Telecommunications Investment and Traffic in Developing Countries: The Effects of International Settlement Rate Reforms

In 1997 the FCC ordered sharp decreases in international settlement rates (bilaterally negotiated telecommunication rates) between the U.S. and other countries. Developing countries, which received about $35 billion in net settlement payments from U.S. carriers between 1985 and 1998, claim that payments finance telecom investment and that reduced rates, and therefore payments, will harm investment. Using a panel dataset of 179 countries from 1985–1998, I find settlement rates negatively correlated with international telecom traffic, suggesting that reduced rates will stimulate traffic. I also find no evidence that payments finance investment as measured by telephone penetration and telecommunications equipment imports.