How can Latin America go digital? The role of both telecommunication regulation and institutions

Institutions and Development

Long-term investment is driven by certain, adequate and trusted rules and institutions. Business press publish everyday statements by companies on future plans (or the cancellation of them) after certain regulatory decisions or institutional reforms. However, the empirical evidence is relatively thin when it comes to the strength impact of rules and institutions on investment, the specific rules and institutions that matter the most, or the interactions of these factors as, for instance, a good government or regulator could set de facto an optimal functioning of markets that could compensate for inadequate rules. Admittedly, isolating the effects of policy changes on investment decisions is challenging, given the lack of reliable data and the multiple factors that can have an impact.

A recent research (Jung and Melguizo, 2020) aims to fill part of this gap and shed some light on the role of regulation and institutions on telecommunication investment in Latin America during the last decade. Indeed, as the Latin American Economic Outlook 2020 put it, the region should go digital, and a necessary condition is to increase telecommunication investment. Latin America should invest USD 161 billion until 2025 in order to achieve just average high-income levels of digital connectivity ( Mason, 2019). This would represent adding USD 61 billion dollars over current trends, roughly a 1% of regional GDP, in times when fiscal accounts show historic fiscal deficits due to the impact of the economic recession and the stimulus packages approved. In fact, a comprehensive digital transformation strategy à la OECD would well double that figure given the need for complementary investments in R&D, hard infrastructure (e.g. energy), education and skills.

Therefore, our main policy assumption is that this big investment effort required to close the digital divide in Latin America cannot arise without significant improvements in the region’s macroeconomic and industry frameworks driving up private investment. As shown in the seminal paper by Alesina et al. (2005) for OECD economies, regulatory context is a crucial factor for investment decisions, finding that the more heavily regulated the sector is, the worse are the incentives for investment. In turn, contributions like Henisz and Zelner (2004) or Andonova (2006) highlight the relevance of institutional quality due to the long temporary horizon that conditions the industry decisions.

The empirical analysis uses Alesina et al. (2005) theoretical model and relies on an original dataset built for this paper, covering 15 Latin American countries – which account for nearly 90% of the region´s population and GDP - for the period 2007-2017. [1] The dependent variable is a CAPEX series, constructed from data from ITU World Telecom / ICT Indicators database.  The quality of the regulation is measured using the Public Policy and Regulation pillar from the Development Index of the Digital Ecosystem (CAF, 2017). Institutional quality is proxied by World Economic Forum Global Competitiveness Index (WEF, 2018). To identify those countries that exhibit “good” regulation, we built a dummy variable that takes value of 1 if the respective observation is above the yearly median of the series distribution, and zero otherwise. A preliminary graphical analysis using CAPEX per capita provides evidence that countries with better regulation and institutions are the ones with larger investment levels in the telecommunications sector.

Focusing on the econometric results, having a “good” institutional quality contributes to counteract partially a “bad” regulatory environment. Intuitively, an adequate institutional framework with public consultations to gather the view of all stakeholders would allow a better implementation of the regulation. Or the possibility of accessing to an independent justice system would make possible for stakeholders to challenge harmful interventions from regulatory agents. The same is true for “good” regulatory frameworks in presence of “bad” institutions, as an investment-friendly regulation for telecommunications (e.g. eliminating red tape) might compensate the uncertainty driven by weak general governance.

When “good” institutions and regulations are present simultaneously, the positive effect in investment is much stronger in terms of magnitude and significance of the coefficient. These results are robust to the addition of further control variables and specifications (e.g. including taxes or inputting a faster depreciation rate), and to alternative estimation methods (e.g. instrumental variables).

Opening up rules and institutions measurement, results suggest that “good” institutions cannot compensate the negative effects on investment of an inadequate cybersecurity and piracy control, and only weakly if competition is low, suggesting these areas should be prioritized in the regulation agenda. On the institutional front, keeping the aggregate regulatory variable while individually introducing the institutional sub-components, “good” regulation cannot compensate a weak property rights regime nor lack of security, advising to improve these institutional features as a priority according to the business sector in Latin America. Again, in all cases, the stronger positive effect is found in cases where the institutional and regulatory subcomponents are good. [2]

As usual, these results should be taken with caution given the limited sample size, the aggregation of telecommunication investment figures, or the lack of reliable estimates of additional key drivers such as industry taxes. However, we are convinced this research contributes, at least partially, to sustain what academic, policy makers and even the press state, i.e. Latin America can go digital and accelerate its productive transformation if rules and institutions are improved, preferably both together.

1. The database covers  Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Mexico, Nicaragua, Panama, Paraguay, Peru and Uruguay.

2. See the full version paper for estimates of the impact of additional regulatory and institutional features, such as regulatory maturity, ethics and corruption fight, presence of undue influence and government efficiency.


Alesina, A., Ardagna, S., Nicoletti, G., & Schiantarelli, F. (2005), Regulation and   investment”, Journal of the European Economic Association 3(4), 791-825.

Andonova, V. (2006), “Mobile phones, the Internet and the institutional environment”,  Telecommunications Policy 30(1), 29-45.

CAF (2017), Metodología del Índice de Desarrollo del Ecosistema Digital. Caracas. (2019), Nuevo Marco Regulatorio para la Convergencia. Report prepared by Analysis Mason.

Henisz, W.J. & Zelner, B.A. (2004), “The institutional environment for telecommunications investment”, Journal of Economics & Management Strategy 10(1), 123–147.

Jung, J. & Melguizo, A. (2020), Rules, Institutions, or Both? Estimating the Drivers of Telecommunication Investment in Latin America (September 22, 2020). Available at SSRN:

OECD/CAF/ECLAC/EU (2020), Latin American Economic Outlook 2020. Digital transformation for Building back better. Paris.

World Economic Forum (2018), The Global Competitiveness Index dataset 2007-2017.

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