An oil pipeline to Canada's untapped Tar Sands deposits would create short-term construction jobs, but its effects on the climate could permanently destroy jobs elsewhere. Photo: rickz (Flickr)

Proponents of the proposed pipeline from Canada’s Athabasca Tar Sands to the Gulf of Mexico claim that its construction would create jobs. But while the long-term employment prospects are debatable at best, the resulting long-term economic devastation is far more certain.

The recent decision by the Obama administration to deny a permit for the construction of the pipeline has received much press and been touted as a victory for environmentalists. But as climate activist Bill McKibben and his organization point out, stopping the extraction of the tar sands would be a victory for those far removed from the American environmental movement as well.

McKibben said in an interview with Green Prophet that “Any place that is already living close to the margins is in the greatest danger” when facing climate change.

This means the world’s poorest, already suffering from food shortages and decreased agricultural production, would be hardest hit by this carbon bomb. And scientific consensus backs up McKibben’s view.

Country Ranks, Estimated Percentage of Agricultural Productivity Loss by 2080: Potential Carbon Emissions from Canadian Oil Sands. Photo: Center for Global Development

David Wheeler, senior fellow emeritus of the Center for Global Development, compiled a recent study specifically tying the exploitation of the Canadian oil sands to increased agricultural losses.

Wheeler concluded that “full exploitation of Canada’s oil sands deposit would impose significant agricultural productivity losses on over 3 billion people in the developing world, and particularly in sub-Saharan Africa.” He calculates that “combustion of the Alberta deposit would increase the atmospheric concentration of CO2 by 99 ppm, or 21.3 percent of the increase already projected to occur by 2100.”

Or, as reputed climate scientist Jim Hansen of NASA put it, tapping the tar sands would be “essentially game over for the climate."

Wheeler's findings show a "game over" scenario in poor rural regions, in particular, predicting agricultural productivity losses of up to nearly 13 percent in Africa and 9 percent in Asia. Wheeler, who also created a ‘Climate Vulnerability Index’ by country, sums up his findings powerfully and succinctly, stating "Put simply, the potential destructive power in Canada’s oil sands exceeds anything modern civilization has witnessed to date."

“This new report puts into stark relief exactly what ‘game over’ looks like: Millions upon millions of starving people across the planet," says 350.org co-founder Jamie Henn.

On the ground, countries projected by Wheeler to see further damaging impacts are already struggling with agricultural losses. Another 350.org co-founder, Phil Aroneanu, told Global Envision that “we have a plethora of anecdotal and story-based thoughts from our organizers around the world” of agricultural devastation and food shortages linked to changing climate patterns.

Drought-stricken countries in the Horn of Africa, including Ethiopia and Sudan, among others, provide some of the most poignant images of climate-related suffering. An Oxfam International report points out that 85 percent of Ethiopians depend directly on agriculture. And as a local farmer told Oxfam, “The rain doesn’t come on time anymore. After we plant, the rain stops just as our crops start to grow. And it begins to rain after the crops have already been ruined.”

And with the projections from scientists like Hansen and Wheeler, Africa’s farmers and communities appear unlikely to recover soon.

While McKibben writes that “Blocking one pipeline was never going to stop global warming,” and Obama’s denial of the Keystone permit may well not kill the project in the long run, the scientific and anecdotal evidence is clear: Vulnerable populations are suffering at the hands of carbon kings already, and tapping the tar sands will exacerbate their problems.

So the Keystone proposal may or may not be dead. But the political discourse around potential job-killing has mostly left out an important aspect: the killing of crops and livelihoods elsewhere in the world.

McKibben has said that extracting Canada’s tar sands would mean lighting the “fuse to the biggest carbon bomb on the planet.” For now, at least, that fuse remains unlit.

Mercy Corps made cutting down trees for cooking fuel more sustainable through a reforestation project in Alta Verapaz, Guatemala. Photo: JGrant for Mercy Corps.

A new program in Brazil is turning tragedy on its head by paying the poor to preserve their natural surroundings.

Resource depletion and environmental degradation are common echoes of poverty. Desperate to get by, many rural poor turn to the only income source around: the natural environment.

That's why Brazilian president Dilma Rousseff outlined a new program called Bolsa Verde (green allowance) to promote environmental protection and decrease deforestation in the Brazilian Amazon, according to mongabay.com. The program will provide BR $300 (US $180 US) every three months to extremely impoverished families living in national forests and sustainable reserves. Recipient families must currently have monthly incomes of less than BR $70 (US $40) to qualify.

In exchange, residents pledge not to deforest illegally or to poach timber. It’s a huge jump in income for the poor, and in one of the world’s most rapidly growing economies, it's a small price for the public to pay.

“Incentive is important because we assign an economic value to nature. It's as if it were compensation for conservation," said Manuel Cunha, president of the National Council of Extractive Populations of Amazonia.

The program is modeled after Brazil’s existing and widely respected Bolsa Familia (family allowance) program, which has helped reduce poverty and inequality over the past several decades, according to The Economist.

Bolsa Verde seeks to expand these successes, reducing the strain of poverty on ecosystem services as well. And when the environment is protected, the poor lead better, healthier lives. So Brazil plans to increase people’s income so they take better care of their environment and themselves.

The government, however, isn’t trying to stop resource consumption that people depend on. "It is an incentive to have sustainable use of natural resources. [Residents] have the right to use biodiversity, but in a sustainable manner," Roberto Vizentin, Secretary of Sustainable Rural Development of the MMA, told Globo News.

If effective, this could mean both improved financial livelihoods and reduced vulnerability for Amazonian residents. And the environment and the rest of the world get something from the deal as well.

Could an open source philosophy be the evolution of policy creation? Photo:Nan Palermo (Flickr)

Hey Germany, let’s have coffee. The simple act of sharing best policy practices could help resuscitate the global economy. So why aren’t we doing it?

The private sector commonly exchanges best practices to create more effective and efficient business models. The public sector could stand to learn a thing or two. Leaders and policymakers need to extend their hand across borders to learn from the success of countries beyond their trade routes.

For instance, the German labor market has not suffered nearly as much as the U.S. during the recession. Brookings Institute Fellow Elisabeth Jacobs provides an underlying reason: they take a long-term approach to labor policy by building (and budgeting) a sort of “what-if” scenario directly into their policy.

By weighing the cost of employee retention against layoffs, they opt to keep workers but trim hours. Once the local economy improves, they ramp up accordingly. Combined with short-term compensation, German companies can mitigate both salary and job loss. How might a similar model work in the United States, England, or Greece?

While not all policies could work seamlessly across hemispheres, many could lay the foundation for localized discussion. Once customized, implementation can begin. Think of it as open-source policy creation. Developing countries could benefit from such collaboration, with the reciprocal also true. Take innovations in Curitiba, Brazil. They created a recycling system that also addressed poverty by exchanging transit tickets for waste, serving as an incentive for citizens to clean up. Could a similar policy-driven incentive also work in urban centers in Sub-Saharan Africa or India?

The ideas are out there. We just need to find them. Instead of traditional foreign policy ambassadors that focus on trade, resources or aid, why not have an official collaborator that seeks to learn, share, and then implement best policy practices?

After all, what good is knowledge if you don’t do anything with it?

Trujillo, Honduras is currently a quiet backwater town, but the Honduran government has grand visions for its future growth. Photo: Wanaku (flickr)

Picture this: a nearly independent city-state -- a Hong Kong in one of the western hemisphere’s poorest countries. Sound far-fetched? Maybe so, but one country has high hopes for a changing urban future.

According to the Economist, Honduras wants to outsource development of a new city. The idea is to create a ‘charter city:’ a semi-autonomous zone with everything from governance to a separate currency managed independently and overseen by experts outside of the Honduran government. But Honduras faces the question of whether a ‘clean slate’ of separate rules and management can spur economic growth that has been largely elusive in the region.

The political wheels are rolling, but the road to a charter city is long and uncertain.

The national legislature recently legalized the creation of “special development regions,” although the ensuing steps are taking longer than anticipated. In December, Honduran president Porfirio Lobo began appointing a ‘transparency commission’ to oversee the project, despite mixed opinions of the initiative held by other government officials.

Yet charter city supporters remain enthusiastic about the steps taken so far, and optimistic about the direction of the project.

According to Paul Romer, an economics professor at New York University who proposed the concept, charter cities represent a “new type of special reform zone,” building on the idea of a special economic zone by “increasing its size and expanding the scope of its reforms.” His idea is to create internal start-ups, akin to the way that businesses often set up new divisions free to operate outside of old rules. Mr. Romer believes that the clean slate will allow government authorities to experiment with laws and governance. “What types of mechanisms will allow developing countries to copy the rules that work well in the rest of the world?” he asked The Economist.

And people in developing countries like Honduras, Mr. Romer says, will respond to the initiative by embracing opportunities in charter cities. “The worldʼs poor know that better rules prevail elsewhere,” he says, citing the Gallup report that 630 million people would like to move permanently to another country.

Charter cities, Romer claims, should also be of interest to rich countries, such as the United States, struggling with illegal immigration, as they offer an alternative to residents of poorer countries seeking to migrate.

“The new entity’s open door gives the huddled masses an alternative," Romer told The Economist. "Instead of risking their lives on perilous journeys to cross borders illegally, they can move legally to a charter city.”

But many do not agree with Romer’s plan for building cities from scratch in the world’s poorest nations, and outsourcing their design and government to rich countries. Duncan Green of Oxfam has been critical of Romer’s idea for several years, and writes that “the underlying motive seems to be to liberate development from the supposedly dead hand of dysfunctional and corrupt states, transferring it instead into the hands of benign and honest technocrats” in Honduras.

As Green points out, the Trujillo charter city proposal is incomplete at best. Even with significant outside investment and oversight, charter cities would likely suck talent and resources away from their surrounding nation-states. And even with private security forces protecting the land of new development and investment, the presence of a wealthy, employment-generating city could create huge slums outside its borders.

The allure of a Central American Hong Kong may sound appealing to some, but officials must address many questions. After all, Hong Kong was a longtime colonial outpost before becoming a semi-autonomous economic zone. Is that really what Honduras wants? Or can Trujillo skip the colonial stage?

Honduran officials have a long road ahead to bring change to the Caribbean coast. But Mr. Romer’s vision has people talking. And for Honduras, it may just have a promising direction in store.

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.

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.

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 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.

Women in Ghana conduct business. Photo: IITA Image Library (flickr)

This article was republished in The Christian Science Monitor.

Ghanaian women are mothers, daughters and wives. Add entrepreneurs to the list. Female entrepreneurs are flourishing across Africa, but Ghanaian women are leading the pack.

Education, national stability, and microfinance have spurred their success.

Ghana’s government recognizes the important role women play in reaching the country’s development goals. “No nation can move on without emphasizing the education and emancipation of women,” said Vice President John Dramani Mahama.

One result of that attitude is an increase in women’s education, and the cornerstone of further education is literacy. The literacy rate among females between the ages of 15 to 24 is 78 percent, according to UNICEF, up from 16.6 percent in 1970. This is an impressive jump in the time span of one generation and demonstrates how many more Ghanaian women today can access the kind of skills needed for running a business, like accounting, marketing and management.

Ghana’s stability has also helped catapult its business environment forward. It was the first nation in sub-Saharan Africa to achieve independence in 1957. In the 1970s and 1980s, political instability took its toll on the country. But since then, Ghana has regained political stability and goodwill from the international community, providing an environment ripe for business growth and development. As a result, investor confidence has increased. Rising investment has influenced Ghana’s economic prosperity, and the country is currently the fastest-growing economy of 2011, growing 20.2 percent in the first half of the year, according to Economy Watch.

Ghana's natural resources also boost its per-capita GDP, which International Entrepreneurship reported is twice that of its poorer West Africa neighbors.

Finally, for decades Ghana has been reaping the benefits of microfinance, a tool that may be especially effective in empowering women. As described by the Economics Web Institute, Ghana provided subsidized credit in the 1950s, established an Agricultural Development Bank in 1965 for fish and farm loans, and required commercial banks to set aside 20 percent of their portfolios for agriculture and small-scale industries in the 1970s and early 1980s.

The result? Today, the female labor force participation rate in Ghana is estimated at 50.1 percent—and women account for about 50.2 percent of the entire population of Ghana. With improved education, the prosperity of the country, and a stable microfinance sector, the women of Ghana are making an impact in the entrepreneurial world that cannot be denied.

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.

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.

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

Related Past Posts:

Microfinance and the Economic Crisis: What to Believe?

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

One Big Deal

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

Social Workers Getting to the Root of Debt