Tuesday, 22 April 2014

The costs of data localization

In the aftermath of recent revelations on mass-scale electronic surveillance, there has been a widespread proliferation of internet restrictions. One of the most drastic, yet a common policy response to the problem has been the mandatory requirement on storing critical data on servers physically located inside the country. This policy of data localisation has been considered by a number of countries including Brazil, where the multistakeholder summit NetMundial 2014 is taking place this week.

What Brazil and other countries like China, the European Union, India, Indonesia, Korea and Vietnam (who all have considered similar strategies) fail - or choose to fail - to see, is that information security is not a function of where data is physically stored or processed.

A forthcoming study by ECIPE economists shows that cross-border data flow is essential for developing economies to secure access to foreign markets and participation in global supply chains. Thus, data is a major sources of growth, jobs and new investments. Manufacturing and exports are highly dependent on access to support services at competitive prices - services that depend on secure and efficient access to data. Forced data localisation affects any business that uses the internet to produce, deliver, and receive payments for their work, or to pay their salaries and taxes.

  • The results of our study show that even the current language of Brazil’s Marco Civil da Internet (without mandatory data localization) results in a GDP loss of -0.2%; EU GDPR results in -0.4%. Other results include China (-1.1%), India (-0.1%), Indonesia (-0.5%), Korea (-0.4%) and Vietnam (-1.7%) for their internet policies.
  • An economy-wide data localisation requirement (or discriminatory barriers to that effect) would substantially increase the GDP loss if they are enforced: Brazil (-0.8%), the EU (-1.1%), India (-0.8%), Indonesia (-0.7%), Korea (-1.1%). Even conservative estimates are sufficient to eradicate all post-crisis economic recovery, benefits from all their currently negotiated trade agreements, or may even cause social unrest in some countries.
  • Impact on investments is also considerable: Brazil (at least -4.2%), China (-1.8%), the EU (-3.9%), India (-1.4%), Indonesia (-2.3%), Korea (-0.5%) and Vietnam (-3.1%). Exports of China and Indonesia also decrease by -1.7% as a direct consequence of loss of competitiveness.
  • Welfare losses (expressed as actual financial loss by its citizens) are up to 63bn USD for China and 193 bn USD for the EU.

The findings show that the negative impact from disrupting data should not be ignored. The globalised economy has made unilateral trade restrictions a counterproductive strategy that puts the country at a relative loss to others, with no possibilities to mitigate the negative impact in the long term. Forced localisation is often the product of poor, one-sided economic analysis, often with the surreptitious objective of keeping foreign competitors out - although economic and security gains are too small to outweigh losses in terms of jobs and output in the general economy.

Wednesday, 26 February 2014

European growth and the stark economic reality of a lost decade

I was asked by a couple of news agencies yesterday what I thought of the new winter economic forecast from the European Commission.

I am neither an optimist nor a pessimist. Average EU growth is picking up but the stark reality is that many economies in Europe will be weighed down for several years to come, with anaemic growth, a deflationary economy, and strong pressures to get better control of fiscal policy and the size of the public debt. It will be worse than a lost decade; the time it will take for many of the problem economies to correct past mistakes and behaviour will extend beyond a decade. Under a positive, steady-state like scenario, countries like France and Spain will have brought down fiscal deficits to zero by 2020.

But general figures for the EU or the Eurozone also hide the fact that some economies will perform better. Several Nordic economies, especially the Baltics, will have healthy growth levels in the next few years. German economic growth will not exactly be staggering, but it will be better than many of its Eurozone peers and it will help to raise the EU’s general growth. Deficits and debts are under control in Germany, and unemployment is low. The weak points are the crisis economies that will have to go through much more fiscal consolidation to bring down their deficits - and that will happen at a time when there is no strong recovery that help to bring about stronger fiscal positions. Italy, Greece, France and Spain will remain in weak economic positions, and we are not seeing many indications that national politicians are planning for new economic policies that would help them to grow. They are all in need of new and, with the current economic jargon, expansionary monetary conditions to avoid prolonged disinflation or outright deflation. The room for fiscal expansion is close to zero.

We have to admit, though, that a monetary jolt is not going to have the same effect today as if the ECB had done the right thing, say, three years ago. Unorthodox monetary policy is clearly needed to raise inflation, but a short-term monetary fix is unlikely to have lasting effects given the ECB’s culture and its constitutional limits. Give the current institutional conditions the likely scenario in the next few years is that the asymmetric rule apply: it reacts if inflation is on a path exceeding 2 percent, but it does not react if inflation is anchored well below 2 percent. Moreover, after several years of economic contraction, assets and supply factors have begun to retire and monetary (or fiscal) expansion cannot support output in the same way they could a few years ago. My conclusion is that the ECB has to changes its overall monetary policy – to a new rules-based policy substituting the defunct inflation-target policy. Absent that, ECB policy will remain unconvincing.

So the big risks are still in the financial and monetary system - and such risks, combined, with weak capacity by several governments to deal with new financial problems, like the collapse of a bank, will remain the main downside risk for some time to come. The other big risk, in the medium term, is that countries will no longer accept the quid pro quo for staying in the euro. With high unemployment, austere fiscal conditions, and lack of structural reforms and adjustments – one wonders how long the political compact for the euro will remain unchallenged by established parties?

Wednesday, 19 February 2014

The World Economy - Running on One or Two Engines?

The image of the world economy in the past years has been one of a slowing tanker, running only on one engine. The developing part of the world, or what in today’s language is called the fast risers, has been holding up the world economy while the traditional centres of economic output has been fighting noxious crises.

Europe has been suffering from a deep recession and has gone through an existential crisis hanging like a dark cloud over the euro currency union. The United States has been weighed down far longer than many people expected by the financial crash in 2008 – helped, of course, by recurring political gridlock in the U.S. Congress. And Japan entered this new decade with the same economic malaise as in the past decades: low growth, high public debt, and general deflation.

Is it now time to change this image from a one-engine to a two-engine tanker?

Let us start with the good news. The Eurozone is not going to crash. While the recovery is patchy – and, like all recoveries, offers mixed and conflicting signals – economic growth is moving up from the negative territory of the past years. The U.S. economy is growing at a far healthier level today than a year ago, let alone two years ago. And Japan has finally started to register economic growth and inflation. While all three economies are facing several downside risks, the consensus forecast is that they are moving in the right direction.

The less good news is that the recovery in the “old economies” is still too slow to cover the slack from the growth slowdown in the “new economies”.

First, despite the ascending recovery in the no one should expect growth levels in “old economies” to rise above historic trends.  European economies will be weighed down by the necessity to cut excessive deficits and debts – while the disposition for growth-inducing economic reforms is not exactly an inspiration to the world. The U.S. economy will no doubt be chilled by Fed tapering. And the Japanese government has yet to deliver on the third arrow of the new growth program. While fiscal and monetary expansion, the first two arrows, can be done by the stroke of a pen – the last arrow, structural economic reforms, require political leadership that yet has to reveal itself.

Second, emerging economies have no doubt entered a period of structural slowdown. Now that the super commodity cycle has petered out, economic growth in Brazil and Russia has tanked. Russia grew by 1.5 percent last year – and Brazil has just cut its growth forecast for 2014 below 2 percent. So all those people that still believe in the BRIC phantasy – that growth in these economies had been disconnected from the liquid Western markets – need at least to take the B and R out of the acronym.

India and China are racing ahead, still at a fast pace, but their economies are slowing down. India’s intrusive but inept government, still far too imbued with the “license Raj”, undermines the country’s discounted hope for a “demographic dividend”. India, says economist Gurcharan Das, “only grows at night”, when bureaucrats are asleep. The cause celebre of global trade policy, India’s growing protectionism is nothing but corrosive for its ambition to spur economic growth on the back of trade and external demand.

China still records growth at elevated levels, but has entered a structural slowdown intimately linked to its increasingly exhausted model for economic growth. While a key source of global growth for the past ten years, its growth expectations for the next ten years are less promising. Much will depend on its capacity to effect a quick transition from an investment-led growth model to a new one based on rising domestic consumption and economic reforms. With growth at 7.5-plus percent in 2014 – significantly below the growth levels experienced a few years ago – China remains the envy of the world. But it cannot alone keep up global growth.

The structural slow down in emerging economies is, however, not reversing the long-term trend of the world economy. It is inexorably moving towards the East. Last year, for the first time ever, emerging markets produced more than half of goods and services in the world.  Annual growth around eight percent in China now equals economic growth of four percent in the United States. Compare that to 1980 when China needed to grow by ten percent annually to expand output with as much as a growth of one percent in the U.S. Today, China adds an entire Greek economy to global Gross Domestic Product – every nine week.

A study by McKinsey Global Institute that geographically positioned the world’s economic centre of gravitation showed that it will have moved to the region of Novosibirsk in 2025. In 1950, that position was close to Iceland, safely tucked in between Europe and the United States. And the world economy especially moves away from Europe. The International Monetary Fund (IMF) expects that of all global growth between 2012 and 2017, the European Union will only account for 5.7 percent. Ten years ago, the equivalent figure was in excess of 20 percent. The European continent may not be permanently demoted to low economic expectations, but absent a new wave of structural economic reforms raising potential growth, Europe will have a hard time making its way in global economic policy.

So the world economy tanker, then, will soon run on two engines – both the mature economies and the rising economies. That is the good news. The bad news is that neither engine will be strong enough for the tanker to regain the pre-crisis speed.

This piece was published as an exclusive comment in People's Daily, China.

Thursday, 6 February 2014

Threats to the European way of life (part 4)

I wrote here about the French peculiar ban against online booking of taxis. Well, yesterday our friends at the FT report that the law has been revoked by the State Council of France. We claim victory  – for the French competition rules, of course!

Thursday, 9 January 2014

More threats to European way of life (part 3): Movies on smartphones.

No rest for the wicked – after declaring war on books and taxis, it took the Hollande government less than a week to come back with a new tax on something digital. This time, the crosshair is on smartphones and other internet connected devices, which will be taxed with an extra VAT of one percent. The beneficiary is the most subsidised industry next to cars in France – the film industry. 

The proposed VAT on smartphones is practically an additional copyright levy, which has been a topic of much dispute, and currently imposed in all member states (except UK, Ireland, Malta, Cyprus and Luxembourg) on blank medias and music players; a handful countries, France, Germany, Italy and Czech Republic, also put a levy on computers. The copyright levy in Europe collects about a half billion Euro per year, which is not a modest sum, equivalent to one-tenth of the music industry turnover.

A general copyright levy is admittedly fiercely debated, but the question is why the musicians, authors and broadcasters seem to have fallen from the grace of my fellow champagne socialists in the  new smartphone tax. Arguably, illegal digital music is far more disseminated than any other type of content on smartphones. Although I have no clue whether Daft Punk voted for Sarkozy, I'll assume that music is not the same political economy powerhouse as Ludivine Sagnier or Emmanuelle Béart. (It took an extraordinary amount of restraint to not mention Hollande's alleged romance with Julie Gaye here!)

In recent months, much has been said about the French resistance to TTIP over its red lines on cultural exception. In some quarters, the French stance was seen as sheer intellectual laziness – the US culture industries never demanded lifting of French screen quotas or language rules. While I find this question of cultural exception a stale debate, the real interesting question is cultural competitiveness. What actually builds a successful film industry?

The French legacy in film needs no quantitative evidence: Look at the auteurs in French Nouvelle Vague like Godard and Truffaut; or more recently with Agnès Varda or Louis Malle. The French ciné-industrial complex even succeeds commercially and internationally when it wants to, with movies like Amélie or La Vie d'Adele – some may question their artistic merit, but I'm sure there are people that see them as the top echelon of European culture. Furthermore, France has some of the best production factors in the world through its actors, cinematographers and screenwriters, and is blessed with cross-sectoral competence synergies with haute couture, an annual industry piss-up in Cannes, and unique shooting locations that are not easily counterfeited in Asian sweatshops.

The real question is why French movies are not successful and in need of protection. Meanwhile, a minor non-player like Korea (come on, Gangnam style and cheesy soap operas?) with an even bigger language barrier overtook French cultural exports within just a few years. A major part of the explanation is that Korea redirected its efforts in the cultural sector from protectionism and production support that could only encourage production of junk. Instead, Korea shifted into export subsidies, and successfully mastered cost-effective distribution through video-on-demand and television – to a point that pop culture fans have started to learn Korean, a language far less useful than French. 

While it is true that the market share of domestic films is higher on the French market, this is not necessary evidence that protectionism and internetophobia is working – it could simply be a question of consumer preferences, or that the French audiences are colourblind to other cultures and languages. I am even inclined to say that French movies are often better, but the industry as a whole is held back by misallocations into projects that shouldn't have been made in the first place. In a similar manner, the lottery proceedings that was channelled into the British film industry only helped to kill off a creative and commercial peak it enjoyed during the 1990s with films like Trainspotting and Four Weddings and a Funeral.

After all, it is just a question of months before the Netflicks or iTunes enabled tablets, or the humongous 42 inch LED televisions people have invested in, will overtake the traditional cinemas as the prime distribution channels. Unlike French bands with drum machines that rule the online music channels, it seems the French film industry won't be ready for that shift. Unfortunately, the French policy is not about helping its film industry to larger markets – just make sure that everyone else is making less in France. The new smartphone tax will bring about meagre 40 million Euros to help the world's most competent (yet uncompetitive) film industry to dig itself just a little faster into an early grave. 

Tuesday, 7 January 2014

Taxis and taxes: More "threats" to the European way of life? (part II)

A couple of days before Brussels shut down for winter holidays, I was reached by an email that my op-ed on internet taxation in France and Italy is one of the most popular articles on European Voice. Seems self-deprecation and black humour still have some mileage, even in the self-important Brussels – and I still have a full tank of it, thanks to a never-ending supply of 'laugh or cry' news stories about how European governments are trying to reverse time, back to an era before globalisation and the internet.

The new year starts with another piece of French legislation in the same vein as the accusation against Amazon for 'dumping' over its free delivery service. This week's irritant in the l'Elysée palace is minicab services – they have existed in Paris as a cheaper alternative to the regular taxi parisienne that are overregulated, overpriced and grossly undersupplied. These cheaper minicabs were not a problem until they went online, where services like Uber, Chaffeur-Prive.com offered direct booking via smartphone apps using GPS.

On New Years Eve, Libération reported that the ministers Pinel (of Crafts, Commerce and Tourism) and Valls (Interior) signed off a decree that forces les voitures de tourisme avec chauffeur (an euphemism for French minicabs ordered via smartphones) to wait 15 minutes before picking up their clients, despite drawing heavy handed critique from the French competition authority. The only exception is for guests of four or five star hotels and convention centres. Hollande government may not alone in its anachronistic desire to protect mercantile guilds from modernity, but it represents a unique brand of socialism that deprives cheaper and expedient services from the masses (and trade wonks eternally doomed to stay at 3½ star hotels), while unashamedly exempting les riches over at Sofitel.

This granular and unsophisticated form of picking losers is more reminiscent of ... an emerging country, not the more elegant form of nepotism we disguise as politics in Europe.

Speaking of picking losers – the Italian 'internet tax' proposal that required all online retailers in the world to register for italian VAT in order to collect taxes for the upcoming pension payment has now been approved. Final draft of this timely tribute to the King Herod (holiday season and all) was limited to 'online advertising' and 'business services'. It is not without a certain sense of trepidation that I admire Italy's zeal to tax a couple of very specific entities, despite the clear violation of the freedom of services in the Single Market – it's obvious that an European business should not acquire 28 VAT registration to operate in the EU. 

However, Brussels is far away from Palazzo Madama. In Rome, where internet companies are too minor to have patron saints in politics, it's a pretty safe bet to act in outright contempt against EU laws – especially in times when US electronic surveillance spooks the Italian public. In my early life as an advertising executive, I learned that the Italian advertising industry was notoriously unscrupulous where TV, print and media agencies blocked any foreigners and newcomers attempting to bypass their established system of kickbacks. As a result, the very few digital enterprises and innovations that sprung out of Italy are linked to fashion retail. 

If we leave aside the minor problem of giving il dito to DG Markt and other member states, the situation in Italy is the essence of the problem of the European digital economy: Italy and European countries had all the market institutions and infrastructure necessary to foster a reasonably successful internet economy, but failed to secure the open competition and regulatory certainty that were necessary to create a favourable investment climate. Audacious and opportunist politics do not restore the market's confidence in the government (which is arguably an underlying cause for Italy's desperate fiscal measures in the first place) – and in extension, how early and how hard the European Commission and other member states come down on Italy will determine how credible the Single Market is. 

Thursday, 12 December 2013

Unwelcome benefits of the WTO Bali deal?

After twelve years of tedious negotiations, only a fraction of the original Doha mandate remains. One is filled with certain surprise and relief, as the news of the Bali agreement reach us on last Friday. But the claim that the Bali package (consisting of an LDC enabling clause and trade facilitation) would generate a trillion dollars in new trade is an embellishment. There are many reasons to be skeptic of such estimates, but most of all, the agreement does not generate any new market reforms, but merely speeds up “at the border” processing by transparency, rule of law and non-discrimination. In a good WTO tradition, the texts are filled with endeavour language with plenty of room for diverging interpretations and means to stall implementation.

The actual impact of the trade facilitation agreement will be determined by the real intent of the WTO members – whereas effort going into the deal reveal their ambivalence to ... actually facilitating trade. Given the south-south trade have surpassed north-south trade, developing countries stand to gain most of trade facilitation. Much of their exports are also in agricultural products subject to decay when consignments are inexplicably held up at the border, while developing countries also have fewer resources available for administration. Yet, some developing countries opposed the trade facilitation deal until the very end. 

India mounted the longest opposition to the deal. The country is entering into an election cycle and conditioned it to a peace clause for a popular price support regime in the name of food security and winning votes. However, it is inconceivable to guarantee stable food prices without imports, or increasing FDIs in more efficient distribution systems. In short, there is no alternative to feeding a billion people without building supermarkets. Globalisation calls for new ways to secure growth and welfare, but these opportunities do not win elections – in India or anywhere else. Instead, political campaigns promise to turn back the clock to a time before global competition, internet and imports.

Roberto Azeveido, the new director-general at the helms, proudly proclaimed that Bali put the W back into the name of the WTO. Indeed, a multilateral trading order – which is governed by rule of law rather than geopolitics – is more needed than ever. This is particularly true for Europe, whose economic influence (and its political leverage with it) is rapidly declining. However, it took 12 years of blame games, modalities and parroting ministers vowing to fight protectionism to arrive to this point. Somewhere along that road, we also lost the O – as in organisation. 

If this is organ harvesting – well, is there any more appetite for kidney pie?