Phone calls

by Biodun Iginla and Tamara Kachelmeier, BBC News and The Economist

Reports of the death of the phone call are greatly exaggerated

Dec 29th 2010 | From The Economist print edition

WHILE the computing cloud expands ever more, the humble phone call is in terminal decline, thanks to text messaging and the mobile internet. So, at least, say commentators in Silicon Valley. Some have already penned obituaries. “The phone call is dead”, read a recent headline inTechCrunch, a blog and currently the central organ of the high-tech region. But is it really time to hang up?

There is no doubt that landline calls are past their prime. The time people spend talking on a fixed telephone has gone down in recent years in nearly all rich countries for which the International Telecommunication Union has data. Yet in most, this fall is more than offset by the increase in mobile calls, according to a recent report by Ofcom, the British telecoms regulator (see chart).

Ofcom also found that cost, more than anything, determined how long people talk for and whether they prefer a landline or a mobile call. Should Germany’s rates for wireless conversation—currently twice the rate of landline calls—come down, people would certainly spend more than 112 minutes per month talking on handsets.

The strongest support for the notion of the disappearing phone call comes from America. Nielsen, a research firm, reports that the amount of time mobile subscribers talk has dropped to 700 minutes per month in 2010. That includes incoming calls. A survey by CTIA, a trade group, shows that the average length of a mobile call has dropped from just over three minutes to one minute and 40 seconds since mid-2007.

Less talking does not necessarily mean less phone use. According to Nielsen the number of paid texts per subscriber has grown rapidly over the same period, recently surpassing 700 per month. This is mainly thanks to the restless fingers of teenagers, who are also buying more smartphones—essentially hand-held computers that let them send messages via social networks. Facebook, the world’s biggest such network, recently announced that a third of its nearly 600m members access the service on their mobile phones.

Yet in Britain, where teenagers have been texting for longer, the spread of smartphones has not had the same effect, says Steve Alder, the general manager for devices at Telefonica Europe, which operates the O2 brand. British subscribers with smartphones talk 11% longer than owners of simpler handsets, Mr Alder says. The young are both more talkative and more text-hungry.

New technologies often fail to displace old ones. Research from the Kaiser Family Foundation shows that young Americans are watching more television even as they spend more time on the computer. And an old form of communication may stage a comeback in a different form. Skype, the internet phone service, is growing rapidly. In the first half of 2010 users racked up 95 billion minutes in voice and video calls.

Odds are that the conventional phone call will be just one of many forms of telecommunication. And for most people outside of Silicon Valley, where some entrepreneurs allegedly do not even know how to use their smartphone to place a phone call, it will remain the most important one for some time to come. That should be welcomed by all those who relish the gentle art of conversation—and dreaded by parents who pay the bills.

Economics focus

by Xian Wan and Biodun Iginla, BBC News and the Economist

What the North and South Koreans can learn from the reunification of Germany

Dec 29th 2010 | From The Economist print edition

SOUTH KOREANS dread the prospect of renewed fighting across the “38th parallel” that divides their country from the communist North. But not all of them savour the alternative ending for their cold war: rapprochement and reunification.

North Korea’s indigence is almost as scary as its belligerence. The collapse of its rogue dictatorship—improbable but not unthinkable—would replace a military threat with a variety of economic perils, including a possible flood of cheap migrant labour and costly obligations to support the North’s people and infrastructure. Germany’s example is hardly reassuring. Two decades after reunification, the East still subtracts heavily from Germany’s budget and adds greatly to its unemployment figures.

Before the last Korean war in 1950, the North was home to most of the country’s heavy industry. As late as 1975, its income per head still exceeded the South’s, according to Eui-Gak Hwang of Korea University in Seoul. “Obviously, sooner or later the country must be reunited,” wrote Joan Robinson, a Cambridge economist, in 1977, “by absorbing the South into socialism.”

South Korea’s central bank reckons that North Korea’s annual income per person was only $960 in 2009, or about 5% of South Korea’s. (This estimate values the North’s output using South Korea’s prices and its exchange rate against the dollar.) This disparity dwarfs the income gap between the two Germanys on the eve of reunification (see chart). Poorer than East Germany, North Korea is also bigger. Its population of 24m is about half the size of the South’s, whereas East Germany’s was only about a quarter the size of the West’s.

If the Koreas reunified, the government would face a stark choice. It could try to fill the gap in living standards between North and South, through handouts, public investment and subsidies. Or it could brace itself for heavy migration, as poor Northerners moved to the South in search of higher wages. Germany leaned towards the first option. East German Ostmark wages were converted into West German D-marks at a rate of one to one, then raised by union pressure closer to Western levels. This allayed fears that migrant workers would flood into the West, or that capital would flood out. But it also deterred private investment in the East—except for heavily subsidised property speculation which ultimately failed—and priced many of its workers out of the market.

Michael Funke of Hamburg University and Holger Strulik of the Leibniz University in Hanover are two of the many economists who have studied Germany’s reunification. In 2005 they used the same framework to model the Korean case. Their calculations (which they describe as “rigorous speculation”) illustrate the scale of the problem. To equalise the standard of living in both parts of the country would initially cost over half of the South’s tax revenues. The government could reduce the fiscal burden to 30% of revenues, but only at the cost of receiving 8m migrants, the two economists estimate.

The government could, of course, spread the cost over time by borrowing abroad: there is no reason why today’s Koreans should pay the full cost of reunifying their country. And in principle, North Korea’s productivity might catch up with the South’s quite rapidly. Because capital is scarce in the North, returns should in theory be high. Investors will be drawn to its promising location, its raw materials and its workers, who are young, reasonably well educated and cheap. (Many South Korean and Chinese firms have already taken the plunge. Hyundai Asan and Korea Land Corporation, for example, run the Kaesong Industrial Complex a few miles inside the North. It hosts 116 factories, employing 40,000 North Koreans, producing over $20m-worth of textiles, chemicals, electronics and other goods a month.)

Despite North Korea’s obstinate commitment to central planning, the market is growing like a vine in the cracks of the socialist edifice. In their new book, “Witness to Transformation”, Stephan Haggard and Marcus Noland document this market reform “from below”, drawing on surveys of refugees in South Korea and China. They find that 62% of the refugees in China had relied on the market as their primary source of food; only 3% relied on the state. And almost 70% of the refugees said they got more than half of their income from some form of private enterprise, such as selling crops or repairing bikes.

North Koreans have turned to the market out of sheer desperation. During the famine of the mid-1990s, for example, the public distribution system broke down, forcing households to rear livestock, collect acorns and sea algae, or cultivate crops in their kitchens. Informal markets sprouted, as people either bent the law or defied it. In 2002 some of these exchanges were decriminalised. But from 2005 the regime cracked down again.

Planning the end of planning

This surreptitious system of truck, barter and exchange might eventually be the kernel of a more dynamic market economy. But the breakdown of North Korea’s central planning is a mixed blessing. One of the few communist countries to liberalise its economy without a big drop in output was China. It did so by keeping its central plan in place long enough to grow out of it. In the early years of reform, households and firms kept their centrally allotted entitlements and obligations. But they were free to sell or buy anything extra for whatever they could get. This allowed prices to do their job of signalling scarcity and abundance, even as it avoided the disruptions and hardship suffered by other transition economies.

North Korea would profit from following China’s example, argues Gérard Roland of the University of California, Berkeley. (At the very least, households should be entitled to a ration of essential goods at controlled prices.) Before the North can make a successful transition to a market economy, therefore, it may have to revive something like its public distribution system. The country’s best route may lie in reviving a rudimentary plan.

The path to a market economy will no doubt be bumpy. South Korea’s communist sibling is both poorer and more populous than West Germany’s ever was. But as Messrs Funke, Strulik and Roland all point out, the Koreas have one advantage Germany lacked. They can learn from its example.