1. June 17, 20061 Privacy Symposium The Institute of Law China Academy of Social Science Global Landscape Dr. Michael Turner Economic Considerations in Privacy Law Political & Economic Research Council

2. June 17, 20062 The Promise of Information Led Development (ILD) Deloitte estimates that between 2002-2006 $356 billion worth of global financial services will relocate to India, creating 2 million new jobs. (“worldwide sourcing”) In advanced and emerging economies, use of personal information increasing.  Risk assessment (credit reporting)  Marketing (offline and online)  Location decisionmaking (retail outlets)  Inventory decisionmaking (initial and ongoing)

3. June 17, 20063 Benefits of Information Sharing Measurement difficulties  Quantifying economic value of information for national economy impossible  US Federal Reserve Bank staff studies (1999) linked productivity gains to use of Information Technology (IT)--subsumed information  Empirical and theoretical micro-economic studies highlight value of information flows more narrowly (e.g. financial services sector)

4. June 17, 20064 Case #1: Apparel Distance Shopping $15 billion clothes sold via direct mail and Internet in US during 2000. Retailers rely on “third-party data”--personal information about existing customers--to target prospective customers. Without access to third-party data, apparel retailers costs increase approximately 7%, resulting in $1 billion additional costs. (ISEC 2001--Michael Turner)

5. June 17, 20065 Case #2: Nonprofits and Charities Third-party data used extensively by US nonprofit and charitable organizations to solicit contributions ($80 billion raised via direct mail and telephone). As with merchants, charities append “internal” data on existing contributors with “external” data to develop list of prospective contributors. Without access to third-party data, US charities and nonprofits, costs increase 30%, reducing funds available to charities by $10 billion. (ISEC 2002--Michael Turner)

6. June 17, 20066 oToo many high-risk borrowers (“adverse selection”) oNot enough incentives to pay (“moral hazard”) oMisidentifying likelihood of paying (“asymmetric information”) Why Share Payment Information? Problems facing lenders and how more payment information can help solve them Consumers oFairer prices oWider access to credit oOffers “calibrated” to match credit risk and credit capacity Lenders oReduced delinquencies oExpand old markets and enter new markets The Economy oBetter overall financial performance oGrowth

7. June 17, 20067 Established: Financial sector mobilizes savings and allocates capital for investment and consumption  growth Some estimates of impact.* If private sector lending, increased by 33% of GDP, results for economy:  +1.0% annual per capita GDP growth  +0.8% annual per capita capital stock growth  +0.8% annual productivity growth Rationale: Finance is Crucial to Economic Growth *Derived from findings of Ross Levine, “Financial Development and Economic Growth: Views and Agenda” Journal of Economic Literature, Vol. 25(June 1997), pp. 688–726. Their findings are consistent with those of other studies, see Jose De Gregorio and Pablo Guidotti, “Financial Development and Economic Growth.” World Development, Vol. 23, No. 3, (March 1995) pp. 433-448. Their reported impacts were larger.

8. June 17, 20068 Estimations: Private Full-File Coverage and Private Sector Borrowing * p < 0.1 ** p < 0.05 ***p < 0.01 Lesson: what matters? Wealth Creditor Rights Reporting oprivate ofull-file owith widespread participation For a country, going from no adults to having all (100% of) adults with positives and negatives in a private bureau increases private sector lending by more than 60% of GDP. (Without the US and UK, which have high private sector lending, the estimated increase is still more than 45% of GDP.)

9. June 17, 20069 Participation & Loan Performance Colombia 2005 TransUnion/PERC 2006

10. June 17, 200610 Data Privacy: When Only Delinquencies Can Be Shared (I) What happens to loan performance? Source: World Bank (Miller and Galindo)

11. June 17, 200611 Data Privacy: When Only Delinquencies Can Be Shared (II) What happens to credit access?

12. June 17, 200612 Impact on Non-Financials-- Change in Acceptance Rates Sample (3.1 million Colombian files) Non financials: cell-phones, utilities, rent TransUnion/PERC 2006

13. June 17, 200613 Loan Performance in Japan (2004)  A more comprehensive reporting system (TeraNet – similar to proposed D&B model for Australia) reduces the probability of delinquencies (60+ days) by 34.1% for the mean loan.  The value of more comprehensive data increases with loan amount (reduces probability of delinquency by 41.3% for the mean large loans). (Waseda University 2004)

14. June 17, 200614 Loan Performance in Hong Kong  In the four years to 2002, Hong Kong experienced growth in personal bankruptcy of 1,900%. Around 12% of all personal bankruptcy was caused by credit card debt. Credit card write-offs stood at 13.6% by the end of 2002. This was significantly higher than comparable Asian nations such as Singapore and Korea, which had write-off rates of 5.5% and 6.1% respectively.  Defaulting customers in Hong Kong had acquired debts up to 55 times monthly income in 2000 and 42 times monthly income in 2002.  Following the shift to more comprehensive reporting, Hong Kong Monetary Authority figures show that between December 2002 and December 2004:  Credit card write-off ratios declined from 13.6% to 3.76%; and  Credit card delinquency ratios declined from 1.25% to 0.44%.

15. June 17, 200615 How Information Sharing Helps the Relatively Less Privileged Less participationLess deep Racial minorities, the young, women, and lower income groups suffer relatively worse than racial majorities, older, men, and higher income groups.

16. June 17, 200616 What Information Sharing Has Meant for Price of Credit? Share of card account balances by interest rate tier Declining cross-subsidy from the creditworthy to the credit-risky Credit card interest rate tier 19902002

17. June 17, 200617 Conclusions Responsible use of consumer information yields efficiencies and growth across a large number of sectors Overly-restrictive data regimes often worst of both worlds:  No additional privacy protections  Enforced inefficiencies