The right to be forgotten On the new dimensions in the battle for online privacy

It was 1984, and the Berlin Wall is still standing, when Gerd Wiesler - a foot soldier in the Stasi, the dreaded East Germanspy agency - is assigned to keep under surveillance a playwright, Georg Dreyman, who apparently is an enemy of the State. Wiesler soon discovers the real reason for the surveillance: Dreyman is having an affair with a movie actress that the minister of culture also covets. The minister's goal is to find some political charges he can pin on his rival. Wiesler, an idealist, though a loyal servant of the state, works silently to protect the man who he is assigned to keep under surveillance.

This is the plot for The Lives of Others, the 2006 German-language film directed by Florian Henckel von Donnersmarck, which, apart from winning innumerable awards, brought so powerfully to centre stage the issue of mass surveillance. It is believed to have influenced even Edward Snowden, the former United States government computer programmer who leaked, among other things, the news that even the phone lines of foreign heads of government, such as Angela Merkel of Germany and Dilma Rousseff of Brazil, were being tapped by the American government security apparatus.

Mr Snowden's revelations reveal one of the central paradoxes of contemporary life. The coming of the internet has made it infinitely easier for us citizens to communicate with each other; we can do that by email, through social media posts, through apps on phones - and from what we can see, citizens worldwide seem to be spending much of their day doing just that. But the way the internet is organised has also made it infinitely easier for governments to tap into this vast information flow. This is because information flow on the internet is concentrated at a few telecom companies, email providers and social media networks. Governments, for both valid purposes such as law enforcement and for improper purposes such as spying on political or commercial opponents, can tap into these networks in a way that was impossible for them to do in the good old days of the paper-post, telegraph and land-line based telephone.

And what is worse, it is not just overweening governments that we citizens have to worry about. Commercial service providers: email service providers, social media networks, e-commercecompanies, to mention just a few, are all potential infringers of our rights. When we use one of these services, we entrust to them our names, our addresses, our credit-card numbers, our dates of birth, who our friends are, who we share a sense of intimacy with, to name just a few dimensions of the information we share. It is only gradually that it is dawning on us that some of this information we have trustingly shared can be used against us when we apply for a job or when we apply to admission to a college.

A frivolous social media post from your college days can return to haunt you when you go for a job interview later. Many such posts are perhaps because the internet allows you spontaneous and effort-free ways to express your opinions; in an earlier era, by the time you committed your silliest thoughts to paper, stuck a postage stamp to it, and sent it off, much time had passed. And even if you posted it, it would at best be seen by one or two persons - whereas, in the internet era, your silly idea may get forwarded around, find an unintended audience of hundreds, and exist in cold cyberspace for ever.

With this realisation has come the battles about "privacy" and the demands that explicit laws be passed to protect the privacy of citizens.

Countries differ to the extent and scope of protection of privacy laws and even on what information should be considered "private". In the United States, for example, there is a specific Privacy Act that specifies that the information about an individual that is collected and stored by the United States government in the normal course of its functioning must be made available for inspection to that individual. In addition, there are innumerable other statutes that define what use can be made of information about an individual's financial status, credit status and health status. There is even a law that prohibits asking a person her age in a job application or interview.

The Europeans have added a new dimension to information privacy by insisting that citizens have a "right to be forgotten". It started in 2010, when a Spanish citizen lodged a complaint saying that an auction notice about his repossessed home was appearing on web search results even though the proceedings against him had been fully resolved; he demanded that search engines and a newspaper site that still showed this auction notice in search results stop doing so. The Court of Justice of the European Union upheld his demand and ruled that this information be removed not only from internet search engines' servers in Spain but also from their servers in the United States. A new human right, the "Right to be Forgotten", has been born, and it is going to extend worldwide.

Constructive lessons from a destructive cyclone The damage caused by Cyclone Hudhud in Visakhapatnam underlines the need for the government to follow some basic disaster management and environmental rules

Hudhud, a severe cyclonic storm, originating in the Andaman Sea around October 6, crossed the coastline nearVisakhapatnam at 11:30 a m on October 12, spewing venom and ferocity unknown in these parts for at least a century.

Hudhud's first spell, which preceded the landfall, lasted six to seven hours. It wreaked destruction, uprooting huge trees and breaking whatever that was fragile in its way. The eye of the cyclone, when it hovered over the city for about three hours, brought in a deceptive but eerie sense of relief, followed this time by the more ferocious, highly destructive second spell that levelled everything that the first spell had missed. After the cyclone, Visakhapatnam bore no resemblance to what it used to be, with its lush green cover. But, its impact was more drastic on the lives of the poor, the slum dwellers and fishing villages along the coast.

There are many lessons to be learnt from Hudhud.

Mangroves and casuarina plantations along the coast and the thick tree cover on the hills used to protect the city in the past from the vagaries of cyclones. Indiscriminate denudation, in defiance of environmental laws in force and the Visakhapatnam Urban Development Authority's mandatory Master Plan, have rendered the city vulnerable to high-velocity cyclones.

The Coastal Regulation Zone (CRZ) requirements are indispensable for protecting the coastal and marine environment of Visakhapatnam. For example, CRZ prohibits mechanical pumping of water through borewells within 500 metres from the high tide line since it will cause saline sea water to contaminate the ground water aquifers. This rule is wantonly breached. When Hudhud disrupted municipal water supplies, potable ground water, had it been available, would have provided relief.

Conserving mangroves, raising casuarina and other durable species of plantations along the coastline and regulating quarrying over the hills should, therefore, form part of the city's future plans. The laws to protect the environment need to be respected rather than held in contempt.

Following the killer Diviseema cyclone and tidal wave of 1977 in Andhra Pradesh, 146 cyclone shelters were constructed along the Visakhapatnam coast. These shelters need to be maintained in a state of readiness. However, few of them came in handy for providing relief to the people. For a government that makes huge investments on statues and decorative arches, to invest in the upkeep of these cyclone shelters should not be difficult.

Post-1977, the state had set up a Coastal Zone Management Authority with its counterpart institutions in each coastal district. These institutions have become defunct. They need to be revived and adequately equipped and empowered. The same is the case with the state and district disaster management authorities.

Cyclones seem to attract VIPs like lights attract insects. Each VIP puts pressure on the already strained local resources such as food, water, milk, vehicles, fuel and so on. When one VIP arrived soon after the cyclone this time, a truck carrying food packets for the victims had to be stopped for several hours for security reasons, causing the food to rot. A taxi booked by a patient was requisitioned for a VIP. One important lesson that our VIPs should learn is to stay at their respective places of work and provide help to the local institutions to deliver.

Hudhud gave the state government more than a week to plan. Knowing that the city's municipality, its police force and the local urban development authority were headless, the government could have quickly responded and posted able officials to give them direction. In times of emergency, nothing can substitute well-managed institutions that can respond on their own.

No government can ever match the spontaneous effort that could come from local communities. Andhra Pradesh has a law providing for area sabhas/ward committees in towns, but the law has remained on paper. Similarly, gram sabhas in villages can play a crucial role in facing calamities. If fallen trees could be cleared along many lanes in the city within five days after the cyclone, the credit should go to self-help groups and some NGOs. The government should, therefore, involve civil society as a part of any disaster management effort in the future.

Lastly, the city's airport was a sad spectacle and so were the petrol stations and many other structures. The design and the architecture of all large buildings should provide for aerodynamic stability at high velocity winds. The material used should be corrosion-free in view of the salinity that pervades any coastal environment.

INS Teg Visits Simon's Town, South Africa for IBSAMAR

Indian Naval Ship Teg, a Stealth Frigate of the Indian Navy, is scheduled to make port calls at Simon’s Town and Cape Town between 20th October and 10th November 2014. The ship will participate in the fourth edition of the biennial India-Brazil-South Africa Maritime (IBSAMAR) Exercise. The port call at Simon’s Town will coincide with the visit of Vice Admiral Anil Chopra, PVSM, AVSM, ADC, Flag Officer Commanding-in-Chief, Western Naval Command.

INS Teg is the 9th Indian Naval ship to participate in IBSAMAR to strengthen the existing bonds of friendship between the three nations. The visit also seeks to underscore India’s solidarity with countries of the Indian Ocean Region.

The ship sailed from her base port Mumbai on 1st October 2014 as part of a four-ship Task Group headed by Rear Admiral R Hari Kumar, VSM, Flag Officer Commanding Western Fleet. During the ship’s stay in harbour at Simon’s Town, various activities are planned including professional interaction between naval personnel. On departure from South Africa, the ship is scheduled to make a port call at Mozambique before returning to Mumbai in end Nov 2014.

INS Teg, built at Kaliningrad, Russia was commissioned into the Indian Navy on 27th April 2012. The ship is a guided missile Stealth Frigate with formidable arsenal. The ship is commanded by Captain Anand Yeshwant Sardesai and is manned by a crew of 25 officers and 220 sailors.

Lessons from mutiny on the bounty

The recommendations of the World Bank/IMF are presented to us, the people of the South, as scientific, objective, necessary, fair, and in the best interests of the countries where they are to be implemented. This is why the rebellion episode by the bank staff to its restructuring is so significant

In the Financial Times of October 8, the columnist Shawn Donnan, reported that the World Bank was facing an internal “‘mutiny.” Yes, the word mutiny was used. The professional staff were apparently angry about several issues, a deep discontent, because of which the rebellion had been brewing over many days. The key issue was the restructuring exercise being undertaken by the President, Jim Yong Kim, to save, through both the elimination of benefits to staff on mission and also through possible lay-offs, the sum of $400 million. The restructuring exercise, staff felt, was deeply flawed both procedurally and substantively. The columnist reported some members saying that this “thing [restructuring] is affecting everything.” “We can’t do business. We don’t have the budget. It’s a mess, ...” Another staff member complained that “nickel and diming” on travel budgets was causing travelling staff to have to pay for their own breakfasts. “It’s really small beer,” she said. “Has anyone ever thought about the impact of these changes on staff morale?”

Resistance against restructuring

To assuage their feelings, before the semi-annual meeting of the Bank and International Monetary Fund (IMF) with Finance Ministers and Central Bankers of member countries, President Jim Yong Kim had to hurriedly convene a “town hall” meeting with the staff to discuss their concerns. The issues that was fuelling their anger were: (i) the cost-cutting exercise which meant that items of expenditure that they had been accustomed to, such as a paid for breakfast, were being withdrawn, (ii) the secrecy and opacity of the whole exercise i.e., appointment of consultants, payment of bonus to the senior management, hiring of new senior managers, etc, (iii) the award of a “scarce skills premium” of $94,000 as bonus, over and above his salary of $3,79,000, to the Chief Financial Officer who was carrying out the exercise, and (iv) to the appointment and payment of the huge sum of $12.5 million to external consultants such as McKinsey, Deloitte, and Booz Allen for advice on how to restructure a development Bank, as reported in the Economic Times of October 15, 2014.

For those of us from the Global South, who not only receive but also have to follow the advice of the Bretton Woods twins, on how to “restructure” our economies and change our policies, this episode has four very interesting lessons. The recommendations of the World Bank/IMF are presented to us, the people of the South, as scientific, objective, necessary, fair, and in the best interests of the countries where they are to be implemented. The World Bank is the repository of the most authoritative knowledge on development. It annually publishes the flagship World Development Report (WDR), the first of which in 1978 was titled “Prospects for Growth and Alleviation of Poverty.” Every year since 1978, it flags important themes for development with the 2013 WDR being on “Jobs” and restructuring required to align them with the new economy. The 2015 WDR is on “Mind and Culture” and the World Bank website reports the central argument as being “that policy design that takes into account psychological and cultural factors will achieve development goals faster.” This is scholarly knowledge and is used by many university classrooms as part of required reading. This is what positions the World Bank as a premier knowledge institution on development. Then why is the rebellion episode so significant? There are four aspects of that which merit discussion.

The first is the resistance against the restructuring medicine. This is the same medicine used by the World Bank against the rest of the world. The restructuring exercise, which has eliminated jobs within the public sector, whether this be in government or in the support services required by any public institution, such as of subordinate administrative staff, has produced an underclass of workers, who, although they are still needed, have been deprived of the welfare and security benefits that the permanent staff enjoys and were benefits that had been won by a long history of working class struggles. So, when security guards, drivers, mess workers, sweepers, the class IV workers, have now to live lives filled with anxiety about illness, unemployment, etc., because they work for labour contractors who do not provide any such benefits, the anger of the World Bank professional staff who, because of the restructuring, have to pay for their “breakfast” is a little difficult to understand. The restructuring exercise of economies in the global south has produced an underclass whose livelihood insecurity has increased exponentially. The mutiny at the World Bank appears somewhat paradoxical. Not only is the exercise personally dishonest, given the rebellion when the policy is applied at home, but it is also intellectually dishonest when read against the 2015 WDR. Is this the modern performance of the “mutiny on the bounty”?

Control by the few

The second aspect is the process adopted in the internal restructuring. The Reuters and FT reports tell us that the common complaint of the staff is that the many aspects of the restructuring exercise, initiated by the president, were non-transparent. There was an opacity to the process. For example, questions such as the following needed to be asked. What was the method followed to give the CFO a “scarce skills premium” of $94,000 over and above his salary? Was the work done outside the normal duty of the CFO? How did the president decide on who qualifies for a “scarce skills premium” and how many persons have qualified for this bonus? These were questions asked at the town hall meeting. If the “scarce skills premium” was based on sound management principles, why did the CFO agree to forego the bonus after the uproar? These are good questions and lead one to wonder if countries have the same option of protesting? Did Greece and Portugal and Ireland and Argentina have the protest option? The interesting lesson from this episode is that restructuring produces pain and distress to the many while it rewards the few especially those tasked with implementing it. These few have access to political and intellectual power. They control the methods adopted of public justification which produces a discourse that the restructuring is necessary and will benefit the whole. The few get rewarded while the many pay the price in the restructuring in many countries of the global south.

Neo-liberal triumph

The third aspect is the use of consultants. This is the most disappointing and alarming aspect of the episode. For an institution such as the World Bank, whose main rationale is that it is a knowledge institution about how to promote development, to now implicitly declare that it does not have the knowledge required to restructure itself is a severe admission of the weakness of its knowledge base and skill sets. How does it then prepare a road map to restructure economies when restructuring an institution is infinitely easier than restructuring the economy of a country? Restructuring an institution can draw on the interdisciplinary knowledge of the WDR 2015 such as best practice, graduated approaches, evidenced-based policies, results-based management, measuring and monitoring, etc. (all the keywords of the World Bank itself), to achieve the result of a better, leaner, more efficient, and fair institution. But the decision to hire outside consultants, paying a whopping fee of $12.5 million, shows that the World Bank does not either believe in its own capability, or worse doesn’t have this capability. What is alarming is the message that development thinking will, from now on, be done and propagated by the big global consultancies. Is the World Bank announcing that henceforth even its development knowledge will be outsourced? As reported in the Economic Times, one of the protesters said, “What do they know about development and the complexities of what we do?” Indeed, what do they know? But if we see the economic policy institutions of many countries, we will see a seamless movement of personnel between global consultancies and central banks. Our own development thinking has been outsourced to neo-liberal knowledge institutions, such as global consultancies, ratings agencies and investment banks. We can see this takeover of knowledge production in the area of economic policy, the triumph of the neo-liberal frame, even in India. Look at the key players of our economic policymaking. The World Bank has now given its stamp of approval to this trend. The recolonisation of the Indian mind and the policy discourse is near complete.

The fourth aspect of this troubling episode is the use of words to legitimise the action. In the last few months of the Indian public debate, we have come to see the power of words and the social power the purveyors of these words acquire. The word makes the world. Tagore argued for this philosophical position that language constructs reality, that we see the beauty of the world through our language, and that outside language there is no beauty. Controlling the word, the Bank decides to reward its CFO with a large bonus, while it is reducing the financial package of its other employees; it deploys the justification for this decision as a “scare skills premium.” The CFO gets the additional money because he has scarce skills. The investment Bank fraternity has to be rewarded with huge bonuses because they have scarce skills. Wall Street is built on this justification. This is capitalism’s masterstroke of controlling perception, controlling the public discourse by controlling words. We accept the differentials because we are made to believe it is a “scarce skills premium” to be paid for our own good. Sometimes a typographical error brings out the truth much better. By mistake I typed it as “scare skills premium.” It is.

Fuelling reform

It was a long-awaited reform measure but when the Narendra Modi government eventually deregulated diesel pricing on Saturday, the timing, in the backdrop of falling global oil prices, was just perfect. With oil companies wiping off the under-recoveries on diesel and going into surplus, the government could sweet-coat what is essentially a bitter pill with a cut in retail price of the transportation fuel. While consumers may rejoice over the benefit now, they need to be conscious of the fact that when the wheel of global oil prices turns into an up-cycle once again, the domestic retail price of diesel will go up. That is also when the government’s commitment to the reform measure will be tested. In a deregulated regime, oil companies will adjust diesel prices at periodic intervals to reflect the prevailing international price of oil, just as they do now in the case of petrol. This is as it should be. Subsidies, including on diesel, have been exerting tremendous pressure on government finances, leading to a widening fiscal deficit. The 2014-15 Budget had projected a subsidy burden of Rs.2,46,000 crore, of which petroleum subsidy accounted for Rs.63,500 crore. Thanks to falling oil prices in the last few months and deregulation of diesel now, the petroleum subsidy is expected to be substantially lower than the budgeted level, thus easing the burden on the fisc.

The Modi government has also done well in deciding to deposit the subsidy on cooking gas directly into the bank accounts of consumers. The government should do the same for kerosene subsidy as well given that leakages are the highest there, but only after ensuring that no deserving recipient is left out. The new Jan Dhan accounts could be used for this purpose. With petroleum subsidies now being addressed, the focus should shift to reducing fertilizer subsidy, which is about the same quantum as that on petroleum. Meanwhile, in the other major announcement on Saturday, the government finally addressed the contentious issue of domestic gas pricing which has been hanging in the balance since the start of this year. The formula has been tweaked to curtail the increase envisaged under the Rangarajan formula by over two-thirds thus containing the final base price to $5.61 per million metric British thermal unit. The government has done well in granting a premium to gas produced in ultra-deep water, deep-water and technologically challenging areas as production costs will be high but the fine print that provides details on premium calculation has to be read closely before a final assessment is made. The point, ultimately, is to balance the interests of consumers who desire the cheapest price, and of producers who would want their costs covered fully and topped by a decent margin.

Why Tirole

Jean Tirole’s Nobel prize has generated much excitement for those of us working alongside him at the Toulouse School of Economics (TSE). Tirole’s prize comes as recognition for over 30 years of work on a wide range of topics, from banking and finance to the regulation of network businesses. On a sombre note, it also comes at a time when we at the TSE are commemorating a decade since the passing of Tirole’s collaborator, Jean-Jacques Laffont, who, Tirole noted, “would have deserved to be with me” in receiving the prize.

The Nobel committee’s award specifically focuses on Tirole’s “analysis of market power and regulation”. There are two central questions. First, how will firms behave when there are only a few of them in the market? What prices will they set, what range of goods will they offer, and what will be the quality level of these goods? Second, if competition among firms is insufficient to constrain prices, what policies should regulators use for the benefit of consumers and society at large?

To answer these questions, Tirole has championed the approach offered by information economics, which centres on the role of information that individuals and firms hold privately. A classic example is the regulation of a firm’s pricing, say, a privately owned network that supplies electricity to homes and businesses. Such distribution networks are examples of “natural monopolies”: firms that face no competitors because replication of their infrastructure is infeasible or too costly. Other examples include railroads, ports and phone lines.

The question for a regulator of a natural monopoly is how to set the firm’s prices, given that it has better information about its technology. One possibility is to simply let the firm recover all of its costs. But this gives the firm’s managers little reason to reduce expenditures. Indeed, the management might engage in wasteful spending that benefits only themselves, knowing that the firm will be reimbursed. Alternatively, the regulator could fix a price that does not depend on the firm’s cost. The firm then keeps any reduction in expenditures for itself; that is, there are strong incentives to reduce spending. Unfortunately, this also means that very efficient firms make large profits to the detriment of consumers. The contribution of Tirole, together with Laffont, was to derive the optimal incentive scheme. They showed that the optimal scheme lies between the two extremes. Optimal regulation balances incentives for efficiency against reductions in firm profits.

Laffont and Tirole also studied dynamic models of regulation, noting that regulators do not set firm incentives once and for all but typically revise them overtime. They analysed the problem of a regulator that cannot commit to its future policies, showing how a firm will be led to reveal its true costs only gradually. Tirole has considered a host of other issues, specific to different markets. Together with Jean-Charles Rochet, he has been a leader in the study of platforms operating in “two-sided markets”. Here, a platform is a firm that provides services to users on each side. Credit cards provide services not only to cardholders but also to merchants who accept these cards. Newspapers not only attract readers, but also sell advertising space to companies that want to reach these readers. Tirole studied pricing and competition in these markets, influencing thinking on the regulation of credit-card interchange fees (the fees paid by a merchant’s bank to a customer’s bank). Another example is his study of “patent pools” (in collaboration with Josh Lerner), where companies come together to cross-license patents needed for a given technology. Such arrangements seem increasingly important in high-tech industries such as software development and biotechnology. However, because companies set prices for the pooled patents cooperatively, it is natural to worry that the practice could hurt consumers. Lerner and Tirole argued that it is difficult to assess whether this is the case, and that it depends on the market in question. But they were still able to provide robust policy advice. Tirole has also studied regulatory issues in banking and finance, of special interest in view of the recent financial crisis. He studied the implications of government bailouts in banking and considered how a government can restore a frozen asset market — the dilemma that was faced in the US market for mortgage-backed securities. As these examples attest, Tirole’s prize was not for a single contribution but for a wide-ranging body of work. He has been successful in identifying topics of importance for practitioners, such as regulatory policymakers. The running theme is careful modelling of the incentives faced by individual actors. He has devised models that are detailed enough to capture the relevant complexities, but simple enough to be accessible to a wide readership of economists.

Bankruptcy Reforms Committee

The Hon'ble Finance Minster in his Budget Speech of 2014-15 announced that an Entrepreneur friendly legal bankruptcy framework would be developed for SMEs to enable easy exit. Pursuant to the above announcement, a Committee has been set up under the Chairmanship of Shri TK Vishwanathan, former Secretary General, Lok Sabha and former Union Law Secretary, to study the corporate bankruptcy legal framework in India and submit a report by February next year. The Committee will examine the whole gamut of issues relating to bankruptcy including the following specific areas: i. Why bankruptcy matters? ii. Early detection and resolution of finacial distress iii. Protection of interest of stakeholders iv. Study the rescue mechanism and suggest ways of improving it v. Examine the role of the institutions engaged in the process of rescue and liquidation vi. Liquidation procedurefor smaller companies vii. Any other aspect relevant to the subject Comments and suggestions on the proposed areas may be sent to Director (FSLRC), Department of Economic Affairs, Ministry of Finance, Room no. 68-A, North Block, New Delhi-110001 or via email on masaldan.gaurav@nic.in within 30 days.