The departure of skilled workers in the developing world may, contrary to popular belief, do more good than harm. Photo:banoiff (flickr)

When educated professionals depart a developing nation, does greater wealth arrive? Some scholars in the international development community are saying farewell to the notion that the ‘brain drain’ hinders impoverished countries from expanding human capital and increasing the growth rate.

Exit brain drain. Enter brain gain.

The brain drain has long been perceived as a constraint on the progress of developing nations—much-needed doctors, professors, and scientists often abandon their homelands in exchange for better salaries and more comfortable lives in the developed world. However, research indicates that if countries can hit a sweet spot of sending around 20 percent of their talent to other countries, the residual impact of those individual losses will actually spur economic and educational growth at home.

But how? One way is through remittances, cash transfers from an individual in one country to another elsewhere. Take Ghana, for example. Some figures place remittance levels at $400 million per year, on par with the country's two biggest exports, cocoa and gold, which account for 25 percent of the foreign exchange earnings of the nation. To put this figure in perspective, in previous years Ghana has received around $650 million in foreign aid. Compared to other developing nations, that's low—in some, “remittances are more than double the amount of foreign aid,” as reported by Foreign Policy.

Furthermore, remittances can withstand the tests of natural disasters, and political and economic crises. Chances are an economic and political collapse in Egypt would deter foreign investment but encourage a migrant to increase his or her monetary givings to Egyptian relatives. Now those are derivatives Fannie and Freddie should have bet on.

Much of the new economic activity happening in African countries like Ghana are catalyzed by residents who have traveled or lived in developed countries. New York University professor William Easterly refers to this as “brain circulation,” that is, the movement of ideas and investments from educated professionals between their homes and the West.

Often, brain drainers will eventually return to their country of origin or maintain residency both abroad and at home. Not only do these individuals in turn support the economic development of their hometowns, but they also inspire members of the community to invest in education. According to Easterly, most students are motivated by the idea of living abroad, noting that “if this prospect is closed tightly, this may have an effect on the effort levels of students in the system, and therefore the quality of the graduates of the school system.”

Additionally, travel expands capital horizons. Robert Guest notes in Foreign Policy that “countries trade more with countries from which they have received immigrants.” A migrant living in the UK might inform his sister in Somalia that there is demand in his city for a specific talent she may have the skill sets to provide. Diaspora thus encourages a fluidity of ideas, innovations, and supplies and demands between often disconnected parts of the world.

Investing money abroad can be the best way to bring more of it home. Brainpower may work that way, too.

You need two DNA sets to tackle big development challenges. You need a development DNA—an understanding of the particular needs and characteristics of your customers, the poor people that you're trying to reach. And you need business DNA—how do we structure solutions that are fit for purpose, scale and sustainability?

- Christ West, Director, Shell Foundation

Stanford Social Innovation Review, V9N4

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.

India preserves small shops, like these in Dehli, in part by restricting foreign investment in retail grocers. Photo: Villie Miettinen (Flickr)

Killing jobs: underrated.

Amid warnings that megaretailers drive small shops and farms out of business, India is backing off from a plan to let WalMart, Tesco and other foreign firms open domestic grocery stores.

Today, American economist Alex Tabarrok mounts a simple, fearless response: Yes, the plan would replace many poorly-paid jobs with fewer poorly-paid jobs. And that, he says, is exactly what India needs.

What India needs is fewer jobs; fewer jobs in retail, fewer jobs in apparel and, most of all, fewer jobs in farming. India cannot become even a middle income country if most of its workers, for example, are farmers. To improve its standard of living, India must use fewer people to produce more agricultural output.

Fewer workers in farming (or retail) means more workers producing more goods in other industries. The same basic lesson holds throughout an economy, it is the declining sectors that allow other sectors to advance.

Tabarrok's case is deeply optimistic: Idle humans don't stay idle. If megaretailers drive out their competition by helping hundreds of millions of Indians save a little money on groceries, the economy will have that much more to create the middle-class jobs of tomorrow: fixing computers, building bicycles, assisting childbirths.

In the long run, Tabarrok suggests, killing an inefficient job only frees a worker to find a better one.

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.

Fortified borders, like this one seen from Calexico, Mexico, are part of measures taken to reduce the flow of migrants. Photo: Omar Bárcena (Flickr)

Today is not exactly a great time to be an immigrant. Though over 215 million people worldwide are first-generation migrants, more than ever before, migration is being restricted as many countries have added immigration to the list of economic burdens. Recent experience, however, suggests global migration helps grow economies and spread ideas.

Legislators in Alabama, U.S., recently passed an anti-immigration law (HB56) that prevents any undocumented immigrant from applying for work, penalizes any citizen who hires an undocumented worker, and prevents undocumented immigrants from receiving most state services. Police are able to arrest anyone they suspect to be an undocumented immigrant, a power which resulted in the recent arrest of a German Mercedes-Benz manager, who couldn't produce proper identification when stopped. European governments, grappling with an unprecedented increase in migrant populations, have passed laws restricting religious freedom, while the popularity of anti-immigration political parties is surging. In China, an acclaimed Chinese-American engineer has been jailed on dubious charges that some see as retribution for immigrating from the United States.

Behind all of these laws is a desire to make migration less attractive by making life more difficult for migrant populations. As Alabama State Representative Micky Hammon, a proponent of the anti-immigration initiative, explains, “the goal of the entire bill [is] to prevent illegal immigrants from coming to Alabama and to discourage those that are here from putting down roots." It's working. Though about 2.5 percent of Alabama’s population is undocumented, according to the Center for American Progress, tens of thousands of workers, documented and undocumented, stopped showing up for work after the law was passed.

Proponents of anti-immigration measures argue that immigrants drain government budgets by using its services without paying taxes, and causing unemployment and wage deflation by willing to work for low pay. Yet the evidence is quite flimsy. As Giovanni Peri, an economist at UC Davis who specializes in migration, writes, “on net, immigrants expand the U.S. economy’s productive capacity, stimulate investment, and promote specialization that in the long run boosts productivity. Consistent with previous research, there is no evidence that these effects take place at the expense of jobs for workers born in the United States.”

So much for being a drain on the economy. Economists at the University of Alabama have recently predicted that for every 10,000 laborers, legal and illegal, who are discouraged from working in Alabama as a result of the recent law, the state’s economy will contract by $40 million.

Aleksynska Mariya and Ahmed Tritah, economists at the University of Maine in France write that most evidence of a negative immigration effect come from studies that only examine wages and employment levels for natives in the short-run. But Mariya and Tritah remind us that immigration affects the global economy through a wide range of mechanisms. After examining these mechanisms, they conclude that immigration has a positive effect on income, labor productivity, and total factor productivity in the long run. "Studies
which focus uniquely [on] one type of effect, such as impact on employment, overlook other channels through which [the] economy adjusts to immigration."

And immigration helps developing countries as well. As The Economist writes, migrants spread ideas, information, and money while making it easier to do business across borders: “A Chinese trader in Indonesia who spots a gap in the market for cheap umbrellas will alert his cousin in Shenzhen who knows someone who runs an umbrella factory. Kinship ties foster trust, so they can seal the deal and get the umbrellas to Jakarta before the rainy season ends.” In some emerging markets institutions that foster free trade, like private property and the rule of law in general, tend to be relatively inefficient. So trust is essential to creating the confidence necessary for trade. If the government can’t ensure that you are accountable for the money I loan you, I will only do so if I know I can trust you.

Michael Clemens, senior fellow at the Center for Global Development whose research examines migration and development, discusses the effect of remittances from Haitian immigrants at home and abroad in Foreign Policy magazine:

"We can do a back-of-the-envelope calculation of what additional migration could do. Suppose the United States lets in 100,000 Haitian immigrants. First, this would dramatically raise their incomes and raise essentially all of them out of extreme poverty. Second, this would increase the size of the worldwide Haitian diaspora by 10 percent. If the new migrants remit like earlier migrants did, this would mean roughly $150 million to 180 million every year in additional remittances for Haiti... The Guardian reports that the United States has committed a one-time total of $167 million in aid. Remittances recur year after year, and unlike aid, almost the whole amount of remittances goes directly into needy families' pockets."

Migration will not solve all of our problems, and it doubtless creates many. But so do free trade and globalization, which are generally hailed as essential to modern economic growth. Why not free migration as well?

Michael Clemens was a 2011 Global Envision guest lecturer at Mercy Corps' Action Center in Portland, Oregon.

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

An informal worker sells mobile phones from a street stand. Photo: MikeBlyth (Flickr)

A man selling toys on Sao Paulo’s streets, a woman grilling fish in crowded markets of Lagos and a handbag maker in Guangzhou might not seem to have much in common. But they are all part of the global informal economy, now estimated to be worth about $10 trillion a year.

Economic exchanges that are not taxed, monitored, or included in GDP measurements make up the informal sector. According to the Organization for Economic Cooperation and Development, more than half the workers in the world make their living this way.

Journalist Robert Neuwirth details the lives and challenges of informal workers in his new book, Stealth of Nations. Speaking of the $10 trillion estimate, Neuwirth says "That's an astounding figure because what it means, basically, is that if the informal economy was combined in one country, it would be the second-largest economy on Earth, rivaling the United States economy."

With innovative relationships and global supply chains, many entrepreneurs are thriving and prefer to stay ‘off the books.’ In Lagos, Nigeria, where 80 percent of the workforce is employed informally, locals call it the ‘economy of resourcefulness’. Street vendors grill fish caught in Europe and sell mobile phones smuggled from China.

Some entrepreneurs earn enough to travel out of Nigeria to purchase products to sell back home. "When you journey to the train station [in Guangzhou, China], you feel like you're in Africa because there's so many Africans located there,” Neuwirth says. “Africans have embedded themselves in society there in very direct ways, and there's a huge [informal] back channel of trade in China and Africa.”

The global scope of the informal economy is staggering. Governments and corporations are noticing traditionally ignored channels for revenue production. A market court in Lagos allows for the settlement of disputes between informal sellers and buyers. And, writes Marc Levinson in his review of Neuwirth's book in The Wall Street Journal, "In Morocco, the consumer-goods giant Procter & Gamble has built an entire network of wholesalers and agents and subagents to sell diapers and soap through merchants in villages so remote that they have no retail stores." Such relationships could indicate a trend in bridging the divide between formal and informal economies.

As informal workers integrate their business globally, many are torn between a desire for added security of infrastructure and support, and the solutions they’ve established. Certainly not all aspire to move into the formal sector with its complications of taxation and regulation.

With such a large magnitude, it’s impossible to ignore the importance of informal exchanges to society's economic survival. Workers continue to forge paths to prosperity through entrepreneurial solutions. For many, that means operating outside the law.

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.

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.

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.

Calls to make changes to our international financial system are being heard. Will they be listened to? Photo: itspaulkelly (Flickr)

Mass unemployment, an overwhelming sense of unfairness and a loss of hope need no translation. Even without written demands, the sentiments of Occupy Wall Street have been interpreted through similar protests in 941 cities in 82 countries - and counting.

Global leaders are taking note. And they agree: A lot has gone wrong in the banking sector. While the basic purpose of the financial sector must remain intact, it’s gotten off track. After all, we still need a secure place to store our money, we still need credit and loans, and advice on how to grow our nest eggs. We need banks.

Can we hit the reset button?

The global financial crisis we’re in is incredibly complicated, and it’s not going away soon. And sadly, there’s no reset button. But changes are needed and changes are happening.

In forthcoming posts, we’ll explore the origins of the crisis, key players, innovative solutions, how the decisions made by developed world financial sectors affect the global poor, how local protests affect global politics, and where we go from here. And we hope to hear your thoughts, too.

Our Series Begins:

An historical look at "too big to fail," in 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.

Surrounded by financial chaos, developing nations start throwing up barricades

For China, flush with cash, the financial crisis may mean political opportunity

Europe's financial troubles worry its neighbors

Amid financial crisis, China is the new champion for carbon reduction

East Africa seeks to learn from the Eurozone's mistakes

A new model for Middle East economic practices starts with Tunisia, Libya

Bank transfer day: A symbolic move

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Microfinance and the Economic Crisis: What to Believe?

A Triple Threat: Food, Fuel and Financial Crises in the Developing World

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The IMF Boosts Financial Aid to Poor Countries

Rural China Could Gain from Financial Crisis

Goodbye Piggy Banks, Hello Working ATMs: Why the Middle East May be More Sheltered from the Global Financial Crisis

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