Laffont (2005). 9 See Harris (2003). Electronic copy available at: https://ssrn.com/abstract=2398519Electronic copy available at: https://ssrn.com/abstract=2398519 9 Concerning economic indices, the Economic Freedom Index and the Overall Regulation of the Fraser Institute, show a region that is open to free enterprise, especially in the second period, and which shows an improving regulation of credit, work and businesses. 10 11 En la literatura de la independencia del Banco Central se señala que el proceso y los cambios políticos pueden estar relacionados con los cambios en las instituciones 12 . Para América Latina, political indicators in the region show a consolidation and normalization of democracy in the region. The tenure of presidents or prime ministers becomes longer, the average age of democracy increases, reaching 25 years for the period 1997-2004, and the Herfindahl Index of the Legislature remains stable. 13 14 The variable Political Constraints (PolCon III), measuring the probability of policy reversals, also stays unchanged. 15 16 As it is well known, the legal origin of the region is mostly French. 17 18 Telecommunications data show an expanding sector, with strong network growth as measured by telephone lines per 100 inhabitants, and also a more productive sector, as the staff that works in the sector as a percentage of the population has diminished. 19 20 10 The Fraser Institute creates, for 129 countries in the period 1970-2004, the data base about “Economic Freedom in the World”, with 29 variables, related to i) government size; ii) legal structure and safety of property rights; iii) access to safe money; iv) freedom of trade; v) regulation of credit, work and businesses. See Gwartney y Lawson (2005) and http://www.freetheworld.com/ 11 These indices have been used for the study of telecommunications by Gutiérrez (2003b). 12 See Cukierman (1992), Cukierman and Webb (1995) and De Haan y Kooi (2000) 13 These data come from the “Political Institutions Data Base” of the World Bank. See Beck et al. (2001) and http://www.worldbank.org/wbi/governance/other_data.html 14 For the study of telecommunications, this data base has been used by Li and Xu (2002) and Gual and Trillas (2004 and 2006). 15 The data base on “policy constraints” due to Henisz (2000) is based on four variables that help estimate the probability of policy reversal for the period between 1900 and 2004, for 234 countries. 16 For the study of the privatization, liberalization and regulation of telecommunications, it has been used by Henisz and Zeller (2001), Gual and Trillas (2004) and mentioned by Gutiérrez (2003b) and Jamison et al.(2005). Henisz, et al. (2005) create and use a data base with three variables to measure (formal) regulator independence, competition and privatization for 205 countries in the period 1960-1999. Both data bases can be obtained in http://www-management.wharton.upenn.edu/henisz/ 17 The data base reported in La Porta et.al (2002) informs about the legal origin of countries’ institutional systems. 18 In the study of telecommunications Gual and Trillas (2004) have used this data base. La Porta has also participated in the construction of a data base containing 20 variables about governance, institutions and social issues for 135 countries between 1960 and 2000 in Glaeser et al. (2004). These data have not been used in the study of telecommunications, to our knowledge. Both data bases can be found in http://mba.tuck.dartmouth.edu/pages/faculty/rafael.laporta/publications.html 19 The International Telecommunications Union (ITU) publishes its own data base with 83 performance variables for 150 countries. See http://www.itu.int/home/index.html. 20 The efficiency data have been used by Ros (2003), Gual and Trillas (2004 and 2006) and by Gutierrez (2003a). Electronic copy available at: https://ssrn.com/abstract=2398519Electronic copy available at: https://ssrn.com/abstract=2398519 16 the executive. 29 There are also changes in the regulator due to cabinet reshuffles, promotions or resignations to run for elected jobs. 30 There are also interesting cases of directors who resign to find a job in the firms that they previously regulated, what is known in the literature as “revolving doors phenomenon”. 31 These changes are not reflected in the index of inverse vulnerability, but a turnover rate or the frequency of changes would capture them. Other failure of the measure to take into account other forms of de facto influence of governments on regulators apart from removal of the agency head Another situation that is not measured in the vulnerability index are those cases where the head of the agency is a member of the Executive (vulnerability 0.00) but where the period in office in longer than the region’s average, especially in countries with high stability in their cabinets and presidential periods. 32 Practical Independence Index Junto con la información de fechas de inicio y fin real del director de las TRA también se obtuvo el motivo público por el que este deja el cargo. El índice de independencia en la práctica (PI) utiliza dicha información. Se cálculo de la siguiente manera: Se da un valor de 0 a la destitución o despido; de 1 a cualquier otro motivo de separación, excepto finalización de periodo establecido (cambio de gobierno, cambio en el gabinete, desaparición de la agencia); y de 2 cuando se finaliza en el periodo establecido. Este índice no interactúa con los cambios en la presidencia del país pero si permite valorar los la independencia en la práctica del regulador con respecto a los motivos de su rotación en el cargo. The Index of Independence in Law and in Practice (LPI1 and LPI2) 29 One of the most representative cases is Argentina, where there have been 11 directors of regulatory agency CNC (previously CNT) in our period, and we only counted three for the index. Only in the presidency of Carlos Menem there were 7 different directors. The local press also reflects other cases of political pressures to force the resignation of the director, like in Bolivia, Brazil and Panama; or resignations due to differences amongst cabinet ministers, like in Chile; or resignations due to a change in party membership of the head of the agency, like in Nicaragua. 30 We find examples in Mexico, where a director became cabinet minister; in Nicaragua and Venezuela two regulators became ministers. In Paraguay one agency head resigned to run for Parliament elections. 31 In Nicaragua a Director General became executive of the country’s subsidiary of the Spanish electricity firm Unión FENOSA. In Panama a former regulator founded and chaired a local and long distance telecommunications firm; in Colombia a former commissioner founded a consulting firm working for a cellular telephony firm; in Paraguay the government appointed the president of the agency as director general of the state-owned telecommunications monopoly. For an analysis of the revolving door phenomenon, see for example Che (1995) and Salant (1995). 32 Chile is the clearest of these cases. It has a low inverse vulnerability index, but the period in office of the telecommunications deputy secretary (the non-independent regulator, actually a cabinet minister) is longer than the region’s average. For our period, in this country there has been only one regulator that has not finished his period with the country’s president. Electronic copy available at: https://ssrn.com/abstract=2398519Electronic copy available at: https://ssrn.com/abstract=2398519 17 The vulnerability index has a limitation when it comes to its use in statistical analysis: it is an average figure for all the studied period, so that it only takes one value for the fifteen years of the period. This limitation causes poor estimation results. In order to overcome this limitation, we have created an Index of Independence in Law and in Practice (LPI1), which combines the time-varying Index of Regulatory Independence (IRI) shown in Montoya and Trillas (2007) 33 and the index of inverse vulnerability, through the combination of both indices ponderados al 50% cada uno. As a result, the LPI is an index that varies over time and that captures the independence in law and in practice, being the first index of this type in the literature. It takes into account the same information as IR1 (or indices that are shown in Montoya and Trillas, 2007, to be highly correlated with this, such as the one presented in Gutiérrez, 2003a), and it adds for the first time information about the degree of independence in practice relative to the political majorities. We also have created an Index of Independence in Law and in Practice (LPI2), which combines the time-varying Index of Regulatory Independence (IR1) and the practical independence index, through the combination of both indices. As a result, the LPI2 is an index that captures the independence in law and in practice, tomando en cuenta el motivo por el que el Director de la TRA abandona el cargo. Ranking Concerning the relative position of the 23 countries (see Table 4), algunos paíese que ocupan los primeros puestos en el indice legal (IR1) también lo hacen en los índices legales y en la práctica (LPI1 y LPI2), como Peru, Bolivia y Argentina (éste último, a pesar de su pobre desempeño en la práctica es debido a su correcto aspecto legal). In general, the countries occupying the first places at LPI1 and LPI2 can be explained by a correct legal framework, and the longevity of some of their directors, together with the fact that turnover takes places long alter political change y/o el director no es despedido. 34 The ten lowest positions are occupied by countries characterized by agencies that are part of a Ministry, and hence with little legal independence and hence independence in practice is meaningless (Chile and Surinam); or by rules prescribing that new governments must appoint regulators (Dominican Republic and Guatemala); or by a high politicization in the appointment of the head of the agency so that turnover is frequent (Nicaragua). Con respecto a cambios señalados en la clasificación de los países entre la medida legal y la medida combinada con la práctica, encontramos a El Salvador que tiene un correcto marco legal pero una baja independencia de facto, lo que hace que aparezca en 33 IRI has 10 components which measure legal independence, it measures: (i) Years of effective operation of the agency since its legal creation. (ii) Percentage of private ownership of the incumbent. (iii) Degree to which the regulatory agency has powers in the allocation of fixed telephony licences. Powers to (iv) set fixed line tariffs, (v) to allocate spectrum, (vi) in administering universal service. (vii) Budget independence. (viii) Term in office for regulators, (ix) Appointment rules; and (x) Dismissing powers. IRI is along the same lines as the indices of Edwards and Waverman (2006) and Gual and Trillas (2006). 34 For example, Bolivia had one of the regulators that stayed in his position for longer time, “surviving” to three different country presidents. Peru had one of the most stable agencies in the sub-continent, with only two regulators in 10 years. Electronic copy available at: https://ssrn.com/abstract=2398519Electronic copy available at: https://ssrn.com/abstract=2398519 18 la parte baja de LPI1 y LPI2. Por el contrario, Jamaica tiene un lugar bajo en la independencia de jure pero un alta clasificación en la independencia combinada con de facto. Table 4. Ranking IR1, LPI1 and LPI2. 1990-2004 average. # Country IR1 Country LPI1 Country LPI2 1 Argentina 0.647 Peru 0.581 Peru 0.947 2 Bolivia 0.487 Bolivia 0.577 Jamaica 0.793 3 Panama 0.459 Argentina 0.490 Colombia 0.774 4 El Salvador 0.441 Brazil 0.478 Bolivia 0.710 5 Peru 0.428 Venezuela 0.468 Argentina 0.590 6 Brazil 0.422 Jamaica 0.460 Panama 0.563 7 Paraguay 0.416 Honduras 0.443 Venezuela 0.557 8 Chile 0.400 Mexico 0.415 Belice 0.550 9 Ecuador 0.387 Paraguay 0.408 Paraguay 0.508 10 Nicaragua 0.371 Colombia 0.385 Costa Rica 0.485 11 Costa Rica 0.370 Panama 0.380 Mexico 0.448 12 Venezuela 0.314 Belice 0.350 Brazil 0.411 13 Belice 0.300 Barbados 0.265 Nicaragua 0.385 14 Honduras 0.286 Ecuador 0.260 El Salvador 0.354 15 Colombia 0.281 Trinidad and T 0.240 Trinidad and T 0.340 16 Trinidad and T 0.279 Uruguay 0.227 Chile 0.333 17 Barbados 0.264 El Salvador 0.221 Barbados 0.299 18 Jamaica 0.253 Chile 0.200 Dominican R. 0.258 19 Dominican R. 0.249 Costa Rica 0.185 Uruguay 0.227 20 Mexico 0.229 Nicaragua 0.181 Guatemala 0.225 21 Uruguay 0.187 Dominican R. 0.125 Ecuador 0.193 22 Guatemala 0.183 Guatemala 0.091 Honduras 0.143 23 Surinam 0.047 Surinam 0.023 Surinam 0.023 Source: Montoya & Trillas (2007) and Author’s calculations 4. Basic Econometrics The purpose of this section is to use the index constructed in the previous section to perform similar exercises to those that have been carried out with legal indices of regulation, so that the performance of both types of indices can be compared. To analyze the impact of independence on telecommunications performance, the general model we use can be expressed as: Yit = Β1it + Β2X2it + Β3X3it + … Xkit + μit (1) where Xit = (X2it , X3it , … XKit) are the explanatory variables, including an independence index (IR1, LPI1 or LPI2) and control variables. Β = (Β1 ,Β2 , … ΒK) are their respective parameters and μit is an error term. We use individual fixed effects for the 23 countries. Electronic copy available at: https://ssrn.com/abstract=2398519Electronic copy available at: https://ssrn.com/abstract=2398519 19 The error term is modelled as: μit = μi + νit (2) where μi denotes non-observable individual effects and νit denotes the remainder of the residual. The performance dependent variable Yit in equation (1) are fixed telephone lines for every 100 inhabitants, obtained from the International Telecommunications Union data base. The indices IR1, LPI1 and LPI2 are our main explanatory variable of interest. Along the lines of other work in this field se espera que la expansión de la red se vea potencialmente afectada por la estructura económica y el desempeño sectorial. Para esto se incluyen las variables de control: para la estructura económica se usa el GDP purchasing power parity per capita (GDPppp) como medida bruta de su estructura económica y sus recursos. Como aproximación del desempeño sectorial se utiliza el Trade (exports plus imports as % of GDP). We obtained those variables from the data base of the World Bank. We expect that an increase in income per capita and trade are associated with higher demand for telephone services. 35 Table 6. Parameter Estimate for Main Lines per 100 Inhabitants. 23 Countries. 1990-2004. Fixed effects Regressors 1 2 3 IR1 6.784* t 9.40 LPI1 6.350* t 9.91 LPI2 3.447* t 7.63 GDPppp 0.003* 0.003* 0.003* t 10.08 10.17 9.52 Trade 0.038*** 0.045*** 0.055*** t 1.34 1.60 1.86 Country dummies Yes Yes Yes R-sqr 0.77 0.78 0.80 N-obs. 345 345 345 Notes. * statistically significant at 1%. ** statistically significant at 5%. *** statistically significant at 10%. 35 Gual and Trillas (2004 and 2006) find that the correlation between the equally weighed index and the one derived from principal components analysis is above 0.9. Based on this, in the rest of this study we use equally weighted indices, although recognising that there may be some residual multicolinearity between the original variables. Electronic copy available at: https://ssrn.com/abstract=2398519Electronic copy available at: https://ssrn.com/abstract=2398519 20 We estimate a Linear equation by OLS with fixed effects 36 Using IR1 (1), LPI1 (2) and LPI2 (3). For the 15 years and 23 countries of our sample, Table 6 shows that higher independence is associated with higher network expansion. In all equations the coefficient for independence is positive and with high values (3.45-6.78), and the t ratio is robust to heteroscedasticity 37 . The results confirm those reported in most of previous studies 38 . Los datos confirman que la independencia bien medida tiene un impacto positive y significativo (no sé si insistir en que el coeficiente de IR1 es el mayor) GDP per capita and Trade are a positive and significant determinant of network expansion, but the magnitude of the effect is low: a one thousand dollar increase in income per capita is associated to a very small growth in the network. The results for those variables coincide with those obtained by Ros (1999 and 2003) and Gutierrez (2003), suggesting that the income elasticity of fixed telephony demand is quite low after some minimum threshold is achieved. 5. Conclusions Telecommunications privatization was widespread in Latin America and the Caribbean in the 1990s. Coinciding with or immediately after privatization, regulatory agencies were created in many countries. Many of these agencies were given some degree of legal independence from government, to facilitate commitment not to expropriate sunk investments. One problem of course is that independence does not solve, but it relocates, the commitment problem, which transforms itself into one of the government credibly committing not to undermine the independence of the regulator, which many countries have found very difficult. Independence in practice improved over time, especially since 2000, but some countries’ governments encountered serious problems in committing to preserve regulator independence. This is the first study that measures independence in practice. We obtained detailed information about the practice of independence in 23 Latin American and Caribbean countries between 1990 and 2004, and constructed with this information two indices of independence that combines legal and practice issues, borrowing from the methodology used in the Central Bank Independence literature. EVALUADOR TRES SUGUIERE: “the LPI index shed some lights about the efforts governments must do in order to provide stability to the regulatory environment and so this could also strengthen in the conclusions and recommendations.” 36 Wooldridge (2006) señala que cuando la unidad de observación es una unidad geográfica grande (cómo estados o naciones), no se pueden tratar a las muestras como muestras aleatorias de grandes poblaciones. Indica que los Efectos Fijos (EF) son adecuados para tratar con datos de panel ante muestras de países. 37 We used year dummy variables without significant changes in the results. 38 Like Gutierrez (2003a) and Ros (2003). 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