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Telecommunications Policy

Telecommunications Policy 34 (2010) 343–345

doi:10.1

URL: www.elsevierbusinessandmanagement.com/locate/telpol

Book Review

From iron fist to invisible hand: the uneven path of telecommunications reform in China. Irene S. Wu., StanfordUniversity Press, Stanford, CA (2009). Hardback, 187 pages including list of tables and figures, preface, abbreviationsand index, £42.50, ISBN: 978-0-8047-5962-5

Probably the most distinctive feature of China’s telecommunications reform is that it has been executed under a uniqueinstitutional context. One-sided economic liberalization that left fundamental political institutions unchanged hassomehow nurtured a skewed institutional environment in which informal forces – often characterized by the ascendancyof the informal rules of the game in the interest distributed among stakeholders – are gaining momentum in constrainingthe process of policy formulation and implementation as well as the private choices of individuals and organizations in agovernment-dominated industry like telecommunications. The understanding of this institutional context has seeminglybecome a premise for interpreting China’s telecommunications industry in which distortions occasionally took place interms of carrier deviations from profit maximization and government agencies from pubic interests. Clearly, neo-classicalindustrial organization theory alone is inadequate for understanding the Chinese case.

Fifteen years after the inception of telecommunications reform in 1994, the Chinese telecommunications industry isregistering exponential growth. Despite the government’s concerted effort to bring competition into this conventionallygovernment-monopolized industry, the status of the telecommunications industry’s state-owned enterprises (SOEs) asgenuine market entities is still murky. One useful justification for this growth, though, is probably the presence of a certaintype of rivalry among carriers, the nature of which is subject to analysis, given the intricate market and institutional forcesin China. This obscurity has ostensibly led to a theoretical quandary when developing an effective explanatory frameworkfor China that covers the evolutionary process to date and current status of this technologically dynamic infrastructuresector, which now features three major players after the most recent round of industry restructuring undertaken in 2008.

My expectation, of this volume being a comprehensive and informative response to the above, was raised at the sight ofthis book in which Wu embarks on an ambitious, yet arduous, journey of intellectual inquiry into the transition from acommand to market orientated telecommunications industry. The book is 187 pages long, covering a brief preface, ninechapters – which include two dozen figures and three tables – as well as freestanding endnotes, a bibliography and anindex. The book is divided into the following chapters: introduction (Chapter 1); a historical perspective of the industry inChina (Chapter 2); an overview of policy-making and regulatory structure (Chapter 3); the following case studies: marketentry—foreign investment (Chapter 4), domestic entrants (Chapter 5), interconnection (Chapter 6), pricing (Chapter 7), theimplications of innovation on regulatory evolution (Chapter 8) and conclusion (Chapter 9).

By citing the existing literature, Chapter 1 sets forth the hypothesis for the policy-making model which runs throughoutthe book, that is, policy-making as a combined result of bureaucracy competition and technological and businessinnovations. This is followed by an overview, structured around chapter themes, incorporating occasional comparativereferences to other industries such as the airline, electric and banking industries in China. In addition, the sources of dataare also briefly explained. Before moving onto the discussion of the themes outlined above, the next chapter, Chapter 2,offers a historical context of the telecommunications industry in China, starting with a description of the introduction ofthe telegraph in the mid-19th century. The chapter emphasizes two periods – using 1980 as a dividing line between thetwo – to describe the frustrations and achievements of the telecommunications industry, claiming that history has ‘‘shapedin part its current policy approaches’’ (p. 23). Continued reading revealed some overlap between the content of Chapter 2with that of succeeding chapters.

The purpose of Chapter 3 is to provide a sector-specific institutional context in which conflicts of interest is claimed toarise among the various government players in the industry. Stories are told about the early separation of operation fromthe ministry, conflict between the telecommunications ministry and the broadcasting administrator over the convergenceof the two systems, and the emergence of other government players such as the macro-economic and state-assetwatchdogs. Despite the author’s efforts to include details, seemingly to substantiate the theoretical model put forward inChapter 1, the material was neither well organized nor adequately convincing and sometimes too anecdotal. There are alsosome unclear statements. For example, the author claims that ‘‘in the days of a monopoly, there is no need for a regulator’’

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Book Review / Telecommunications Policy 34 (2010) 343–345344

(p. 24), but a regulator may still be necessary under a private monopoly. Strictly speaking, SASAC was not ‘‘established’’(p. 39) in 2003, but upgraded from the State Administration for State-Assets, which was established in the 1990 s. Inaddition, Yang Xianzu is mistaken for ‘‘Yang Xianzhu’’ (p. 31) and Zeng Peiyan misspelled as ‘‘Zeng Peiyuan’’ (p. 38).

Chapter 4 describes the evolution of market structure and competitive interactions between the incumbent and newentrants. Starting with a brief introduction of entry into the Chinese telecommunications industry as well as entry policyinternationally, the chapter then describes the early entrants such as the Great Wall, Jitong, and Unicom in the early 1990sas well as the two rounds of structural separation and industry consolidation in 1999 and 2002 and the implications of 3Gon a renewed round of industry restructuring. Despite sporadic minor flaws – for example, in the government’s thirdrestructuring plan of 2008 China Railcom was merged into new China Mobile whilst it is mistakenly claimed that ‘‘ChinaTelecom would take over Railcom’’ (p. 59) – the chapter can be considered to be a good case study. The analysis isinformative although the conclusion seems to be a little farfetched.

Chapter 5 shifts the theme onto foreign investment policy. Following a brief overview of China’s mixed sentimenttowards attracting foreign investment, which has usually resulted in a compromised approach of maximizing benefitswhile retaining strict control over telecommunications operations, the author demonstrates that before the WTO accessionChina’s foreign investment regulation was not transparent, uncertain and often subject to willful regulatory discretion.Outlined is the case of the battered path of China Unicom’s initiative of raising foreign funds by circumventing existingrules that prohibited foreign investments in telecommunication operations. Even after the WTO accession the authorargues that China’s telecommunications commitment is still essentially characterized by the imposition of constraints onforeign participation. The author, therefore, claims that ‘‘it is unlikely that any major foreign investment in thetelecommunications services market will occur, leaving all the best market opportunities to the major state-ownedoperators’’ (p. 78). To support this argument, stories of major Chinese carriers manoeuvring in the international capitalmarkets and business–regulator interactions are vividly and informatively told. There was, however, one minor questionregarding a technical detail: by the ‘‘Ministry of Economic Reform’’ (p. 72) did the author mean the Commission ofEconomic Reform (or ti gai wei).

Chapter 6 demonstrates the frustrations and disputes that occurred during new entrant and regulatory efforts to makeinterconnection with wireline and wireless incumbents workable. The author indicates that interconnection regulation inChina is still ambiguous in terms of the regulatory regime and government–business interactions, notwithstanding theincremental improvements that have taken place over the past decade. Although useful data and case material areappropriately used in this chapter, the stories are straightforwardly told. This content would have been more insightful ifthe author would have offered a perspective on the institutional root causes in terms of the incentives underlying theuncooperativeness among telecommunication SOEs as well as the regulator’s weak enforcement of existing rules. It is alsodebatable whether the author can ascribe the two divestitures of China Telecom primarily, if not solely, to resolving theinterconnection issue. There was a spelling error: Si Furong was written as ‘‘Si Furoung’’ (p. 87). Except for these mistakes,this chapter is generally well written.

Chapter 7 tries to unravel price regulation and the pricing practices of telecommunication operators. First, a briefdescription is provided concerning pricing policy framework, and is followed by an elaboration of the installation/connection fee, price rivalry in the mobile segment, the effect of new modes (i.e., VoIP and XLT) on price competition, andthe process of tariff rebalancing. While stories are told and questions are again raised, convincing insights are not offeredwith regard to those underlying forces that have underpinned pricing behaviour in the market and regulatory mindset.This makes this chapter unappealing to the reader. In addition, the chapter is unclear. For example, the author claims thatthe ‘‘government has stated that it will eventually abolish price controls’’ (p. 99). Convincing support is needed herebecause, to the best of my knowledge, price-cap regulation was billed as a long-run policy as recently as 2005. In addition,is ‘‘State Planning and Development Commission (SPDC)’’ (p. 101) different from ‘‘State Development and PlanningCommission’’ (SDPC) (p. 37)?

Two unique cases are the focus of Chapter 8, one in long distance (i.e., VoIP) and the other in the mobile segment (i.e.,PHS or XLT). According to the author, both of these have followed a similar cycle of regulatory destiny—meeting regulatoryresistance during entrepreneurial stage, growing popularity due to attractive prices, and ultimately legalization underconsumer pressure. The author demonstrates that competitively priced VoIP and XLT services have been squeezing thevoice market, particularly in the wireless segment where the XLT service exerted substantial constraints on the pricingstrategies adopted by mobile carriers. This triggered conflicts of interest among stakeholders and posed challenges for theregulator. Reaffirmed by the case studies was the argument that forces other than ‘‘shifts in ideology or bureaucraticinterest’’ (p. 133) such as business innovations like the VoIP and XLT cases, may also trigger institutional reform.Nevertheless, the XLT case may be more involved in this process than what was described here. First, the development ofXLT services has ostensibly received regulatory resistance from the very beginning. However, the stricter the regulatorycall for its banning, the faster its expansion. Why? Because XLT technology was, and has proved to be, a short-livedtechnology that is currently withdrawing from the market. Further elaboration of the impact of this technology would havemade the argument presented here more insightful. The presentation is also not well structured, with only two headingsbeing used in the 19 pages of Chapter 8.

The last chapter serves as a summary and conclusion. The author generalises regarding key argument of the book,highlighting the idea that forces underpin telecommunications reform in China. These are bureaucracy competition andthe changing technological and economic contexts. Also provided is the author’s perspective on those factors that would

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contribute towards better policy-making and a mixed outlook vis-�a-vis media freedom, which is, supposedly, animperative of further institutional reform.

Overall, the content of the book might be of interest to those who are contemplating the institutional root cause thatunderpins the myth of China’s exponential expansion in the telecommunications industry. The methodology isinterdisciplinary, spanning political economy, regulation, politics and sociology. Some previous knowledge of theprinciples of economics may help the reader, but this is not necessary to understand the content.

There are a number of unclear statements, unconvincing arguments and inaccurate data included throughout the book.In addition, the role of bureaucratic competition in policy formulation is unconvincingly exaggerated as telecommunica-tions policy-making is now decided by the State Council based on proposals from a third agency or agencies. This type ofinaccuracy, along with other ambiguities or inaccuracies inevitably undermines the quality of the content.

This book has partially succeeded in fulfilling the objective suggested by its title. It fails, however, to provide an accurateand rigorous portrait of the actual telecommunications landscape in China. The quality of the content varies depending onthe cases studied. Broadly speaking, the author better explains subjects where information is available to the public, whileshe poorly explains those subjects which entail an in-depth knowledge of the actual situation in addition to publiclydisclosed information and interviews.

Generally the book is relatively weak when it comes to analysis and probably also requires a sounder analyticalframework and some updates to include recent developments (such as the 2008 industry and government reform). Theacademic value of the book is largely compromised because of this. The book also appears to be a little too short when itcomes to addressing such an ambitious theme as suggested by the title ‘‘From iron fist to invisible hand’’—the core of thebook runs to 146 pages, with a substantial proportion being devoted to underdeveloped issues.

In summary: although it seems unreasonable to expect a substantial theoretical contribution to the intended area fromthis book, those who are unfamiliar with the Chinese situation may find the stories told in this book entertaining. However,one should be cautious in reading the book for its analysis and argument.

Jun Xia 1

School of Economics and Management,

Beijing University of Posts and Telecommunications,

Beijing 100876, People’s Republic of China

E-mail addresses: xiajun@bupt.edu.cn, junxia66@gmail.com

Received 16 April 2009

1 I would like to thank Dr. Jason Whalley for his assistance in language editing. Nevertheless, any errors remain with the reviewer.