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.

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?

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.

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

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

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

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

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

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

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

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

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

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

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.

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

Well-maintained cars like these are now private reserves of wealth for their owners. Photo: Ben Osborn for Mercy Corps

Starting today, Cubans can buy and sell property for the first time in over 50 years. Yet while most are excited to escape the cage of government restrictions, others fear being kicked out in the cold.

Many Cubans haven't paid for rent, health care or education since 1959, when Fidel Castro seized power and began nationalizing private property in one of the staunchest socialist experiments in world history. While the results were far from perfect, many of Cuba’s poorest undeniably benefited.

During the heyday of the Revolution, most Cubans had job security and guaranteed food rations. The Cuban government tinkered with novel programs and ideas, and where those programs failed, the Soviet Union often stepped in, checkbook in hand, to balance the books. While Cuba severely limited its citizens’ rights and freedoms, it also ensured a basic economic safety net below which no Cuban would fall. For the most part, success was more a function of loyalty to the government than it was a measure of personal skills. This is the government that many older Cubans identify with.

But after decades of stuttering progress, the fall of the Soviet Union brought an end to the heavily subsidized years of Cuban socialism, and a so-called “Special Period” of austerity began. For most young Cubans, these years of recession and stagnation are all they know of the Castro regime.

So the reforms of the past five years are evoking mixed emotions among Cubans. The loosening restrictions on property and trade will finally allow a burgeoning entrepreneurial class to openly improve their lives. Cubans can now buy and sell homes and cars, private businesses can be established, and skilled workers can offer their services freelance. These reforms are part of an effort by the government to wean its bloated public sector off of government assistance and flood the private sector with cash.

Suddenly, Cubans can earn more on their own initiative. As the New York Times reports, the iconic and ancient cars that sputter through Havana can be traded or sold, transforming old clunkers into a private reserve of wealth.

But as Cubans are given their own paddles to navigate capitalism, some fear the loss of the government life jacket. "What happens if I sell my home and then I can’t find another one to buy? Where do I sleep?” laments Félix Méndez, a 47-year-old hospital technician quoted in the New York Times.

Another risk inherent to the reforms is a widening rift between the richest and poorest Cubans. People can now sell their homes and move elsewhere. This newfound mobility is expected to lead to segregation, as wealthier Cubans (and their money) leave poorer neighborhoods in search of better living. "Thousands of Cubans have been waiting for this signal, like runners crouched at the starting line waiting for the gun to go off,” writes Yoani Sánchez, a prominent Cuban dissident blogger. When the gun goes off, existing inequality will likely be increased as money is drained from some neighborhoods without the government around to replenish it.

Spectators on both sides of the ideological aisle call the reforms necessary. Capitalism's enthusiasts see the changes as inevitable; the end of an anachronism. Those farther to the left view the reforms as necessary concessions amidst tough times; concessions to ensure the survival and restoration of one the few remaining self-proclaimed socialist regimes in the world.

As Ms. Sánchez writes, “a house, for 40 years an anchor, will become a set of wings.” It remains to be seen, though, who will sink and who will fly.

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

Some say a transaction tax could put humans back in charge of financial markets. Photo: RoGb77 (flickr)

As lightning-fast computer programs replace human brokers on Europe's virtual trading floors, anti-poverty warriors want to slow things down.

There's never been a better time, they say, for a redistributive "Robin Hood tax," which would slap a fee on each financial transaction, deterring meaningless trades and putting the revenue toward fighting poverty and climate change. The center-right leaders of France and Germany called for such a tax last month, Reuters reported, and leftish outlets like The Guardian have happily joined their choir: "Even if such a tax was levied at just 0.05%, it could raise hundreds of billions of dollars, which could be ploughed into development projects," the paper wrote of a petition signed by 1,000 economists from around the world. The EU plans to gather support for a tax at November's G-20 summit, says Reuters.

Political attacks on money-changers are nearly as old as money itself. What's new is that the usual arguments against such a tax – that it'd reduce trading volume and hurt the economy by making financial markets more volatile – may be getting weaker. In fact, people like former London Stock Exchange executive Martin Wheatley now argue that computer-driven trades make volatility worse.

Exhibit A: Wall Street's May 2010 "flash crash," in which computer algorithms temporarily wiped 10 percent off major stock indexes in a squall of rapid transactions, apparently because they saw one another doing the same thing.

On the Robin Hood Tax website, spokesman Richard Gower called this "casino capitalism cyborg-style" and suggested that humans could tax irrational computer programs out of the market.

Others use less colorful language.

"For the first time in financial history, machines can execute trades far faster than humans can intervene," Bank of England executive Andy Haldane said in July, according to The Telegraph. "Grit in the wheels, like grit on the roads, could help forestall the next crash."

Haldane was speaking in favor of internal or regulatory changes, not a redistributive "Robin Hood" tax. But with Western economies in a skid, some think financial markets might be safer with Robin behind the wheel. After all, at least he's human.