Sunday, 7 March 2010

Global Health

In this interview, we speak to Sir Richard Feachem, who is Professor of Global Health at both the University of California, San Francisco, and the University of California, Berkeley, and Director of the Global Health Group. Sir Feachem was also the founding Executive Director of the Global Fund to Fight AIDS, Tuberculosis and Malaria, which has saved over 4.9 million lives globally. We discuss the key issues facing health in the developed and developing world, strategies to eradicate some of the most prevalent conditions, and the future of global health.

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Vikas Shah, Thought Economics, March 2010

That human persons are flourishing” said Thomas Pogge (in his 2002 book, ‘World Poverty and Human Rights) “…means that their lives are good or worthwhile, in the broadest sense. Thus, the concept of human flourishing, as I understand it, marks the most comprehensive 'all in' assessment of the quality of human lives. It is broader than many other concepts including pleasure, wellbeing, welfare, affluence and virtue.

What Mr. Pogge realised was that for humanity to flourish (in both a philosophical and physical context) presupposes at least elementary levels of stability in diverse areas such economics (at a basic level, the ability to participate within an economy), politics and law (a framework which supports rather than suppresses, provides at least the basic levels of protection and freedoms), environment (the ability to subsist agriculturally, find water, shelter, safety from threats, and not fall victim to environmental conditions) and community (the existence of, and ability to interact with, other humans). Once these ‘elementary criteria’ (often referred to as basic human rights) are fulfilled, human beings can begin to flourish in other senses; intellectually, artistically, technologically, and so forth.

At the core of all these factors of human success is the core presupposition not discussed above, which is that humans are healthy, and able to participate in society. Many of the greatest commentators on life have realised this. “It is health,” said Mahatma Gandhi, “that is real wealth and not pieces of gold and silver.” A view supported by such statesmen as Benjamin Disraeli who said, “The health of the people is really the foundation upon which all their happiness and all their powers as a state depend” and even philosophical commentators such as Samuel Johnson, who stated, “To preserve health is a moral and religious duty, for health is the basis of all social virtues. We can no longer be useful when we are not well.

Humanity has also experienced a profound period of growth, in number (population), capability (technology) and mobility against a backdrop of economic ‘development’. These changes have exacerbated the spread of diseases (as humans are more mobile, and have greater variety of interactions), and created other health challenges (as health issues are compounded by poverty, or somewhat paradoxically created by wealth).

In this exclusive interview, we speak to Sir Richard Feachem, and discuss the key issues facing health in the developed and developing world, strategies to eradicate some of the most prevalent conditions, and the future of global health.
Sir Richard Feachem is Professor of Global Health at both the University of California, San Francisco and the University of California, Berkeley, and Director of the Global Health Group at UCSF Global Health Sciences. He is also a Visiting Professor at London University and an Honorary Professor at the University of Queensland.

From 2002 to 2007, Sir Richard served as founding Executive Director of the Global Fund to Fight AIDS, Tuberculosis and Malaria and Under Secretary General of the United Nations. During this time, the Global Fund grew from scratch to become the world's largest health financing institution for developing countries, with assets of US $11 billion, supporting 450 programmes in 136 countries. Previously, Sri Richard was Director for Health, Nutrition and Population at the World Bank (1995-1999) and Dean of the London School of Hygiene and Tropical Medicine (1989-1995). Professor Feachem holds a Doctor of Science degree in Medicine from the University of London, and a PhD in Environmental Health from the University of New South Wales. In 2007 he was awarded an Honorary Doctorate in Engineering by the University of Birmingham. He is a Fellow of the Royal Academy of Engineering and an Honorary Fellow of the Faculty of Public Health Medicine of the Royal College of Physicians and of the American Society of Tropical Medicine and Hygiene. In 2002 he was elected to membership of the Institute of Medicine of the US National Academy of Sciences. Sir Richard was knighted by Her Majesty Queen Elizabeth II in 2007.



Q: Looking at the core conditions of HIV/AIDS, Malaria and Tuberculosis. What are the economic, political and social challenges contributing to the continued growth and spread of these conditions? And what are the measures which are in-progress, and needed to move towards eradicating or managing these conditions?

[Sir Richard Feachem]HIV/AIDS, TB and malaria are among the largest health challenges faced by low and middle income countries today. In addition, these three major killers form the focus of the Global Fund to Fight AIDs, Tuberculosis and Malaria. At this point the similarities end. It is necessary to discuss these pandemics individually, because their specifics are very different.

HIV/AIDS is the greatest pandemic in human history. It is chronic pandemic, in the sense that its rise and fall is measured in decades. The known part of this pandemic is now three decades old, and it has several decades still to run. We have been remarkably successful in rolling out anti-retroviral therapy to those who need it, and therefore prolonging the life of millions of individuals in the developing world, who would otherwise die. We have been much less successful in prevention or in gaining a full understanding of the dynamics of transmission and the reasons for the large differences in infection rates among different populations.

The key challenges for the next decade are twofold. First, continuing to increase the level of international and domestic investment, both in antiretroviral therapy and in more successful and better designed programs of prevention. The second priority lies in designing and implementing effective prevention programs. We are not good at doing this today and we do not fully understand how to increase our effectiveness. The discovery of an effective HIV vaccine is the nirvana for all our efforts to prevent AIDS.

Turning to tuberculosis, there are two key dimensions. First, it is the handmaiden of HIV. As HIV worsens, so does TB. TB is the most common cause of death of HIV positive people in the developing world. Second, because we have so vigorously rolled out tuberculosis treatment programs, in some countries with great success, we have fuelled a rising pandemic of multiply drug-resistant (MDR) TB and extremely drug-resistant (XDR) TB. These forms of TB are steadily growing and will continue to do so. We are scientifically naked in front of this threat. We do not have the diagnostics to quickly detect an MDR or XDR case. Once detected, we do not have the drugs to effectively treat the patient at reasonable cost, and we do not have a TB vaccine. This is an area where major investments in basic science and laboratory research are urgently needed in order to bring us a new generation of improved tools and technologies for confronting this rather scary threat.

For malaria, the news is extremely good. Roughly 100 countries in the world have already eliminated malaria (most of them since the Second World War). Of the 100 countries in the world that still have endemic malaria, 39 are in the process of eliminating while the remaining 61 are making steady progress with their control programs. Numerous countries, even in the tropical heartland of malaria, have halved their morbidity and mortality rates since the beginning of this century. Challenges ahead of us are to maintain and, if possible, to increase successful investments in this field. In addition, we have to be ever vigilant about emerging resistance in the parasite populations to the drugs and emerging resistance in the mosquito populations to the insecticides. We can never prevent this resistance; we can only postpone it. Eventually, we will need new drugs and new insecticides.

Q: Looking at life expectancy, can you discuss the differences in life expectancy based on where one is born? How can be prevented?

[Sir Richard Feachem] The world experiences, on a daily basis, a zip-code lottery (or postcode lottery) with regard to the expectancy of life and the expectancy of health. Roughly speaking, a child born today in a very poor country can expect to live about 40 years, while a child born today in a wealthy country could expect to live about 80 years. These numbers come from national averages, and if you contrast life expectancy between a child born in the poorest communities in the poorest countries with a child born in the wealthiest communities in the wealthiest countries, the gap between the fortunate and the less fortunate is even wider. The reasons for these differences are well-known and, in most cases, the solutions are also well-known and have been effectively used in many places. The well-managed and large-scale implementation of known interventions would greatly close the life expectancy gap between the wealthy and the poor. The challenge is to finance this work and to deliver it effectively. Even with today’s resources, strengthening the management and delivery of programs can still have great impact.

Q: What are the key challenges facing the developed and developing world with regards human nutrition?

[Sir Richard Feachem] We are in the midst of a pandemic of eating too much (the overweight and obesity pandemic) and a pandemic of not having enough to eat (the under nutrition and hunger pandemic). Roughly 1.6 billion people in the world are affected by the first pandemic and roughly 1 billion people in the world today are affected by the second pandemic. Both numbers are rising rapidly. Curiously, 52% of the world’s population resides within countries where these pandemics co-exist on a significant scale. The solutions to the two pandemics are very different. The pandemic of hunger is related to poverty, the equitable distribution of food, and rising food prices. The epidemic of obesity is related sedentary lifestyles and the skill of the food industry in producing unique combinations of fat, sugar and salt, which override our appetite mechanisms and cause us to consume far too many calories. A single super large combo meal at any popular hamburger outlet will contain a full day’s worth of calorie intake. When one sees such meals being purchased and eaten, one wonders whether the individual concerned is going to consume only water for the next 24 hours. Unlikely!

Q: What impact are global topics such as conflict, climate change, the global economic slowdown and mobility playing in global health?

[Sir Richard Feachem] The global economic slowdown has huge implications for global health. Global health benefited from a rising tide of investments in recent years, which has now abruptly come to an end. The major global health investors, such as the Global Fund to Fight AIDS, TB and Malaria, find that their income is plateauing and may even start to decline. This provides a fundamental challenge to their business model and their ability to support the high quality applications that they continue to receive in large numbers. Significant reengineering is required in the face of this reality, combined with a major movement towards smart investment and not just more investment.

Conflict is and always has been a huge enemy of global health. Diseases surge forward in times of conflict and painstakingly developed public health programs can be destroyed in weeks. In addition, conflicts create refugees and migrants, who typically experience worsening health and epidemics linked to the squalor of their temporary living conditions.

The global warming and global health relationship is more nuanced and subtle. There may be gains and there may be loses through gradual increases in temperature and shifting patterns of rainfall. What is clear is that extreme climatic events, which appear to accompany global warming, are greatly hazardous to health and typically produce acute setbacks and epidemics together with longer term undermining of carefully designed and implemented public health programs.

Q: What role does philanthropy play in providing solutions to health challenges globally and organisations such as The Global Fund? Can you explain the need and premise behind health-systems initiatives (PPiP)?

[Sir Richard Feachem] In recent years, philanthropy has played important and influential role in global health. This has been led by the Bill and Melinda Gates Foundation which has significantly changed the global health landscape. Global health is now a field in which, rather than having a monopoly of ideas and initiatives coming primarily from the WHO, we have a competitive plurality of initiatives and investments coming from a variety of public and private organizations. Provided there is not duplication and wastage of effort, this competitive plurality is a good thing and has greatly stimulated the intellectual and investment landscape in global health.

New mechanisms for financing global health, especially the Global Fund, have shown that the modalities used since the end of Second World War can be greatly improved upon. The Global Fund has embraced a number of radical innovations which have set new standards in the business of aid. The leading innovations implemented by the Global Fund have been:

1. To let the demand side rule and to separate the business of finance from the business of designing and implementing programs;

2. Disbursement on the basis of independently validated performance;

3. Financing both public and private actors on the basis of the quality of ideas and the success of implementation of those ideas; and,

4. Extreme web-based transparency to allow citizens in both donor and recipient countries to track every detail of every grant.

Another major arena of active debate concerns the role of private actors (in Europe, referred to as NSAs; non-state actors) in health systems strengthening. Most developing countries start from a position where half or more of all health care delivery is done by disorganized and unregulated private providers and is paid for out-of-pocket. A major movement is underway to conscript private investment, skill, and energy into the achievement of public policy goals, by forming long-term public-private partnerships between government and the private sector. Much of the innovation in this area is coming from the developing countries themselves rather than from debating rooms in Geneva, London or Washington. This local innovation provides the beginnings of a way out of decades of health systems neglect and the lack of access to high quality services experienced by most people in low and lower-middle income countries.

Q: How are investment markets playing a role in these challenges?

[Sir Richard Feachem] Innovation in the financial market place is playing an increasing role in global health. We already have bond issues to support global vaccination programs, and advance market commitments to promote research and development investments in new drugs and vaccines targeted at priority diseases of the developing world. Big pharma companies are working on patent pools. Organizations such as the Clinton Health Access Initiative are negotiating highly favourable prices for large volume supply of HIV and malaria products for the developing world. And so on and so on. This will continue.

Q: What are the key technological developments which will impact global health?

[Sir Richard Feachem] This falls into two domains. Biomedicine and biotechnology on the one hand, and everything else on the other. The rapid progress in molecular biology and biochemistry will continue to accelerate the pace at which new drugs, diagnostics and vaccines targeted at major health problems in the developing world will become available. The challenge then is to make these new products quickly accessible to poor people in remote parts of poor countries. We are getting better at doing that, but we still have a long way to go.

The other domain of technical innovation will be, simply put, everything else. Prominent in the everything-else space will be information technology of many kinds. Already cell phone technology is being used for surveillance, data reporting, remote diagnosis, tracking the movements of people who might carry malaria across borders, and much more. Satellite based mapping technology is also rapidly improving our ability to track health and disease spatially, down to the level of the individual house. This kind of intelligence can be extremely helpful in the fight against infectious diseases and in responding effectively to outbreaks and pandemics.

Q: Is enough attention also being directed towards the development of treatments for orphan diseases?

[Sir Richard Feachem] There are two kinds of orphan diseases. First are the very rare diseases of wealthy people in wealthy countries. For this category, there is explicit legislation providing substantial incentives for research and product development. These incentive structures have worked very well in North America, Europe, and Japan, for example. The other kind of orphan diseases are the common diseases of poor people in poor countries, which are not also experienced by rich people in rich countries. For these diseases, there is also a profitability risk for anyone contemplating a research and development investment. We have seen much less ingenuity in designing incentive structures for this second group of orphan diseases. For HIV/AIDS, this has not mattered because it is a disease both of poor people in poor countries and of wealthy people in wealthy countries. Profitability is ensured by the second category of patients and new products, appropriately priced, can also benefit the first category. This is not true of the so-called neglected tropical diseases or conditions such as malaria. We need to improve incentive structures for this category. The rise of a research-base pharmaceutical industry in countries like Brazil, China, India and South Africa will not make this problem go away. These companies will be subject to the same incentive structures as their competitors in North America and Europe and their boards will equally favour research and development directed towards chronic disease of wealthy people (or well-insured people) in rich countries. Because a new drug is developed and manufactured in India does not mean that it is more likely to address the needs of the 700 million poor Indians rather than the 300 million middle-class Indians. Again, much more ingenuity around incentive structures is required to unleash the full potential of the pharma and biotechnology industries to tackle the biggest of global health problems.

Q: What does our experience with the first year of the H1N1 pandemic tell us about challenges and opportunities in global health?

[Sir Richard Feachem] It tells us a great deal. H1N1 (swine flu) has let us off the hook by being such a mild virus with such a low case fatality rate. H1N1 does have one of the two properties we fear; namely it is very easily transmitted from one human to another. H1N1 spread to 120 countries in the first 10 weeks after the index case in Mexico, and this wasn’t due to flying pigs! This was people getting on airplanes. Fortunately (to put it mildly), H1N1 does not have the second property which we fear, namely high virulence and a high tendency to make infected people severely ill or to kill them. By contrast, H5N1 (bird flu) does have this second property but lacks the first property. When a virus begins to spread which has both of these properties, humankind is in big trouble.

H1N1 has shown us that we lack the ability to identify new pandemic strains quickly or to contain them. Global spread is therefore assured. The challenges are: how to collaborate?, how to cope?, and how to respond globally once the cat is out of the bag?

How did we do? In national terms, some countries did quite well. In global terms, we failed miserably. The 30 OECD member countries pre-bought pretty much the total drug and vaccine production capacity of the small numbers of companies in Europe and North America that make the drugs and the vaccines. The only exception is China, which created its own H1N1 vaccine manufacturing capacity and bought it for its own people. The remaining 170 non-OECD countries were left out in the cold. They made no vaccine and there was little vaccine to be bought, even if they could afford it. Dr. Margaret Chan at WHO worked hard to persuade the wealthy countries to donate 10% of their pre-purchased vaccines to the low- and middle-income countries. This was better than nothing, but a token contribution. 10% of the population of the 30 most wealthy countries is roughly 2% of the population of all other countries. Even if all of this 10% contribution had been made and effectively distributed to where it is most needed, its contribution to attenuating the pandemic would have been minor at best.

Ironically, history then overtook us and we found that the mildness of the pandemic, and the fact that, in the United States and elsewhere, the major vaccine supplies arrived after the peak of the pandemic, meant that demand for the vaccine collapsed and many wealthy countries have been left holding large amounts of vaccine that they cannot use for their people at home. A scramble is therefore underway to give or sell this vaccine to other countries that may have need for it.

If there were a Government of the World, one of its first duties would be to create a CDC for the world (Centers for Disease Control and Prevention). A sensible leadership at CDC would work to optimize the rapid production of vaccine in the face of a flu pandemic and to allocate that vaccine in a way that would cause maximum attenuation of the global spread and impact of the pandemic. Such an allocation of available vaccine would look nothing like what we have seen through this winter in the northern hemisphere.

What H1N1 has shown us is that, despite the heroic efforts of WHO, the world is very far from the point of international collaboration that can allow globally optimal responses to global threats. In other words, we have a failure to address a prominent global public good, or put the other way, to redress a prominent global public bad, namely a potentially devastating pandemic. When the current northern winter is behind us, we should gather internationally to debate and discuss this experience and struggle to create new and better systems. A highly virulent and easily transmissible flu virus will emerge. We just do not know where and when.

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It is also important at this stage to address the issue of whether healthcare is a basic human right, and whether it is the responsibility of governments to provide universal healthcare for their citizens. Interviewed in October 2009, Professor John Harris (Lord Alliance Professor of Bioethics at the University of Manchester) stated, “I think access to healthcare is very important. I tend not to use the language of rights if I can avoid it, except to add rhetorical force to what I say. The better way to look at it is not as a human right because you then have the problem that if a particular society doesn’t have the resources to deliver healthcare, are they denying human rights to their people? Well, not if they can’t generate the resources. For some African countries, for example, the available money for healthcare per capita, is something like ten dollars and you can’t deliver a comprehensive healthcare system on that sort of funding. What is an entitlement, and what is very important is firstly that we should care for other people if we can (including care for their health). This is one of our basic moral duties, partly the duty of beneficence (the duty to do good and not harm), and partly the rule of rescue (that if someone is in need of healthcare, they are in need of rescue) and a good person will try to rescue someone if he or she can. So rather than think of it in terms of rights, we have very strong moral reasons to provide healthcare to the best standard we can. That standard will vary from society to society.

To put this in a macro-context, a report by the World Health organisation (The World Health Report 2008 - primary Health Care -Now More Than Ever) states, “Globalization is putting the social cohesion of many countries under stress, and health systems, as key constituents of the architecture of contemporary societies, are clearly not performing as well as they could and as they should … People are increasingly impatient with the inability of health services to deliver levels of national coverage that meet stated demands and changing needs, and with their failure to provide services in way that correspond to their expectations. Few would disagree that health systems need to respond better – faster – to the challenges of a changing world.

The identification of ‘globalisation’ as a driver by the WHO is important. Societies, in general, wish to be fair and decent. The advent of global free-market capitalism has created a great deal of perceived liberty in the industrialised countries who have most benefited from it, but this capitalism has brought costs, including (as A.C. Grayling identifies), “…environmental damage, crippling third world debt, untenable disparities between rich and poor, and the destructive effect upon communities of turning people into commodities and social relations into market transactions.” Grayling also identifies humbling facts including, “…Mexico’s richest man has more money than the poorest seventeen million of his countrymen put together, and the annual debt repayments of many poor countries far exceed what they can spend on health and education.

Capitalism has, though, given us huge innovation across all fields of human experience from transportation, to medicine, communication, and more. Alongside these innovations has come our ability to interact as a society, understanding the plights of those in need in our communities, and elsewhere in the world. While defenders of free-markets assert that markets themselves will remedy their inequities in time, the fact remains that while greed and human nature play a part in economics, intervention is necessary by us, as participants in society, to remedy the disparities and plights which exist.

For global policy makers, this presents immediate and necessary challenges to their incumbent policies. To take paradigm from Thomas Pogge, “One's human right to adequate nutrition, say, should count as fulfilled when one has secure access to adequate nutrition, even when such access is not legally guaranteed. Legal rights can be, and often are, an effective means for realising human rights, but such legal rights need not, however, have the same content as the human right they help realise. Depending on the context, the best way of realising a human right to minimally adequate nutrition may not be legal rights to food when needed, but rather some other legal mechanisms that keep land ownership widely dispersed, ban usury or speculative hoarding of basic staples, or provide childcare, education, retraining subsidies, unemployment benefits, start-up loans. And non-legal practices - such as a culture of solidarity among friends, relatives, neighbours, compatriots - may also play an important role.

To contextualise these thoughts for global-health, we can see that the challenges faced will not simply be remedied by the creation of drugs, or techniques for managing conditions. A wider approach is necessary, creating policies which focus on health issues in all facets of human experience, from education about health issues (not solely for children, but even adults), through to political and economic frameworks for the delivery of care, and strategic involvement from commercial and sovereign partners to fund these great challenges.

The importance of health cannot be understated. Whatever measure we use, whether it be political, economic or otherwise, we come down to the fact that society is made of participants who need health to flourish, and regardless of our race, colour, background or nationality, we share the same DNA, meaning that health becomes the core of our collective experience, and part of our collective responsibility to remain acutely aware of.

As A.C. Grayling allows me to conclude, “Health is not an end to itself; it is the principal instrument for the enjoyment of life”.

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Tuesday, 9 February 2010

How The Internet and Digital Culture Affect Rights and Liberties.

In this interview, we talk to Gigi Sohn, President and Co-Founder of Public Knowledge (a highly influential Washington, D.C.-based public interest group working to defend citizens' rights in the emerging digital culture) and Ross Anderson, Professor of Security Engineering at the University of Cambridge. We talk about how digital technologies and the internet have affected our rights as citizens and consumers. We discuss the challenges and opportunities posed by the digital era, and how these will affect our rights in the future.

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Vikas Shah, Thought Economics, February 2010

History has seen humanity exist in a near constant battle for social, economic, political and (since the enlightenment) individual freedoms. These battles have been set against a backdrop of great change and conflict, as states, commerce and other bodies struggle to reconcile their needs for utility, their risk aversion and so forth, with an individual’s right to autonomy.

In the modern age, we exist in a society which is largely defined using economics, and where (as Ben Wilson observed in his book, ‘What Price Liberty?), “....individuals are supposed to always exist in real or potential conflict. Freedom in this sense is seen as negative, in excess it leads to antisocial behaviour and unacceptably risky actions. Nowadays, states regard the individual as a potential troublemaker (a ‘selfish economic actor’) who puts personal gain first; in other words, a risk.” He continues (somewhat retrospectively) by stating “…faced with barely explicable changes and dangers, people found it hard to articulate the kind of liberties appropriate for the twenty-first century. It was a time of revolutionary change in the economy, in world affairs, in technology, and in the very identity of the modern state. The public was overwhelmed by the fear of terrorism, and the sheer complexity of modern life.

This articulates very clearly the fact that society assumes that you either have protection (on one hand) or liberty (on the other) – without assuming that the two can co-exist. It also illustrates that change and uncertainty have created an atmosphere of fear which gravitates people towards protection and paradoxically means that concepts such as ‘liberty’ are no longer held as sacred in society (as liberty itself is seen as a threat to protection). History also shows us that some of the greatest changes in the structure of rights in a society emerge from periods of upheaval and change. In the past quarter century, society has experienced one of the most profound changes with digital technologies combining with globalisation meaning that humans now exist as individual in both a hugely democratic decentralised space (the internet) and within their existing nation states, with varying degrees of liberty. The internet has changed not just the nature of how we communicate, but also how we engage economically, socially, and politically alerting us to where rights are being subverted to others, and ourselves, but also bringing challenges to our own understanding of rights.

In this interview, we talk to Gigi Sohn, President and Co-Founder of Public Knowledge (a highly influential Washington, D.C.-based public interest group working to defend citizens' rights in the emerging digital culture) and Ross Anderson, Professor of Security Engineering at the University of Cambridge. We talk to about how digital technologies have affected our rights as citizens and consumers. We discuss the challenges and opportunities posed by the digital era, and how these will affect our rights in the future.

Gigi is an internationally recognised communications attorney, regularly quoted in some of the most influential publications on the subject. She is a Senior Adjunct Fellow at the Silicon Flatirons Center for Law, Technology and Entrepreneurship at the University of Colorado and a Senior Fellow at the University of Melbourne Faculty of Law, Graduate Studies Program in Australia. She has been a Non-Resident Fellow at the University of Southern California Annenberg Center, and an Adjunct Professor at Georgetown University and at the Benjamin N. Cardozo School of Law, Yeshiva University. Gigi served as a Project Specialist in the Ford Foundation’s Media, Arts and Culture unit and as Executive Director of the Media Access Project, a public interest law firm that represents citizens’ rights before the FCC and the courts. In 1997, President Clinton appointed Gigi to serve as a member of his Advisory Committee on the Public Interest Obligations of Digital Television Broadcasters. In May 2006, the Electronic Frontier Foundation gave Gigi its Internet “Pioneer” Award. Gigi currently serves on the board of the Telecommunications Policy Research Conference (TPRC) and Broadcasters’ Child Development Center (BCDC). She is a member of the advisory board of the Future of Music Coalition and the Center for Public Integrity’s “Well Connected” Telecommunications Project. Gigi served on the District of Columbia Bar Board of Governors from 1997-2000.

Ross John Anderson, FRS is a researcher, writer, and industry consultant in security engineering. He is Professor in Security Engineering at the University of Cambridge Computer Laboratory, where he is engaged in the Security Group.

Anderson graduated with a BA in mathematics and natural science from Trinity College, Cambridge, and subsequently received a qualification in computer engineering. He worked in the avionics and banking industry before moving in 1992 back to the University of Cambridge, to work on his doctorate under the supervision of Roger Needham and start his career as an academic researcher.

In 1998, Anderson founded the Foundation for Information Policy Research, a think tank and lobbying group on information-technology policy. He is well-known among Cambridge academics as an outspoken defender of academic freedoms, intellectual property, and other matters of university politics. He is engaged in the Campaign for Cambridge Freedoms and has been an elected member of Cambridge University Council since 2002. In January 2004, the student newspaper Varsity declared Anderson to be Cambridge University’s “most powerful person”. In 2002, he became an outspoken critic of trusted computing proposals, in particular Microsoft’s Palladium operating system vision. Anderson is the author of Security Engineering, and was the founder and editor of Computer and Communications Security Reviews.

Q: What impact do you think the internet has had on liberty and free speech?

[Gigi Sohn] The internet has had a tremendous positive impact because it’s the most democratised and decentralised medium ever known. I started out as a communications lawyer around twenty one years ago, and the only mediums available were broadcast and cable. And those medium have a gatekeeper that controlled who could get access, what channels were broadcast and what programming was carried on those channels. It was a very top-down command and control medium.

Along comes the internet, ten or fifteen years into my service as a public interest and communications lawyer, and it changes all that, it puts the power of communication in everyone’s hand, at least everyone who can afford access, and if we can get our policies right in a way that makes sure that people can afford to get access, it becomes a total game changer for free speech and liberty.

It’s not just the internet which is contributing to these changes, its mobile and digital technology generally, it makes everyone a journalist. This is why the internet has blown apart the notion of journalism, because it gets rid of the gatekeepers. We don’t need to have CNN, NBC and their counterparts. Anybody can report on the most important news of the day. The best example recently was the video circulated of that young girl who got killed in Iran; that had an unbelievable impact on our knowledge of what was going on in that country. There are numerous examples of how handheld videos, or twitter feeds from war-zones have changed the face of journalism forever, and informed people inside and outside repressive regimes about what is going on.

[Professor Ross Anderson] Very positive indeed - not so much two steps forward and one step back, as ten steps forward for every step back. By breaking the oligopoly of the established press and letting everyone be a publisher, it has made information much harder for the powerful to control. And the overall picture that's emerging is that the controls which still work operate more along corporate boundaries than along national boundaries. In order to censor youtube, for example, countries like Turkey and Pakistan had to block access to the whole site; it's not practical just to block selected content. And a country that stops its citizens having access to Facebook, say, or Google or Skype, faces real disadvantages - from inward investment to domestic discontent. We analysed this process in "Shifting Borders", a paper for Index on Censorship. That's why Google's showdown with China is welcome and important; previously big countries like China could persuade Google to be selective about the content they made available there (while smaller dictatorships like Burma or Tunisia just had to censor whole swathes of the Internet). And even if Google had not stood up to China, the shift of censorship's borders from countries to companies is very welcome. It's easier to set up a new company than a new country.

Q: Do you think total freedom of speech is a realistic goal on the internet? And what are your views on the dilemma where such an environment gives a voice to morally objectionable groups? Should that be legislated?

[Gigi Sohn] I don’t think this should be legislated. Our first amendment contemplates that freedom of speech is a value, and contemplates that people will say things which are morally objectionable. They may, for example, make hate speeches, or release videos threatening to commit terrorist acts. The first amendment contemplates such eventualities and answers that if we don’t like these messages, we should have more messages saying that [the message of hate] is morally objectionable. The aim is not to censor or cut it off.

When I was working mainly in broadcast and cable in the late eighties and early nineties, the anti defamation league and other Jewish groups would try to shut-down public access channels rather than have the Klu Klux Klan or Nazi groups use them. Even though I, myself, am Jewish, I am opposed to that course of action and find it particularly objectionable given that Jews were subject to a holocaust where books were burned, and music was banned (which in itself was censorship).

The way to stop “bad speech” is not by having the government come in and cut it off, the way to stop it is to have people shout it down. When the Nazi’s marched on Skokie (IL) in the eighties, Jewish groups objected, but Skokie allowed the march to go on and in the end, there were far more people who shouted down the Nazis, than Nazis marching. The underlying notion here is that people are good, honest, and not haters. When haters want to speak out, they should be allowed to, but what will happen is that the good, honest, non-hating people will drown them out.

Q: Do you think the same is true of the politicisation of the internet, where, for example, China restricts what people can and cannot see?

[Gigi Sohn] This is not politicising free speech, but is, in fact, a limitation of free speech. What China and Iran are doing is the wrong thing for governments to do. Governments should have no role in deciding what speech is proper, and what speech isn’t. You could really call this the politicisation of internet access rather than speech.

[Professor Ross Anderson] What we're doing is helping to maintain Tor, an anonymous routing system that lets people in places like China and Iran get round the national firewall and see the proper internet. In the past, one of our contributions was the Eternity Service - a design for a censorship-resistant distributed file store that was one of the inspirations for the peer-to-peer movement. Action on such matters is still largely for geeks; the role of governments is to support the right projects. For example, the US State Department is one of the financial supporters of Tor.

Q: What is net-neutrality? And why is it an important issue for internet users?

[Gigi Sohn] Net neutrality is the concept that the companies that provide internet access, providing the on-ramp for the internet, should not be able to pick and choose ‘winners’. I talked before about how in the broadcasting world, broadcasters decide who gets access, what programming is on. Similarly in the cable world, the cable operator decides what networks get on the system, on what tier, at what price. The internet blows this concept away, and we want it to stay that way. If, all of a sudden, the companies who provide the conduit and gateway to the internet start picking and choosing who gets faster speeds, better service and so forth, they are simply replicating the centralised model on top of this wonderfully democratic and decentralised technology.

Net neutrality is a very narrow regulation. It only goes to the question of whether these on-ramp providers will become gatekeepers. Will they pick and choose who gets faster speeds and better service based on who pays more? That is not the nature of the internet, nor the way the internet was envisioned when the government, defence department and universities planned it as far back as the 1960’s. The internet was planned to be a democratic medium, and because of that we had a great explosion of creativity, innovation, free speech and education. It has generally been a positive factor, particularly for allowing voices which would never have been heard before. If all of a sudden you had telephone and cable companies deciding which website comes up faster and clearer, it will hurt the little-guys. Small-businesses, for example, will be at a distinct disadvantage. The citizen journalists with their blogs would be blown away by CNN or Disney.

[Professor Ross Anderson] There's a tussle, particularly in the USA, about whether the revenues from e-commerce should go to the network carrier or the service providers. It's less of a tussle in Europe because there's more competition between network providers; no-one in Britain would think it was reasonable for BT to be given 20% of Google's revenue just because Google ads flow over BT's fibres. BT's attempt to muscle in via Phorm was unlawful interception and has rightly failed. The solution in the USA is deregulation via local loop unbundling, like we have in Britain - not awarding huge rents to incumbent network operators

Q: Do you think this discussion will just make companies search for more complex ways to control content?

[Gigi Sohn] I think if the government create neutrality rules, then no. It will get away from such actions. Ultimately, we are happy to accept the notion that when a network is congested, or needs to run more efficiently, that a network provider should be able to manage that network using whatever tools are available. At times of congestion, it may be necessary for a network provider to throttle back all users or just higher bandwidth users. That is not the same thing, however, as picking and choosing among applications and content, deciding which are more or less important. There’s no problem with non-discriminatory or neutral network management techniques.

Looking at a recent case; Comcast picked on peer to peer, and said “we’re having congestion problems, so we’re going to throttle back only peer to peer” and they ignored video streaming and other high-bandwidth applications, regardless of times of congestion. That was clearly discriminatory. Comcast now has to network manage in a neutral way, throttling back all high bandwidth users, regardless of the application, only during times of congestion. It is not necessary to prioritise certain items over others to manage ones network, and we would be opposed to that. We would also be opposed to access tiers, whereby the internet service provider charges a Yahoo!, Google or indeed a gaming company for a certain speed or quality of service to carry its content.

Q: What impact do you think internet access and digital technologies have on human development?

[Gigi Sohn] We believe that the broadband internet is critical to full participation in society. It is more than just being “part of the conversation”, as [without internet access] you don’t have access to economic opportunities, best healthcare, best education and so forth. It essentially means that without access, the opportunity gap will become larger, as more services, job announcements, and education opportunities are moving online. If you don’t have access, or cannot afford it, you are going to be left behind. It is therefore critically important for lower socio-economic classes to get online.

There already is a connectivity gap in society, which has existed for many years. 10% of the USA, particularly rural areas, are completely un-served. In urban areas, telephone and cable companies have decided that it is not economically beneficial to enter certain areas. Even here in Washington DC, if you visit some of the poorer areas such as Prince George’s County, you cannot get broadband service.

[Professor Ross Anderson] The change brought in places like India and Africa by cheap mobile phones is enormous, and wire line Internet will give them another big boost to development when it arrives. In many less developed countries, though, this is held up by dozy incumbent phone companies. May foreign aid should be tied to local loop unbundling, the award of WiMAX licences, or other mechanisms for ensuring that the rest of humanity can get broadband Internet access

Q: Do you think access to the internet is an enabler for democracy?

[Gigi Sohn] To the extent that people have a better sense of what their government is doing, it becomes an enabler. In the USA, for example, the current administration is dedicated to putting more data and proceedings online, and so it can facilitate greater transparency, but the government has to be willing to get online and put the data and proceedings online. The mere fact of access is not enough, you need a government willing to open up processes to the public through internet access. Once that [government participation] happens, then, indeed, you have greater transparency and accountability.

Q: How do you think intellectual property vehicles, and the intellectual property itself is affected by digital rights?

[Gigi Sohn] I think the jury is still out as to how the internet and digital technology affects intellectual property. I can tell you that it blows apart business models. The old “command and control” business model for the recording industry where the record company controlled everything from production to distribution and sales is finished. The internet disaggregates, dis-intermediates and takes away control from big gatekeepers such as recording and motion picture industries. They will tell you that the internet has destroyed intellectual property and protection, but I can point you to empirical studies that show that people who use file sharing and other services enabled by the internet are, in fact, more likely to buy records, songs, and movies.

One could argue just as persuasively, that digital technologies have helped the sales of records and movies, and helped intellectual property more than harming it. It has certainly, though, hurt the old business models.

The internet has also enabled the creation of more intellectual property, by more people. I can, for example, take my HD movie camera and make a semi-professional movie, which can be distributed via YouTube and Facebook, maybe I’ll get discovered! This property [of enabling content creation] means that many more people can be creative, and thus gives momentum to the destruction of ‘top down industries’. You don’t just have to watch Hollywood movies anymore, or manufactured music from the multinational record companies. A good musician can now make a living or be heard by millions of people, and have millions of fans independently of large firms. Just fifteen years ago, if you didn’t have a recording contract, nobody would hear you.

The big companies will tell you that because people are stealing their intellectual property online, that’s a disincentive to create. We are seeing that is absolutely not the case. What is the case is that profit margins are going down. You don’t have to buy a CD anymore, you can buy the two songs you want rather than the two songs you want plus the ten that you don’t for an ever increasing price. You can take a look at a movie beforehand and decide, “I don’t like that movie, I don’t want to see it” and save your dollars. I have to add, though, that Hollywood had its best year ever in 2009, taking more than ten billion dollars. This notion, therefore, that the internet destroys intellectual property rights, and that people are stealing and economically harming the big companies is completely unsubstantiated.

I was watching the Comcast/NBC merger, and noticed how Hollywood always get their one or two congress members to talk about the billions of dollars lost every year. That’s assuming you believe that every time someone shares a movie, they wont go to the movie theatre, or buy it otherwise, which has been proved wrong over and over again.

To complete the thought, digital technologies also give the ability to lock-down content, hurting people’s rights to use technologies and the media they buy. In the USA this is called “fair use”. The flip-side of the freedom; when we talk about copyright filtering by ISP’s, and ‘three strike’ policies, that chills speech and creativity, and hence people’s rights.

[Professor Ross Anderson] Technological change has shifted power in the music supply chain from the music majors to the platform companies like Apple; the majors no longer have anything very much to do. The result will be positive for listeners, musicians and the platform firms while the majors will go bust. Politicians should stop fighting this. It's just like the budget air travel revolution: great for air travellers, great for Boeing and Airbus, tough luck on BA. The solution is not for ministers to tax easyjet's passengers; it's for them to stap taking BA's calls.

Q: What digital rights issues arise from social networks, cloud computing and collaboration?

[Gigi Sohn] This is a huge topic. The nature of what ownership is in the digital world, to me, is one of the biggest questions. In the USA, there are initiatives such as the DECE (Digital Entertainment Content Ecosystem) and Disney’s Keychest which essentially allow you to use your DRM (Digitally Rights Managed) content on any device, or allow any authorised device to play the content. There are many flaws with these systems, but once you don’t actually own the physical ‘thing’, what does that do to your rights? What if Keychest or DECE shut down? What do you own?

If I don’t actually own a disk, or digital file, if ownership is simply the right to access, rather than the right to own the content itself, then how do I exercise my first sale right? If I own a book, I can sell it, burn it, or give it away. What I cannot do is make a hundred copies and give those away, but I have the right to make use of the copyright work that I purchase. If you no longer own the item; and ‘ownership’ is merely the right to access it, then what do I really own? And what can I do with it afterwards?

[Professor Ross Anderson] Social network services have a huge conflict of interest. The users aren't the company's customers, but its product; it makes money from selling their personal data to advertisers. In order to have lots of data to sell, the services create the illusion that the users are in a private space with friends. This deception has a number of interesting aspects, on which my colleagues Joe Bonneau and Jon Anderson have done interesting work. For example, the services try to avoid privacy becoming salient; and while they do make privacy controls available to users, they are extremely complex and difficult to use, with very poor defaults. This approach is fragile, with Facebook in particular constantly being surprised when some new advertising innovation causes user outrage. It will be interesting to see whether the services converge on something sustainable or whether they get regulated. If it's the latter, I expect that any effective regulation will in the long run come from the European Commission. America doesn't care, and no-one else is big enough to matter.

Q: What about the rights of individuals as content generators vis-à-vis social networking sites who claim to own their content?

[Gigi Sohn] One day, this will be challenged. When a company decides to exercise that ability, and say ‘I own all your pictures’, someone will challenge this, and invariably the company will lose. We call this a ‘contract of adhesion’. You cannot use facebook, for example, if you don’t agree to their terms. There is no bargaining power; you cannot say ‘I don’t accede to that’. It is similar to the paradigm from sports where you see a warning stating, “Any reproduction, publication, or any other use of this broadcast without written consent, is prohibited by law.” This is nonsense, you cannot contract away your rights like that, it is a one sided negotiation. This is an interesting area of law, but if a company ever try to sell an individual’s content (for example, a photo) which they thought was valuable, I feel the individual would win.

Q: How do you think phenomenon such as media-consolidation and the emergence of dominant players in search and other markets are affecting digital rights?

[Gigi Sohn] I don’t mind consolidation so long as entry barriers remain low. The fact that Google continues to grow, and remains dominant in search is concerning, but someone could create another search engine. That is how the internet differs from the networks. You cannot easily build another telephone, cable or wireless network. You need public rights of way, government licenses, and much more. I am, though, less concerned about the consolidation in the content market than I am about consolidation in the infrastructure market. Also concerning is when a content provider merges with a conduit, such as a Comcast buying an NBC. Our concern with this would be that ‘over the top’ video providers such as Netflix and Apple TV who want to aggregate content, and make it available without owning the pipe, will no longer get access to the content. Cable companies are doing everything they possibly can to keep people buying cable subscriptions. In the US, we have a “TV Everywhere” initiative which says if you want access to certain content online, you must buy a cable subscription. The flipside is that they will not make the programming available to a company who allows you to get rid of your subscription, cutting the cord.

[Professor Ross Anderson] Back in January 2005, there was a fascinating talk at a DRM conference by Google's chief economist, Hal Varian. He asked who would benefit from stronger DRM, and argued that it would not be the music majors but the platform vendors like Apple and Microsoft. The reason is that a technological link between two industries tends to cause the surplus to flow to the more concentrated industry. The music industry people there reacted with a mixture of anger and scorn, but by the end of that very year it was clear that Hal was right: at the copyright conference organised as part of the UK presidency of the EU, the music firms were complaining loudly that Apple was stealing their breakfast.

In other words, technological changes have shifted the market power up the supply chain. In the short term this is good for users and for artists but bad for the music majors; we'll have to wait and see whether users and artists continue to gain in the longer term.

Q: How do you think governments can balance the needs for security versus rights to privacy?

[Gigi Sohn] Governments must be sensitive to this, and certainly should put restrictions on commercial actors who want to invade your privacy. In the case of Phorm, for example, we argued that people should have to opt-in. Opt-out simply wasn’t good enough as they were reading your packets and personal communications. When it comes to security, this is a very delicate balance. We feel that when then government has to look at your transmissions; they should have to get a warrant, not be able to do it at their discretion. You cannot wiretap someone without a warrant. That has been the case in the USA for many years, and should similarly be true of reading an individual’s packets on the internet. We think the same due-process protections which exist in the telephone world should certainly apply in the internet world, we shouldn’t loosen things ups because we are afraid of cyber-attacks, or terrorists using the internet. It’s not a technology issue, it’s a people issue, and we shouldn’t therefore punish the technology and other people’s privacy rights for security reasons.

[Professor Ross Anderson] I don't agree that "balance" is the right approach - that's a word used by bureaucrats when they're up to no good. For example, the whole dreadful business of torturing detainees was obfuscated by officials talking about "balancing" the rights of detainees with those of citizens. There is no such balance. Tony Blair and his ministers justified torture by claiming that "the most important human right is the right to remain alive" but in terms of human-rights law this is a complete nonsense. The obligation on a state to protect people within its jurisdiction is always secondary to the limits on the methods that may be used, and the main purpose of constitutional and human-rights law is to set these limits clearly, in advance, in a calm and relatively unemotional environment.

Similarly, there are hard limits on what can be done with data. Since 9/11 these have been systematically ignored by many states, and in particular the British state, but now the European Court of Human Rights has been reasserting the fundamental principles in a number of key judgements. The Marper judgement ruled that the state can't retain DNA data on innocent people indefinitely, for example, and the I v Finland judgement ruled that people can forbid their doctors (and by extension the government) from using their medical records for any purpose other than their healthcare.

Donald Rumsfeld justified torture by asking the "ticking-bomb" question. If you have a terrorist who knows the whereabouts of a ticking atomic bomb in Manhattan, surely it's legitimate to get him to talk? We know now, of course, the right answer to that question: "Rumsfeld, the fact that you're asking that question shows that you're not fit to hold public office". But the question will be asked again and again in different variants, and the only sustainable answer to it is to point to entrenched constitutional law and explain the purpose and function of constitutions. (In fact, I greatly admire the U.S. approach of having federal employees from private soldiers up to the President pledge allegiance to the constitution.) Translated into clear English: “there are some things you just can't do, no matter what”. You just can't torture people; it's been illegal in Britain since 1640. And the same will increasingly apply to information, thanks to section 8 of the European Convention on Human Rights.


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It is important, at this juncture, to understand that liberty (as James Griffin, White’s Professor Emeritus of Moral Philosophy at the University of Oxford describes), “guarantees not the realisation of one’s conception of a worthwhile life, but only its pursuit.” He continues to explain, “…One can be denied liberty in many ways. One can be constrained – physically by another person, or by a law with swingeing penalties, or by the threatening presence of an absolute ruler, or by sever social disapproval. Or one can be compelled to live in a way that one does not want to – by a state or a church or a family, each with its own idea about how one should live. Or one can find oneself placed in conditions that themselves allow only a very few ways of life, one’s own rationally chosen way not among them.” The structural backdrop his statement is that (in his words), "…out of the notion of personhood, we can generate most of the conventional list of human rights. We have a right to life (without it personhood is impossible), to security of person (for the same reason), to a voice in political decision (a key exercise of autonomy), to free expression, to assembly, and to a free press (without them, exercise of autonomy would be hollow), to worship (a key exercise for what one takes to be the point of life). It also generates a (disputed) sense of positive freedom, a right to basic education and minimum provision needed for existence as a person, something more - that is - than mere physical survival.

Digital technologies have acted as a great tool of empowerment in the battle for liberty (in a political context) as it provides a medium which provides the notional ability for one to exercise the pursuit of liberty without constraint, and also provides those who are oppressed with the knowledge that their liberties are being subverted, and a voice to communicate that to each other, and the outside world. The driver here is the pace of change as societies which previously existed in subsistence, or extreme poverty, are becoming parts of globalisation.

To quote James Griffin again, “Freedom for expression, for example, is highly important in certain social settings and quite unimportant in others. Anyone who lives, as we do, in a society with democratic political institutions, culturally heterodox citizens, and a complex economy needing mobility of labour, and having to absorb fast-developing science and technology, vitally needs freedom of expression. It is sufficiently important to us in this setting to justify promulgating the right and imposing correlative duties. But anyone who lived in a traditional medieval hamlet, with static technology and unchallenged social tradition, and where skills were acquired by growing up in the place, quite rightly had a relatively minor interest in freedom of expression, and interest too minor to justify the burdensome apparatus of a right. This example, though misunderstands what the right to expression protects. The right lies in the normative notion of agency; we are self-deciders; that is part of the dignity of human standing. To be a tolerably successful self-decider, requires the ability to ask questions, hear what others think, and so on.

So we see that as societies are elevated into ‘the conversation’, provision of the necessary apparatus to support the pursuit of liberty is important.

In a commercial sense, we see that digital technologies are raising many questions about the nature of ownership, intellectual property, and our rights as individual and commercial citizens of this new internet-state, and as consumers and participants within it. Many of these issues draw paradigm from political philosophy (which argues as to who gets what? under what terms? and says who?) and present us, as digital culture matures, with deep challenges to our own notions of ownership (as Gigi presented with the example of downloaded music and media).

As we move towards an increasingly distributed, politically and physically abstract, computing infrastructure (through social media, mobilisation, and cloud computing) these questions become more relevant as a global economic environment provides constant tests to our incumbent notions; through the testing of patents, intellectual property, ownership of our personal and company data, ownership of our own ‘virtual’ assets such as software, right to access systems, right to service levels, and more. The changes which we are seeing, for both civil and commercial actors, is a wave of momentum which is forces participation in the ‘new way of doing things’ without due consideration to the consequences of that participation. It is critical that the global community (including individuals, business, policy makers and academics) address these commercial and social challenges to build a framework which is appropriate for the medium itself.

This test of ‘appropriateness’ is important. We have to approach the internet with fresh eyes; it is a decentralised non-political environment, and perhaps the greatest engine we have ever seen for democracy, equality and social change.

While digital technologies could never guarantee equality of conditions, they can guarantee equality of options. They also give rise to the philosophical dilemma which states that one person’s liberty can conflict with another’s. John Mill, in his argument ‘On Liberty’ stated in this context “…We should tolerate even the speech we hate, because truth is most likely to emerge in a free intellectual combat from which no idea has been excluded”. It is this freedom of intellectual combat and participation which, when combined with the inevitability of social change, means that governments can either act as supporters and enablers to these changes, or continue with their incumbent policies until society fights back, and takes its freedom regardless.

Participants in society (individuals, businesses, and as nation states) do, though, need to understand that liberty and security can (and must) co-exist. The solution is not achieved through the creation of restrictive policies and legislation, but through ensuring that all members of society, in all their forms, are connected to the digital medium, and that they are all encouraged to participate, ensuring that voices are heard, and that the majority speak louder, and in greater number, than the minority who would choose to subvert their peace.

As Benjamin Franklin said, “Anyone who trades liberty for security deserves neither liberty nor security”. And as Walter Cronkite allows me to conclude, “There is no such thing as a little freedom. Either you are all free, or you are not free.

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Friday, 29 January 2010

The Post Crisis Economy

In this article, we talk to John Brynjolfsson, Managing Director of Armored Wolf LLC, a global macro hedge fund. Previously, Mr. Brynjolfsson was a Managing Director with PIMCO, firm with in excess of $750 billion of assets under management. Mr. Brynjolfsson discusses the risks, opportunities and the future of the world’s economy—covering the range from inflation to interest rates, commodities to equities, and currencies to emerging markets

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Vikas Shah, Thought Economics, January 2010

Dr. Hyman Minsky (1919-1996) was an influential post-Keynesian economist who focussed on understanding the causes and characteristics of financial crises. At the core of his theory rested the belief of ‘financial market fragility’. Dr. Minsky observed that an economy in prosperous times experiences cash-flow in excess of what is needed to pay of debt, creating a ‘speculative euphoria’. This euphoria invariably leads to conditions where debts exceed an economy’s cash-flow, creating financial crises, and economic contractions (as a result of banks, lenders and central banks tightening credit availability). Minsky argued that, “a fundamental characteristic of our economy is that the financial system swings between robustness and fragility, and these swings are an integral part of the process that generates business cycles.

The process of moving from stability to crisis has been termed a “Minsky Moment” where investors, loaded with debt and suffering cash-flow problems, begin a major sell-off. The lack of counterparties to these sales creates a sudden and steep collapse in prices of assets and dramatically reduced liquidity. Many suggest that in 2007, the world experienced just such a “Minsky Moment”, as a dramatic rise in mortgage delinquencies and foreclosures in the US triggered a “sub-prime crisis” which, arguably, was a key catalyst for the global recession we are experiencing today.

With co-ordinated action from central banks, regulators and other bodies, it would seem we have averted a precipitous depression, but whether we like it, or not, the shape of our economy will change.

In this exclusive interview, John Brynjolfsson, Managing Director of global macro hedge fund Armored Wolf LLC, discusses the risks, opportunities and future of the world’s economy, covering the range from inflation to interest rates, commodities to equities, and currencies to emerging markets.
Prior to launching Armored Wolf with proprietary capital in February 2009, Mr. Brynjolfsson was Managing Director and Portfolio Manager at PIMCO, a firm with more than $750 billion in assets under management. Mr. Brynjolfsson is co-author of Inflation-Protection Bonds and co-editor of The Handbook of Inflation-Indexed Bonds. He has 20 years of investment experience and holds a bachelor’s degree in physics and mathematics from Columbia College and a master’s degree in finance and economics from the MIT Sloan School of Management. Mr. Brynjolfsson oversees all investment activity at Armored Wolf, which currently has assets exceeding $100 million and is widely regarded as an expert in the area of managing alternative real assets; with experience including commodities, global inflation-linked bonds, event-linked catastrophe bonds, asset allocation and risk management.


Q: In your view, what do you think will be the key differences in the shape and nature of the post crisis economy?

[ John Brynjolfsson ] I see this as a real estate, mortgage, financial and banking crisis and congratulations to the U.S., U.K. and southern California, for being the collective epicenter of that crisis. Rather than the emerging markets, or weaker economies, this problem originated in the most sophisticated and advanced financial markets because those are the markets where leverage was the greatest and people took the most advantage of it.
I believe that the best policy makers can do is to provide lubrication and a temporary balm to some of the challenges faced by the U.S. and the U.K. However, the policies they prescribe are a continuation or exaggeration of the previous policies that created the structural problems in the first place. I am therefore relatively pessimistic on the intermediate and longer term outlook for the U.K., the U.S., Spain and other countries where credit was readily available and where real estate was built up and the net worth of financial institutions frankly is suspect.

To make sure we don’t sound too pessimistic, I see the emerging market countries as having transformed over the past 50 years or more, and in particular during the past 10 years. Even though they were hit by contagion and other financial transmission mechanisms at the onset of the crisis, they did not have the same fundamental problems. These nations had lower debt-to-GDP levels on a central government basis, and lower private debt, lower cost of living and a greater ability to compete on export. This means that the lubrication needed by the U.S. and U.K. to get through the crisis will overheat these emerging markets. We have already seen this in China, India and even Australia, though it’s not technically an emerging market, and the central banks are tightening in these nations.

Q: What are your views on sovereign credit ratings?

[ John Brynjolfsson ] The developed nations have routinely been able to operate at debt-to-GDP levels of 60% to 100%. In contrast, countries with more suspect reputations (often called emerging markets) have sometimes been cut off from credit when debt-to-GDP was as low as 40% or 50%. This may not make sense when analyzing demographics.

The developed world actually has worse demographics when looking at competitiveness and systemic issues, and has a lot of work to do in order to shore up financial systems. Separately, some of the government guarantees and accounting generosity that was allowed to get us through the crisis has not yet matured, which means that the future holds headwinds. As much as I have to acknowledge that policies were needed to navigate through the implosion, these policies are, in the long term, very dangerous for productivity, growth, entrepreneurial spirit and wealth generation and will create further issues within the developed economies.


Q: Where would your sentiment be in context of inflation and interest-rate expectations?

[ John Brynjolfsson ] There is limited ability on the fiscal side to borrow because of problems such as debt ratios and so forth, and the maturity of debt in the U.S. in particular has come in quite a bit as huge amounts of T-bills and other forms of short-term financing were issued to cut these checks and patch up the system. Now, these debts are maturing and the Treasury is trying to extend their maturities towards the seven-year average, or what they call 84-month average maturity, and is issuing a lot of 30-year instruments (“TIPS”) and nominal Treasuries, and more in the 10-year sector. Those longer maturities fortunately are being absorbed by the market because of deflationary fears. That’s the good news.

The bad news is that I think it is inevitable that seriously higher inflation will be spawned and, in fact, is already here because the core inflation numbers are severely muted by domestic factors such as falling rents, dropping home ownership and equivalent rents. Headline inflation, which includes food and energy, is more appropriate as these items are both high-frequency indicators of inflation and also more global indicators of inflation.

The performance of the dollar will have an impact on food and energy inflation more so than on core inflation. These are exactly the portion of the inflation calculus that U.S. Federal Reserve Chairman Ben Bernanke and the Fed have chosen to exclude from their arithmetic, even though they are accelerating sharply and bringing the overall inflation rate up towards the 3% to3.5% rate. You probably haven’t heard that U.S. inflation is running at 3.5% Part of this is the Fed’s focus on core inflation, and part of it is the use of year-over-year calculus, which is used to remove seasonality from inflation calculations.

However, remember that back in 1950, they invented something called the computer that allows you to do more complex calculations than you could with a paper and pencil. Computers allow us to use much more sophisticated statistical techniques to calculate seasonal adjustments, which mean that we do not need to use year-over-year calculations.

I tend to look at seasonally adjusted rates on a three- or six-month horizon, and in the current situation, I am free to ignore the fact we did have deflation in Oct-Dec 2008. That is now ancient history because inflation has been positive since then, and in recent months, has been dramatically positive (in the range of 3% to4%) and is on its way up from there.

In context of interest rates, while I focus on the U.S., the same challenges relate to the U.K., and even Japan (although they have been finding it politically difficult to re-flate due to an elderly population wanting interest on bank deposits). The European Central Bank remains relatively hawkish given conditions and therefore not as vulnerable the same inflation risk that the Fed is engineering.

Chairman Bernanke, as good as he is academically, and as much integrity as he has (which I believe is unlimited), has an analytical framework that suggests a lot more inflation is allowable. Part of this is because he looks at core rather than headline, which is a flawed calculus, and also because he looks at inflation, not as a targeting objective (though this could be inferred from headline) but as a price-level plus trend-targeting system. The subtle difference is that when prices peaked in 2008, and the CPI started falling because of negative inflationary trends, Bernanke’s analytical framework (as he described in Toyko, 2003) is to extrapolate from that peak price level, a straight line with the trend inflation rate. What this means is that the deflation in 2008 has to be erased from the records by having similar inflation prints on the other side. The problem is that none of this offset would be considered as inflation in Bernanke’s mind—at least as I read it.

What this means for interest rates is that the Fed must keep them at zero for an extended period of time (which is my expectation). However, even if they raise it from zero, the Fed will keep the front-end shorter-term rates much lower than you would typically expect. The longer term bond will certainly reflect inflation and interest rates will go up. Some of this can be managed or manipulated with Fed purchases of longer term treasuries rather than monetary policy (money-market). Absent that kind of artificial cap on interest rates (which ultimately can only be temporary) the general effect would be a very steep yield curve with low short-term, and much higher long-term rates.


Q: Where do you think the next bubble will come from?

[ John Brynjolfsson ] Part of what we’re suggesting here is that the Fed can continue to engineer low short-term interest rates and affect artificial value by buying open market instruments. I would call that a bubble in 2- 3-year Treasuries. However, I am not sure that the global markets realize the risk embedded here.

If they do not, the dollar would, in effect, be in a bubble because it would be debased by this process continuously, and the debasing could get masked by the Fed’s purchase of Treasuries and maintenance of the steep yield curve (low interest rates). The scenario I am describing would involve a relatively sharp collapse of the dollar, which I would qualify by stating that if the same policies are undertaken in U.K., Japan and continental Europe, the collapse of the dollar may not be reflected in exchange rates between these currencies, as all would collapse at same time. The collapse would more likely be reflected against more robust currencies such as the RMB (which has upward pressure on it, even though it’s maintained in a peg), other emerging market currencies and commodities such as gold (most specifically) and industrial metals, crude oil, energy products and food.


Q: Could you explain the concept of ‘catastrophe bonds’ and how they give risk-protection in the market?

[ John Brynjolfsson ] Traditionally, insurance markets have been highly specialized and the complexity of the contract between a home owner and an insurance company would depend on the jurisdiction--property type, peril and so forth. That is clearly something which is a specialty and the insurance industry is well qualified to deal with that. As you start to aggregate these risks, insurance companies can diversify them across their portfolios, and even with re-insurers and so forth.

However, when aggregated there is a point where certain risks are in such large quantities that they radically imbalance an insurance company’s balance sheet or risk profile. These risks are called “peak perils” and the two most dramatic in the U.S. are “California Quake” and “Florida Wind,” which is due to the combination of large wealthy populations (meaning huge real estate values in those states) and the uniqueness of the perils in those states. Florida is distinctive as it is the epicenter of most hurricane tracks that originate in the Eastern Atlantic, and California is unique in that it has such a scientifically high earthquake risk. It is impossible for insurance companies to create a diversified portfolio of natural perils without leaving homeowners and businesses in these states under-represented. The alternative is to represent them on insurance company books, but this would cause an imbalanced risk profile.

This situation created the “cat-bond” market, which allows insurers and re-insurers to offload the risks of peak-perils. You may think the capital markets have the same problem, but the answer is no. While insurance companies diversify portfolio risks consisting of, for example, automobile risks, U.K. ice storm risks and German flood risks, the Florida Wind and Cal Quake risks would be so large as to make this portfolio lop-sided. The capital markets already have huge risks that dwarf any of these, which mean that if you add Florida Wind and California Quake to the capital markets, they literally become diversifiers within the larger context, meaning that when you price them, rather than pricing them at a steep premium (which insurance companies would be forced to do), you price with a healthy risk premium—but not exaggerated. This is why capital markets players who have equity market risk, corporate risks, mortgage risks, forex risks and so forth, can incorporate cat-bonds in their portfolios, thereby enhancing their risk-to-return profile.


Q: Do you think the role of corporate and sovereign paper will change in the market? And are there any particular opportunities in the market?

[ John Brynjolfsson ] One of the things that we have observed is that risk has been somewhat socialized. There are various camps and angles to expand that, but clearly one of the most important is volatility. Socializing risk does tend to reduce risk overall, but at the cost of reducing return. You therefore deal with a socialized business or economic risk resulting in more managed and less volatile environments and with less income distribution between high- and low-income. In the long term, this gives a lower trend growth rate.

The other notable thing here is that we are dealing with some one-off costs that resulted in huge debt on public balance sheets. Debt servicing also is important as homeowners de-leverage and reduce their rates of consumption. In the face of higher interest servicing costs, we see cyclical patterns emerging, combining with the longer term structural problems. There is a point of view that says the political process is so far off the rails that spending could become unending (President Obama suggested, in 2010, he will push pay-as-you-go aspects through Congress to limit this excessive spending, and cap it, but acknowledging and fixing the problem are two different things). There also are camps concerned with more rapid acceleration of budget deficits and debt that agree that socialization will reduce volatility.

Looking at corporate paper, as uncomfortable as private or company defaults are, we must acknowledge that it would be much more volatility-inducing to have defaults at the sovereign level where a state like California or New York, or a country such as Greece, Ireland or even the U.S. or U.K. cannot repay their debts. Past experience suggests that corporate entities should have less volatility as workers, jobs and bond-holders have been guaranteed by government.

This is like an automobile accident where a teenager is lying in the road in dire need of emergency medical care. The parents must first deal with the crisis at hand, and deal later with the teen’s mis-deeds that caused the accident. Keeping this paradigm in mind, many people have suggested that there were some serious mis-deeds that got us into this crisis, and therefore, as soon as we get through the immediate difficulties and back into the healing process, we have to take aggressive steps to prevent it happening again. If that is the case, a loud and clear message would need to go out to corporate bondholders stating that we would no longer guarantee those bonds, and that next time stock-holders, management, and other stakeholders are responsible to “watch the house” to ensure against excessive risk-taking.


Q: What are your views therefore on increased regulation?

[ John Brynjolfsson ] My views are highly bifurcated. Let’s start by looking at my kinder gentler view. If you do have guaranteed deposits (and we do) then you need to have tight regulation on the assets backing those guarantees, because otherwise whoever is doing the guarantee (in the US, the FDIC/Treasury) is being taken advantage of, which is clearly not a good model. I am generally in support of these guarantees.

However, if you look at the current crisis and look at a short synopsis of how we got here, Congress wanted to promote home-ownership, and have had this remit for 70 or 80 years. This is fine, but they got very aggressive about it, and failed to acknowledge the cost of promoting home ownership. Rather than budgeting for these programs, they tried to get them “off budget” through all sorts of hidden costs or contingent liabilities, such as guarantees. The first of these was in 1971 when the U.S. government privatized mortgage agencies. This was unilaterally done by congress, and the reason was clear—to make debt-issuance an off-balance sheet item. This also made it a private rather than public liability. We know that the reality was that these agencies were simultaneously guaranteed with a $1 billion line of credit. This is a tiny line, but it was taken by the markets as an unconditional guarantee of the whole private entity. Ultimately, this guarantee was effectively called upon, and as of December 2009, the Treasury has accepted unlimited liability for these transactions for at least the next three years. So you had the U.S. Congress creating a housing agency and other programs that guaranteed and promoted housing, but the costs were hidden. Now we are paying these costs and they are running to trillions of dollars.

You can point the finger at greedy homeowners who wanted to buy a house irresponsibly, but there is nothing irresponsible about looking after your family and taking advantage of a government guarantee where you have no downside, and pretty low interest payments. That strategy, or opportunity, which was provided to homeowners, looks great as housing prices go up, as people could generally live in nicer houses than they would otherwise been able to afford. After the crisis-induced foreclosures occurred, I find those individuals may have been put back into the situation where they were before the house with the free money, cheap mortgage, and zero down-payment.

You could say the same about the mortgage bankers, the banks, the officers and agencies who originated these loans, but it would be hard to blame this on free markets, as the genesis of all of these things has been the idea that we could have promotion of housing without associated costs, and in effect have regulatory slack in the form of regulators saying that you didn’t need income, solid credit, appraisals, and so forth.

If you have an architecture that is so convoluted that it creates huge incentives to borrow, originate and buy with no downside risk, there is no regulation that could make that functional. The first rule of economics is to watch out for “unintended consequences.” You cannot intend to bring home ownerships to 80% from 50% without consequences. In this case, the consequences were that when you made housing affordable for those without the income or down-payment necessary to support multi-million-dollar homes, you got massive defaults.


Q: Do you think there are any key global topics which will affect commodities pricing?

[ John Brynjolfsson ] Commodity prices are driven by supply and demand. Some people look at these factors in the spot market, while I tend to start at the other end of the maturity spectrum and think in terms of very long term (5-, 10-, 30- year) supply-and-demand trends. This is hard to nail down precisely, but if you start with that and work backwards, you can see how much effort should be put into exploration, production, conservation, and substitution now, and then get to a spot price. I think this is the only realistic way to understand commodity prices within the market.

Going back to 2006, we realized that in the very long term, there are certain commodities that will be scarce, the reasons being depletion (typically oil, but applicable for most commodities), and emerging market population growth. If you think of the developed world (U.S., U.K., EU), it represents perhaps a billion people. This means that there are another five to six billion people who are not in the developed world. Some of them are quasi-industrialized, while some are still in agrarian societies. I do believe that a good chunk of this six billion will become industrialized and developed, and increase their standards of living closer to ours. That means that they will stop growing their own grains and vegetables, and become more integrated with the global economy. This can involve migration from grain to meat (which is more agriculturally intensive) and migration from manual labor towards machine-based farming, and changes to household and industrial construction using metals.

If you put that in context, you are looking at a population which is four or five times the current industrialized world, so there will be some serious appetite for raw materials and it will certainly put pressure on supply. There is no such thing as demand exceeding supply; demand always equals supply, the contingent being price. The price will, therefore, be pretty high, and determined by marginal purchasers of these products who have available income to buy. That’s where we were in 2006, and I suspect it is where we will be in 2030.

Where we will be in 2008 to 2012? We have a huge global industrial production contraction due to the crisis. This is anywhere from 10% to 20% by some measures, which creates a glut of commodities. Frankly, even though economies are recovering globally, with synchronization in 2009, and less in 2010, the recovery takes us from the bottom and must grow from that point upward, so we are still way below the point where demand is using up 100% of available supply capacity. Prices on spot markets are therefore very low. I would expect over the next two or three years that there will be slack in most commodities such as crude oil. As you extrapolate even modest rates of growth and migration, the current capacity will become fully utilized, and we will expect to return to a situation where discussions turn to expanding capacity and to assessing how long that expanded capacity can use resources before depletion starts to bite. Ultimately this means that commodities that are hard to store will be more affected by immediate surplus of productive capacity and have muted prices. I put crude oil into that category, staying at $80 to $90 for at least the next few months, but commodities that are easier to store, such as industrial metals, will certainly continue to rally. Commodities that are the easiest to store and have value as debased currencies will continue to perform the best.

Q: Are there any particular countries or sectors where you feel there are opportunities in equity markets? And do you think the structure and performance of equity markets will change?

[ John Brynjolfsson ] First of all, equity markets got hammered during the crisis. Part of this was due to concern over the break-down of the financial system affecting economies and earnings. It was quite a dark period. The liquidity-fuelled rally is due, in part, to a realization that we are not facing Armageddon, but seems largely overdone because the structural problems have not been addressed, and have been exacerbated by bail-outs and greater debt, leading to greater tax burdens. There already are programs to aid employment and medical care that will certainly be a drag on earnings. If you look at the global pie of earnings, and I’m talking mainly of the developed world such as the U.S. and U.K., that global pie will grow at a slower rate due to the factors I alluded to. The global pie also will be divided with more going to workers and government and less to corporations. Both of these factors have depressant effects on earnings, and bring in a third factor of valuations. The multiples on equities should, therefore, drop, as growth prospects for developed world equities reduce.

While I’m quite pessimistic on developed market equities, emerging market equities are a different story. While certainly caution is always advisable, and these regions are not back to the pre-crisis peaks, we see that many of these countries are not as export dependent as they were. China, for example, has been historically very export-dependent, but in the past 12 months it has taken a huge inward look, focusing on domestically generated demand. The demand is coming from the consumer and investment sectors. Even though it is essentially a planned country, the planners are pushing schools, dams, infrastructure, power generation, and transportation. This combines with financial infrastructure such as banking and insurance and means that they are no longer as dependent on the fate of U.S. and U.K. consumers to support them. They have, in effect, become a self-sustaining dynamo, which creates opportunities.

Even though these markets are volatile, and have relatively high prices, they are not nearly as high as the fundamentals that justify them. For example, there are Chinese companies that have 2% to 4% penetration in the Chinese market where similar industries in the U.S, e.g., the insurance industry, have 50% to 60% penetration. The Chinese companies are generating earnings from a fraction of the population and it is inevitable that over the next 20 years, these companies will grow in double digits (I’m not talking about 10.1%. I’m talking of 20% to 25% per annum.) as the Chinese economy and customer base grows. To be able to buy companies like that, at earnings of 30x may seem expensive as similar companies in the U.S. trade at 20x, but I would gladly give up 10 multiples for that dramatically higher growth trajectory.

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We can see from Mr. Brynjolfsson that the economies of the developed world are still in a perilous state, with much co-ordinated action needed to bring a new found sense of stability.

This crisis has also revealed complexities and interdependencies of our highly global economy, demonstrated by the failure of a specific financial structure (in this case US Sub Prime Mortgages) creating a rapid global contagion.

It would seem Dr. Minsky’s theories have held true in diagnosing a financial crisis, but we can also take a step back and understand the larger cycles at play within the economy. There are many proponents of ‘wave theory’ (referring to the regular sinusoidal cycles in a modern capitalist economy), one of the most quoted having been Russian economist Nikolai Kondratiev (the first to bring such cycles to international attention in his 1925 book ‘The Major Economic Cycles). Kondratiev supposed that economies move in 45-60 year cycles. The ‘ascendant’ period comprising “Spring” (improvement or plateau) and “Summer” (acceleration or prosperity). The ‘downward’ period comprising “Fall” (recession or plateau) and “Winter” (acceleration or depression). Each phase not only carries financial characteristics, but social shifts and changes in the public mood.

Scholars such as Joseph Schumpeter further extend the theory showing capitalist “long waves” consisting of prosperity, recession, depression and improvement, which form the 50 year cycles. While most academic economists do not accept such ‘long-wave’ theories, scholars of Kondratiev waves do show that cycles of innovation, capital investment, war and crisis exist historically, and follow waveforms such as Kondratiev with remarkable accuracy. The “Schumpter-Freemen-Perez” interpretation of Kondratiev theory shows five cycles occurring, with a sixth to come. The industrial revolution (1771), The Age of Steam and Railways (1829), The Age of Steel, Electricity and Heavy Engineering (1875), The Age of Oil, the Automobile and Mass Production (1908), the Age of Information and Telecommunications (1971). Scholars also show that cycles of global war are usually linked to these capitalist ‘long waves’, typically preceding an output upswing.

Whether you agree with the academic merit of such ‘wave’ approaches, it helps us to understand the structure and cycles within the global economies. We as ‘developed nations’ are still within the information and telecommunications cycle (which began in 1971) and with the current recession roughly timed with the expected ‘saturation point’ for the cycle (c.2010). The question for us is what next for the “developed” world? Mr. Brynjolfsson predicts a much more socialised economy and a shift of focus as our generation, and the one which follows; struggle to rebalance the books after the stimulus needed to prevent a catastrophic failure. The impetus for this rebalancing may not, though, come from our immediate surroundings. As Mr. Brynjolfsson has identified, there are up-to six billion new economic participants coming on-stream with ‘emerging’ economies entering, and leaving industrialisation, gaining wealth, and contributing to both consumption and output within the global system. In the same way that Europe and the US contributed to the growth of China and other emerging economies, so too may the emerging economies contribute to the repair of the developed world. The sixth cycle (referring to the long-waves above) may, therefore, be a shift in the balance of economic power between core groups within our global system. This balance shift may occur not solely at a country level (as the US and UK become less powerful than their Asian counterparts) but also at a structural level within individual economies as wealth (and debt) become socialised reducing economic growth, and return, but increasing equality and wealth distribution within the economy.

To make an accurate call on ‘what next’ in the face of such uncertainty, global conflict, and other issues, would be tantamount to impossible. So what is the best strategy in such circumstances? As Charles Darwin once said, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.

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