Democracy Lab

Decoupling: Ties That No Longer Bind

Emerging market economies have protected themselves from global economic downturns.

Everybody knows that the global economy is becoming more tightly integrated -- that factors ranging from the collapse of ocean shipping costs, to the rise of multinational manufacturing, to the growth of truly international securities markets, have bound national economies to each other as never before. This, of course, must mean we're now all in it together. Booms and busts in rich countries will reverberate ever more strongly through developing and emerging market economies. Right?

Sounds reasonable, but that's not what's happened. The big emerging market economies (notably, China, India and Brazil) took only modest hits from the housing finance bubble and subsequent recession in the U.S., Japan and Europe, then went back to growth-as-usual.

Hence the paradox: Emerging-market and developing countries have somehow "decoupled" from the Western business cycle in an era of ever-increasing economic integration. But the experts have yet to agree on why. Here are the two contending explanations:

Changing Trade Patterns

Just a few decades ago, most developing countries depended heavily on commodity exports -- everything from bananas to copper to soybeans to oil. And trade patterns were pretty straightforward: Rich countries supplied industrial goods in return for those commodities. When Europe, Japan and the U.S. went into recession, their demand for commodities fell, dragging supplying countries down with them. Actually, the impact was even worse than you might expect, since commodity suppliers were hit by the double whammy of falling export volume and falling export prices.

The content of trade shifted in the 1980s and 1990s with the movement of industries that used lots of cheap labor to low-wage economies, mostly in Asia. But most of the demand for the exports of poor and emerging market countries came from the U.S., the E.U., and Japan. So when the U.S. burped, Thailand, Mexico and Chile all got indigestion. (Hey, be thankful I found an alternative to the sneeze/caught cold metaphor.)

Many countries -- notably, the oil and mineral producers -- remain one-trick ponies, heavily dependent on commodity exports. But as the major emerging-market economies have grown bigger and more sophisticated, they've diversified their exports and moved up the food chain with higher-tech products. China, not so long ago the global hub for cheap apparel and shoes, now exports (among so many other things) solar panels and medical equipment. India exports pharmaceuticals and software as well as cotton, sugar and home furnishings. Brazil exports weapons and commercial jets along with coffee, soybeans and oranges.

This has set the stage for a radical shift in who trades what, and with whom.  China and India have become voracious importers of commodities from countries that once looked only to the rich industrialized countries for markets. By the same token, emerging market economies are selling a greater proportion of their manufactured exports to other emerging market economies. All told, EME exports to other EMEs has risen from less than 10 percent of their total to close to 40 percent today. As a result of this diversification, both emerging market exporters of manufactures and developing country exporters of commodities have become less sensitive to the ups and downs of rich economies.

The obvious example is the new synergy between China and the major oil exporters. Growing Chinese demand probably prevented a collapse in oil prices during the recession, and is being blamed by the White House for the current spike in fuel prices  But the impact of the shift -- including the political friction it is creating -- can be seen all over the place. India has resisted US-led efforts to embargo trade with Iran because it gets much of its oil from Iran in return for sugar and rice. Mexico and Brazil recently settled a trade dispute in which Brazil sought to keep out Mexican autos that competed with domestic Brazilian production.

Decoupling has been documented more rigorously. A recent statistical study from the Inter-American Development Bank found that the impact of a change in GDP in China on the GDP of Latin America has tripled since the mid-1990s, while the impact of a change in US GDP on Latin America has halved.

Better Policy Making

One reason emerging-market countries managed to skate through the last recession without much damage is that they used fiscal and monetary tools appropriately to offset the impact of falling demand for their exports. Beijing ordered China's provincial and local governments to spend an extra $580 billion (mostly on infrastructure projects) in response to falling exports to the U.S. and Europe. India's central bank, for its part, sharply cut the interest rate at which banks could tap government funds and directly injected funds into financial markets through other means. Brazil's left-center government used a combination of fiscal and monetary stimulus to end its own economic downturn after just two quarters, and managed a stunning 7 percent growth rate in 2010.

So, isn't that what any sensible government would do? Britain and, arguably, the eurozone, have not behaved sensibly, leaving them vulnerable to a "double-dip" recession. The more important point here, though, is that China, India and Brazil were able to act decisively to decouple from the rich countries' recession because they had built credible records in managing budget deficits and containing inflation.

Equally important -- and more surprising -- developing countries that were heavily dependent on commodity exports also managed to buffer the impact of the downturn. Traditionally, these countries have been unable to resist government spending binges in boom times and have lacked the capacity to borrow in lean times to offset the fall in export revenues. Their fiscal policies were thus "pro-cyclical" in the sense that they exacerbated swings in total demand.

But as Jeffrey Frankel of Harvard has shown, most commodity-dependent exporters have managed to get their fiscal acts together, and were thus able to expand demand with "counter-cyclical" stimulus policies during the last recession. Chile has led the way with a remarkably sophisticated law that largely forces the government to build fiscal reserves when the price of Chile's premier export -- copper -- is high, and allows it to spend down the fund when copper declines. More generally, Frankel argues, developing countries are getting better at buffering export price fluctuations because they are building credible government institutions for managing their economies.

There is no real need to choose between these explanations. By virtue of their size and diversification, emerging market economies have now more influence on the economic fortunes of other emerging-market and developing economies. And by virtue of their improving track records as credible inflation-fighters, they have more capacity to use fiscal and monetary stimulus to stay ahead of global recessions.

This is surely good news. But it does leave a big unanswered question. The big emerging market countries are acquiring the will and the way to protect their own interests during global economic crises. We don't know, though, whether they will have sufficiently broad perspective to step up to leadership roles in managing global crises as their economic power converges with that of the rich industrial countries.




Internet Freedom Starts at Home

The United States needs to practice what it preaches online.

"An electronic curtain has fallen around Iran," U.S. President Barack Obama warned in a recent video message marking the Persian New Year. Government censorship and surveillance, he said, make it more difficult for Iranians to "access the information that they want," denying "the rest of the world the benefit of interacting with the Iranian people."

Implied though not explicit in Obama's remarks was the idea that if Iran's Internet were freer and more open, Iran's relationship with the world generally -- and the United States in particular -- would be different. Cases like Iran are the main driver of Washington's bipartisan consensus around the idea that a free and open global Internet is in the United States' strategic interest.

Yet more than two years after Secretary of State Hillary Clinton gave her first speech declaring "Internet freedom" to be a major component of U.S. foreign policy, it turns out that many of the most sophisticated tools used to suppress online free speech and dissent around the world are actually Made in the USA. American corporations are major suppliers of software and hardware used by all sorts of governments to carry out censorship and surveillance -- and not just dictatorships. Inconveniently, governments around the democratic world are pushing to expand their own censorship and surveillance powers as they struggle to address genuine problems related to cybercrime, cyberwar, child protection, and intellectual property.

Even more inconveniently, the U.S. government is the biggest and most powerful customer of American-made surveillance technology, shaping the development of those technologies as well as the business practices and norms for public-private collaboration around them. As long as the U.S. government continues to support the development of a surveillance-technology industry that clearly lacks concern for the human rights and civil liberties implications of its business -- even rewarding secretive and publicly unaccountable behavior by these companies -- the world's dictators will remain well supplied by a robust global industry.

American-made technology has turned up around the Middle East and North Africa over the past year -- from Syria to Bahrain to Saudi Arabia, from pre-revolutionary Tunisia to Egypt -- in contexts that leave no doubt that the software and hardware in question were being used to censor dissenting speech and track activists. While much of this technology is considered "dual use" because it can be used to defend computer networks against cyberattack as well as to censor and monitor political speech, some members of Congress are seeking to prevent its use for political repression. To that end, the Global Online Freedom Act (GOFA), which passed through the House of Representatives Subcommittee on Africa, Global Health, and Human Rights last week, takes aim not only at U.S.-headquartered companies but also overseas companies funded by U.S. capital markets.

As GOFA's sponsor, Rep. Chris Smith of New Jersey, bluntly put it, repressive regimes in Iran, China, and Syria "are transforming the Internet into a 'weapon of mass surveillance.'" The bill has been kicking around Congress in various forms since 2006 after Yahoo handed over dissidents' email account information to the Chinese authorities and other companies including Cisco, Microsoft, and Google came under fire for aiding Chinese political censorship to varying degrees. While its specifics have changed over the years, the current version contains three main elements:

1. It requires the State Department to create a list of "Internet-restricting countries."

2. It requires that all companies listed on U.S. stock exchanges disclose to the Securities and Exchange Commission what procedures and practices they have put in place to protect the free expression and privacy rights of users in "Internet-restricting" countries.

3. It revises U.S. export control laws to forbid the export of censorship and surveillance technology to "Internet-restricting countries."

GOFA has received ringing endorsements from a number of human rights groups as well as from Yahoo -- which, after a few years of humiliation in Congress and the media over its mistakes in China, has made a public commitment to human rights. The second part of the bill, focused on corporate transparency, is modeled after sections 1502 and 1504 of the recently passed Dodd-Frank Act, which requires conflict-minerals and extractive-revenue disclosure. It is based on the premise that at least some investors care about the human rights responsibilities of U.S.-listed businesses. More broadly, the idea is that just as companies are expected to commit to basic environmental, labor, and human rights standards when it comes to their operations in the physical world, investors, consumers, and government regulators should expect similar commitments to users' and customers' rights to digital free expression and privacy when using the Internet and mobile devices.

Companies that join the Global Network Initiative (GNI), a multi-stakeholder organization through which Internet and telecommunications companies work with human rights groups, socially responsible investors, and academics to uphold core principles on free expression, privacy, and human rights, would receive "safe harbor" from this requirement. So far only five companies have joined the GNI: Google, Microsoft, Yahoo, Websense, and Evoca. (Full disclosure: I am on the GNI's board of directors.) It is possible that the bill will be an incentive for more companies to join the GNI even if it fails to pass.

Some free speech groups, however, have stopped short of a full-on endorsement of the bill. The Center for Democracy and Technology, while supportive of its general aims, cautions that GOFA needs refining in order to prevent unintended restrictions on the sale of badly needed technology to activists and NGOs working in authoritarian countries. Existing laws already fail to get the balance right: The Electronic Frontier Foundation is campaigning to reform current trade sanctions that are preventing opposition activists in countries like Syria from accessing U.S. companies' software and communications tools. The digital freedom group Access shares these concerns and also worries that the State Department's list of "Internet-restricting countries" will become politicized, potentially absolving companies that assist U.S. allies in censoring and monitoring political dissent.

The bill's drafters have further created problems for themselves by combining export controls and transparency requirements in one piece of legislation that applies to the same list of "Internet-restricting" countries. Export controls by nature target a list of countries that, due to U.S. trade and diplomatic interests and political lobbying by companies, is inevitably a relatively short list focused on the worst offenders. Thus the export control section of the bill will create pressure on the State Department to keep the list of "Internet-restricting" countries as short as possible.

Yet the bill's transparency requirements will lose much of their force and meaning unless they target corporate-government collaboration in a much wider range of countries where governments attempt to abuse censorship and surveillance powers. Consider, for example, India, the world's largest democracy -- which is unlikely to be placed on a State Department "Internet-restricting countries" list making it subject to sanctions -- but where the government is making increasingly aggressive demands of Internet companies to censor content and hand over user information. Or Britain, where civil liberties groups are in an uproar over plans by Prime Minister David Cameron's government to introduce a law enabling the government to monitor calls, emails, texts, and website visits of everyone in the country without a court order or warrant. Under GOFA, companies are unlikely to be held responsible for assisting these democratically elected governments in abusing their censorship and surveillance powers.

In congressional testimony last December, I argued that the section of GOFA requiring companies to adopt and disclose measures to protect Internet users' free expression and privacy rights should be based on a universal standard, not just the State Department's whim. The Global Network Initiative, for example, applies a global standard to corporate-government interactions. Why? Because the initiative's members -- who include a range of civil liberties groups, human rights organizations, socially responsible investors, and academics -- cannot come up with a single country where the abuse of free expression and privacy by government and corporations is not a genuine concern.

All companies doing business everywhere -- including in the United States -- should commit to uphold and defend the free expression and privacy rights of their users for the same reasons we expect other types of companies agree to respect the health and safety of the people who purchase and consume their products. Companies should be required to demonstrate that commitment by reporting publicly not only on how they gather and retain user information, but also how and under what circumstances they share that information with governments as well as other companies. Only then can people have a clear sense of how power is being exercised over their digital lives and know whom to hold accountable when that power is abused.

But GOFA, by targeting corporate sales and government relationships in the worst-case countries while skirting the much more inconvenient question of how companies facilitate government abuse of surveillance and censorship powers in democracies and close U.S. allies, completely sidesteps the root of the problem: the main market drivers whose demand for surveillance technology is actually shaping and funding the development of these technologies.

Make no mistake: American tech companies are up to their eyeballs in bad behavior. Despite industry and government efforts to keep the media in the dark about a traveling trade show for surveillance technology known as the "Wiretappers' Ball," recent media reports have revealed the extent to which American corporate innovations in surveillance technology are driven by U.S. government demand. And the U.S. government is by far those companies' biggest customer.

According to the Washington Post, at last year's trade show just outside Washington in Northern Virginia, 35 federal agencies as well as representatives from state and local law enforcement mixed with representatives of 43 countries. Despite the Obama administration's proclaimed commitment to Internet freedom, the executive branch of the U.S. government makes no effort to be honest or transparent with the American public about the types of surveillance technologies it is sourcing and purchasing, what capabilities these technologies have, or which other governments are purchasing these technologies.

What this means for American democracy -- let alone for the democratic aspirations of people anywhere else -- became abundantly clear this past Sunday, April 1, when the New York Times reported on a detailed investigation by the American Civil Liberties Union that uncovered widespread use of cell-phone tracking technology by police departments around the country in non-emergency situations without court orders or warrants.

Meanwhile, as GOFA moves forward, Congress is considering several cybersecurity bills that would authorize Internet service providers and other companies not only to monitor private communications passing over their networks, but also to share private communications with the National Security Agency and other federal entities or with any other agency of the federal government designated by the Department of Homeland Security -- and with less due process and judicial oversight than ever before. While acknowledging that cybersecurity is a legitimate goal, groups focused on the defense and protection of Internet users' rights, including the Center for Democracy and Technology and the Electronic Frontier Foundation, have expressed deep-seated concerns about the extent to which these bills open the door even wider for civil liberties violations.

GOFA's supporters argue that one has to start somewhere and that focusing on the relationship between U.S. companies and authoritarian dictatorships is the best way to obtain bipartisan consensus to pass legislation. That is no doubt true. But if the American people continue to allow the U.S. government and American industry to forge increasingly unaccountable and opaque relationships around the exchange and use of citizens' private information, the damage will extend well beyond American democracy and civil liberties. The business norms and technological innovations born of such opaque and unaccountable relationships will keep dictators supplied with handy tools for decades to come.