TVA Rural Studies

Telecommunications and Rural Development:
Threats and Opportunities

Edwin B. Parker
Parker Telecommunications
May 1996

11. Six Important Questions

In 1991 the Office of Technology Assessment prepared a report to address six questions asked by the Joint Economic Committee of Congress. This is an appropriate occasion to revisit those six questions and to provide a current answer to each.

Question 1: Will technological advances be available in a timely manner to rural America?

The answer is a mixed one. Independent rural telephone carriers that benefit from current subsidies and are eligible to borrow funds from the Rural Utilities Service have provided advanced telephone technology to their territories. If pending changes in the Federal and state regulatory mechanisms continue the availability of funds to those carriers, this trend will continue. Reduction or removal of the rural subsidy mechanisms could reduce the incentive to provide technological advances. Since the current subsidy mechanism permits recovery of cost plus return on investment, the carriers may not have incentives to deploy lower cost technologies. Since the licensing structures are different for wireline carriers than for wireless carriers, it may not always be legally possible for current wireline telephone carriers to integrate lower cost wireless technology into their networks.

The larger telephone carriers serving rural America are not eligible to receive subsidies for rural service and will almost certainly not provide advanced technology in a timely manner in their smaller rural communities. The current disparity between the quality of rural service provided by subsidized independent carriers and that provided by GTE and the Regional Bell Operating Companies is likely to widen even further. The larger carriers do not have economic incentives to make the necessary investments in rural areas. This disparity has led to a number of sales of rural telephone exchanges by larger carriers to smaller independents that are eligible for rural subsidies. The smaller subsidized carriers do have the economic incentive to upgrade the technology and consequently the quality of service in those territories.

In the longer run, the emergence of competition will bring technological advances to rural America. Entrepreneurial competitors will bring new technologies and the threat of competition may make incumbent providers more responsive to rural needs. Nevertheless, changes in the current subsidy mechanisms to accommodate the change from monopoly to competition may deter some deployment of advanced technology. Rural America will need regulatory protection during the transition to new regulations that hopefully will provide incentives to make timely and cost-effective rural technological advances.

Question 2. Does information-age technology involve economies of scale and scope that will enable rural businesses and communities to adopt these technologies?

Widespread adoption of information-age technologies in urban areas and some rural areas is driving down the costs, making them affordable for many rural telecommunications providers. Larger markets are likely to be more profitable. Network providers incur high fixed costs for purchase and installation of technology and low variable costs for adding additional users. Therefore providers may be reluctant to install new telecommunications technology in rural areas without demonstrated demand. Nevertheless, the costs of telecommunications infrastructure are so much less than transportation and other infrastructure that it should be cost-effective to provide modern telecommunications technology to all rural communities. Rural communities with advanced telecommunications become more effectively integrated into the global economy. They thus lose some of the rural disadvantage of small market size and large distances, because their businesses have access to larger markets. At the same time, their exposure to national competition increases.

Question 3. What are the expected economic effects of information-age technologies in rural areas, particularly on employment (including job creation, training needs, and job displacement) and investment (including capital requirements and public infrastructure)?

Technology alone will not bring about job creation, but can be an important catalyst. With adequate information technology, rural communities can establish, expand or recruit a wider range of businesses offering goods and services to larger urban markets. Rural communities can use the rural advantages of quality of life, attractive natural environments, and lower land and labor costs to improve their economies once the economic disadvantages of distance and small market size are reduced by information technology. With strong local leadership, rural communities with improved information technology have the opportunity to attract the capital for further investment and have improved access to training. Rural businesses must understand the paradox of creating more jobs by being more productive and thereby attracting larger markets. If they resist improving the information technology in their businesses in a short-sighted attempt to save jobs, they will lose even more jobs by losing market share. Information technology is a double-edged sword for rural communities. If they do not adapt to the new technologies in ways that make their businesses operate with lower costs and achieve larger market size, then they will lose to competitors elsewhere that do. Telecommunications networks that permit rural businesses to reach urban markets also permit urban businesses to better reach rural markets. The technology can reduce two of the major problems for rural business, distance and lack of scale, but they do not bring an automatic advantage. Once the playing field is more level between rural and urban, rural players must work hard to succeed in that tougher competition. Fortunately, a strong work ethic is still very much a part of the culture of rural America.

Question 4. Which rural areas are likely to have the greatest ability to make use of these new technologies?

Those rural areas with the local leadership needed to help guide their communities through a difficult time of transition and to encourage a rural culture of entrepreneurship and risk-taking will fare best. The current technological revolution creates opportunities; not all communities will have the vision to take advantage of the opportunities. Most rural communities have native sons and daughters who would love to return home, if only they could support themselves and their families there. Rural communities, by definition, have less congestion than urban locales, which makes them attractive to those seeking to escape urban congestion. Some communities will welcome newcomers and prosper. Others will resist and decline. The rural communities with the greatest potential are those with attractive natural environments and climates or those than can add more value to local products before exporting them. All rural communities have advantages. What will distinguish the successful ones from the less successful will be local leadership and vision.

Question 5. What roles can the various levels of government play in fostering information-age technology?

The Federal government is a major player setting the national framework for the current telecommunications technology transition. Congress has removed barriers to competition, while retaining some rural safeguards during a risky transition. FCC policies protect universal service, particularly in rural areas. The Rural Utilities Service in the US Department of Agriculture continues to provide financial and technical consultation support for rural telephone carriers.

State governments have a particularly large role to play in helping their states use telecommunications technology for rural development. Three different areas of state policy are all important. First is the state public utility commission’s regulations. State regulatory policy has a major effect on the incentives of rural telecommunications providers. State regulators control subsidy mechanisms that determine whether carriers invest in new technology, and provide services at reasonable prices.

Second is the policy of other branches of state government for the procurement and use of telecommunications. State governments that buy dedicated leased lines for their “private” networks connecting rural locations to state governments are seriously harming rural development, because they make it unlikely that there will be sufficient other demand to put enhanced public access networks in place. State governments that use their own network requirements to leverage the development of rural data and video networks that are accessible to all rural businesses and citizens are major contributors to the economic development of their rural communities. The State of Oregon is replacing its leased lines for dedicated data networks throughout the state, including networks connecting lottery terminals, with the procurement of fast-packet, frame-relay services that have encouraged the network providers to make comparable data services available to all business and residential users, including those in rural areas. Rural Oregon communities have benefited from this policy. Other states might find it an instructive example.

Third is the effectiveness of state government agencies in using information-intensive applications to accomplish their missions and to make themselves accessible to citizens in all parts of their states. Projects from rural distance learning, to rural telemedicine, to providing rural areas with access to kiosks and on-line information services from state agencies will play key roles in improving the cost-effectiveness of state government and in providing role models for rural communities. Idaho is one rural state that did a particularly good job of planning for effective use of telecommunications.

For rural communities and rural counties, local government is particularly important because rural people can use their own governments to achieve local goals. Successful rural distance learning projects depend on the leadership of local school districts. Rural governments can make their information more accessible to their constituents through local computer bulletin board or Internet access. Local schools and community colleges can provide the training needed to help local residents and businesses take advantage of new information technology. Local rural governments can be a focal point to bring to the attention of state government the issues that affect rural people, but cannot be resolved with local jurisdiction. On the central Oregon Coast, a group of 37 local government and non-profit organizations organized CoastNet in order to take advantage of fiber optic telecommunications capability being installed by one of their group, the Central Lincoln Peoples’ Utility District. The rural electric utility was prevented by both Federal and state law from providing telecommunications services. (The Telecommunications Act of 1996 removed some, but not all of these regulatory barriers. State legislation amending its charter may be required before it can legally offer telecommunications services to the public.) However, it was able to make services available to other governmental entities and as a “carrier’s carrier” to provide facilities to telecommunications providers licensed by the Oregon Public Utility Commission. Whether getting service from a traditional telephone carrier or a new entity, such as a rural electric utility, local governments can play the key role of helping bring together a combined volume of public and private sector business sufficient to attract at least one supplier to meet the local needs.

Question 6. Can rural America expect to be competitive serving national and international markets for the goods and services of this new era?

Rural America will have an equal or near-equal opportunity to compete for national and international markets. Rural America cannot reasonably expect to be competitive unless, like their urban and international competitors, they work aggressively to reduce costs, improve quality and become rapidly responsive to the changing needs and desires of their customers. Improved telecommunications alone will not make rural communities competitive in national and international markets. They will have to find and make their own competitive advantages. Telecommunications reduces the disadvantages, so that they have an opportunity to compete. Flexible manufacturing networks connecting small rural manufacturing businesses can permit them to respond collectively to larger orders that otherwise would go only to large businesses. Better communications will permit them to stay in closer touch with customers and suppliers. It will not be automatic and it will not be easy, but rural America will have the opportunity.

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