Indonesia's reactions to the global economic crisis will affect the next generation's prosperity. Photo: Cassandra Nelson/Mercy Corps

Economic perils from abroad are encroaching on Indonesia's soil, reports Adnkronos International. The country is considering tightening liquidity and regulating international investments, Voice of America adds.

Around the world, developing nations are vulnerable to the Euro-American financial crisis. If Indonesia, with 100 million residents in poverty, can avert collapse, its actions could be a positive example for other developing nations.

With reporting and writing by Holly McFarland.

Critics say developed countries have broken promises for international aid. Photo: UK Department for International Development (flickr)

With cause for concern about the future of international aid amid the financial crisis faced by rich countries, some developing nations find microfinance playing an increasing role in fueling local growth.

At last week's 4th High Level Forum on Aid Effectiveness in Busan, South Korea, powerful advocates including U.S. Secretary of State Hillary Clinton and U.N. Secretary-General Ban Ki-moon pressed for continued financial assistance from rich countries and better transparency for aid programs, according to the Washington Post.

But is "continued assistance" enough? Is it the kind of assistance that will lead to actual change? The European head of Oxfam International says the EU failed to take a leadership role at the summit, despite previous promises of aid allocation. Natalia Alonso says “donors are not on track to meet the Millennium Development Goals. In 2000, all rich countries recommitted to spend 0.7 percent of their national income as overseas aid by 2015, but a number of EU governments, such as Italy and Germany, are pretty far from this.” Oxfam found that amid the economic crisis, EU overall aid last year was just 0.43 percent of income, leaving a $65 billion shortfall to 56 poor countries.

It may signal more trouble for traditional international aid, the flow of cash or food aid transfers from richer to poorer countries. The economic crisis and criticisms of the summit leave the trajectory of aid in question.

As the world's wealth shifts to developing nations, some Western leaders want to be sure their aid is paying off. Former British Prime Minister Tony Blair wrote in a Washington Post opinion piece that “leaders of emerging economies must ensure that they are able to attract high-quality, sustainable investment.”

World Bank president Robert B. Zoellick also points to this shifting paradigm, stating that “the time has come to envision a world “beyond aid” – a world where the shift is from the paradigm of charity to one of mutual economic benefit.”

One way in which some developing countries are expanding local markets in the era of questionable international aid is through successful microfinance programs. While the long-term solvency of some forms of microfinance are in question, other examples point to successes engineered by both developing countries’ governments and private local banks.

Government funded cash-transfer programs in Mexico and Brazil have been recognized as quite effective at reducing poverty and spurring local market growth, The New York Times reports. These programs provide small infusions of capital to low-income residents for both entrepreneurial and cost-of-living expenses, feeding local economies. Indonesia’s state-owned Bank Rakyat has successfully demonstrated similar results in recent years through a mixed savings-credit model, according to Elisabeth Rhyne in her article, “Five countries where microfinance works,” for China Daily.

Rhyne also highlights Bolivia’s BancoSol, a for-profit bank dedicated to serving the poor that operates within a strict regulatory framework. Competition among similarly modeled microfinance banks has spurred growth with low interest rates in Bolivia. Cambodia and Mongolia are two countries where replication of the Bolivia model has allowed microfinance banks to be “market leaders and innovators,” according to Rhyne.

In Columbia, where 96 percent of businesses are small, demand for microfinance has grown fast in the years of the global financial crisis, according to IPS news. Microfinance in Columbia “grew at a steady rate of 15 percent between 2007 and 2010," states a Visión Económica study. Small companies fuel demand for microfinance because "they generally do not meet the requirements set by commercial banks,” Jorge Varón, the manager of the development credit fund of the Colombians Supporting Colombians (CAC) programme, told IPS. And in a country with so many small businesses fueling market growth, this is a divergent route from typical aid pathways.

The financial crisis hasn't killed international aid. But it has people talking about what's next. Microfinance looks like a big part of the answer.

Erik Mandell is a graduate of Middlebury College in Vermont. He is currently pursuing a master's degree in public administration and global leadership at Portland State. Read his other contributions to Global Envision.

Bill Clinton's well-meaning 1993 campaign to tie executive pay to performance may have attracted risk-loving CEOs. Photo: World Economic Forum (flickr)

To poor countries, 2008's economic crisis must have seemed like a disease seeping from the wealthy global north. Two American thinkers have traced it to an unlikely source.

One early germ of the financial meltdown, which World Bank data show led to an unprecedented drop in foreign direct investment in the developing world and some of its slowest economic growth in a generation, may have come from a 1993 crusade against overpaid American executives, argues Daily columnist Reihan Salam.

Building on an argument by Nassim Taleb in the New York Times, Salam recalls a law championed by Bill Clinton as a way to slow rocketing executive compensation. The policy, Section 162(m), essentially capped executive salaries at publicly traded companies at $1 million annually by refusing to recognize larger salaries as a deductible business expense.

But there was an exception. Executive pay could be higher than $1 million if it were tied to performance.

Clinton's goal, reported in the New York Times in 1993, was to stop Wall Street executives from taking home "hefty amounts even when times are bad." But the effect, as shown on p. 65 of this report, was that executive compensation kept shooting up—it simply shifted from salaries to bonuses based on short-term corporate goals. This new compensation trend, in turn, helped drive out 1980s-style bankers who were "bland and predictable," as Taleb puts it, in favor of bankers who tended to be risk-loving gamblers.

Salam doesn't claim that Clinton's initiative was anything close to the only origin of the 2008 crisis. But he calls it a "cautionary example" of what can happen when you "layer new bad regulations on top of old bad regulations and call it progress."

Risk-loving gamblers, it turns out, may not be the best people to run massive corporations that can tank the global economy if they go down.

Chart by Carola Frydman and Raven E. Saks, from Historical Trends in Executive Compensation 1936-2005.

Industrial emissions are a major source of CO2 contributing to climate change. Photo: United Nations Photo (flickr)

The ongoing global financial crisis should not impede the fight against climate change. That's the concern coming from a surprising corner of the world: China.

As the latest round of UN-sponsored climate talks continue in Durban, South Africa, Chinese officials warn that financial hardships in Europe, the United States and elsewhere are no excuse for inaction on climate change.

With the Kyoto Protocol about to die, the global financial crisis could add another dimension to the already complex relationship between rich and poor countries when it comes to climate change.

China’s top climate official said a global pact to fight climate change should be a top priority for developed countries, even as they face severe economic challenges at home. "After the financial crisis, every country has had its problems, but these problems are just temporary," Xie Zhenhua, vice-director of the National Development and Reform Commission, told reporters, according to Reuters. He expressed concern that rich countries will break their promises to help poor ones mitigate and adapt to climate change.

According to The Economist, the vast majority of ‘climate finance’ for developing countries comes from western nations. Over $75 billion a year, or more than 75 percent of climate finance to the developing world, comes from a combination of private donors and multilateral and bilateral banks funded by taxpayers in wealthy countries. These sources have been hit the hardest by the global financial crisis.

"Climate change hasn't become less important because of the international financial crisis, but it has become less prominent," Xie said.

Developing countries, meanwhile, would be hit hardest by climate-related disasters. They lack the infrastructure and financial resources to deal with problems they have had less of a hand in causing. The 2010 climate talks in Cancun included a commitment of $30 billion to poorer nations to adapt to impacts of climate change, and an increase to $100 billion a year by 2020 for this ‘green climate fund.’ Now, says China, even the initial $30 billion commitment seems unlikely to be met.

China might seem an unlikely voice of support for carbon cuts, as it has surpassed the United States as the world’s leading producer of CO2 emissions. Under the Kyoto protocol, China was deemed an emerging economy, and not bound to the stipulations placed on developed countries. Yet China has pledged to reduce its emissions intensity by 40 to 45 percent by 2020, and hopes western countries sign on for an extension of the protocol’s commitment period. Kyoto signatories Canada and Japan have already refused to extend the protocol’s requirements. The United States has also said further negotiations are off the table.

That means the Durban discussions themselves may well determine the direction of climate funding and its impacts. And without climate action, the financial crisis could soon seem like a small-scale problem.

Erik Mandell is a graduate of Middlebury College in Vermont. He is currently pursuing a master's degree in public administration and global leadership at Portland State. Read his other contributions to Global Envision.

With a shared currency, entrepreneurs like this Tanzanian vendor won't have to change money when selling their products in other countries. Photo: justCRONO (flickr).

Has the eurozone crisis made shared currencies passe? East African leaders don’t think so, and they’re looking to Europe for an example of what not to do.

Economic integration isn’t a new idea for the East African Community. Its five member states&mdashUganda, Kenya, Tanzania, Rwanda, and Burundi&mdashalready have free movement of goods and labor, thanks to a customs union and, since last year, a common market (a type of trade bloc). According to EAC Deputy Secretary General Dr. Enos Bukuku, a shared currency would build on this by controlling price instability and exchange rate volatility among the states, writes In2EastAfrica. He says this would encourage businesses to invest and spur development in the region.

An EAC monetary union could face many of the same problems Europe has already experienced. Critics point out that the five EAC states’ economies differ greatly in size and scope. Kenya’s GDP is $31,408,632,915, while Burundi, with a fifth of Kenya’s population, has a GDP of $1,610,544,922, according to the World Bank. This could mirror the dynamic between powerful European states like Germany and the EU’s smaller states like Greece, as Tanzanian IMF head John Wakeman-Linn told The Financial Times. But EAC Secretary-General Dr. Sezibera doesn’t think this will be an issue. “If you look at EAC trade statistics, all the partner states have gained. I do not think Kenya will swallow up the other countries; it will only enrich the economic base of the community,” he said in an interview with The East African.

To the citizens who will be affected by these changes, the European Union’s tribulations are probably either unknown or seemingly distant, but EAC leaders are paying attention and believe that they can avoid Europe’s mistakes. At a round of negotiations in Uganda earlier this month, Bukuku said "For the eurozone ... maybe there wasn't well coordinated fiscal policy management and enforcement. If there are benchmarks that are agreed upon, it would be expected that the community would also agree on sanctions and enforcement mechanisms," reports The Christian Science Monitor. He also cited the issue of fiscal discipline and said that many of Europe’s problems are a result of the eurozone countries not having “lived up to what was in the treaty.”

Economists like the World Bank’s Paul Collier warn that a currency union could hurt East African economies, according to allAfrica.com. Others feel it’s simply inappropriate in the current economic climate; The Financial Times cites shrinking regional growth and depreciating currencies as discouraging indicators. But Wakeman-Linn disagrees, telling the newspaper that even if a common currency isn’t feasible, putting the necessary components in place could help East Africa:

“All the things that they need to do to achieve a common currency – integrate financial markets, trade policy, labour markets, capital markets, statistics databases, develop easy mechanisms for exchanging each others’ currencies – all of these things would be extremely valuable and would help develop the regional economy, and so these are things they should do.”

By revealing the cracks in the world’s financial systems, the global financial crisis has provided developing nations with a handy "What not to do" guide. EAC leaders are strong in their belief that a shared currency is possible, even if there are challenges along the way. “The monetary union is a possibility, not a dream,” Dr. Sezibera told The Financial Times. They originally hoped to implement the currency union by next year, a deadline that has proven to be overly optimistic.

With the lessons they’re learned from the euro’s failures, they hope to avoid some of the bumps along the way.

Margo Conner is a senior at Lewis & Clark College in Portland, Oregon, majoring in international affairs. Read her other contributions to Global Envision.

The European Central Bank looms large over the Euro debt crisis. Photo: soumit (flickr)

As Europe attempts to thwart a broader global recession, it is facing what many economists refer to as a trilemma, and poorer countries could be the victims.

A financial trilemma is comprised of three goals that policy makers try to achieve: (1) a stable/fixed exchange rate; (2) an economy open to international flows of capital; and (3) a sound monetary policy to stabilize the economy.

Here's the catch: In reality you can only achieve two of these goals, not all three.

In 1999, the Eurozone decided to give up the third goal, independent monetary policy. In exchange, they enjoy a common currency across 17 member nations and the freedom to exchange money and goods across borders. Though the European Central Bank creates monetary and fiscal policy for the European Union, each member nation relinquishes its own control.

This becomes an issue when a country gets into financial trouble and must defer to the European Central Bank or greater European Union. This was recently evidenced with the bailout and continuing debt problems in Greece.

Potential for problems arise due to our ever globalized, interconnected world. Eurozone policies are far-reaching, extending their grasp to neighboring emerging markets dependent on foreign dollars. With austerity measures becoming the norm, lenders are avoiding risk and could cut foreign lending in favor of keeping business in their own backyard. The Economist references a speech by the Financial Stability Board head, Mark Carney, in which he warned about the damage if the European bank were to deleverage on the world economy.

Many emerging economies in Eastern Europe depend on both foreign aid and outside investment. If the Eurozone's financial well runs dry the effect will ripple throughout Eastern Europe, even the U.S. Poorer E.U. members worry that they'll emerge the victims. French president Nicolas Sarkozy rocked the political world after his comments at a University of Strasbourg debate on November 8, where he described a proposal for a two-speed Europe, presumably divided between richer and poorer nations.

What part does the European Central Bank (ECB) play in this? That’s the question everyone is asking. Similar to the U.S. Federal Reserve, the ECB has the power and leverage to swoop in and bail out E.U. members on the brink of collapse. They are hesitating, however. Germany feels the ECB should step in only as a last resort. Many policymakers in Germany believe that the current crisis is forcing reform and thus serving a purpose, as recently expressed in The New York Times.

With optimism waning on debt solutions for the U.S. and abroad, tensions mount and consensus becomes imperative. Politics need to be set aside before any sort of real dialogue can exist. Will the E.U. decide on a two-speed Europe? Will any countries abandon the Euro? The implications for emerging markets are considerable; several outcomes could result in global recession.

Managing Director of the IMF Christine Lagarde meets China's Vice Premier Wang Qishan, Beijing, China. Photo: International Monetary Fund (flickr)

The global financial crisis has shaken up the international seating chart, and China may be vying for a better spot.

Though China was one of the International Monetary Fund’s original members, that invitation to the table didn’t mean it had a voice in the conversation. But last year, the World Bank and IMF both moved the country to third place. While the move changes the pecking order for Germany, the UK and France, traditional leaders, it matches China’s increasing position in the world economy with voting power.

Now, we wait to learn whether China will use its power to ease the Eurozone crisis. The IMF, typically the lender of last resort for sovereign states, needs more capital to provide the kind of liquidity Europe needs. China has that liquidity. In loaning to the IMF to play middleman, China can keep itself out of European politics, while keeping world economies - and important European trading partners - humming.

China’s funds would go far. Just last week, the New York Times reported, the IMF offered an additional short-term credit to “bystanders” - member nations feeling the “contagion" of regional and global default. One tool is a “precautionary and liquidity” credit line that would help countries approved by the Fund as having sound economic policies to meet short-term payments. The other new tool combines emergency disaster and post-conflict relief under a new rapid-financing instrument, which can now also be used after exogenous shocks like global financial crises.

The announcement immediately reversed earlier market slides the same day, showing the move boosted investor confidence, according to the Times. But if even a few countries take up the IMF on its offer, its account will soon run dry.

If that happens, China and its ocean of cash will be waiting. The country has shown signs that it’s at least willing to play, but it remains to be seen what rules it will follow. With Western economies looking increasingly desperate, China has the opportunity to play tough. Its decision could relieve the global economy, but it could also help put a new country at the head of the table.

The Continental Illinois National Bank and Trust Company. Photo: Paola Rosa (flickr)

"Too big to fail." We’ve all heard it. It’s why the U.S. government bailed out some the world’s largest banks in 2008. And the largest U.S. automakers in 2009. But where did we get this idea that our governments can and should bail out private companies in a free market? Here's how the seeds were planted more than 70 years ago that made bailouts not just legal, but seemingly essential. This is Act 2 of our four-part exploration.

In the 1970s and early 1980s, Continental Illinois National Bank and Trust Company was one of the biggest commercial lenders and among the largest major banks in the United States. In 1984, after purchasing bad loans from another failed bank without due diligence, it failed. The Federal Reserve stepped in to bail out the bank, going beyond FDIC obligations to recapitalize the entire bank with public money.

The implication was that some banks were so important to the U.S. economy that the federal government would be willing to save them from failure.

While being grilled in Congress over the action, then Comptroller of Currency C.T. Conover all but stated the new policy of bailouts when he named the 11 largest banks that the U.S. government would provide with a safety net.

When somebody is around to catch you, you’re probably more likely to risk falling. Economists refer to this as ‘moral hazard.’ “If someone pays you for your accidents, you will expend less effort trying to avoid them,” writes George Mason University professor and economist Peter T. Leeson in his review of Too Big to Fail, The Hazards of Bank Bailouts by Gary Stern and Ron Feldman, 2004.

That was exactly what banks were about to do.

NEXT UP
Act Three: The value and perils of deregulation

The Asian bond market crisis halved the value of the South Korean won on the dollar. Photo: micmol (flickr)

"Too big to fail." We’ve all heard it. It’s why the U.S. government bailed out some the world’s largest banks in 2008. And the largest U.S. automakers in 2009. But where did we get this idea that our governments can and should bail out private companies in a free market? Here's how the seeds were planted more than 70 years ago that made bailouts not just legal, but seemingly essential. This is Act 4 of our four-part exploration.

While risk invites danger, it can also bring success. Banks’ confidence in throwing their capital around gave all of us cheaper credit and injected much needed money into emerging markets and developing countries. From 1991 to 1994, the amount of foreign capital injected into developing countries in Latin America and Asia quintupled to $670 billion, the Journal of Economic Perspectives reported. Banks were bullish on the developing world, and their risks brought great rewards to creditors and debtors alike.

But obviously, the more risks you take, the more likely you are to mess up. Combine consumer confidence that "their" money will be insured with banks’ confidence that “their” money will be insured, and the results can get pretty dicey. Remember that this period also saw the government scaling back its role as a bank watchdog. The idea was that free and open markets would produce the best results for everybody, which is often the case. But with the government promising to protect depositors and banks from their mistakes while declining to police their risky behavior, the invisible hand was, well, nowhere to be found.

This trend, in hindsight, made it all the more likely that the Fed would eventually have to realize its promise to bail out big banks. Two events in 1998 did just that. The first was a domestic event in the United States. Long Term Capital Management (LTCM) was an important hedge fund that was founded by two Nobel Prize-winning economists. In 1997, it was averaging 40 percent profits per annum.

But remember the legislation passed during the Great Depression to regulate banks and prevent another crash? The fine print of that legislation specified that hedge funds composed of under 100 shareholders were basically exempt. As a result, most hedge funds in the United States, including LTCM, ensured they had less than 100 people managing their vast sums of assets. Fewer eyes on each investment made all of them riskier. In this world, "success" meant huge success—billions-of-dollars-in-profits success. But failure would spell catastrophe.

Disaster struck LTCM in 1998 when Russia devalued the ruble and declared a moratorium on all future sovereign debt repayments. The value of emerging market bonds—the ones on which LTCM had bet biggest—plummeted. As LTCM approached the brink of failure, it called the Fed to see what kind of a deal it could strike. The solution they found mimicked what would have happened in the private sector, but with better results for LTCM: The Federal Reserve negotiated for a group of private banks to buy out LTCM and inject it with equity. By the next year, the firm was making profits again.

That same year, the crash of Asian bond markets prompted Asian governments to step in and stop the subsequent run on banks that was exacerbating the bust of those bond markets. Just as the U.S. government had promised to save troubled banks, world governments were now doing the same. And in most countries, developed and developing, these bailouts entailed the merging of already huge banking institutions.

The subsequent 10 years saw much consolidation occurring around the world, with banks and other financial institutions merging to reach the economies of scale that enable huge profits. As Andrew Ross Sorkin explains in his new book Too Big to Fail, in 2007 “the financial services sector had become a wealth-creation machine, ballooning to more than 40 percent of total corporate profits in the United States.” As the banks profited, so did many of the people to whom they lent.

Yet while we all were able to live better through cheap credit, we now have to pay up while facing the largest recession since the Great Depression. Both sides of the ideological divide have legitimate views on how we got where we are. However, our future will depend on where we go next.

Ben Osborn is a 2011 graduate of Lewis & Clark College in Portland, Oregon. Read his other contributions to Global Envision.

A golden parachute for all. Photo: John Kannenberg (flickr)

"Too big to fail." We’ve all heard it. It’s why the U.S. government bailed out some the world’s largest banks in 2008. And the largest U.S. automakers in 2009. But where did we get this idea that our governments can and should bail out private companies in a free market? Here's how the seeds were planted more than 70 years ago that made bailouts not just legal, but seemingly essential.

We’ve split up our thoughts into four acts:

Act 1: The battle over the lessons of the Great Depression.
Act 2: The first bailout leads to the next, and the next.
Act 3: The value and perils of deregulation.
Act 4: Banking crises go global.

Cafes in Tunisia have become a common hangout for unemployed college graduates, but now that educated youth may be able to get back to work. Photo: Flickr (clurross)

Sitting in cafes all over Tunisia are unemployed youth with college degrees and nothing better to do.

Tunisia's recent revolution left it with skyrocketing unemployment and an economic collapse. Libya, Tunisia’s neighbor, finds itself in a similarly precarious situation. Their crucial difference is that while Tunisia is relatively developed, Libya has no working infrastructure. And ironically, it is this lack of infrastructure that provides the solution to both countries' problems.

Following the wake of Tunisia’s President Ben Ali stepping down and the death of Libya’s Qaddafi, the nations’ new governments are hoping to set up more open ways of conducting business. Previously full of government corruption and theft, transparent business practices will allow both countries to allow the creation of companies that address the people’s interests rather than the government’s. Tunisia and Libya’s citizens are taking advantage of this change, and are already creating businesses aimed at building the desperately needed infrastructure in Libya that Qaddafi never developed. This will, in turn, relieve the strain on Tunisia’s hospitals and other infrastructure, which are currently working at double capacity. According to Tunisian economist Moncef Cheikhrouhou, the rebuilding of Libya could provide jobs for 250,000 Tunisians, all while developing lasting economic ties between the nations and creating the building blocks for Libya’s economy to sustain itself.

The new opportunities for growth and economic connection also have a broader appeal. In the post-Arab Spring Middle East, the example these two struggling countries provide sets the pace for a region full of economic growth potential.

Prior to the Arab Spring, the Middle East economy neglected to build privatized business connections within the region. Ben Ali aligned Tunisia with Europe and Qaddafi kept Libya isolated. When regional investment did occur, it was often corrupt. Libya and Tunisia are both poised to set the example for regional cooperation in an area where business connections are rare, and their timing couldn’t be better. Recent Citibank rankings have placed two other Middle Eastern countries—Egypt and Iraq—as nations with the greatest potential for growth in the next 40 years. Investment in these growing economies would benefit all involved. This closer connection with up-and-coming neighbor economies is particularly important as Tunisia’s long-standing ties to faltering economies like those of Italy and Greece seem to be deteriorating.

With a lot of work cut out for them in the months and years ahead, it looks like as many as a quarter of a million Tunisians could finally leave the cafes and get back to work. Jobs, opportunities, and examples for their Middle Eastern neighbors may follow.