Photo: Will Weathersby/Mercy Corps

Mercy Corps and Google.org are linking up to change the Gaza Strip and West Bank, one peaceful IT solution at a time.

Thanks to the Arab Developer Network Initiative (ADNI), young Palestinians will have the opportunity to develop web-based technological skills, sparking a new generation of capable, creative entrepreneurs. With the help of training sessions from Google and Mercy Corps’ seasoned experts, and additional funding from Source of Hope, ADNI is expected to open up a new professional field for Palestine’s motivated, young, job-seeking graduates.

The Challenge: For many Palestinian youth these days, unemployment is standard—the majority are jobless, despite relatively high educations. This youth bulge, created by a large baby boom in the 1980s, has ballooned during a global economic lull and left thousands of skilled 20- and 30-somethings without work. The unemployment rate for youth between 20-24 years is 66 percent in Gaza and 34 percent in the West Bank. It’s a terrible time to be young and in need of a job in the Middle East.

Palestine’s tech sector is so far not keeping up with forward-thinking tech innovations, such as cloud computing and app software. Currently, the sector represents a small niche, accounting for only five percent of the Palestinian economy. The lack of harmony between technological innovation and economic development is compounded by the alarming fact that about one percent of online content is available in Arabic.

The Opportunity: With a $900,000 grant provided by Google.org (the philanthropic branch of Google) for the first two years, and an additional $1 million provided by the Source of Hope Foundation, ADNI will have a healthy nest egg to start developing its program. The initiative includes three major components: technological and business-specific training, local and international mentorships, and seed capital investments.

What are they coming up with? Ideas already proposed by Palestinian ADNI participants include an app that turns off when entering a mosque, hand gesture recognition software, and Gaza Places, the Palestinian version of Google Maps. Mercy Corps and Google hope that investing in ambitious, fertile minds will, in turn, create dynamic innovations with social impact and the potential to produce income.

Photo: Mohammed El Baba for Mercy Corps

The Obstacles: Mobility and location flexibility is a well-known headache for the territorially-conscious region. However, an Internet connection allows people to work anywhere and cloud computing has changed the way we think about physical IT resources and traditional bumps in the road to developing apps. The initiative sets up a win-win situation: Palestinians receive the toolkit they need to supply an unfulfilled demand, while Google expands its interests in the Arabic-speaking market, which is ripe for paid online advertisements.

While the results of this project appear promising, ADNI still has many valleys to cross before reaching the promised land. No 3G network currently exists in the region for wireless devices. Commercial goods and materials cost a pretty penny, approximately 50 percent more than outside the borders. PayPal is not available to most. In Palestine, the platforms the global tech sector is built on simply aren't in place.

The Hope: In spite of these inconveniences, both Mercy Corps and Google are optimistic about their joint venture. “Palestinians have such a unique position," says Gisel Kordestani, Google's director of new business development. "They're well educated. They have strong English-language skills. With 88 million people in the [Middle East and North African] region getting online, they have the opportunity to build something for the Arab world."

And so Google.org, Mercy Corps and Source of Hope seem to be abiding by a proverb from one of the most notable male figures from Nazareth, who once preached: “Do not withhold good from those to whom it is due, when it is in your power to do it.”

Get involved as a mentor, trainer or investor: arabtech@sea.mercycorps.org

RELATED CONTENT:What They're Saying at Startup Weekend in Gaza

Young Portuguese congregate in a park in Lisbon. Photo: Erik Mandell for MercyCorps

Amid its ongoing financial crisis, Portugal’s prime minister has a surprising message for his country’s struggling residents: leave.

It’s just one example of Portugal looking to emerging markets for relief as power dynamics of international economic relationships change.

Conservative Prime Minister Pedro Passos Coelho suggested that moving to Portuguese-speaking countries and former colonies such as Brazil and Angola could be an alternative for young Portuguese hit hard by unemployment, according to IPS news. Coelho’s suggestion specifically focused on teachers, saying that other places could provide better job markets for educators. But the Prime Minister’s suggestion is being met with criticism, including from the governments of his imagined receiving countries for Portuguese emigrants.

Brazil and Angola both shot down this suggestion quickly, stating that they had no need for teachers from Portugal, IPS reports. Ana Maria Gomes, a leader of Portugal’s opposition Socialist Party, also criticized Coelho, saying "that is the last thing a prime minister should say... because no matter how complicated things are, we can and must pull out of this.”

Yet given recent economic trends, it makes sense that a struggling European country like Portugal might consider unorthodox solutions.

Brazil, the world’s largest Portuguese-speaking country, recently surpassed Great Britain to become the world’s sixth largest economy, reports The Guardian. Douglas McWilliams, chief executive of the Centre for Economics and Business Research (CEBR) described Brazil’s economic rise as part of a larger trend. He told The Guardian that "Brazil has beaten the European countries at soccer for a long time, but beating them at economics is a new phenomenon. Our world economic league table shows how the economic map is changing, with Asian countries and commodity-producing economies climbing up the league while we in Europe fall back."

This global shift of economic power, evident in Brazil’s rapid growth, is seen elsewhere as well. The emerging power of the so-called BRIC economies (Brazil, Russia, India and China) has been widely recognized for a while now, with trade in manufactured and resource-based commodities fueling the rapid growth. And the global financial and Euro-zone crises have accelerated the divide in growth between emerging economies and traditional economic powers.

Including the BRIC countries, 19 of the 30 predicted largest economies by 2050 are currently emerging markets, according to HSBC. And Project Syndicate reports that changing patterns of innovation and research and development will further fuel this shift, pointing out that in 2000 so-called developed countries only accounted for 76 percent of global R&D, down from 95 percent in 1990.

News of the rise of emerging economies isn’t new, but these figures pose a problem for struggling countries like Portugal. And the trend of turning to emerging countries for financial assistance signals a rebalancing of power likely to last.

Coehlo’s suggestion for emigration coincides with news that the Chinese state-owned Three Gorges Corporation bought 21 percent of Portugal’s largest power producer from the debt-burdened government, reports the Christian Science Monitor. The largest-ever Chinese investment in Europe further illustrates Portugal’s precarious situation. As another Chinese state-owned enterprise, China State Grid Corporation, bids on purchasing Lisbon’s national power grid operator, Portugal shows its willingness to sell assets to emerging economies to stay afloat.

“The European economy needs blood, but not in the form of a transfusion,” said Wang Yiming, a senior Chinese economic policymaker. “We need to create new blood by promoting investment.” In other words, China doesn't want to simply loan cash to the West. But it’s willing to invest in concrete assets.

Wang’s statement demonstrates China’s view of itself as an economic savior. If troubled countries have assets to sell, emerging economies are willing and able to buy.

So China is buying shares of Portugal’s utilities, and Brazil doesn’t want its unemployed emigrants. The Portuguese example shows that emerging economies now have more choices when it comes to global economic relationships.

Five hundred years after Portuguese landed in Brazil, have the colonial winds reversed? Maybe not entirely, but emerging economies now have a comparatively better hand to play. And for countries like Portugal, the game of economic power is no longer stacked so strongly in their favor.

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.

Reliance on quality produce from Africa prompted Albert Heijn to undertake aid projects. Photo: Erik Mandell for MercyCorps

A Dutch company looks to combine international aid with corporate profit, according to allAfrica.com.

The supermarket chain Albert Heijn is funding and conducting development projects in Africa, including constructing water systems in Ghana, farmer training programs in South Africa, and expanded schooling in Kenya. But the company doesn’t claim that its efforts are based in charity. "It's very much business-driven. It bears almost no resemblance to charity or good causes," says Henri Zondag, chair of the Albert Heijn foundation.

Albert Heijn supermarkets rely heavily on quality produce from Africa, and the idea is that healthier, happier and better-educated suppliers make trade relationships more productive. The Dutch government is a player in this arrangement too, encouraging business-sector participation in cooperative development relationships and economic benefits for the Netherlands. The government hopes that “making a profit can be a great incentive for [development] projects.” The company envisions projects that forge partnerships that lead to greater profit. If both are correct, in the long term all parties involved could win.

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.

Candles provide a light in the dark for those without access to electricity. Photo: Sara Y Tzunky

Is microfinance the solution to energy poverty? If partnered with renewable energy, it could prove to be true.

Energy poverty—a lack of access to electricity, fuel and more efficient cooking technologies—affects over two billion people, according to the United Nations' Rebeca Grynspan, making it a huge development priority.

Living without electricity simply makes you poorer. Kerosene lamps are expensive, ineffective and fill a home with hazardous fumes. But without a lamp, it's impossible to work or study after sunset. Cooking over an open flame pollutes the lungs and requires hours of wood-gathering, a huge loss of productive time. This is where simple solutions (like more efficient cookstoves) can yield huge impacts.

As a weak economy shrinks international funding pools, countries need to be increasingly wiser and more creative in their resource management. It’s worth noting that a lack of infrastructure presents the rare opportunity to build right the first time. By funding sustainable energy initiatives through microfinance, two things can happen: (1) Programs aiming to reduce energy poverty can work closely with locals and make more informed decisions by relying on indigenous knowledge; and (2) Money stays in the local economy, creating avenues for future investment and wealth generation.

Mercy Corps is combining these two endeavors to address energy poverty. The organization's Energy for All (E4A) program, funded by the European Commission, began in May 2011 in the country of Timor-Leste. It's primarily focused on lighting, cooking fuel needs and natural resource management. Because the population of Timor-Leste heavily relies on crops for fuel, food and income, they are especially vulnerable to shocks. Without access to energy, their problems are exacerbated, true for most poor people in developing countries.

Mercy Corps utilizes a market-driven approach to address energy poverty issues: By remaining external to the market, they strengthen the local economy and seek to create linkages where gaps in service exist. Simply donating materials or stoves undermines local businesses and acts as a disservice to the community. But upfront costs of adopting new technologies is often a major barrier, so Mercy Corps is partnering with microfinance institutions in Timor-Leste to initiate loans.

Mercy Corps' comprehensive survey compiled and assessed the needs of local households, to paint a clear picture of the specific needs and challenges of the community. The outcome is a program design that will implement solar power, improved cook stoves, seed storage and sustainable forestry initiatives.

And a performance tool developed by the Grameen Foundation, the Progress out of Poverty Index (PPI), will help local microfinance institutions determine whether the services they provide are effective or not.

Additionally, the E4A program is establishing alternative energy centers that will demonstrate their sustainable business models to the local market, with a special focus on rural off-grid areas.

I had the opportunity to visit Soft Power Health in Kyabirwa, Uganda, an organization testing an improved community cook stove. Access to a seemingly simple cook stove not only improves the health of the user but requires less fuel and reduces cooking time. By easing access to tools like this, the group is educating the surrounding community with hands-on instruction and use, the first step in technology adoption.

The concept of energy poverty received international attention last year when the UN announced that 2012 is the International Year of Sustainable Energy for All. They are seeking opportunities to scale up efforts that will achieve universal access to modern energy services. As part of the Millennium Development Goals, the UN has set a target date of 2030.

That's an ambitious timeline for getting electricity to everyone, and it's unlikely to happen without the for-profit sector. This makes it imperative that governments, lenders and non-governmental organizations implement market-based solutions that allow communities to lift themselves out of poverty through developing a robust local economy. Microfinance-backed renewable energy can be the first tool in this process.

Many organizations are taking the lead in implementing energy innovations where the need is great. What other programs and innovations d you know of that address the needs of people without energy access?

Post-independence affirmative action policies to redress the class imbalance in India include reserved spots at schools for lower castes. Photo: Thatcher Cook for Mercy Corps.

Few Indians make it across the divide between poor and rich. But some so-called “untouchables” who have crossed it see only one way to bring fellow Dalits across: employ them themselves.

Lydia Polgreen writes in The New York Times of the struggles faced by Dalits, who occupy the very bottom rung of Hinduism’s social hierarchy, in today’s booming Indian economy. She says that while Indian law officially prohibits caste-based discrimination, ongoing social stigma in the private sector—in the form of exclusion from all but the lowest-paying jobs—has left the group among the poorest in the country.

Most struggling Dalits never turn their rags to riches, but the few whose successful businesses have catapulted them to the top have “bought rank in the market economy,” Polgreen writes. Many of their successes are, in part, the product of post-independence affirmative action policies to redress the class imbalance, including reserved spaces for lower castes in education institutions and public jobs.

Just last month, the Indian government continued this trend by requiring state and public companies to make 20 percent of their purchases from Indian businesses, specifying that a fifth of those purchases be made from businesses belonging to the country’s lower castes, like Dalits. Four percent of public purchases equals about USD $1.3 billion, which is nothing to sniff at.

The push to expand affirmative-action policies into the private sector, particularly in hiring quotas, has met harsh criticism. The Economist argues that moves in this direction would be disastrous, resulting in even more social polarization and hiding the real source of inequality—lack of access to good education— which is already being addressed by older policies, albeit inefficiently.

Meanwhile, Dalit business owners have developed their own solution. The Dalit Indian Chamber of Commerce and Industry is a thriving hub of corporate leaders bypassing government intervention altogether by networking with qualified jobseekers and filling purchase orders from other Dalit businesses. And if the group’s growth in membership and activity is a harbinger, we’ve found the bridge to cross the divide.

More consumers are choosing products that are both hip and support a cause. Photo:mariahfleming (Flickr)

This article was republished in The Christian Science Monitor.

We already know that good marketing does not equal good aid. Tom’s Shoes has earned a fair amount of criticism for its “One for One” model—a pair of shoes is donated to a child in need for every pair bought by the consumer—but, after seeing the marketing benefits, more and more for-profit businesses are using a similar model to donate goods in developing countries.

Here's the basic problem of the “One for One” model: when everyone in a community can get a free pair of shoes, the local shoe vendor goes out of business. Not only does it hurt the local economy, but it is also a short-term solution that creates long-term problems. Tom’s model may also encourage poverty tourism, as the company allows people to pay to travel along with distribution trips as shoe fitters. Niharika Jain writes more in-depth about the unintended consequences of charitable giving for the Harvard Crimson, and Peace Corps volunteer Zachary Mason discusses Tom’s Shoes from a public health perspective, questioning the cost-effectiveness of the model for reducing disease.

Despite the unintended consequences of its “One for One” program, Tom's has a cult following. Chances are if you don’t already have a pair, you know someone who does. Is Tom’s merely a fashion statement, or are consumers drawn to the company for its cause, creating an atypical status symbol? It’s hard to know what motivates individual purchases of Tom’s products, but a 2010 Cone Cause Evolution study shows that 85 percent of consumers surveyed feel more positively about companies that support a cause they care about. When price and quality are equal, most consumers choose the product supporting the cause.

If we want to be socially conscious consumers it’s important to understand the impact of Tom’s and similar products. We can learn from Tom’s marketing success, but to alleviate poverty in the long-term we need to promote sustainable programs the support local economic development.

Warby Parker, another for-profit enterprise that donates its product in developing countries, is getting a lot of attention for the innovative way that it sells eyewear to the consumer and sends glasses around the world to people who can’t afford them—earning them the B Corp status. Like Tom’s, they are popular among the fashion-conscious and have a hugely successful marketing campaign.

Warby Parker partners with a non-profit called Vision Spring in order to donate their glasses abroad. Vision Spring is in tune with how local economies function and what kind of products are culturally appropriate—something that Warby Parker itself may not have the resources to know. Vision Spring receives funding and glasses from Warby Parker to train low-income local entrepreneurs to start their own businesses selling glasses at affordable prices.

Warby Parker uses the same “buy one, give one” strategy as Tom’s, which is successful at attracting consumers, but is sensitive to the impact donations have on local economies. Warby Parker and Vision Spring’s mission is to help entrepreneurs sustain a business and to create jobs—not create a dependency on unpredictable donations which unintentionally creates economic stagnation.

As socially conscious consumers, we should reserve some skepticism for businesses that claim to do good. Transparency and randomized studies are need in order to assess their impact. A recent randomized control trial by the University of Michigan found that people who bought Vision Spring glasses earned 20 percent more, but more research is needed. It is also promising that Vision Spring is continually learning and evolving its strategy to increase its impact, as recognized by Duke's Fuqua School of Business Center for the Advancement of Social Entrepreneurship.

This partnership between a for-profit business and a non-profit looks promising and solves some of the problems with Tom’s “One for One” model. “Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime,” is what we’re told. It’s an excellent example of the ability of corporations and non-profits to do what they do well and team up to do good. Hopefully, organizations that inform consumers—like B Corp—will make this kind of partnership more attractive.

Have you bought or would you buy Warby Parker glasses and Tom’s Shoes? What drew you to the brand?

Monica Gerber is a 2011 graduate of Reed College. Read her 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.

A flourishing economy has enabled many Chinese citizens to climb the socio-economic ranks. Photo:xiaming (flickr)

The spirit of 1989’s Tiananmen Square is alive in China, except the swarm of charged students has been replaced by a disgruntled, expanding middle class.

Inadvertently, an economic boom has resounded with cries for change.

2011 has been an exceptionally rough year for government officials trying to maintain social complacency across China’s far-reaching borders. Perhaps inspired by the Arab Spring, Chinese civilians took to the streets in February to enact their own “Jasmine Revolution” (taken from the Tunisian movement of the same name), demanding greater accountability and transparency from their current one-party system. At least 54 activists, including lawyers and intellectuals, were arrested, and, the New York Times reports, the term “jasmine” was blocked on internet search engines. In recent months, labor strikes have swept the People’s Republic, resulting in street rallies filled with middle class voices expressing their frustrations with meager wages and unhealthy work conditions.

However, the butterfly effect of protests—originating from the Arab Spring and expanding into the Occupy Wall Street movements—reaches beyond income inequality. Much of the Chinese middle class will no longer play the passive bystander to haphazard industrialization. On July 23rd, a high speed train collision, killing 40 passengers, moved government-backed news broadcasters to risk publicly questioning the Chinese Communist Party’s ability to provide the public with safe, accessible infrastructures.

In early August, more than 12,000 people converged in the city of Dalian to stop the re-opening of a paraxylene plant (a toxic chemical used to make polyester) after a storm had exposed citizens to chemicals known to cause leukemia and birth defects. The plant’s closure provided a significant win for the protesters—the government agreed to the shutdown despite a reported $1.5 billion invested in the industry.

In a land where censorship and submissiveness are ingrained in the cultural psyche, why are so many compelled to take a stand now? It’s a complex question, but part of the explanation lies in the problem itself: the rise of China’s economy.

Globalization, specifically global export trade, has upshot China into a leading economic powerhouse. Now the fulcrum of production in the globalized world, many Chinese workers are finally transitioning from poor to middle class (defined by The Brookings Institution as households that spend $10 per person daily).

By 2015, the Brookings Institution estimates that for the first time in 300 years, "the number of Asian middle class consumers will equal the number in Europe and North America. By 2021, on present trends, there could be more than 2 billion Asians in middle class households. In China alone, there could be over 670 million middle class consumers, compared with only perhaps 150 million today.”

The Chinese Communist Party has come to rely on the middle class for support; in the past they have served as a relatively quiet buffer between a populous but powerless poor class and a power-driven rich minority. The Economist observes that China has “kept themselves to themselves as a result of the implicit social contract offered by the Communist Party: you let us rule and we will let you get rich.”

China's middle class wants to renegotiate this contract, demanding more environmental and wellness security from their political leaders. “As many previously poor people adopt middle-class lifestyles in the decades ahead,” Brookings researchers observe, “they may find themselves not only consuming more but also more forcefully advocating for less pollution and lower emissions.” In other words, more money means more demands.

If the party chooses to reinvest its money into the people’s pockets through increased incomes, subsidized health care, lowered taxes, and environmental protection, the middle class is expected to grow by leaps and bounds in the coming years. However, one only needs to look back at China’s Great Leap Forward to see that blind fixation on economic prowess can result in a neglected, damaged social sector. Looks like China will need to take a middle-road approach if it hopes to flourish.

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.

By Ben Osborn

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

Citibank's merger with Traveler's Insurance in 1998 made it the first financial 'supermarket.' Photo: Herve Boinay (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 3 of our four-part exploration.

By Ben Osborn

This new generation of bankers, freed from the caution ingrained by experience in the Great Depression, looked to push new boundaries and support entrepreneurship across the economy by lending and investing in new markets, particularly emerging markets.

Former Federal Reserve chairman Paul Volcker witnessed these changes firsthand. “Memories of financial crisis had faded for a new generation of commercial bankers," he wrote in in his 2009 forward to Gary Stern and Ron Feldman’s book, Too Big to Fail, The Hazards of Bank Bailouts. "They were faced with intense new competitive pressures. Ready to challenge established practices and regulatory restraints, they moved more aggressively into new lending areas and international markets.”

Feeling secure in taking on more risk, banks hired lobbyists to kill the Glass-Steagall Act and allow them more freedom to invest. The compartmentalization between commercial and investment banks that had been the keystone of the act in the 1930s was now seen as a barrier to innovation and global competition. $300 million in lobbying funds chipped away at it until it was barely recognizable. The financial sector saw in the Depression-era relic’s demise a great opportunity for mergers and growth.

In 1999, the Gramm–Leach–Bliley Act finally repealed and replaced Glass-Steagall.

Under the new rules, financial entities could become giant supermarkets, with commercial banks, investment banks, securities firms, and insurance companies under the same big roof. The idea was that during bad economic times, consumers put more of their money into savings accounts, while good economic times encouraged riskier activities, like investment. Putting savings and investment under one roof would bring economies of scale and diversification, letting banks and their customers prosper during both good and bad times.

But critics at the time may have had an ounce of prescience about today’s financial woes.

''I think we will look back in 10 years' time and say we should not have done this," said former Senator Byron L. Dorgan of North Dakota in 1999. "But we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010."

Ten years later, some would say that Dorgan had been right—and on a far larger scale than any banker from the 30s would have recognized.

NEXT UP
Act Four: Banking crises go global

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.

PepsiCo and Cambridge University recently unveiled the i-crop, a web-based system that could reduce agricultural water waste by 50 percent. Photo:zekasaur (flickr)

This article was republished in The Christian Science Monitor.

"More Bounce to the Ounce.” In the 1950’s, it was a cola slogan; thanks to a new partnership with Cambridge University, it could become the catch phrase of PepsiCo’s i-crop, a web based program that helps farmers reduce water waste.

Here’s how it works: data systems collect information on local weather conditions, farming activity, and soil moisture from underground probes and compiles them online. With a few keystrokes, farmers can eliminate the guessing games about water consumption, resulting in more precise and environmentally-friendly farming. In October, PepsiCo publicly announced its goal of reducing carbon emissions and water usage from their largest UK farms by 50 percent in five years. So far i-crop is testing well: preliminary reports from 22 farms in the UK show farmers have achieved 90 percent efficiency in water usage.

"Farming is in the DNA of our business - we rely on fresh produce everyday," said Richard Evans, President of PepsiCo UK and Ireland, according to PR Newswire. "Finding ways to produce more food with less environmental impact is essential to our future." He added, "i-crop has the potential to revolutionize the way we farm, enabling our farmers to save costs and [reduce] water and carbon consumption, while at the same time improving their yields.”

PepsiCo’s potential to revolutionize water efficiencies in farming is sizable. Netting approximately $43.3 billion annually and employing more than a quarter million people, PepsiCo is the second largest food and beverage business in the world.

Ever enjoyed Pepsi-Cola, Mountain Dew, Lay's, Gatorade, Tropicana, 7Up, Doritos, Lipton Teas, Quaker Oats, Cheetos, Ruffles, Aquafina, Tostitos, Sierra Mist, or Fritos? If the i-crop can deliver as hoped, those products will soon be made with less water waste than most competitive grocery items (and who doesn’t want something positive to hold onto after downing a bag of Cheetos?).

Although the i-crop is only accessible to UK farmers, PepsiCo hopes to introduce its technology to farms in India, China, Mexico, and Australia by 2012. However, speculation about i-crop’s availability has raised some eyebrows and provoked the question: Will the i-crop technology, owned privately by PepsiCo, be withheld from those who most need it?

Brain Pickings editor Maria Popova argues that owning such coveted technological rights will put PepsiCo in the middle of an often tense relationship between profiteering and humanitarianism. “The technology is currently only available to PepsiCo-affiliated growers, which raises interesting questions about the relationship between corporate interests and social good in innovation, as well as bespeaking the disconnect between the value of open-source software and the fact that the best-funded research initiatives, most competent scientists and highest-grade technology tend to be subsidized by private corporations.”

If, how, and with whom PepsiCo shares i-crop technology has yet to be determined. In any case, PepsiCo has taken corporate social responsibility by the horns, hopefully luring other influential corporations to recognize that being green is achievable. "Every Generation Refreshes the World," Pespi ads claim. Let’s keep our fingers crossed that PepsiCo can do so for the next generation’s water supply.

A $5 donation with your morning cup of coffee could be the first step to job creation. Photo: rohobit (flickr)

Would you like to create a job with that latte?

Starting today, this will be the question you’re asked the next time you step into a Starbucks for a cup of coffee. November 1st marks the beginning of the Create Jobs for USA program created by Starbucks chairman and chief executive Howard Schultz. Starbucks is partnering with the Opportunity Finance Network and community development financial institutions (CDFIs)—lending institutions that work with populations ineligible for traditional bank loans—to empower every customer to make a difference through small sum donations.

The $5 donations will provide the funding for affordable loans to small U.S. businesses that are selected by local CDFI’s to have the greatest potential to create and sustain job growth.

With nearly 7,000 stores in the US, the potential donation base is huge. And as concerns about the economy are higher than ever, the Create Jobs program is a huge step toward taking the jobs issue out of the hands of politicians and putting it in the hands of those most affected, one cup of coffee at a time.

Gap opens in Shanghai. Photo by kreep (flickr)

What would happen if you took off every article of clothing not made in America? asks ABC at New York’s Grand Central Station (video).
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Gap is betting big on China, announcing plans to triple its retail stores there by the end of 2012, reports the Associated Press. But in doing so, the chain will directly compete with its own Chinese suppliers, which for years have been sharpening their teeth making cheap knockoffs of the popular clothing.

Gap is not the only global brand to jump on what they hope will emerge as the next massive consumer class. Apple, Nike, Gucci, Louis Vuitton and Walmart have all positioned themselves to profit from China's nouveau riche. Despite these expectations, the New York Times reports that China’s consumer spending has actually plummeted in the last decade as a portion of the overall economy, to about 35 percent of gross domestic product, from about 45 percent - the lowest percentage for any big economy anywhere in the world.

The remarkable growth the nation has seen has not translated into fruits for middle class families, but rather state-run banks, government-backed corporations and the affluent few with connections, says Carl E. Walter, a former JP Morgan executive who is co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.” Worse yet, low-wage workers who make the clothing sold in stores like Gap simply can’t afford the finished goods. Marketplace’s Kai Ryssdal visited a new Gap store in Shanghai recently; the most striking thing he found about the store was how empty it was. Sales of global “brands” come mainly in the form of the counterfeits and knockoffs sold at busy outdoor markets.

The New York Times suggests the “state capitalism” that’s fueled much of China’s growth must be dismantled before ordinary Chinese citizens will start feeling flush enough to buy Gap’s ‘nostalgic’ 1969 jeans - even the made-for-China version. Chinese Premier Wen Jiabao asserts that the government is ready to make some of those changes. Until then, hedge your bets.