Author Archives: Alex Harrowell

About Alex Harrowell

Alex Harrowell is a research analyst for a really large consulting firm on AI and semiconductors. His age is immaterial, especially as he can't be bothered to update this bio regularly. He's from Yorkshire, now an economic migrant in London. His specialist subjects are military history, Germany, the telecommunications industry, and networks of all kinds. He would like to point out that it's nothing personal. Writes the Yorkshire Ranter.

Price and quantity

Posted on by

An upshot from the last post. Markets can adjust by price, or by quantity. Economics usually assumes that they do both simultaneously, although the maths usually doesn’t work that way. There is no reason I can think of to prefer either mode of adjustment a priori, but practical applications will usually show that one or the other would be better.

In the radical view that markets are institutions that are defined by the societies that create them, it is a very important question whether a new one (or an old one undergoing change) will tend to adjust price-first or quantity-first.

Still in search of requisite variety: UK housing edition

Posted on by

The search for requisite variety goes on. At the moment, the big guessing game in British macroeconomics is “when does the Bank put up interest rates?” The following story suggests that this is beside the point.

The statement noted that mortgage loan demand like the mortgage loans from Five Star Bank was up 40% in the year to January, while surveys by the main mortgage lenders suggested prices were around 10% higher in February than a year earlier.

It said: “In a continuation of a longer-term trend, mortgages at loan-to-income ratios above four times accounted for a higher share of new mortgages in the third quarter of 2013 than at any time since the data series began in 2005. New mortgage lending at high loan-to-value ratios remained low by historical standards, though the number of mortgage products offering higher loan-to-value ratios had doubled over the previous six months.

“Given the increasing momentum, the FPC will remain vigilant to emerging vulnerabilities, will continue to monitor conditions closely and will take further proportionate and graduated action if warranted.”

Threadneedle Street intends to oblige banks and building societies to carry out stringent stress tests later this year to see whether they would find themselves in trouble in the event of a slump in house prices or a sharp rise in interest rates.

Oh jesus here we go again

Yeah. Interestingly, most of the classic bubble pathologies are showing up – try this for size – but for the first time in my life, this seems to be accompanied by dread, not euphoria. Nobody is cheering.

These stress tests are interesting. First of all, the fact that the Bank needs to audit the banks to work out if it is actually possible to increase the policy rate without triggering a major bank failure is itself evidence that the situation I described in the original In Search of Requisite Variety post is coming to pass. The rest of the economy is more than lacklustre but the housing market is going ape again.

Secondly, the version of that story that appeared in the paper contained several paragraphs that don’t appear in the web version. For example:

Amid growing concern that the central London property market is already overheating, the Bank’s financial policy committee said that from June it wanted to have the powers to set the interest rate scenarios lenders would have to consider when granting home loans

Another quotes Brian Hilliard of Société Générale as saying:

Both of these metrics, loan-to-value and loan-to-income, appear in the list of potential future tools the committee could use. The FPC would probably move first on loan-to-income. The problem with controlling loan-to-value ratios is that it might be thought to run contrary to the idea of the government’s Help to Buy scheme

What’s going on here is that the Bank is seeking requisite variety. Specifically, they’re trying to create policy tools to address a housing bubble without imposing monetary contraction on the whole economy. Setting “the interest rate scenarios lenders must consider” and then auditing them should lead the lenders to turn down more applications for very large mortgages. Setting a limit in terms of loan-to-income would have a similar effect on mortgages applied for by borrowers who might struggle to repay them. Rather than changing the price of credit economy-wide, this would mean that some new applications would be credit-rationed.

This, of course, represents finance being re-regulated. In the de-regulation era, it was thought that the big issue was the overall price of credit, which a central bank could control. Its distribution among borrowers, sectors, and geography would find its own level. Brad DeLong’s Republic of the Central Bankers gets at this weird combination of enormous central-planning power vested in the Fed, and its restriction to hugely general and rough measures.

It was hoped that this represented a sensible compromise between the need for a stabilisation policy, and the avoidance of what was thought to be harmful bureaucracy. But another way of looking at the republic of the central bankers is that it is rather like Russia – it has a stash of nuclear weapons with which it can destroy the economy and that’s basically it. Precisely because its chief policy options are “Nobody notices” and “Blow everything up”, its day to day influence is often less than it imagines. It is also superbly, peerlessly unaccountable.

I am much in favour of re-creating a variety of policy responses. I am, though, worried that the regulatory power is being re-created in the unaccountable and often explicitly anti-democratic domain of the central bank. This is evidence, though, that the political system itself lacks requisite variety. Who do I vote for to re-regulate mortgage finance? As a result, the problem landed with the people who did have enough degrees of freedom to do something: the Bank.

Mark Carney agrees.

“This focus initially made sense since one of the greatest challenges for macroeconomic policy in the late 1970s and 1980s was the fight against inflation,” he said. “However, with time, a healthy focus became a dangerous distraction.”

He described the move by Brown in 1997 to give the Bank independence to set interest rates focusing on an inflation target as a “deconstruction of the old model of central banking”.

“In my view, while there were enormous innovations of enduring value during this period, the reductionist vision of a central bank’s role that was adopted around the world was fatally flawed,” Carney said in his Mais Lecture at the Cass Business School in London.

Crimea: meet the family

Posted on by

Here’s something interesting: the pro-Russian paramilitary leader in the Crimea is the son of the pro-Russian paramilitary leader in Transnistria.

As that empire was pushed out of Eastern Europe, Aksyonov’s father, Valery, became the leader of a group called the Russian Community of Northern Moldova, which campaigned for the rights of ethnic Russians in a country ruled by the Moldovan majority. In 1990, the ethnic tensions in that country erupted into war, and the Russian army came to the rescue of paramilitary groups fighting the forces of the Moldovan government. Two years later, the conflict ended with the de facto secession of a breakaway state called Transnistria, a sliver of land that runs along the Dniestr River.

Today, Transnistria is still a frozen conflict zone on the map of Europe – and a state that Aksyonov reveres. Its independence is not recognized by any member of the United Nations, including Russia. It is the only part of Europe that still uses the insignia of the Soviet Union, and its economy imposes Soviet-style subsistence living on the masses while the politically-connected elite benefit from its unique black market. As an unrecognized state unbound by international law, its customs points are a clearinghouse for contraband, including tobacco, guns and counterfeit liquor. But Aksyonov sees it as a place to be emulated. “Transnistria is a bastion of Russian culture inside Moldova,” he says. “They wanted to preserve their identity. And I fully support them, because I know what kind of pressures they faced.”

Who knew frozen conflicts could be a family business? Of course, “family” and “business” are usually very ordinary words that can take on a very different significance.

He remembers Aksyonov in the 1990s as a member of a criminal syndicate called Salem, which was named for the brand of contraband cigarettes they imported and dealt in bulk. (Other accounts claim the group was named for the cafe where they hung out.) “Aksyonov was a capo for them, an enforcer,” says Los. “He had a group of ten guys that would go around collecting money.” Aksyonov’s nickname in the local underworld, says Los, was the Goblin. “Every gangster had a nickname. I was called Horns because of my surname.” (Translated from Russian, the word los means moose or elk.)

In Crimea, it looks like he’s starting with the banks. Of course. Was ist ein Einbruch in eine Bank gegen die Gründung einer Bank? I do think this fits with my idea that this is about post-Soviets vs. pre-Europeans.

Update: He may have just added two gas companies. Nothing succeeds like success.

Ukraine: it’s a thing

Posted on by

This piece of Galrahn’s has a great title: US Soft Power in Ukraine is Missing Hard Power’s Escalation Control. It then wanders off into generic stuff about how Obama is lacking resolve and a succession of supposed military options, all of which would lead to war with Russia.

But if we were to stick with the title, we might learn something. “Soft power” – influence, the EU as a magnet, that stuff – is very hard to “calibrate” precisely because it deals in influence over people rather than physical force. People may not be impressed for years, but then change their minds and hugely over-deliver. The participation that makes it important also makes it very difficult to use as an instrument of policy. Classical theories of innovation diffusion tell us that “reinvention”, the degree to which users make innovations their own, is a critical factor in whether this or that idea reaches enough early adopters to hit the inflection point into mass adoption. As a result, not only does it work far better than anyone expects when it works, it also goes to new and unpredictable places nobody expects.

Fair enough. It is obviously true that US and European soft power played a role in Euromaidan. They called it Euromaidan, after all. But I have been writing so far in the voice of someone who imagines they controlled the situation, explaining why they failed to control it. Saying that soft power lacks escalation control is another way of saying that you underestimated the agency of Ukrainians. This theme runs through the whole story.

Vladimir Putin, famously, doesn’t believe it’s a nation and openly treats it as a colonial entity. The US imagines that some National Endowment for Democracy money and advice will solve everything in the way they would like it to be solved. The EU sees it as a fairly cynical bargaining process between Yanukovych and Yulia Tymoshenko and wouldn’t have minded Yanukovych sticking around even after all the shooting. Yanukovych, for his part, clearly didn’t think of Ukraine as a nation; he thought he owned it.

Operationally, this was meant to work like so. The conflict could be presented as a divide between (ex-Polish) western Ukrainians and (ex-Soviet) eastern ones. Experts differ. This would permit people to see it as not a proper nation, a conflict that had to be managed, or alternatively a Soviet survival that needed protecting from the IMF. At street level, this would show up as a pro-Yanuk movement big enough to be a potential political majority. But Yanuk was let down by the failure of the supposed “pro-Russian East” to show up. He was counting on it and he may have reassured Vladislav Surkov, Putin’s very influential PR expert, that it was coming when Surkov came to see him.

The problem was, though, that the “pro-Russian east” had already been a disappointment in 2004, and it was even weaker this time. Research on the ground suggests that the idea of a geographical split is misleading – the political divide is generational, and eastern Ukrainian identity does not signal support for Russia and still less for Yanuk. There is even some evidence that the linguistic picture has changed since 2004, with more people, especially young people, opting to speak Ukrainian and to adopt such an identity. This could be described as the transition from a post-Soviet to a pre-European identity. We might make a little leap of faith and argue that the EU missed this too, and the evidence is that Tymoshenko’s polls are horrible.

If the pro-Russian east didn’t show up, who did? There was a big surprise about Ukraine, and there was a big non-surprise. The surprise was the appeal of the European Union as an ideal – who expected that? – and the non-surprise was the emotional force of nationalism. This brings me to Tuesday’s standoff at Belbek airfield, Sevastopol, where Ukrainian Colonel Yuri Mamchuk led an unarmed march of the 204th Aviation Brigade’s ground crew to assert their right to access the runway and maintain the 40 or so MiG-29 aircraft there. You can watch the confrontation, with subtitles, below:

But I prefer this photo, which reminds me of Ilya Repin, perhaps a painting entitled Colonel Mamchuk Defies the Rascally Cossacks:

The imagery here is very important – the red banner is the colours of the Soviet unit whose traditions the 204th inherited, which had no fewer than six Heroes of the Soviet Union. The Ukrainians have both appropriated the Second World War heritage, and also posed the question as to who looks like the Germans here. It’s also crucial to note that the people Mamchuk led up to the Russian sentries will have been the cooks and clerks and avionics technicians you need to make an air force work, not some sort of commando elite. This is, I think, what nationhood looks like.

And as a piece of strategic nonviolence, it came close to scuppering the whole Russian plan or non-plan in the Crimea. If the Ukrainians got to use the airfield, they could resupply and indeed relieve their garrisons there. If they could fly their planes, they would evidently discredit any Russian claim to control the air. Starving them out would no longer be an option. Having both Russian and Ukrainian forces present would be very much like the Crimea pre-revolution, and therefore something close to the status quo. The degree to which Russian and Ukrainian forces coexisted there until this month is shown by the fact the 204th is a counter-air wing with the dogfighter variant of the MiG-29, and the Russian air wing up the road is a strike force with the Su-24 bomber. The Ukrainians essentially provided the Black Sea Fleet’s air defence. (SO AWKWARD.)

The upshot was a compromise – the Ukrainians didn’t get to reoccupy the airfield, but they did get to station people there. But this is progress towards the status quo. And today, this Daily Mirror piece mentions that the Ukrainian navy’s helicopters are active in Crimea and that the Mirror journalist saw one resupply the garrison he visited. If this is true, the Ukrainians can hold out a long time.

On Tuesday, both Putin’s odd self-contradictory statement and Kerry’s words in Kyiv were united in tone; they both seemed huffy, calling for OSCE monitors to check on the kids-on-lawn situation. Two old men who found they controlled the situation much less than they thought. It is worth pointing out that historically, Crimeans have usually demanded autonomy or even independence, not integration in Russia.

Sources I used beyond the ones linked in the text:

https://twitter.com/TheWarRoom_Tom/status/441248164906303488
https://twitter.com/TheWarRoom_Tom/status/441248640531980288
http://www.telegraph.co.uk/news/worldnews/europe/ukraine/10679161/Ukraines-hero-colonel-insists-he-was-just-doing-his-duty.html

Putin’s Victorious Defeat


http://seansrussiablog.org/2014/03/02/ukrainian-civil-war-wasnt/

Putin’s Pyrrhic Crimea Campaign


http://www.newyorker.com/online/blogs/newsdesk/2014/03/who-will-protect-the-crimean-tatars.html?utm_source=www&utm_medium=tw&utm_campaign=20140306
http://www.theglobeandmail.com/news/world/tide-of-opinion-turns-against-russia-in-ukraines-east/article17293095/#dashboard/follows/
http://eng.kremlin.ru/news/6763
http://zik.ua/en/news/2014/03/05/journalists_recognize_fsb_colonel_posing_as_crimea_selfdefence_commander_467743
http://www.telegraph.co.uk/news/worldnews/europe/ukraine/10670547/Ukraine-crisis-Polite-people-leading-the-silent-invasion-of-the-Crimea.html
http://www.theguardian.com/commentisfree/2014/feb/28/ukraine-this-is-no-second-cold-war

The role of the Black Sea Fleet in Russian naval strategy


http://www.sueddeutsche.de/politik/krise-in-der-ukraine-die-fuenf-tage-herrschaft-des-volksgouverneurs-gubarew-1.1907550
http://www.edmundconway.com/2014/03/how-britain-became-russias-banker-of-choice-and-what-that-means-for-sanctions/

These Five Charts We Totally Stole Explain What’s Up With the Italian Economy

Posted on by

I’ve been wanting this for a while. What happened to the powerhouse Italian SMBs of the 1980s? We’ve known for quite a while that it was productivity, not wages, not hours, not savings that gapped-out between northern and southern Europe in the 2000s. I made the point back in 2011 and again that this is the responsibility of management, and perhaps of government.

Here is a great VoxEU post on productivity in Italy from Fadi Hassan and Gianmarco Ottaviano.

It is productivity that’s the problem.

ottaviano fig1 29 nov

It’s not the labour market. This chart shows a measure of “Strictness of overall employment protection”.

ottaviano fig4 29 nov

It might be the banks, or if not banks, finance. This chart compares the change in investment and the change in productivity in detailed sectors of manufacturing, between Italy and Germany.

ottaviano fig3 29 nov

It may also be to do with computers. This chart shows the percentage of non-residential investment made up by information and telecommunications technologies.

ottaviano fig5 29 nov

Hassan and Ottaviano think Italian human resources managers are at fault.

ottaviano fig7 29 nov

The basis of this scoring is as follows:

  • Italian firms promote workers primarily on tenure, rather than actively identifying and promoting top performers;
  • Managers tend to reward people equally, irrespective of performance level, rather than providing targets with performance-related accountability and rewards;
  • Poor performers are more rarely removed from their positions;
  • Senior managers, rather than being evaluated on the strength of talent pool they actively build, are more likely to not see attracting and developing talents as a priority

The first seems to conflict with the second chart, as does the third, and the second is arguable. The fourth, though, reminds me of Diego Gambetta on Italian professors and incompetence as a costly-signalling mechanism. I wrote about him here and here.

In search of requisite variety: central banks and property bubbles

Posted on by

After last week’s festival of secular stagnation (StagFest?), this week’s trend kicks off from Paul Krugman’s post wondering why the Swedish central bank is raising rates. Simon Wren-Lewis gets into it more. The Riksbank is worried about property prices, and the banks that love them. They’re afraid that a property bubble might break out, and hope that cranking up interest rates for everybody will stop it.

At the same time, the Reserve Bank of New Zealand and the Bank of England are taking a different approach. The New Zealanders have imposed a regulatory limit on big mortgages, defined by loan-to-value. They’re not totally banned, but each bank has a limit in how many they can give out above a given LTV. The Bank of England has vetoed any more funding for property loans under the joint Bank-Treasury Funding for Lending scheme. Meanwhile, Germany may be going to impose rent controls, which is important if you think property is worth the net present value of its rent.

So what’s up here? Consider the case where the market for property is rocketing while the rest of the economy is far from full employment on some metric like…uh…employment. The interest rate that would be appropriate for the property sector is different from that in the wider economy. Theoretically, the market for capital ought to smooth this out but observably it doesn’t happen. (Like the difference in interest rates within the Eurozone between German and Italian SMBs.) Lowering interest rates for the wider economy will cause even more trouble in housing, while upping them to stop the insanity will impoverish still more people. We could call this the UK case, as it happens in Britain all the time. Another example would be a strong, indeed overheating, macro-economy and a housing market that is already far enough along the Minsky scale that pulling up the interest rate to slow the wider economy will cause a financial crisis starting in the property market.

These are, in a sense, the same problem. What’s happened in both is that monetary policy control has been lost. We can look at this in two ways – either it’s impossible to use monetary policy effectively, because the consequences are so bad, and therefore it’s no longer a practical instrument of control, or else the central bank no longer controls monetary policy itself. To see how this might happen, think of the second case. Whether the crisis is because a marginal buyer can’t afford to buy at the new interest rate, or because the policy change is taken as a signal and sellers unload, asset prices dive and financial institutions end up in trouble. The magnitude of the increase in market interest rates, or the volume of credit provided in the market, is decoupled from the policy input. This is what it means to lose control.

In some circumstances it might even be possible to have a perverse response to control – Mike Konczal explains, and foreshadows a point that will be important later.

It’s worth thinking about the relationship of bubbles and monetary policy for a moment. A good working definition of a bubble is a situation where the capital gain an investor expects over their operating horizon is much greater than the potential change in interest rates in that time.

J. K. Galbraith made this point about the Wall Street crash of 1929 in The Great Crash. The typical speculator of the time bought on margin, borrowing from a stockbroker, who themselves borrowed from the world capital market. Brokers’ loans in the summer of 1929 were repayable on call and attracted a 20% interest rate, but even with these terms, people made money fast, as long as the market went up. Galbraith pointed out that, therefore, no movement in interest rates the Federal Reserve could bring about would stop the bubble.

He also pointed to the role of foreign companies and wealthy individuals who invested directly in brokers’ loans, attracted by the high rates and call terms, who unlike banks didn’t draw on Fed funds and therefore didn’t care about its rates. But this is beside the point. If the bubble is going up fast enough, the change in interest rates required to stop it may be either unachievable because the policy instruments can’t deliver it, or else it may be so large that the consequences for the wider economy are unacceptable.

Minsky’s three phases are interesting here. In phase one, hedge finance, the cash flows from a typical asset pay the interest and principal and something more. In phase two, speculative finance, they pay the interest, and the resale value of the asset has to go up to make the deal work. In phase three, Ponzi finance, they don’t even pay the interest. Another way of saying this is that the interest rate is now irrelevant. It’s win or Sing Sing.

A further point here is that the market interest rate determines the boundaries between the phases. Innovation in financial services tends to increase their power to create credit, to increase the spread between policy and market interest rates, and therefore to escape from monetary policy control. Charles Kindleberger would point out that bubbles have happened in every known monetary regime, very much including gold, and I think we can summarise the point by saying that financial innovation is the microeconomic reality of the macroeconomic concept of endogenous money.

Why care? The argument here is capable of general application to all kinds of asset bubbles, but housing plays a special role in the economy. It is BULLish – Big, Universal, Leveraged, and Life-Essential. Everyone has to live somewhere and it’s not optional. Because houses are themselves a large investment of capital, building or buying them usually requires credit and lots of it. The combination of the two means that it is big. Therefore, this is a highly leveraged market that touches whole nations in the pocket, unlike (say) technology startup shares or even commercial real estate. Edward Leamer made this point to the Kansas City Fed back in 2007 in a paper called Housing Is The Business Cycle.

How to look at this? The cybernetic tradition, I think, is the right way. Cybernetics, the study of control systems in general, was concerned from the word “go” with the problem of what happens if there are more questions than there are answers. One version of this was imported from psychiatry, the notion of the double bind. A patient is forced by their situation to respond to two mutually incompatible expectations, so that whatever they do is wrong. The result is that they go mad (to be brief), and the shrinks of the time did horrible experiments in inconsistent conditioning with dogs to prove the point.

Various cyberneticians, especially Stafford Beer and Ross Ashby (himself a psychiatrist and quite the pre-ethical review board creep), identified an important principle here: the principle of requisite variety. To exercise control over something, you need a range of responses – a degree of variety – that matches the variety of its outputs.

If its outputs can change along more than one axis, you need at least as many responses. If you want to determine both the air speed and the vertical speed of an aeroplane, you need both the elevators and the throttle. If you want to determine both its course and its attitude, you need both the ailerons and the rudder. If I need to please my mother and my husband…you may see the point. To some extent, you can get away with less variety in the more forgiving bits of the flight envelope. In that case the variety adds to redundancy, which is good. But the problems arise when things become more challenging.

So, we’ve already done too many of them words. The point is, I think, that you can’t have effective monetary policy at the macro-level if monetary policy has to do micro-level interventions. You may not even be able to do those interventions at all, and I have my doubts about doing the whole of macro policy with monetary policy. And we already assume that macro-level monetary policy exists in order to avoid doing micro-level interventions. Central banks getting interested in regulatory intervention do so, in part, to get enough requisite variety so that monetary policy can work.

And if you don’t like this for libertarian reasons, well, it is what it is. We tried that.

The FT could not be more wrong about Brazil and the Internet.

Posted on by

The FT is worried about the Internet, and specifically what the Brazilians are up to with it as a result of the Snowden disclosures.

I am not. Details of Brazil’s very successful policy with regard to the development of the Internet are here, in a fine post on the Renesys blog. Basically, we’re seeing the conflation of two things here – the US’s genuine concern for the Internet, and its equally genuine concern for the interests of Silicon Valley, Hollywood, and the spooks.

What is the Internet? You can always start a good row on the NANOG list by asking for a definition. But I don’t think there is much real dispute that it’s fundamentally a set of interconnected autonomous networks. The key protocols overlay diverse media bearers and underlay diverse applications, while the routing system unites Autonomous System numbers, defined as networks having an independent routing policy. It differs from, say, the mobile carriers’ GRX and roaming hub infrastructure, or the older international voice interconnection systems, in that there is no central intermediary or necessary hierarchy. If AS X and AS Y want to interconnect directly, they can do so as long as they can physically reach each other.

As such, more local interconnection is always and everywhere a good thing for the Internet. Back in the 90s, although the rhetoric of radical networking was at its peak, the system was in fact heavily dependent on central intermediaries, the so-called Tier 1 operators. As a very rough generalisation, you could say that the Internet worked like it was meant to among US universities, government users, and research centres, and everyone else was eventually a customer. This had distinct geographical and political consequences – supposedly, the topological centre of the African Internet was the 111 8th Street carrier hotel in New York City, or the LINX in London, depending on who tells the tale. The convenience of this for the NSA should be more than obvious.

Those days are long gone. The Tier-1 operators no longer rule the earth like they once did, and anyway the club of Tier-1s has a very different membership now, with major players including Tata of India, Telecom Italia-Sparkle, and PCCW of Hong Kong where once it was a nearly total American monopoly. What changed? More competition, for a start, but also much more interconnection between customer networks. I mentioned the LINX, the London Internet Exchange. IXen are membership organisations that provide for peering between their members, and their spread has been a major factor in the quantitative growth and qualitative development of the Internet worldwide. Another important issue is the increasing tendency of eyeball networks – consumer ISPs – and content networks to peer directly.

To understand why this is a good thing, I recommend another Renesys post. Shorter paths equal lower latency, and more diverse paths equal greater resilience to disruption.

Latin America was rather late to this development. It exhibits the traits of the 1990s Internet to an extreme degree, with both nearly all its traffic to and from the wider world and enormous amounts of intra-regional traffic passing via Terremark’s NAP of the Americas in Miami. The politics of this, again, ought to be obvious, especially from a Latin point of view informed by their distinctive intellectual tradition. The economics and engineering of it are not good either. Locating hosting, applications, or content delivery infrastructure in a country that reaches its neighbours via a 5,000 mile submarine cable round trip is asking for trouble, and a structural barrier to scaling up an Internet company anywhere in the region.

Hence Brazil’s effort to create local IXen and ISPs and to build more regional fibre links, which has been a great success (check out the numbers in the post!). Not only do they want better connectivity, they also want participation in the Internet rather than just consumption of Google searches and lolcats. A good measure of this is AS numbers per capita. Theirs are rocketing.

latam-asn

(If you find this interesting, a more detailed technical report on it has just appeared here)

So, to summarise so far: there is nothing natural, open, or free about sending traffic from Sao Paulo to Rio via Miami. And the Internet founders did not intend and do not want this. It is bad economics and bad engineering, and the rest of the world left it behind years ago. Brazil is right to do everything possible to get rid of it, and its efforts are already bearing fruit. I think they are also right to identify it as a form of underdevelopment imposed on them by the rich. IETF and ISOC are very clear that peering and local interconnection are nothing but good.

We have an excellent counter-example to Brazil in the Renesys data set – Mexico, which had until very recently a private monopoly of telecoms, no regulator, and no IX. Mexico has far fewer AS numbers per capita and far less growth in this metric.

The FT is confusing the entirely healthy development of the Internet as it was intended to work, and indeed does in Europe, with the Great Firewall of China or the lesser firewalls of Saudi Arabia, the UAE, or Iran. In doing so, it is letting the US get away with using the rhetoric of free speech to maintain an exorbitant commercial privilege, and of course to tap Dilma Rousseff’s phone whenever this seems expedient. This agenda permits freedom in a negative sense, but at a real economic price and at the cost of giving up participation and control.

And it serves, probably unintentionally, another agenda – the Chinese or Iranian approach, in which free speech on the Internet is a political threat that must be censored and an open door for US competitors that must be closed by censorship in its secondary function as a non-tariff barrier. This one can work economically – note the huge Chinese Web 2.0 companies like QQ and Sina Weibo, or the roaring growth in AS numbers within Iran – but it is deeply illiberal and anti-democratic.

There is an alternative to this unattractive pair of options. That is real Internet development, like the Brazilians are doing, like Kenya is doing, or like Europe did in the 2000s. It must not be demonised by conflation with Chinese opinion management.