5 In order for the USO to be sustainable through cross-subsidy from profitable routes to unprofitable ones, there have to be enough profitable routes (and few enough unprofitable ones) to allow for universal service at a reasonable price. The evidence suggests, however, that average per piece costs in developing countries are very high, both due to scale effects but also a large proportion of expensive-to-service rural customers. This suggests that there is not the amount of profitable service at an acceptable price to support the letter USO.

With obvious exceptions such as China and India, absolute mail volumes in poorer countries are very small. Total mail volumes in countries under $1,000 GDP per capita average 10 million pieces, compared to 2.5 billion pieces in countries with a GDP per capita of over $5,000 (Table 1). This suggests that the average LDC will be far less able to benefit from economies of scale. There are fixed-costs associated with mail systems that make low-volume environments highcost ones as well. Scale economies, due to factors such as automated processing and (more significantly) scale effects in delivery, will be one factor behind a relationship between total mail volumes and letters delivered per employee. Countries that see delivery of fewer than one million letters a year deliver on average below 4,000 letters per employee per year (such countries include Cape Verde, with just over 939,000 letters delivered by a staff of 3,947). This compares to over 60,000 per employee in countries where over 100 million letters are delivered a year (South Africa delivers nearly 2 billion letters using a staff of 74,000, for example). This is a 15-fold productivity difference (Table 2).

**<u>Table 2:  Cross-country Evidence of Scale Economies in Posts</u>**

||**Average for Total Letters De**|**livered Band**|
|---|---|---|
||_<1,000,000_<br>_1,000,000 –_|_>100,000,000_|
||_100,000,000_||
|Letters/Employee|3,587<br>20,693|59,739|

_Source: Calculated from UPU and World Bank data, 2001_ We can further examine the impact of scale economies by looking at estimates based on the United States Postal Service (USPS) on the costs of a US-style service in lower volume environments with lower input costs. The USPS will differ dramatically in terms of automation, route topography, mix of mail, efficiency, and the nature of its customer base—and so the model is only an approximation (made less accurate by a weak proxy for input costs—that of GDP per capita). While Cohen et. al. show that it functions reasonably well in estimating features of rich country postal operations, it is very likely that the adjusted model will become increasingly inaccurate as a guide when looking at low-income postal markets (Cohen et. al. 2003a). It is also worth noting that UPU data suggests a fairly weak relationship between GDP per capita and total costs per letter.<sup>6</sup> With those caveats, Figure 2 shows what the Cohen study and World Bank data suggests the cost of delivering a letter under United States’ USO standards would be in countries with lower mail volumes. As the number of pieces per capita drop below 100 per year, costs rise dramatically

> 6 The result will be due at least in part to the facts that labor costs are lower in developing countries and that most developing countries offer a lower quality, extent, and scope of services (not delivery to the door, not six days a week, not fast and reliable, and absent ancillary services such as pension payments).