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Tuesday, 27 March 2012

Freedom and the Internet

The Jasmine Revolution that has affected many of the Arab countries showed how big a role the Internet in general and social networks in particular can play in promoting political freedom. Social networks promoted the free flow of information and also helped people organize spontaneous demonstrations against oppressive regimes.

Yet, on second thought, it is not entirely clear that the Internet automatically guarantees free speech. The fact that user-generated content is recorded on Internet servers makes it easier for authorities to track contributors and punish them if the promoted information and ideas are not supporting the regime. The Chinese government, for example, has just introduced regulation that requires people to setup their accounts on microblogging sites and social networks with their true identities. Foreign sites (e.g. Twitter) are banned and local sites (SinaWeibo, Tencent Weibo, Renren, etc.) are constrained by such regulation. Enforcing the law is not a trivial task (the trade of bogus IDs is very liquid) but still the recorded information makes it easier for authorities to track down individuals who disseminate undesirable information.

But the government can be more subtle in the control of information by actually influencing it. In a recent Economist article ("The power of microblogs", March 17, 2012, p.55) it is reported that "... [Chinese] government agencies, party organs and individual officials have set up more than 50,000 weibo accounts" to influence the public debate about current issues and controversies that are massively affected by the rumors circulating on the Internet. This environment is particularly interesting and it is not clear who - the uncoordinated individual citizens or their coordinated government counterparts - are at a disadvantage in building consensus from the noisy cacophony humming on the Web. Maybe, with a sophisticated government the Internet is a more dangerous threat for freedom than traditional media....

Saturday, 24 March 2012

Credit Rating Agencies

Last week has been rich in news about Credit Rating Agencies (CRAs). Both the Financial Times (March 23, 2012) and The Economist (March 17, 2012) had articles on CRAs commenting on how the industry is being reshaped after the scandals triggered by the global credit and fiscal crises. I have followed this industry for over a decade now but I keep being surprised how little progress has been achieved in fixing it.

The Financial Times reports Europe's efforts to regulate the big three CRAs (Standard & Poor's, Moody's and Fitch). European governments are angry because CRAs have downgraded their debt. It doesn't really help the regulatory effort, of course, that its leader is Michel Barnier, a french carrier politician who knows little about economics and probably even less about information markets. His idea of regulation is to put a straight jacket on CRAs, e.g. by making them liable for their decisions or forcing issuers to rotate CRAs. Obviously, simply introducing more competition (e.g. reducing the barriers to entry) would be far more effective in making the industry more careful with the ratings, without mentioning the cost effectiveness of implementing such 'deregulation'.

The Economist reports on the evolution of CRAs in India. It praises the local industry wondering what might explain its success given that local CRAs use the exact same model observed in the US, i.e. exhibiting massive conflict of interest, which, of course, has been in big part responsible for the global financial crisis. One argument advanced is that in India, agencies have been better regulated by the local financial supervisor (SEBI) and India'd central bank. Of course, we all trust Indian government agencies in doing a good job at overseeing and regulating the economy. Is this a joke - really?

The other argument raised is that the CRAs in India have done a better job at diversifying their businesses. I am not sure I understood this argument. Essentially, incompetence and conflict of interest are going to be spread to other sectors of the economy and we should cheer about this? The article mentions one agency moving into hospital ratings, for example...

When evaluating threats to the industry, The Economist mentions that new entrants might represent a danger. Presumably, these would provide soft ratings to gain market share. Of course, we don't expect that conflict of interest will lead to biased ratings from the incumbents who are comfortable in controlling the market (?). Again, I am lost in the reasoning.... Reading between the lines, the picture gets even grimmer. India has 6 licensed agencies with three large 'local' agencies (CRISIL, CARE and ICRA) leading the pack. Reading on, we discover that CRISIL, the largest (worth $1.3 billion) is 52% owned by Standard & Poor's. In turn, Moody's owns 29% of ICRA. Given the uncertainty surrounding India's economic institutions and the devastating climate of corruption the apparent health of the local CRA oligopoly is rather depressing.