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21 posts from November 2009

November 30, 2009

Syria Emerges

In August of last year, I wrote a post entitled The Politics and Economics of Peace for Syria. In that blog, I wrote: "As a country's economy becomes more free market oriented and a sustainable middle class emerges, increased civil liberties and deeper calls for more democratic institutions are never too far behind. This may well be the path that Syria, one of world's pariah states, may soon be taking." Over the past year, Syria has continued to make progress. By March of this year, analysts were willing to declare that Syria's isolation as a pariah was over ["With Isolation Over, Syria Is Happy to Talk," by Robert F. Worth, New York Times, 26 March 2009]. Worth reported:

"Only a year ago, this country’s government was being vilified as a dangerous pariah. The United States and its Arab allies mounted a vigorous campaign to isolate Syria, which they accused of sowing chaos and violence throughout the region through its support for militant groups like Hezbollah and Hamas. Today, Syria seems to be coming in from the cold. A flurry of diplomatic openings with the West and Arab neighbors has raised hopes of a chastened and newly flexible Syrian leadership that could help stabilize the region. But Syria has its own priorities, and a series of upheavals here — including Israel’s recent war in Gaza — make it difficult to say where this new dialogue will lead."

Worth noted that heads of state, such as King Abdullah of Saudi Arabia and President Nicolas Sarkozy of France, have visited Damascus and received warm welcomes. This was a big change for the Saudi King who, according to Worth, "was said to be furious at the Syrian president, Bashar al-Assad." Worth noted that one reason Saudi Arabia and other countries were warming up to Syria was because they were trying to drive a wedge between Syria and Iran. The very fact that those ties brought leaders to Damascus, however, makes Syrian leaders believe "that their ties with Iran are in fact useful, and accord them an indispensable role as a regional broker." While European countries are moving to embrace Syria, "American officials are moving slowly, and have been careful to tamp down any expectations of sudden or significant change." Worth continued:

"A number of Syrian analysts have sounded a triumphant note, ... suggesting that after emerging intact from the deep freeze of the Bush years, Syria has more power to dictate the terms of its new relationship with Washington. ... Nevertheless, there may be real opportunities for diplomatic progress, in part because some of the issues that divided Syria and the United States in recent years appear to have subsided. ... In Iraq, Syria’s goals are now similar to those of the United States, analysts say. Despite its history of enabling jihadists to fight American troops in Iraq, Syria is now contemplating an imminent American withdrawal and is keenly aware that it might itself become a jihadist target, especially if it concludes any sort of peace deal with Israel."

In fact, five months after Worth wrote his article Syria agreed to help monitor its border with Iraq ["Damascus Agrees to Help Monitor Iraqi Border," by Jay Solomon and Julien Barnes-Dacey, Wall Street Journal, 19 August 2009]. Solomon and Barnes-Dacey reported:

"The Obama administration and Damascus tentatively agreed to establish a tripartite committee, with Baghdad, to better monitor the Syrian-Iraqi border as the Pentagon draws down American troops from Iraq in coming months, said senior U.S. officials. The proposed three-way border-control assessments could boost Iraqi security and patch one of the region's most volatile fault lines. The initiative was made by a team of U.S. Central Command officers and their Syrian counterparts."

Iraqi leaders were miffed at the agreement because they weren't included in the negotiations. But they realize that Iraqi security requires closer cooperation with Syria. To prove its intentions were sincere, Syria reported "it has detained more than 1,700 militants, blocked potential combatants from passing through the country en route to Iraq and imposed stricter border policing. Syria also appears to have cracked down on former members of Saddam Hussein's Baathist regime who fled to Damascus after the Iraqi invasion." Syria's full emergence from isolation will only be seen when it concludes a peace deal with Israel. But, according to Worth, that could take some time.

"The top priority for the Syrians is a peace deal that would return to them the Golan Heights, occupied by Israel since 1967. ... That is a tall order, and any resulting peace deal would require Syria to cut off its support for Hamas and Hezbollah, among other things. Starting such talks may be more difficult after the ascent of Benjamin Netanyahu as Israel’s prime minister. But the Syrians do not seem to be in any hurry. For the moment, they are happy enough with their changed circumstances."

Those "changed circumstances" are starting to pay economic dividends ["Damascus Revels in Its New Allure to Investors," by Chip Cummins, Wall Street Journal, 17 November 2009]. Cummins reports:

"From the corridors of Syria's stately central bank to the capital's winding, barrel-vaulted souk in the heart of the Old City, it is hard to remember that 18 months ago Syria was a diplomatic and economic pariah state. Growth is expected to come in this year at a respectable 3%, despite a big knock from the global financial crisis. European tourists spill out of recently renovated boutique hotels in the capital's Old City. American accents boom across the dining room of the Four Seasons. In the tony Maliki neighborhood nearby, tourists, foreign businessmen and fashionably dressed Damascenes sip $4 lattes at one of several bustling cafes."

The biggest change, however, is that Syria has begun to attract foreign direct investment, which provides a firm foundation for developing a sustainable economy. Cummins continues:

"Central-bank chief Adib Mayaleh is practically giddy about Syria's new allure to foreign investors. Amid warming ties between the West and Syria, executives from two French banks recently dropped by his office to talk about opening branches here. The same French bankers 'previously said they would have nothing to do with me,' he says, gloating. ... In fact, Syria's still-isolated economy protected it from the worst of the global financial crisis. Banks here haven't been hit by defaults. Tourism receipts dipped but are recovering again. A recent private-sector-led investment boom in real estate shows no signs of the bust felt in other regional markets like Dubai. Earlier this year, real-estate adviser Cushman & Wakefield listed Damascus office space as the eighth most expensive in the world. That is behind Paris and two spots ahead of midtown Manhattan. ... On top of all that, the West's recent embrace of Syrian President Bashar Assad is translating into a booster shot of economic optimism."

Of course a country doesn't move from pariah to prosperity in eighteen months. Cummins notes that "it has been a long road, with plenty of obstacles still ahead." One of those obstacles has been the government.

"When Mr. Assad took over here after his father's death in 2000, he kept tight control of the state, suppressing dissent. But he also ushered in economic overhauls. Lower import tariffs allowed foreign goods from China and Europe to flow in. In 2003, banking reform opened the door to a handful of private lenders. The overhauls brought with them galloping inflation, but everyday Syrians embraced the new consumer culture. ... Shortly after the U.S.-led invasion in Iraq, Washington accused Mr. Assad of allowing fighters across the border to battle Americans, and in 2004 imposed sanctions. In 2005, the U.S. held Syria accountable for the assassination of former Lebanese Prime Minister Rafik Hariri and pulled its ambassador. (Syria denies both allegations.) The sanctions didn't directly affect much business here since American companies weren't that active anyway. But U.S. Treasury officials suggested European firms risked being frozen out of the U.S. banking system if they didn't play ball. 'Foreign banks were intimidated by the American sanctions,' says Mr. Mayaleh, the central banker."

One benefit of having a single-party state headed by a leader for life is that it can change policies without much political repercussion. That is what happened in Syria.

"In what could be one of the most significant diplomatic rehabilitation acts in recent memory, Mr. Assad turned the tables. Last year, he agreed to indirect peace talks with Israel. He also helped to broker a deal between warring Lebanese politicians. Earlier this year, U.S. commanders traveled to Damascus to discuss Syria-Iraqi border security cooperation. French President Nicolas Sarkozy invited Mr. Assad to Paris in the summer of 2008 and flew to Damascus later that year. Mr. Assad traveled to France again [this month]."

Although the United States has continued to move slowly in its rapprochement with Syria, thawing has been sufficient to provide some western enterprises enough confidence to invest in Syria. Cummins concludes:

"The thaw has boosted confidence here, as shown by the sudden rush of Western bankers calling on Syrian officials. In an interview in his marble and wood office, Abdullah Dardari, Syria's deputy prime minister for economic affairs, gestures to two business cards left on his coffee table by executives representing big U.S. financial firms. 'Finally,' he says, 'we put Syria on the map for foreign investors.'"

Although circumstances are improving, Syria still has a long ways to go. Iraqi officials claim that Syria is responsible for 90% of the insurgent violence still wracking the country. There are still questions about Syria's nuclear program. And while Israel's prime minister would like to hold direct peace talks with Syria, President Assad wants to use Turkey as a mediator. Until these issues are dealt with, the U.S. is likely to remain sidelined rather than engaged with Syria. For its part, Syria is just happy not be a pariah any longer.

November 27, 2009

Hope, Infrastructure, and the Future

Hope is an interesting topic. Samuel Smiles (a good name for someone filled with hope) once said, "Hope is the companion of power, and mother of success; for who so hopes strongly has within him the gift of miracles." Hope is lifeline to the future. San Francisco's famous assassinated mayor Harvey Milk once remarked, "The important thing is not that we can live on hope alone, but that life is not worth living without it." America was once filled with hope. The future held limitless opportunities. Everyone talked about achieving "the American dream." America doesn't seem to be dreaming as much as it used to. The Swiss have overtaken the U.S. as the world's most competitive country ["Swiss, not U.S., now the most competitive," by Elaine Engeler, Washington Times, 9 September 2009], China is predicted eventually to pass the U.S. as the world's largest economy, and unemployment remains in double-digits. The question is whether as a country the U.S. has lost hope in the future. That is the subject of an opinion column by David Brooks ["The Nation of Futurity," New York Times, 17 November 2009]. He begins his column by reminding readers that America was once the most hopeful nation on earth.

"When European settlers first came to North America, they saw flocks of geese so big that it took them 30 minutes to all take flight and forests that seemed to stretch to infinity. They came to two conclusions: that God’s plans for humanity could be completed here, and that they could get really rich in the process. This moral materialism fomented a certain sort of manic energy. Americans became famous for their energy and workaholism: for moving around, switching jobs, marrying and divorcing, creating new products and going off on righteous crusades. It may seem like an ephemeral thing, but this eschatological faith in the future has motivated generations of Americans, just as religious faith motivates a missionary. Pioneers and immigrants endured hardship in the present because of their confidence in future plenty. Entrepreneurs start up companies with an exaggerated sense of their chances of success. The faith is the molten core of the country’s dynamism."

Brooks asserts that the U.S. is now facing a crisis of faith; produced, he claims, by the rise of China.

"It is not only China’s economic growth rate that produces this anxiety. The deeper issue is spiritual. The Chinese, though members of a famously old civilization, seem to possess some of the vigor that once defined the U.S. The Chinese are now an astonishingly optimistic people. Eighty-six percent of Chinese believe their country is headed in the right direction, compared with 37 percent of Americans. The Chinese now have lavish faith in their scientific and technological potential. Newsweek and Intel just reported the results of their Global Innovation Survey. Only 22 percent of the Chinese believe their country is an innovation leader now, but 63 percent are confident that their country will be the global technology leader within 30 years. The majority of the Chinese believe that China will produce the next society-changing innovation, while only a third of Americans believe the next breakthrough will happen here, according to the survey."

The Chinese look at the horizon and see light where too many U.S. citizens now see gathering clouds. The U.S. would like to find a scapegoat for its gloominess; but most of its pains are self-inflicted. When the U.S. education system was stirring the souls of America's youth, the U.S. led the world in hope, productivity, competitiveness, and innovation. As it let its education slip, its workers became less capable of meeting the challenges they would face. Greed, of course, played a large role in the numerous economic bubbles that have burst, but the fact that America has had to rely on immigrant entrepreneurs to keep its entrepreneurial spirit alive demonstrates that America needs an infusion of hope. For more on the links between education, good jobs, and a brighter future, read my post entitled Education and Employment. Brooks continues his commentary:

"The anxiety in America is caused by the vague sense that they have what we’re supposed to have. It’s not the per capita income, which the Chinese may never have at our level. It’s the sense of living with baubles just out of reach. It’s the faith in the future, which is actually more important. China ... invites a certain sort of reverie. It is natural, looking over the construction cranes, to think about the flow of history over decades, not just day to day. And it becomes obvious by comparison just how far the U.S. has drifted from its normal future-centered orientation and how much this rankles. The U.S. now has an economy shifted too much toward consumption, debt and imports and too little toward production, innovation and exports. It now has a mounting federal debt that creates present indulgence and future hardship. Americans could once be confident that their country would grow more productive because each generation was more skilled than the last. That’s no longer true. The political system now groans to pass anything easy — tax cuts and expanding health care coverage — and is incapable of passing anything hard — spending restraint, health care cost control. The standard thing these days is for Americans to scold each other for our profligacy, to urge fiscal Puritanism. But it’s not clear Americans have ever really been self-disciplined. Instead, Americans probably postponed gratification because they thought the future was a big rock-candy mountain, and if they were stealing from that, they were robbing themselves of something stupendous."

Brooks believes that it will take a great leader to "induce the country to salivate for the future again." Such a leader would not only inspire hope but would connect "discrete policies — education, technological innovation, funding for basic research — into a single long-term narrative. It would mean creating regional strategies, because innovation happens in geographic clusters, not at the national level. It would mean finding ways to tamp down consumption and reward production." It would also mean that we would have to stop listening to media pundits who are more interested in stirring up fear than in finding solutions. We would need politicians to support bipartisan legislation instead of voting along party lines. It's hard to argue with anything that Brooks says. However, it wouldn't be fair to write a column about hope if one thought there was no hope for the future. Brooks seems to think that there is a dim hope. He writes, "The most pragmatic guide for that remains Michael Porter’s essay in the Oct. 30, 2008, issue of Business Week." In that essay, Porter reminds us of those things that made America great in the past. He wrote:

"The U.S. has prospered because it has enjoyed a set of unique competitive strengths. First, the U.S. has an unparalleled environment for entrepreneurship and starting new companies. Second, U.S. entrepreneurship has been fed by a science, technology, and innovation machine that remains by far the best in the world. While other countries increase their spending on research and development, the U.S. remains uniquely good at coaxing innovation out of its research and translating those innovations into commercial products. In 2007, American inventors registered about 80,000 patents in the U.S. patent system, where virtually all important technologies developed in any nation are patented. That's more than the rest of the world combined. Third, the U.S. has the world's best institutions for higher learning, and they are getting stronger. They equip students with highly advanced skills and act as magnets for global talent, while playing a critical role in innovation and spinning off new businesses. Fourth, America has been the country with the strongest commitment to competition and free markets. This belief has driven the remarkable level of restructuring, renewal, and productivity growth in the U.S. Fifth, the task of forming economic policy and putting it into practice is highly decentralized across states and regions. There really is not a single U.S. economy, but a collection of specialized regional economies—think of the entertainment complex in Hollywood or life sciences in Boston. Each region has its own industry clusters, with specialized skills and assets. Each state and region takes responsibility for competitiveness and addresses its own problems rather than waiting for the central government. This decentralization is arguably America's greatest hidden competitive strength. Sixth, the U.S. has benefited historically from the deepest and most efficient capital markets of any nation, especially for risk capital. Only in America can young people raise millions, lose it all, and return to start another company. Finally, the U.S. continues to enjoy remarkable dynamism and resilience. Our willingness to restructure, take our losses, and move on will allow the U.S. to weather the current crisis better than most countries."

The current malaise has the U.S. marching in place. Porter argued that the recession presents an excellent opportunity to restructure and consolidate inefficient institutions; but he noted that politicians seem little interested in making changes. He rightfully claimed that America needs to elect a new breed of politician who is more interested in progress than power and who is more interested in giving new direction to America than in dividing it. He wrote:

"To make America competitive, we have to get beyond this thinking. Political leaders, business leaders, and civil society must begin a respectful, fact-based dialogue about our challenges. We need to focus on competitive reality, not defending past policies. ... Is such strategic thinking possible, given America's political system? It happens in other countries—Denmark and South Korea are just two where I have participated in serious efforts by national leaders, both public and private, to come together and chart a long-term plan. This almost never occurs in the U.S., except around single issues. ... America is at its best when it recognizes problems and accepts collective responsibility for dealing with them."

Unfortunately, for at least a decade, America has been at its worse. Divisive politics are now what defines the American system. Brooks wistfully concludes that "it would be nice if Americans would once again start looking to the horizon." One of the things that researchers have found that helps instill hope in neighborhoods is to spruce them up. It's easy to get discouraged when you see unpainted and unmended fences; windows that are broken; and grafitti sprayed on walls. It's also easy to get discouraged when one sees a nation's infrastructure begin to decay. If sprucing up a neighborhood can revive hope, so can sprucing up national infrastructure. That is the focus of a separate op-ed column by Bob Herbert ["What the Future May Hold," New York Times, 17 November 2009]. He writes:

"What will the United States be like in 20 years when today’s toddlers are in college or trying to land that first job or maybe thinking about starting a family? The answer will depend to a great extent on decisions we make now about the American infrastructure. ... In 20 years, will today’s toddlers be traveling on bridges and roads that are in even worse shape than today’s? Will they endure mammoth traffic jams that start earlier and end later? Will their water supplies be clean and safe? Will the promise of clean energy visionaries be realized, or will we still be fouling the environment with carbon filth to the benefit of traditional energy conglomerates and foreign regimes that in many cases wish us anything but good? The answers to these and many other related questions will depend to a great extent on decisions we make now (even in the midst of very tough economic times) about the American infrastructure. We’re trundling along in the infrastructure equivalent of a jalopy, with bridges rotting and falling down, while other nations, our competitors in the global economy, are building efficient, high-speed, high-performance infrastructure platforms to power their 21st-century economies."

Many people would argue that hard economic times are exactly when you need to invest in infrastructure. Not only would the hopes of Americans rise because the neighborhood looks better, but because they were put back to work. When I speak with leaders of developing countries, I reiterate the importance of infrastructure for attracting businesses and making already established businesses more competitive. America seems to have forgotten this lesson -- or as Herbert puts it, "We used to be so much smarter about this stuff." America moved forward only as fast as its infrastructure improved. People were moving west, but the transcontinental railroad opened the country up to real growth. America emerged strong from the Second World War, but the interstate freeway system helped keep the economy growing as it turned from war production to commercial manufacturing. Herbert laments:

"Policy makers all but gave up on that kind of thinking years ago. America’s infrastructure, once the finest in the world, has been neglected for decades, and it shows. Felix Rohatyn’s book on the subject, 'Bold Endeavors,' opens with: 'The nation is falling apart — literally.' It’s almost as if we no longer understand the crucial links between infrastructure and the health of the American economy, the state of the environment and the viability of the nation as a whole. We’ve become stupid about this. Consider transportation. [A Brookings Institution report] tells us, 'Other nations around the globe have continued to act on the calculus that state-of-the art transportation infrastructure — the connective tissue of a nation — is critical to moving goods, ideas and workers quickly and efficiently. In the United States, however, we seem to have forgotten.' Much of the nation’s rail infrastructure is approaching the tail end of its useful life. If you’ve flown anywhere recently, you know what a nightmare that can be. To the extent that we have any infrastructure policy at all, it is badly disjointed, dysfunctional, often doing more harm than good as it serves the interests of politicians who are crazy for pork rather than the real needs of the American public."

Perhaps Warren Buffet's recent railroad acquisition will pump new life into America's failing infrastructure and new hope into the American psyche. We'll have to wait and see. Herbert asserts that if we begin improving our infrastructure, hopes will rise and the future will be brighter. Herbert concludes:

"Brookings’ ... [executive], Bruce Katz, offered a glimpse of the kind of economic environment today’s toddlers could face in a couple of decades if we started getting things right now. 'We’ll very likely have a low-carbon-based economy,' said Mr. Katz, 'which will require enormous innovation with regard to energy and the infrastructure. We’ll be much more export-oriented than we are today, less consumption-focused.' And as a nation, he said, we should have a better understanding of the importance of the metropolitan areas that are the major drivers of the U.S. economy, and how essential it is to give them the coordinated national support that they need on infrastructure and other forms of development. You can’t thrive as a nation while New Orleans is drowning, and Detroit is being beaten into oblivion decade after decade, and a bridge in Minneapolis is collapsing into the Mississippi River, and cities in upstate New York and the Rust Belt are rotting from lack of employment opportunities, and so on. Imagine, instead, an America with rebuilt, healthy, dynamic metropolitan areas, and gleaming new port facilities, and networks of high-speed rail, an America with electric vehicles and a smart grid and energy generated by the power of the sun and wind and water and the ocean’s waves. Imagine if the children of today’s toddlers had access to world-class public schools all across the nation and a higher education system that is both first-rate and affordable. Imagine if we set out seriously to do all this. Imagine."

Brooks, a conservative, and Herbert, a liberal, seem to share a common vision. Their prescriptions for generating a better future look remarkably similar. Given that Brooks and Herbert can see eye-to-eye, is it too much to ask U.S. politicians to find common ground on how to move forward, spruce up the country, educate America's children, employ its workforce, and instill hope in this and coming generations? I don't think so. I read that the election results in November didn't really tell us much about how the public was thinking -- except in one respect: the electorate is unhappy with incumbents. Hopefully, incumbents will get the message and begin to replace divisiveness with vision -- or maybe the whole lot of them will be thrown out during the next election. Norman Cousins wrote, "The capacity for hope is the most significant fact of life. It provides human beings with a sense of destination and the energy to get started." I think it's time that America found some hope so that we can get started making a brighter future.

November 26, 2009

Happy Thanksgiving

Whether you're religious or not, it's good to celebrate a season in which we can offer thanks -- be it to your god, your family, or your friends. This is the second Thanksgiving in a row during which many people are finding themselves struggling to get by. Unemployment in the United States remains in double digits and reports earlier this month indicated that the number of people going hungry in America is rising as a result of the recession. Worldwide the number of hungry has also risen by millions. In times of plenty, it is easy to find things for which to be thankful. It is sometimes not so easy, when times are difficult. H.U. Westermayer reminds us that "the Pilgrims made seven times more graves than huts. No Americans have been more impoverished than these who, nevertheless, set aside a day of thanksgiving."

Even if you are struggling, the best way to demonstrate thanks for things like the beauty of the earth is to help someone else. That help need not be monetary. A kind word or a thoughtful act can be meaningful in someone else's life. President John F. Kennedy said, "As we express our gratitude, we must never forget that the highest appreciation is not to utter words, but to live by them." W. J. Cameron expressed a similar thought when he wrote: "Thanksgiving, after all, is a word of action." I wish you all the happiest of Thanksgiving holidays.

November 25, 2009

Networks and Social Responsibility

Yesterday's post [The Latest Views on Corporate Social Responsibility and Philanthropy] discussed some of the changes that are occurring in the area of social responsibility. The post focused on a special Wall Street Journal report having to do with philanthropy. In a later article, the paper discusses how companies and business schools are teaming to find better approaches to social responsibility ["Networking for Social Responsibility," by Alina Dizik, Wall Street Journal, 19 November 2009]. Dizik reports:

"The Boston College Center for Corporate Citizenship created an invite-only online community this month for its member companies to directly share best practices on corporate responsibility. In less than three weeks, 314 members joined a group of 226 who tested the system for six months. Center administrators expect this kind of exchange will attract even more companies to join the center—and pay as much as $10,000 a year for membership."

Boston College administrators indicate that they established the online network because companies were increasingly asking the Center "for advice and information about what their peers were doing in the area of corporate social responsibility." As I noted yesterday, the fact that corporations continue to be interested in socially responsible outreach during troubled economic times is a good sign. Dizik reports that eBay was one of the original members of the test group that led to the establishment of the online community:

"With input from other members and business-school case studies, [eBay Inc.] is finding ways to expand the reach of its social initiatives. For example, Ebaygreenteam.com, a site that points users to ecofriendly products, is now seen by millions of users as a result of tips from the online community to align its marketing with eBay's brand-name cachet, says [Robert Chatwani, head of global citizenship at eBay]."

As I noted in yesterday's post, business schools are becoming important resources for both social responsibility and social entrepreneurism. Dizik indicates that "firms in industries across the board are looking to incorporate initiatives in this area into their business plans and everyday leadership decisions." Their reasons are not altogether altruistic.

"One reason for the heightened interest in social responsibility is that companies seeking to expand globally need to first understand what social issues matter most in their target countries, says Gil McWilliam, an executive director at Duke Corporate Education. 'If you are doing business in India, you are very aware of what's happening around you—businesses these days can't avoid it,' she says. Since Duke began its custom executive-education offerings in 2000, about 40% of corporate clients have either discussed or taken on social initiatives, with a big chunk of those doing so for the first time this year, she adds. In August, International Business Machines Corp. collaborated with Duke to offer Forward Looking Insights, a hands-on exercise to educate the firm's emerging leaders on the needs of the developing world, says Suzanne DeWitt, program director of education and leadership development. Taught in Singapore, Madrid and Raleigh, N.C., the program aims to help company managers expand technology offerings and sell products abroad."

It's not just social issues that companies need to learn about in developing countries, they need to learn about buying habits. Consumers in emerging markets are proving that they have clout, but in order to tap their wallets manufacturers must understand their tastes as well as their resources. Most emerging market consumers can't afford to buy the kinds of bulk offerings found at Costco, BJ's, or Sam's Club, for example, so manufacturers must tailor their packaging to the markets they want to penetrate. Building a good social reputation also helps penetrate those markets. Dizik continues:

"For some companies, a renewed—or new—focus on social responsibility is necessary to build a stronger reputation locally and abroad. Kellie McElhaney, an adjunct assistant professor at the University of California Berkeley's Haas School of Business, says this kind of brand management can help positively shape a company's public image. A large part of her consulting in the past 18 months has been focused on helping companies highlight their social efforts to build their brand. She's currently working with a large retailer to highlight its longtime commitment to ethical products. Indeed, 57% of consumers say a company or brand has earned their business because it supports good causes, according to a survey from Edelman, a public-relations firm."

One of the areas that companies are increasingly interested in Dizik reports is helping promote sustainable economies. A sustainable economy is one that fosters the emergence of a middle class and then is robust enough to help it grow. Middle class consumers are the prize on which retailers are keeping their eye. An economy that rapes the environment or exploits workers is not sustainable.

"MIT's Sloan School of Management is designing a custom course on sustainability for 12 executives and 120 directors at Itau Unibanco SA, a large financial-services company. The program, which launches next year, will tackle concepts like understanding sustainability as a business opportunity and integrating sustainability into the evaluation of risk. Richard Locke, deputy dean at the school, says it is the first time a financial firm has asked MIT for this sort of extensive training."

Dizik reports that business executives often require more than classroom instruction. When profits and losses are the metrics by which one is judged, understanding how corporate social responsibility can help the bottom line is often difficult.

"The concepts—incorporating an ethical approach to business decisions and understanding the impact on surroundings—can be difficult to grasp for professionals focused on profits, losses and monetized strategic goals. Ms. McWilliam [from Duke] says immersion and emotional influence make the most impact on developing a mind-set for incorporating responsible practices. To that end, Duke is making an effort to harness internal resources at companies to foster learning and change—and to make the ideals more real for numbers-oriented managers. The school recently created a program pairing executives at an energy and mining company with the heads of its nonprofit environmental foundation so they can learn from each other. The firm hopes leaders will understand the needs of a developing area by learning about its social and environmental factors, and that, in turn, this knowledge will help the company manage risk as it continues to expand internationally."

Duke's approach highlights the fact that those in the development community now understand how important commercial businesses are for helping lift impoverished areas out of the economic morass in which they have been mired for generations. Businesses create jobs, jobs provided incomes, incomes support families, and families support communities. Of course, businesses that don't operate ethically or that create environmental problems can destroy communities rather than help them.

"At Northwestern University's Kellogg School of Management, a module that simulates a corporate crisis component with a corporate social responsibility angle has become a popular add-on. For example, managers will spend class time re-enacting a scenario in which they react to environmental groups that have attacked their firm's reputation. Participants learn that 'you have to integrate these moral quandaries with respect to the social issues fairly quickly,' says Daniel Diermeier, a professor of management at Kellogg. Last year, Mr. Diermeier taught the module to managers from more than 40 companies, up from about five in previous years. 'It's an increasingly important part of managing and enhancing a company's reputation,' he says."

The best way to avoid a PR crisis, of course, is to avoid questionable practices and be a good corporate citizen from the start. I believe that more and more companies understand that; which is why business schools are filling their executive management courses with individuals who want to increase both the profits they make and the good they do. It's just one more thing to be thankful for this week.

November 24, 2009

The Latest Views on Corporate Social Responsibility and Philanthropy

In a recent special report, the Wall Street Journal discussed the changing face of philanthropy, including corporate social responsibility. The report noted that many charities have fallen on hard times as demands on their resources increase and donations to their causes decrease. Then, of course, there were the dozens of charities that entrusted their funds to scoundrels like Bernie Madoff and lost them all. Corporations, too, are struggling in many cases and, as a result, "to augment—or in some cases to replace—cash donations to charitable causes, corporate philanthropists have increased their focus on skills-based volunteering, pro-bono services, policy advocacy and, perhaps most notably, making business decisions that accomplish a public good" ["Tough Times, New Tactics," by Shelly Banjo, Wall Street Journal, 9 November 2009]. These tactics are in line with those recommended by Jack and Suzy Welch in BusinessWeek. For more about what the Welches wrote, read my blog entitled Corporate Social Responsibility in Financially-Troubled Times. Banjo asked four business executives, Jim Rogers, John Chambers, Peter Sands and Sophie Gasperment, "How do you do good at a time when cash is tight?" Their answers are included below:

Jim Rogers, chief executive of Duke Energy Corporation

"'It's about profit, [the] planet and people,' he says. The Charlotte, N.C., company is committed to putting people to work, reducing environmental impact and increasing energy security, he says. This year it built wind farms, put more solar on rooftops, and earmarked $600 million with Florida Power & Light to transform their combined car-and-truck fleet to plug-in-hybrid or all-electric by 2020. It also hired more than 3,000 people whose jobs are related to construction work that will reduce the company's carbon footprint and pollution. ... The company hasn't pulled back on direct philanthropy in the meantime. Last year it donated $4 million for cooling and heating assistance, and an emergency grant of $800,000 for heating. Support for all causes rose slightly to $30 million last year from $29 million in 2006. But the recession has led Duke to find new ways to leverage its contributions. Budget shortfalls at local United Way agencies, for example, led the company to encourage agencies with similar missions to work together and share resources."

Sophie Gasperment, chief executive of the Body Shop International PLC

"[Gasperment] continues to run the cosmetics company on the founding belief 'that business can be a force for good in society,' she says. Her company recently launched a world-wide campaign to stop sex trafficking of children and young people. With more than 2,500 stores in 65 countries to help spread its message, the campaign urges decision makers to give children greater protection. The global recession has heightened the vulnerability of young people, Ms. Gasperment says. Poverty has increased in the children's countries of origin. This can mean that some children may be forced to quit school in order to work and contribute to the family income, thus making them more exposed to sexual exploitation. And in so-called destination countries, meanwhile, the clients of prostitution have less disposable income, which may drive the exploiters to look for cheaper labor, namely children, to maintain their criminal operations. The role for the Body Shop is to team up with experts who are working directly on the problem, and to raise awareness of the issue with Body Shop customers. The company, a unit of France's L'Oréal SA, created a hand cream, the proceeds from which go to organizations that work to stop sex trafficking. Says Ms. Gasperment, 'This is what we stand for, and why our customers come to our stores."

John Chambers, chief executive of Cisco Systems Inc.

"The recession has forced Cisco to expand its approach to philanthropy, Mr. Chambers says. In addition to making straightforward donations, the company focuses on how to increase the multiplier effects of giving—through partnering with governments, non-governmental organizations and other companies 'to leverage our dollars tenfold,' Mr. Chambers says. Last month Cisco announced a $10 million contribution in cash, services and equipment over the next two years to support rehabilitation and reconstruction in the western Indian state of Karnataka, where recent flooding caused widespread loss of life and heavy damage to local infrastructure. Just as it did after Hurricane Katrina in 2005 and the Sichuan, China, earthquake last year, the company plans to work with the state government in a private-public partnership not only to rebuild but to improve the infrastructure, especially for education and health care, with 21st-century information-technology and communications equipment. ... The goal, he says, is not just to rebuild schools, but to 'skip a generation and build 21st-century schools for the future,' and to modernize how hospitals operate. ... The company says it has boosted support in its own backyard through $1.26 million in Silicon Valley Impact Grants to support community-service nonprofit groups within 50 miles of Cisco's headquarters in San Jose, Calif. The company also encourages employees to get personally involved. Cisco has created 35 employee-led civic councils around the world to plan volunteering projects, forge nonprofit partnerships and coordinate charitable donations. Last year, personal philanthropy efforts became a part of every employee's performance review."

Peter Sands, chief executive of Standard Chartered PLC

"If any good is to come out of the crisis, it is that banks and bankers reflect more on their role in the broad economy to make sure their impact on society is positive, says ... Sands. ... 'This is not the time to turn away from the issues' pressing the global economy and 'the communities in which we operate,' he says. Microfinance, for instance, or making small loans to the poor, can help promote economic growth and lift people out of poverty in developing nations, Mr. Sands says. The company hopes to provide $500 million to microfinance organizations by 2011, working with such groups as the World Bank, Accion International and the U.S. Agency for International Development. 'There is a real opportunity to make microfinance much, much bigger than it is at the moment,' says Mr. Sands, who adds that his intention is to turn the practice into a commercially viable business. The company is offering free technical assistance workshops, conferences and training in governance, risk management and investment readiness to support microfinance institutions across Asia and Africa. Standard Chartered is active in purely philanthropic campaigns as well, particularly in Asia, Africa and the Middle East. It tries to focus on projects that resonate with its world-wide staff of 70,000 and their local communities. For instance, it recently pledged $20 million to bring eye-care services to 20 million people in 20 cities by 2015. Company officials say their Seeing Is Believing initiative has helped more than two million people so far. Other core initiatives include Living with HIV, a program that aims to reduce the number of new HIV infections through the education of one million people about HIV and AIDS by 2010. Nets for Life, an anti-malaria program, has distributed more than one million mosquito nets since 2006. The company gives its employees a few days of paid leave for volunteer work each year and gives awards to those in the countries with the highest volunteering rates. In 2008, the winners got additional days of paid-volunteering leave, and trips to visit community projects in India. Says Mr. Sands, 'We want our employees to own the various projects we've committed to.'"

One side note on what Sands said. Although I'm a supporter of microfinance, his plans to turn Standard's microfinance "practice into a commercially viable business" could do as much harm as it does good. For more on that topic, see my post entitled The Ups and Downs of Microfinance. For the most part, however, I believe that the efforts described above are positive ways for businesses to do good in the world. As the Welches pointed out, however, the best good that businesses accomplish is providing jobs. Jobs support individuals, families, and communities. For those jobs to be sustainable, companies must be profitable. John Chambers of Cisco Systems noted in his response that Cisco likes to work in public-private partnerships. In most developing countries, public-private partnerships are critical for success. In another article in the Wall Street Journal series on philanthropy, Ms. Banjo reports that public-private partnerships are also proving beneficial in the developed world ["Is It Public, or Is It Private?"]. She writes:

"Traditionally, when it comes to philanthropy, there has been private philanthropy, and there has been government philanthropy, and rarely did the two meet. But that division is now changing, as a growing number of philanthropists are looking at new opportunities in so-called public-private partnerships. ... 'Government and philanthropists have been on parallel tracks for decades trying to solve bigger problems, and now the tracks are coming together,' says Eric Kessler, founder of Arabella Philanthropic Investment Advisors in Washington, D.C. Mr. Kessler says he is working with a number of wealthy families and foundations on establishing public-private partnerships." Both sides stand to gain: Donors leverage their dollars, and the government gets additional capital, plus the expertise and credibility that high-profile philanthropists often bestow on the causes they support."

One of the benefits of public/private partnerships is flexibility. Often money from one source or the other comes with restrictions that can unintentionally impede progress. When such roadblocks are encountered, funds from the other source can often been used to get through it so that progress can continue.

"In the past 15 years, nonprofits and private foundations have assumed larger roles in providing social services. Government often contracts with such groups to provide social services, including homeless shelters, food pantries and senior care. So, philanthropic cooperation between government and private sector has existed for a while. But the past couple of years saw two other developments: a severe recession causing budget constraints at the local, state and federal levels and, as a result, even greater willingness of various governments to team with nonprofits and philanthropists to address major social problems. That means bringing new money and human resources to the table. A variety of local, state and federal initiatives have sprung up to provide incentives for nonprofits and philanthropists to donate to a particular cause, largely through government grant programs that match private donations. Public authorities have also created offices of social entrepreneurship to promote innovative programs, work with private donors and fund those programs that become successful."

Of course, there are also some challenges that private philanthropies can encounter when teaming up with government agencies.

"Any use of public funds invites debate over whether the money is being spent properly. Philanthropists thus can become targets for public criticism when they help fund initiatives that are controversial. ... Politics aside, working with government agencies also can take longer and be more bureaucratic than making direct, individual grants."

Despite the potential drawbacks, Banjo reports that "government bodies continue to warm to such opportunities."

"President Barack Obama created the White House Office of Social Innovation and Civic Participation to funnel government resources to nonprofit and private programs involved in charitable work. When private philanthropists find an approach that works, the government allot funds to those programs. The White House office started with a $50 million budget. Similar government efforts are cropping up in Louisiana, Ohio, Texas and other states, and in such cities as New York, Boston and Chicago."

In the developing world, public/private partnerships are needed to construct critical infrastructure that helps businesses become more efficient (like reliable electrical power, transportation systems, etc.) but at the same time serve a larger public good. By partnering together in such situations, companies and governments both win. If you (or your company) are looking to donate to causes in developing countries, Anjali Cordeiro wrote an article in the report that can help you find the cause for which you might are looking ["Expanding Your Horizons"]. She writes:

"Americans have shown a growing interest in philanthropic causes overseas in recent years. But giving abroad can be complicated for those who want their money to go to a specific cause in a particular region—say, education in Southeast Asia or health care in sub-Saharan Africa. Ensuring that such donations reach their intended target and are used effectively, are tax-deductible and don't violate antiterrorism laws or any other U.S. government restrictions can be a daunting task. Well-known organizations like the American Red Cross provide a convenient way for many people to make contributions. But they aren't set up to target donations the way some contributors would like. Those are some of the reasons many donors opt to work with U.S.-based intermediary charities created for international giving. These organizations act as a channel for donations, ensuring that the money goes to reputable recipients and has the desired effect, and that contributions meet all legal requirements. Because they are U.S.-based, donations made through them are tax-deductible."

No organization that I'm aware of can actually direct your money to specific individuals. They send the money to organizations that help a particular cause or a particular clientele in a particular region or country. Take, for example, Kiva, which helps provide microfiancing in the developing world. Even though it allows donors to apparently click and donate to specific individuals or groups, what the donor is really doing is providing funds to the microfinance institution that will provides the funds to the individual. Kiva has recently received some flak for making it appear that donors are actually lending money directly to the selected individuals [see "Confusion on Where Money Lent via Kiva Goes," by Stephanie Strom, New York Times, 9 November 2009]. Personally, it makes little difference to me. Cordeiro continues:

"A list of intermediaries and nonprofits involved in international philanthropy can be found on the Web site of U.S. International Grantmaking, usig.org, a project of the Council on Foundations and the International Center for Not-for-Profit Law."

Cordeiro provides a few examples of how and why people use intermediaries.

"When Dale Van Aken, founder of a Pennsylvania technology company, and five of his friends heard of water shortages in Zambian villages from an acquaintance who was born in that country, they decided to donate and raise money to drill wells there. They chose not to funnel the money through church groups or send it directly to nonprofits in Zambia, for a number of reasons. To draw from the broadest pool of potential donors, they decided to work with secular organizations. And they didn't want to send money directly to Zambia because they didn't know how to ensure that they didn't violate any laws on money transfers overseas, or that the donations would be tax-deductible, another key to attracting as many donors as possible. ... He and his friends ultimately settled on using a New York-based intermediary charity, the King Baudouin Foundation U.S., as a conduit for their donations. The foundation set up a so-called donor-advised fund for the group. Contributors donate money to the fund, and the foundation then distributes money from the fund to water projects in Zambia recommended by Mr. Van Aken and his friends."

An accompanying article in the Wall Street Journal report indicates that donor-directed funds are growing in popularity with philanthropists because they significantly reduce overhead costs when compared to establishing a private foundation. "It takes a minimum of $15,000 to set up a donor-advised fund at the King Baudouin Foundation U.S., but there is no minimum for subsequent gifts." Cordeiro continues:

"Pandju Merali, an 80-year-old retired businessman in Seal Beach, Calif., says he turned to intermediary groups after he wrote to education departments in developing countries about his interest in funding women's education and received no response. ... Now, he works with a handful of intermediary charities to identify and donate to universities and young women in need of funding. He established a foundation named for his wife, the Shirin Pandju Merali Foundation, that has funded more than 700 students in India, Afghanistan and elsewhere by making donations through GlobalGiving, a nonprofit in Washington, D.C. GlobalGiving works with hundreds of grass-roots groups around the world, which it vets to ensure they meet U.S. tax and antiterrorism rules. Some local partners help identify the universities and students who meet Mr. Merali's requirements. GlobalGiving provides Mr. Merali progress reports on the performance of the students he supports. GlobalGiving usually charges 15% of the size of each grant, though on rare occasions fees may be negotiated on large grants. Mr. Merali, for instance, pays a 10% fee."

Even if you're not super-wealthy, Cordeiro reports that you "can still direct [your modest] contributions to specific causes abroad."

"The King Baudouin Foundation U.S. allows donors to make what it calls an advised gift of $5,000 or more to support a nonprofit of the giver's choice overseas. As it does for advised funds, the foundation vets recipients of advised gifts and ensures that the money is put to good use. It charges a fee that starts at 5% of the first $100,000 of each gift and drops to 1% of any amount over $400,000. Donations are tax-deductible. The Fidelity Charitable Gift Fund allows a donor to set up what it calls a giving account of $5,000 or more and then distribute that money to any of the U.S.-based charities vetted by the fund that do international work, or to domestic charities. Contributions are tax-deductible. An administrative fee starts at 0.6% for the first $500,000 in an account and declines for amounts above that level. Much smaller donations can be targeted to specific causes through intermediaries including GlobalGiving. Donors can go to the GlobalGiving site, choose among projects posted by charities the organization has vetted and make tax-deductible donations of as little as $10. One recent post, for example, sought donations for learning centers for rural Afghan women. A $25 donation would help 15 women learn to read, it said; $75 would pay for a month of a teacher's salary for 30 literacy students."

The final article in the report that I would like to discuss, also written by Ms. Banjo, talks about philanthropists who set out to make money with their ventures so that they can continue to grow the amount of money that can be used to do good ["Consider It an Investment"]. She reports:

"With fewer resources to go around, philanthropists are using a host of methods to stretch their charitable dollars. Instead of simply giving money away to a cause, groups and individuals are plowing their funds into financial vehicles—known as program-related investments—that let their money grow while it does good. So, rather than make a one-time gift of $1,000, they might invest in a project that generates revenue, such as a loan to an entrepreneur in the developing world or real estate that rents to nonprofits. The returns can then go to other causes. ... To be sure, these charitable options aren't new, but for a long time only big institutions like the Ford Foundation pursued them. Given the lingering economic slump, though, program-related investments are getting attention from a wider array of potential donors—including smaller family foundations, investors with donor-advised funds and everyday individual givers. And lots of options are springing up to help donors along, from specialized donor-advised funds to opportunities to invest in microfinance and community development."

If this sounds like something you might be interested in, Banjo provides some avenues you might pursue, including Kiva, which I mentioned above:

"In the past few years, a number of Web sites have sprung up to give individuals access to the growing industry of microlending—making small loans to entrepreneurs, mostly in developing countries. At Kiva.org, for instance, donors choose an individual to help, such as a Ghanaian entrepreneur starting a clothing business or livestock farm. [This is not exactly correct as noted above.] Individuals decide how much they're willing to donate—$25 and up—and within six to 12 months, they get the money back. (Loans made through Kiva don't earn interest, however.) From there, donors can funnel the money into another loan, donate it to Kiva for operational expenses or return it to their bank account. The site says it has handled more than $100 million in loans since its founding in 2005, and almost 98% of loans have been paid back. Another microfinance site, eBay Inc. subsidiary MicroPlace.com, takes a different approach. Lenders pick a microfinance institution to invest in—such as the Habitat for Humanity investment program or international microfinance organization Accion—and can choose when they get repaid, from three months to five years. MicroPlace is a registered brokerage firm—unlike Kiva, which is a nonprofit organization—so investors can earn returns on the money that can be reinvested, ranging from 1% to 6%. What's more, MicroPlace offers individuals low-dollar access to microfinance groups that typically require larger contributions. For instance, Oikocredit USA, an arm of the large Netherlands-based microfinance group, usually requires a minimum $1,000 contribution. But if you go through MicroPlace, you can start with just $20. ... There are other ways to get into microfinance, such as specialized funds. Accion's Global Bridge Fund offers what the group calls a private-placement investment, similar to a CD, pooling investor assets to support microfinance institutions. The minimum investment is $2,000 for at least 18 months; interest rates vary from 0% to 3% for new investments. Finally, if you'd like to support lending closer to home, there are U.S. community-development banks—institutions that make loans to low-income individuals and business owners, nonprofits, environmental and faith-based groups. The simplest way to get funds to these banks is to open an account there; your money will be insured by the FDIC, just as in regular banks. You can also invest in funds run by the banks."

The good news in all this is that even though charities and charitable giving has fallen on hard times, help for worthy causes hasn't dried up altogether. Even small contributions, if provided by enough people, can do a great deal of good. During this Thanksgiving season, you will find it a little brighter and filled with greater joy if you reach out and help someone else.

November 23, 2009

Innovation and the Military

A common theme in many Hollywood scripts is that the military is only interested in science and technology because they are looking for new and more devastating weapons. Movies that incorporate this theme generally involve an evil military bureaucracy (normally represented by a reprehensible, if rogue, colonel) funding the research of a brilliant, but unwitting, scientist with the sole purpose of turning what is supposed to be a beneficial discovery into a weapon system. In real life, however, military innovations often play an important role the everyday routines of millions of people. Two quick examples are the Internet and the Global Positioning System. Another innovation that just may play an important role around the world could be military gum ["Doctors create gum that helps promote tooth health," by Mary Meehan, Boston Herald, 12 November 2009]. Meehan reports:

"With the help of a gum chomping machine and years of careful chemistry, University of Kentucky researchers have developed a chewing gum that can help replace toothpaste and a toothbrush, thus improving the health of soldiers in the field as well as children in poor countries. Seriously. Gum. In what is known around the UK College of Pharmacy by the ever-so-catchy title of 'the military gum project,' an antimicrobial, known as KSL, is infused in chewing gum. KSL is anti-adhesive and abrasive agent that disrupts and helps dissolve plaque. And, as every toothpaste commercial has told us for years, fighting plaque is key to good dental health."

As the old saw goes, "necessity is the mother of invention." When troops are engaged in small patrol activities in isolated areas where water is scarce and they have to carry all their own necessities from ammo to food, being able to replace some toothpaste and a toothbrush with some gum is a small but important matter. Healthy soldiers make better warriors -- and dental health is as important as physical health. Meehan continues:

"Since World War I, thousands of American soldiers have suffered from the extreme form of gingivitis that can result in painful ulcers, infection and bleeding gums. You’ve probably heard it called 'trench mouth.' 'Between World War II and Korea and Vietnam those numbers have not been changing,' said Geoffrey Thompson, Commander of the U.S. Army Dental and Trauma Research Detachment, that sponsored the research at UK. Even today, about 15 percent of all Army sick calls are related to dental problems, said Thompson, who is both a colonel and a dentist. Not only do poor teeth take active soldiers out of duty, but getting treatment can put others in harm’s way. For every soldier who must be transported to a dentist in Iraq, Thompson said, seven others must ride in a convoy over often treacherous roads. There are other practical considerations, said Deluca, a professor in the department of pharmaceutical sciences at UK, who began the research in 2005. Soldiers have told him even the white spot left by rinsing toothpaste can help enemy trackers locate soldiers on the move. And, he said, if a solider can pack one more bullet or a toothbrush, you can guess what he or she is going to pick."

I suspect that enemy trackers can use spit out gum as easily as expectorated toothpaste drops to track troop movements, but the other stated benefits of the gum are clearly evident. As Meehan suggests, however, not just soldiers can benefit from the gum's properties.

"The gum could also be key in protecting children in impoverished nations from potentially deadly infections, said Abeer Al-Ghananeem, assistant professor of pharmaceutical sciences who took over leading the research last year. For example, she said, children born with AIDs in Africa often have serious and painful dental problems. The gum could enhance their quality of life."

Meehan reports that the work of "Pat DeLuca, a professor in the department of pharmaceutical sciences at UK, who began the research about five years ago," was technically more challenging than one might think. Researchers had to invent a way for the gum to release its active ingredients slowly "over the course of a good chew" rather than "in a burst with the first chomp." They enlisted the help of an automated chewing machine owned by the Army so that they could conduct hundreds of experiments with results that could be precisely measured. What the machine couldn't help them with was the taste of the gum. Meehan continues:

"The taste [of the gum], which is a crisp wintergreen, was determined the more old-fashioned way. [Abeer] Al-Ghananeem, [assistant professor of pharmaceutical sciences who took over leading the research last year,] and her researchers did a fair amount of chewing."

My suspicion is that it won't take long for the major manufacturers of toothpaste to get in a bidding war for rights to produce the gum. The market for such a product could be huge in both the developed and developing worlds. The only place on earth that won't have much of interest in the product is Singapore, where gum chewing is officially outlawed (except for therapeutic purposes -- and even then it's highly discouraged). Meehan indicates that the search is already on for a manufacturer.

"Clinical trials will begin and then the Army will look for a manufacturer to actually produce the gum, Thompson said. Al-Ghananeem envisions that eventually it will be commercially available over-the-counter for use by, perhaps, hikers going on remote treks. It is not designed, she said, to be a long-term replacement for toothbrush and toothpaste. Still, DeLuca said, something as seemingly simple as gum 'can have amazing possibilities.' 'We are looking forward to some sort of global attention to the whole project,' Al-Ghananeem added."

The practicality and widespread applicability of military gum is immediately obvious to even casual observers. Other military-sponsored research projects aren't quite so universally applicable to daily life; but they are nonetheless fascinating. I'll just mention two more research projects being conducting at the University of Utah. The first involves exoskeletons (robots you strap on -- like Iron Man) and the second involves a cloak of invisibility (used by such nefarious characters as the Klingons of Star Trek fame) ["U of U researchers are working to bring cloaking devices and more to the real world," by John Blodgett, Continuum, Summer 2009]. The first also exists and the second remains only a possibility. Blodgett begins with the exoskeleton:Iron Man

"The ... movie Iron Man offers a glimpse of what the Raytheon Company and U of U researchers have in the works—a kind of 'wearable robot' that allows a user to repeatedly lift up to 200 pounds, punch a speed bag, and run up stairs, all without tiring. Raytheon public relations has played up the semblance between the character in Iron Man and the exoskeleton suit. ... Stephen Jacobsen BS’67 MS’70, University of Utah Distinguished Professor of mechanical engineering, who leads the Raytheon Sarcos team in Salt Lake City, has described the exoskeleton not as a product of a 'mad scientist' but rather the result of a 'process of getting together, understanding the problems [and] goals, and then designing something to satisfy the need.' To him, it’s a blend of art, science, engineering, and design. ... Even in still photographs, the exoskeleton looks like it’s in motion; the effect is heightened when Jameson isn’t wearing it. It seems to have jumped right out of CGI (computer-generated imagery) animation. Jameson steps into what appear to be Teva sandals made for lunar exploration and straps on the exoskeleton. The suit looks a bit awkward, but that’s belied by the degree to which it can predict, mimic, and magnify human motion. The suit appears tough and delicate all at once. The present exoskeleton is the third prototype built since the idea was conceived in 2000. It currently is under development for the United States Army as part of a two-year, $10-million contract—the only full exoskeleton the military has moved into the next development stage."

As noted above, the "cloak of invisibility" discussed by Blodgett is a lot further off than the Iron Man suit. He writes:

"Now you see it, now you don’t. Invisibility at will has long been part of the world of superheroes, but now, with the advent of the superlens, the cloak of invisibility is jumping from the pages of comic books to the real world. Graeme Milton, Distinguished Professor of mathematics at the U, is beginning to see his work on cloaking come to light. It might seem unusual for a mathematician to get involved with invisibility, but Milton points out that applied mathematics is, in actuality, a broad discipline that encompasses biology, engineering, physics, and other areas of study. With a background in physics, Milton says it was 'natural' for him to become involved in this kind of work, which he and his colleagues Nicolae Nicorovici and Ross McPhedran, at the University of Sydney in Australia, began in 1994. It’s difficult to state their work in terms other than how Milton describes it. While researching properties of arrays of composite materials that contained coated cylinders, they discovered some fascinating properties: When the shell coating a single cylinder had negative properties, that cylinder would act like a solid cylinder of much larger radius. 'The shell, in effect, acted like a magnifying glass,' explains Milton. 'That’s where our research started, and we should have followed it up further at the time but didn’t realize the importance of the result.' Milton’s interest in the problem rekindled in 2000 when Sir John Pendry, a solid state physics theorist at Imperial College London, obtained a closely related result and found himself awash in the scientific spotlight. He discovered that a slab of material with negative electrical and magnetic properties acted like a lens—not a normal lens but one unimpeded by diffraction. This lens was christened a 'superlens,' and Milton explains one potential application of the discovery. 'The reason microscopes can’t see atoms is because they are limited by diffraction. [The superlens] promises new types of microscopes that might see much more detailed information.' Essentially, Milton’s work in 1994 had identified the first cylindrical superlens."

A quick physics lesson on diffraction. Because light beams travel in waves, they tend to "leak" at the ends, as described by Isaac Azimov [Understanding Physics, Volume II, 1966]. That's the reason that shadows have fuzzy rather than sharp edges. Azimov writes, "This phenomenon of a wave form bending sideways at either end of a wave front is called diffraction, and this is, in fact, easily observed in water waves and sound waves." The amount of diffraction depends on the wavelength of the light. Red has a longer wave length than violet and, therefore, diffracts more. The only reason we see rainbows in the sky is because of diffraction as light travels through water vapor. The breakthrough with the superlens is that it apparently defies the laws of physics because light passing through it is "unimpeded by diffraction." So what does that have to do with invisibility you ask? Blodgett continues:

"Milton was on sabbatical in his native Australia when he came up with the notion of cloaking. It was in response to a comment by Alexei L. Efros, Distinguished Professor of physics at the U, who saw a potential paradox associated with the superlens: If you put a point source near the superlens, the math would suggest that the superlens would absorb an infinite amount of energy; but how could this be possible if the source were providing only a finite amount of energy? Milton and his collaborators found that cloaking was the answer to this paradox. But where previous research posited that the cloaking region lies inside the cloaking device, Milton’s work suggests that it lies outside the device. 'It’s a completely different mechanism for cloaking, one that even sci-fi writers haven’t thought about,' he says. 'And the cloaking device in our case is a superlens' that isolates particles from their surroundings, creating a cancellation effect that makes them appear invisible from the outside."

Although cloaks of invisibility may sound exciting, what is really exciting is the mathematics behind the idea. Blodgett admits that cloaking devices are probably a long way off and other applications of the mathematics even further off. But those other applications could prove to be lifesaving. He concludes:

"The work still has a ways to go before it can be applied to real-world situations, whether to microscopes or something else. Milton even muses about related technology some day, long away, protecting a building from being destroyed in an earthquake. 'There are military [and other] applications that people wonder about,' Milton acknowledges. 'But it’s hard to predict at this stage' what other kinds of uses visionary thinkers might yet devise."

In other posts about innovation, I've remarked that one never really knows how an innovation is going to be used until you put it into peoples' hands. Technologies imagined for use in one sector often find amazing and important uses in other sectors once creative people get a hold of them. Although the military does fund research into weapons systems, they also fund basic research that can help mankind. I suspect, however, that the movies will still find a way to keep those rogue colonels in business turning good science bad.

November 20, 2009

Development and Stability

A recent study completed by the Feinstein International Center at Tufts University seems to cast doubt about the strategy of securing peace by helping people engaged in conflict extricate themselves by developing their economy and gaining a stake in the future ["A ‘weapons system’ based on wishful thinking," by Andrew Wilder, Boston Globe, 16 September 2009]. Wilder is a research director at Tufts and one of the authors of the study. In his op-ed piece, he writes:

"This summer the US government indicated that it plans to nearly double (to $1.2 billion) the main fund military commanders in Afghanistan use to support projects intended to 'win hearts and minds.' ... The underlying assumption is that aid projects, such as building schools, clinics, and roads, will win the hearts and minds of Afghans, give them more faith in their government, and turn them away from the Taliban. The logic sounds reasonable. But the problem is that there is little evidence to support it. Some colleagues and I have spent the last year conducting more than 400 interviews in Afghanistan trying to understand the stabilization benefits of the billions of dollars worth of development aid that have been spent so far in Afghanistan. While many projects have clearly had important humanitarian and development benefits, we have found little evidence that aid projects are 'winning hearts and minds,' reducing conflict and violence, or having other significant counterinsurgency benefits. In fact, our research shows just the opposite. Instead of winning hearts and minds, Afghan perceptions of aid and aid actors are overwhelmingly negative. And instead of contributing to stability, in many cases aid is contributing to conflict and instability. For example, we heard many reports of the Taliban being paid by donor-funded contractors to provide security (or not to create insecurity), especially for their road-building projects. In an ethnically and tribally divided society like Afghanistan, aid can also easily generate jealousy and ill will by inadvertently helping to consolidate the power of some tribes or factions at the expense of others - often pushing rival groups into the arms of the Taliban. In the southern province of Urozgan, an Afghan government official said to me: 'In this area the family and friends of Karzai get everything. All aid in these areas is to make them more powerful. They are corrupt and cruel people, but donors continue to support them.' The most destabilizing effect of aid, however, is its role in fueling massive corruption, which in turn is eroding the legitimacy of the government."

Wilder’s arguments are actually an attack against corruption, not development. Corruption corrodes any program and undermines any development effort. I certainly can’t argue with that; but Wilder seems to be dismissing the strategy completely -- throwing the baby out with bathwater as it were. Fortunately, his arguments don't stop there. He continues:

"Our research suggests that we have failed to win Afghan hearts and minds not because we have spent too little money, but because we have spent too much too quickly, often in insecure environments with extremely limited implementation and oversight capacity."

Wilder appears to arguing that, if implemented correctly, the strategy could work. Unfortunately, he goes on to conclude that "foreign aid should focus on promoting humanitarian and development objectives, where there is evidence of positive impact, rather than on promoting humanitarian and development objectives, where there is not. Without compelling evidence to the contrary, the United States should stop wasting money on a 'weapons system' that seems to be largely based on wishful thinking and the delusion that money can buy Afghan hearts and minds." Wilder's evidence, at least the evidence presented in his short article, doesn't support his argument, however. The evidence he presents highlights the corrosive effects of corruption not the lack of benefits generated when developmental aid is administered properly. He notes that the Taliban point to corruption as an evil that they will eliminate. He writes, "The Taliban exploits this sentiment, and seeks to legitimize its movement by promising better security, quick justice, and a less corrupt government, rather than more roads, schools, and clinics." Yet the reason that Osama bin Laden was welcomed into Afghanistan under the Taliban was because he brought money with him and he used that money to build infrastructure and provide social services. There is evidence within Afghanistan that the strategy of winning hearts and minds through infrastructure development can work if implemented correctly ["Afghan Enclave Seen as Model to Rebuild, and Rebuff Taliban," by Sabrina Tavernise, New York Times, 13 November 2009]. She reports:

"Small grants given directly to villagers have brought about modest but important changes in this corner of Afghanistan, offering a model in a country where official corruption and a Taliban insurgency have frustrated many large-scale development efforts. Since arriving in Afghanistan in 2001, the United States and its Western allies have spent billions of dollars on development projects, but to less effect and popular support than many had hoped for. Much of that money was funneled through the central government, which has been increasingly criticized as incompetent and corrupt. Even more has gone to private contractors hired by the United States who siphon off almost half of every dollar to pay the salaries of expatriate workers and other overhead costs. Not so here in Jurm, a valley in the windswept mountainous province of Badakhshan, in the northeast. People here have taken charge for themselves — using village councils and direct grants as part of an initiative called the National Solidarity Program, introduced by an Afghan ministry in 2003. Before then, this valley had no electricity or clean water, its main crop was poppy and nearly one in 10 women died in childbirth, one of the highest maternal mortality rates in the world. Today, many people have water taps, fields grow wheat and it is no longer considered shameful for a woman to go to a doctor. If there are lessons to be drawn from the still tentative successes here, they are that small projects often work best, that the consent and participation of local people are essential and that even baby steps take years."

As she continues, Tavernise sound likes she is taking direct aim at Wilder's op-ed piece. She writes, "The issues are not academic. Bringing development to Afghans is an important part of a counterinsurgency strategy aimed at drawing people away from the Taliban and building popular support for the Western-backed government by showing that it can make a difference in people’s lives." It makes sense that development aid works best when it directly reaches the people it is intended to help and, as a result, the people feel that they can use it to create a brighter future. Another key point seems to be that the aid should be funneled to communities rather than to individuals. Creating prosperous communities is much more important for stability than creating prosperous individuals. Jurm provides a good example of how development aid can help create stronger and more prosperous communities.

"Jurm was tormented by warlords in the 1990s, and though it never fell to the Taliban, the presence of the central government, even today, is barely felt. The idea to change that was simple: people elected the most trusted villagers, and the government in Kabul, helped by foreign donors, gave them direct grants — money to build things like water systems and girls’ schools for themselves. Local residents contend that the councils work because they take development down to its most basic level, with villagers directing the spending to improve their own lives, cutting out middle men, local and foreign, as well as much of the overhead costs and corruption. 'You don’t steal from yourself,' was how Ataullah, a farmer in Jurm who uses one name, described it."

Wilder pointed out that spending too much, too fast was a bad idea. He was right. Tavernise notes that the grants provided to Jurm "were small, often less than $100,000." She reports that the strategy used with success in Jurm "has already been replicated in thousands of villages across the country." Wherever it has been tried, she reports, there are "anecdotal accounts [that] point to some success." The people in the Jurm valley demonstrated that they were willing to work hard to secure a better future. "When villages in the Jurm Valley wanted running water, for instance, they did much of the work themselves, with help from an engineer. A private contractor with links to a local politician had asked triple the price. (The villagers declined.)" Tavernise is quick to point out that "even such modest steps have not come easily." The path to success was strewn with obstacles. She concludes:

"It took a development group with determined local employees to jump-start the work here. One basic problem was literacy, said Ghulam Dekan, a local worker with the Aga Khan Development Network, the nonprofit group that supports the councils here. Unlike the situation in Iraq, which has a literacy rate of more than 70 percent, fewer than a third of Afghans can read, making the work of the councils painfully slow. Villagers were suspicious of projects, believing that the people in the groups that introduced them were Christian missionaries. 'They didn’t understand the importance of a road,' Mr. Dekan said. Most projects, no matter how simple, took five years. Years of war had smashed Afghan society into rancorous bits, making it difficult to resist efforts by warlords to muscle in on projects. ... Muhamed Azghari, an Aga Khan employee, spent more than a year trying to persuade a mullah to allow a girls’ school. His tactic: sitting lower than the man, a sign of deference, and praising his leadership. He paid for the man to visit other villages to see what other councils had accomplished. ... When it came to women, villagers were adamant. But forcing conditions would have violated a basic principle of the approach: never start a project that is not backed by all members of the community, or it will fail. ... Five years later, the village of Fargamanch has women’s literacy classes and a girls’ high school. Over all, girls’ enrollment in Badakhshan is up by 65 percent since 2004, according to the Ministry of Education. The number of trained midwives has quadrupled. Health has also improved. Now, 3,270 families have taps for clean drinking water near their homes, reducing waterborne diseases. The councils are also a check on corruption. When 200 bags of wheat mysteriously disappeared from the local government this year, council members demanded they be returned. (They were.) When a minister’s aide cashed a check meant for a transformer, Mr. Ataullah spent a week tracking down a copy. (The aide was fired.) ... Televisions have begun to broadcast the outside world into villages. Phone networks cover more than 80 percent of the province, triple what the figure was in 2001. Perhaps most important, Afghans are tired of war, and seeing the benefits of a decade of peace might be enough to encourage new kinds of decisions."

The Dutch have also found success in Afghanistan using this approach. Although Dutch troops have been assigned to more peaceful areas of the country, they "have been focusing more on development work and civilian protection and less focus on fighting" ["Dutch troops' method in Afghanistan gains new prominence," by Mark Magnier, Los Angeles Times, 13 November 2009]. Magnier writes:

"In recent months, since the appointment of U.S. Army Gen. Stanley A. McChrystal as the top commander here, the new mantra for U.S. and NATO forces in Afghanistan has become: more development work, more civilian protection, less overarching focus on fighting. This is nothing new for the Dutch, who are credited with using less of a tough-guy approach here in Oruzgan province. ... The Dutch soldiers came in 2006 to Oruzgan, a strategically important province north of troubled Helmand and Kandahar that is a power base for both Afghan President Hamid Karzai and Taliban leader Mullah Mohammad Omar. The Dutch strategy, hardly rocket science but implemented earlier and more successfully than those of many allies, involved focusing resources on three 'ink spot' population centers -- Deh Rawood, Tarin Kowt and Chora -- then gradually expanding until the spots merge. Dutch planners said they've concentrated on community development nearly as much as military security and have worked to ensure that complex tribal, political and governmental interests had a stake in building schools and other civilian projects. This, they hoped, would encourage residents to protect the structures against Taliban attacks, even if the process required far more time and effort than paying foreign contractors to throw up a showcase project. They also sought to engage moderates and Taliban sympathizers long before the U.S. considered talking to its adversaries, trying to 'turn' borderline radicals and build up community goodwill. ... It's difficult to quantify the progress in Oruzgan since 2006, given a lack of consistent benchmarks, Dutch military officials said. However, they said, the 'ink spots' have expanded; Tarin Kowt, the provincial capital, is safer; there's more commercial activity; and a growing number of civic groups are working in the province. ... Social indicators have also improved, although they're still rather dismal. The province of 360,000 people has seen a fivefold increase in the number doctors since 2001, to 31 from six."

Once again the key to success appears to be engaging the community in an effort to help itself. Despite the fact that 75% of the people in the region supported by the Dutch now live in protected areas, the Dutch approach has its critics. Locals fear that the situation will deteriorate as soon as the Dutch leave. Magnier continues:

"Better security may be more a function of the Taliban's desire for a haven near Helmand and Kandahar provinces than a result of Dutch success, others said. Insurgents recently blocked the main Tarin Kowt-Kandahar city highway for 10 days, tripling food prices, hardly a sign that they're in flight, the others said. 'You don't control anything if you don't control the road,' said Arnold Karskens, a Brussels-based correspondent with the Dutch newspaper De Pers, who has reported extensively in Oruzgan. The Dutch, who have lost 21 soldiers in Afghanistan, have also been criticized for staying in their camps too much, leaving U.S. and Australian troops to handle the heavy fighting. 'The others get dirty hands, allowing the Dutch to play the good guys,' Karskens said."

I have argued for some time that security and development go hand-in-hand. You will never have sustained development in a insecure environment; and, lack of development can exacerbate instability. If there is a legitimate beef with the Dutch approach, it is that they have either not appreciated how closely security and development are linked or are simply willing to leave security to others. If there is a thread that weaves its way through all of these stories, it is that aid implemented badly can do as much harm as good. Aid should not be considered dole. It should be used as a tool by the people not as an excuse not to work. The best way to do that, argues Glenn Hubbard, dean of Columbia Business School and a former chairman of the White House Council of Economic Advisers, is to use aid to support local businesses ["Bypassing the aid trap in Pakistan," Washington Post, 13 November 2009]. What prompted Hubbard to write an op-ed piece was a "recently approved $7.5 billion in aid to Pakistan for social and economic development." Hubbard writes:

"The bill itself should raise questions. After all, does Pakistan, or the U.S. Agency for International Development, or any other agency that will implement the aid actually know how to successfully spend these funds? In other parts of the world, especially Africa, foreign aid has been a spectacular failure in promoting social and economic development. This bill promises more of the same."

Hubbard, like Wilder, has seen the evidence of the damage aid can do if implementation strategies are flawed. So what does Hubbard recommend? He continues:

"There is ... an example of effective large-scale aid on which to draw: the Marshall Plan of postwar Europe, which is still recognized as the most successful aid program in history. The essence of the Marshall Plan was loans to local businesses, which paid them back to their local governments, which used the money for commercial infrastructure to help those same businesses. The result was economic growth, employment and a stable middle class that opposed the popular communist parties across Europe. With creative adaptation, the same basic model can work in Pakistan. ... All of the world's prosperous countries became rich through the growth of a domestic business sector. India and China are the most recent examples of this. A thriving local business sector is the only known path to prosperity and stability."

Those who have followed this blog know that is exactly the philosophy behind Enterra Solutions' Development-in-a-Box™. A sustainable economy requires a vibrant middle class and a vibrant middle class only emerges when local businesses create good jobs. Hubbard concludes:

"The World Bank's Doing Business index ranks countries by how easy it is for citizens to start and run businesses. Among the 183 nations ranked, most of sub-Saharan Africa falls in the bottom half. Pakistan, at No. 85, is less anti-business than most poor countries, so a Marshall Plan there has a reasonable chance of success. Right now, nothing in the package suggests that this $7.5 billion will do any better than previous development aid, largely because government and NGO aid projects make it harder for prosperity to take root. Aid projects hire qualified staff away from local businesses. For example, they deliver fertilizer to farmers instead of a local business doing it. And they remove incentive for Pakistan to make reforms that foster business development. After all, why make it easier for business when government and NGO projects give out so much money? But a Marshall Plan would help Pakistan's efforts to encourage its local business sector. ... This is a major shift from tradition, in which the government Planning Commission was solely in charge of economic policy. Foreign aid should work with this new effort rather than at cross-purposes with it. Former secretary of state George Marshall famously suggested fighting the spread of communism in Europe through local business. That strategy could contribute to the battle against Islamic extremism. The current aid package should become a Pakistan Marshall Plan -- before it's too late."

Afghanistan and Pakistan are not the only countries where a new development approach is required. Aid programs should be aimed first at fostering the local business sector so that jobs can be created. Where governments remain corrupt, work-arounds must be found. Experiences in Afghanistan indicate that working with local councils is a better approach anyway. Communal groups that have full knowledge about available funding won't allow corrupt politicians to steal from the community because they know it would be robbing their future. Developed nations, who have been supplying billions of dollars in ineffectual aid, are growing both weary and impatient. That's unfortunate because any new approach will require patience. Nevertheless, a new approach is worth trying.

November 19, 2009

The Forests and the Trees

The seemingly endless debates about global warming normally focus on how human activity releases harmful greenhouse gases into the atmosphere. The activities that most people think about include the gases emitted by: combustion-engine powered vehicles (like cars, trucks, aircraft, ships, and trains); coal-fired power plants that generate electricity for homes and businesses; and, agriculture (where cows belch methane in enormous amounts). New York Times' columnist Thomas Friedman reminds us, however, that there is another devastating activity taking place that doesn't get nearly the attention it deserves -- deforestation ["Trucks, Trains and Trees," 11 November 2009]. He writes:

"No matter how many times you hear them, there are some statistics that just bowl you over. The one that always stuns me is this: Imagine if you took all the cars, trucks, planes, trains and ships in the world and added up their exhaust every year. The amount of carbon dioxide, or CO2, all those cars, trucks, planes, trains and ships collectively emit into the atmosphere is actually less than the carbon emissions every year that result from the chopping down and clearing of tropical forests in places like Brazil, Indonesia and the Congo. We are now losing a tropical forest the size of New York State every year, and the carbon that releases into the atmosphere now accounts for roughly 17 percent of all global emissions contributing to climate change. It is going to be a long time before we transform the world’s transportation fleet so it is emission-free. But right now — like tomorrow — we could eliminate 17 percent of all global emissions if we could halt the cutting and burning of tropical forests. But to do that requires putting in place a whole new system of economic development — one that makes it more profitable for the poorer, forest-rich nations to preserve and manage their trees rather than to chop them down to make furniture or plant soybeans."

Unfortunately, "a whole new system of economic development" can't be put in place "like tomorrow." That doesn't mean we shouldn't start doing something today. Friedman continues:

"Without a new system for economic development in the timber-rich tropics, you can kiss the rainforests goodbye. The old model of economic growth will devour them. The only Amazon your grandchildren will ever relate to is the one that ends in dot-com and sells books."

Reporting from Brazil, Friedman writes about flying over the vast tropical Amazon rainforest, which he calls "one of the lungs of the world." In discussions with local citizens and politicians, he comes to the realization that "to save an ecosystem of nature, you need an ecosystem of markets and governance." He continues:

"'You need a new model of economic development — one that is based on raising people’s standards of living by maintaining their natural capital, not just by converting that natural capital to ranching or industrial farming or logging,' said José María Silva, vice president for South America of Conservation International. Right now people protecting the rainforest are paid a pittance — compared with those who strip it — even though we now know that the rainforest provides everything from keeping CO2 out of the atmosphere to maintaining the flow of freshwater into rivers. The good news is that Brazil has put in place all the elements of a system to compensate its forest-dwellers for maintaining the forests. Brazil has already set aside 43 percent of the Amazon rainforest for conservation and for indigenous peoples. Another 19 percent of the Amazon, though, has already been deforested by farmers and ranchers. So the big question is what will happen to the other 38 percent. The more we get the Brazilian system to work, the more of that 38 percent will be preserved and the less carbon reductions the whole world would have to make. But it takes money."

As Friedman points out, the world's rainforests provide a common good, like the atmosphere and the oceans. But just as it is with air and water, countries are reluctant to pay for their use and protection. In the United States, for example, conservatives not only deny that global warming is occurring they are actively fighting measures to reduce greenhouse gas emissions ["Rightwing activists fly in face of efforts to cut CO2 emissions," Financial Times, 4 November 2009] Supported by big energy and oil companies, groups like Americans for Prosperity claim they are protecting freedoms by opposing efforts to curb environmental degradation. According to the article, "the group says the Democrats’ carbon-curbing plans mean lost jobs, less freedom and higher taxes." Apparently the group is so sure of itself that it doesn't let people know what the consequences are for their children and grandchildren if they're wrong. I firmly believe that sensible people can develop a way to protect the environment, create jobs, and promote economic growth. Flying hot air balloons over South Carolina simply adds to the problem. As Friedman concludes:

"That is why we need to make sure that whatever energy-climate bill comes out of the U.S. Congress, and whatever framework comes out of the Copenhagen conference next month, they include provisions for financing rainforest conservation systems like those in Brazil. The last 38 percent of the Amazon is still up for grabs. It is there for us to save. Your grandchildren will thank you"

Brendan Borrell laments the fact that we seem to have lost interest in protecting the rainforests ["Amazon? Still not out of the woods, Washington Post, 10 November 2009]. He writes:

"Using the Nexis news database, [analysts] found 993 articles about the Amazon forest in U.S. newspapers from 1990. In 1995, that number dipped by more than one-third, even as deforestation rates spiked higher than they'd ever been. Today, about one-fifth of Brazil's remaining forests are officially protected, but huge swaths of land in such states as Mato Grosso have been taken over by cattle plantations and soy. Brazilian laws require Amazonian landowners to maintain 80 percent forest cover, but the law is rarely enforced. Even now, Brazil continues to encourage landless peasants to flock to the Amazon, and it has yet to give up on the dream of a transoceanic highway. The good news is that interest in the Amazon has begun to take off again. That's mainly because of the role that forests play in staving off climate change: Scientists estimate that the Amazon itself has between 85 billion and 100 billion tons of CO 2 stored in its trees and shrubs, or about 11 years' worth of U.S. carbon emissions. The dangers aren't limited to Brazil, of course -- deforestation rates in Asia and parts of Africa now rival those seen in the Americas. In 2009, Guinness World Records named Indonesia the country with the most rapidly disappearing forests -- it's losing about 2 percent per year -- although Brazil remains the leader in acreage lost annually."

Borrell reports that "many environmentalists now pin their hopes on a U.N.-sponsored plan to use carbon credits as a means of reducing deforestation in developing nations. The REDD scheme (the name stands for Reducing Emissions from Deforestation in Developing nations) will be on the table at the climate negotiations in Copenhagen." Other environmentalists, however, while in favor of saving the rainforests, don't believe that letting industries in developed nations off the hook for their greenhouse gas emissions by allowing them to buy carbon credits for saving rainforests will do enough. They base their conclusions on a decade-long experiment in Bolivia ["Use of Forests as Carbon Offsets Fails to Impress In First Big Trial," by Juliet Eilperin, Washington Post, 15 October 2009]. Eilperin reports:

"More than a decade ago in the northeast corner of Bolivia, a group of polluters and environmentalists joined forces in the first large-scale experiment to curb climate change with a strategy that promised to suit their competing interests: compensating for greenhouse gas emissions by preserving forests. The coalition of U.S. utility companies, two nonprofit groups and the Bolivian government had the common goal of making a dent in the worldwide deforestation. ... The outcome of that experiment is fueling debate over a key element in international climate strategy. While the Noel Kempff Mercado Climate Action Project has succeeded in keeping a biologically rich preserve of more than 6,000 square miles free from logging, it has fallen far short of its goal of reducing emissions. The mix of pragmatism and idealism -- providing powerful financial incentives to encourage influential companies and poor countries to work together to slow global warming -- shows the complexity of a much-heralded approach that Democratic lawmakers and international negotiators are trying to write into law. Preventing the clearing and burning of tropical forests, which help absorb carbon dioxide and provide habitat to an array of species, has become a critical objective for environmentalists."

So what went wrong with the Bolivian experiment that is raising concerns? The short answer is that nothing went wrong, it simply didn't live up to expectations. Eilperin continues:

"[A recent Greenpeace report] questions the premise of using forest conservation overseas to compensate for U.S. pollution, noting that Noel Kempff envisioned keeping 55 million metric tons of carbon dioxide from entering the atmosphere over 30 years but has lowered that expectation to 5.8 million. The revised estimates do not take into account that logging may have moved to areas to the north, east and southwest of the project. And the report notes that the project's three corporate underwriters -- American Electric Power, BP America and PacifiCorp -- overestimated how much carbon the project kept from entering the atmosphere, telling the EPA it accounted for 7.4 million metric tons from 1997 to 2004."

Hardcore environmental groups like Greenpeace would like to see coal-fired power plants shut down. That simply isn't go to happen anytime soon (if ever). So the big debate is whether a global fund should be established to save the rainforests or whether the marketplace should be relied upon to save them through carbon credits. As the above debate clearly highlights, there are no clear answers. The only wrong answer is doing nothing. Eilperin continues:

"Several forestry experts said the world has learned from the Noel Kempff project and has incorporated lessons from it in the policies that U.S. lawmakers and international negotiators are now shaping. The sharp cut in verified emissions reductions came from satellite technology and better computer models that adjusted the baseline for what would have happened if the project had not been conducted. Toby Janson Smith, who directs Conservation International's forest carbon markets program, said two new global standards -- one measuring a project's carbon storage and another its social and environmental benefits -- have built 'great confidence in the market' in the last couple of years. And Sarene Marshall, deputy director of the Nature Conservancy's climate team, said any binding climate regime would allow emitters to use verified offsets only after the fact, rather than projected estimates. 'We can definitely measure with a high degree of scientific accuracy, and this can be verified by a third party, what would have been the emissions from forests that were targeted for destruction,' she said."

One would hope that even the most conservative ideologue would recognize the global benefits of saving rainforests. Even if the rainforests are protected from further destruction, we need to continue efforts to develop in a greener way. If you want to learn more about REDD, read "Last gasp for the forest" [The Economist, 26 September 2009]. REDD proponents tout its simplicity as its main selling point. The Economist notes that changing the world's energy consumption habits and implementing greener technologies are complex and controversial. "Paying people to not chop down trees looks easy by comparison. It does not depend on any elaborate or costly new technology and is likely to be able to garner the required political support." The article concludes:

"Doing nothing, in short, would be more dangerous than giving REDD a try. Kevin Conrad, Papua New Guinea’s climate ambassador, says financial systems must begin to take account of environmental values 'if our economies are to survive'. Given that the basic principle of REDD is to establish a financial link between those who will benefit from preserving forests and those who must ensure the forests’ survival, it is an economically sound idea. The question is whether the world has the determination to create a system that will work. Some, like the UN’s Mr Steiner, say that it isn’t rocket science. Others, though, wish it were that simple."

The answers to global warming are not simple. Nor are they cheap. In the long run, that is why groups like Americans for Prosperity can draw supporters. They would like to go on abusing the commons and let future generations pay the bill for our excesses. We owe our posterity better than that. This generation has a stewardship it needs to fulfill. If a new economic system can be developed that will raise the quality of life in both the developed and developing worlds and, at the same time, saves the environment for future generations, we will all be better off for it. It won't happen tomorrow, but we can start looking for answers today.

November 18, 2009

Education and Employment

Just over a year ago, while President Obama was running for office, he gave a major economic speech in Toledo, Ohio, during which he declared: "Today I’m proposing a number of steps that we should take immediately to stabilize our financial system, provide relief to families and communities and help struggling homeowners. It’s a plan that begins with one word that’s on everybody’s mind, and it’s easy to spell: J-O-B-S." Fast forward to today and one can only be disappointed that an effective job creation strategy has yet to emerge. As New York Times op-ed columnist Charles M. Blow writes, "Job creation has dropped from top priority to one of many, and President Obama has been remanded to pandering for patience and offering excuses. On the one hand, he argues the tortured rationale that there is good news in the awful numbers: Things are still getting worse but at a slower pace. On the other, he incessantly reminds us that he inherited the crisis. The implication: Don’t blame me, blame Bush. But this president can’t keep deflecting to the last one. Pain is presently felt. The crisis that took form on Bush’s watch is being experienced on Obama’s. Fair or not, finger-pointing is not effective policy." ["Obama’s to Fix," 6 November 2009]. Candidate Obama had the solution correct, but he has yet to produce the strategy that can achieve it. As Blow puts it, "It isn’t President Obama’s fault that he inherited this mess, but it is his to fix, and he must make haste. To paraphrase his Toledo prelection: you need to do it not five years from now, not next year, you need to do it right now. J-O-B-S."

The unemployed and underemployed in America don't feel that the U.S. is on the verge of recovery. As one headline declared, "Of all the signs of recovery being seen, 'help wanted' is not one of them." The graphic that accompanied Blow's op-ed column reveals the devastating reality of the current crisis.

Jobs

Amid this awful news, "the White House is touting reports from recipients of stimulus funds asserting that they have created or saved 640,000 jobs so far." ["Why won't Obama give you a job?" by Alec MacGillis, Washington Post, 8 November 2009]. But those numbers have been questioned. MacGillis' article is about getting people to work by "subsidizing workers' private-sector employment or by creating new government-paid jobs." I agree with the White House that those approaches may not produce long-term value and, once started, such programs are difficult to end. Germany, however, has used some of those strategies to keep unemployment in check with some success. MacGillis insists that some of the recommendations for creating immediate job opportunities could translate into long-term benefits. He writes:

"There is plenty of direct job creation that could be done, short of heavy infrastructure, that could have lasting value. The liberal Economic Policy Institute has drafted a plan that, along with a new business tax credit for hiring that the White House is already considering, includes a pure public jobs proposal: giving money to states and cities to hire people to paint schools, board up vacant homes, staff child-care centers and reopen library branches. Workers would be paid the market wage. It would cost $35 billion for a year, not much more than the combined price tag for the homebuyers' tax credit and the $250 checks that Obama has proposed sending to Social Security recipients. [Economics professor Robert] Lerman offers a variation: Pay people lower-than-market wages, maybe $8 an hour, and reserve the jobs for those who really can't find better work. Instead of extending unemployment benefits over and over, the government would help people develop job skills and would get something in return. He estimates the cost of 1 million jobs (including supervisors) at $30 million, or about $30,000 for each job created, compared with the $92,000 per job that the White House estimates its approach is costing. And taxpayers would be able to see clearly that the spending was putting people to work -- instead of questioning, as many are now doing, the reliability of the job totals that the White House is attributing to the stimulus."

Even though the President has been criticized for "pandering for patience," I fear he is right. America's long-term economic health depends on the creation of substantive jobs that provide career opportunities for U.S. workers for the next generation of workers. Creating such jobs is going to take a few years and will require a change of strategy beginning with how we educate and train the work force. Professor Lerman's recommendation for creating job opportunities may be a start, but we have to start immediately educating the next tranche of workers -- beginning with those just getting started with their education. The proof that our education system needs to change can be found in today's job market. There are jobs begging to be filled right now; but available workers don't have the skills to fill them. That has to change. The current recession has exposed the U.S. education system and many of its work force to the sad truth that they are not up to meeting the challenges of the future. As New York Times' op-ed columnist Thomas Friedman puts it, they have been "swimming without a suit." ["Swimming without a Suit," 22 April 2009]. Friedman writes:

"Warren Buffett once famously quipped that 'only when the tide goes out do you find out who is not wearing a bathing suit.' So true. But what’s really unnerving is that America appears to be one of those countries that has been swimming buck naked — in more ways than one. ... In our case, the excess consumer demand and jobs created by our credit and housing bubbles have masked not only our weaknesses in manufacturing and other economic fundamentals, but something worse: how far we have fallen behind in K-12 education and how much it is now costing us."

Friedman points out that in the 1950s and 1960s, when America was becoming the world's economic engine, "the U.S. dominated the world in K-12 education." Since then, the U.S. has not only slipped a rung or two on the educational ladder, it has fallen dramatically. As Friedman puts it, "Today, we have fallen behind in both per capita high school graduates and their quality. Consequences to follow." Part of the slow U.S. job recovery picture can be directly attributed to its past demise in educational quality. You don't recover from that quickly. This gloomy picture of U.S. education is not simply Friedman's personal opinion. It's based on a study entitled The Economic Impact of the Achievement Gap in America’s Schools completed by the McKinsey consulting group. Friedman continues:

"In the 2006 Program for International Student Assessment that measured the applied learning and problem-solving skills of 15-year-olds in 30 industrialized countries, the U.S. ranked 25th out of the 30 in math and 24th in science. That put our average youth on par with those from Portugal and the Slovak Republic, 'rather than with students in countries that are more relevant competitors for service-sector and high-value jobs, like Canada, the Netherlands, Korea, and Australia,' McKinsey noted. Actually, our fourth-graders compare well on such global tests with, say, Singapore. But our high school kids really lag, which means that 'the longer American children are in school, the worse they perform compared to their international peers,' said McKinsey. There are millions of kids who are in modern suburban schools 'who don’t realize how far behind they are,' said Matt Miller, one of the authors. 'They are being prepared for $12-an-hour jobs — not $40 to $50 an hour.'"

In a nutshell, that is the conundrum facing the President and the reason that job creation is such a difficult thing to achieve. The situation is not hopeless. Friedman continues:

"It is not that we are failing across the board. There are huge numbers of exciting education innovations in America today — from new modes of teacher compensation to charter schools to school districts scattered around the country that are showing real improvements based on better methods, better principals and higher standards. The problem is that they are too scattered — leaving all kinds of achievement gaps between whites, African-Americans, Latinos and different income levels. ... There are some hopeful signs. President Obama recognizes that we urgently need to invest the money and energy to take those schools and best practices that are working from islands of excellence to a new national norm. But we need to do it with the sense of urgency and follow-through that the economic and moral stakes demand."

Not keeping its educational system relevant cost the U.S. dearly in the past and will continue to cost it in the future if the situation is not corrected.

"If America had closed the international achievement gap between 1983 and 1998 and had raised its performance to the level of such nations as Finland and South Korea, United States G.D.P. in 2008 would have been between $1.3 trillion and $2.3 trillion higher. If we had closed the racial achievement gap and black and Latino student performance had caught up with that of white students by 1998, G.D.P. in 2008 would have been between $310 billion and $525 billion higher. If the gap between low-income students and the rest had been narrowed, G.D.P. in 2008 would have been $400 billion to $670 billion higher."

In addition, all of those good paying jobs that currently unfilled because there are no skilled workers to fill them would be providing livable incomes for someone and the unemployment rate would be slightly lower. Friedman's New York Times' colleague, Bob Herbert, agrees with Friedman's assessment of America's educational system ["Peering at the Future," 29 September 2009]. He writes:

"Visiting classrooms is like peering into the nation’s future. Right now the view is somewhat frightening. American kids drop out of high school at an average of one every 26 seconds. Only about a third of those who graduate are prepared to move on to a four-year college. And in the savage economic downturn that has gripped the U.S. for the better part of the past two years, retrenchment in public schools and colleges is widespread. For a country that once led the world in educating its citizens, we are now moving decidedly in the wrong direction."

Herbert's column focused on the work being done by the Bill and Melinda Foundation in the area of education. He continues:

"The Gateses are co-chairs of the Bill and Melinda Gates Foundation, the world’s largest philanthropic organization. They are investing billions of dollars and much of their considerable energy in an effort to spark not just change but a transformation in the way American youngsters are educated. It’s an overwhelming challenge, and not all of their early efforts have borne fruit. Educating children in the U.S. means engaging issues like poverty and homelessness, racial and ethnic transformations and entrenched, outdated ways of doing things. But the Gateses seem determined to master this issue and do what they can to help reverse the current dismal trends. ... The issues can be maddeningly complex. There are school districts in which much of the population is aging and predominantly white and the taxpayers are less than enthusiastic about supporting a school population that is largely poor and black or Hispanic. There are schools trying desperately to raise their test scores, an important measure of accountability, while at the same time trying to keep poor and struggling youngsters from dropping out — the very youngsters who are often a drag on overall test scores. But the many challenges will have to be met and overcome if the U.S. is to maintain a successful society. The American work force is becoming increasingly black and Hispanic, and a two-year or four-year college credential has become a prerequisite to a middle-class standard of living. With that in mind, it’s not difficult to see how disastrous it is to have nearly 50 percent of minority kids dropping out of school before they even get a high school diploma."

In a follow-up column to his earlier one, Friedman writes that there is some truth to the assertion that "our struggling public schools — was actually a critical, but unspoken, reason for the Great Recession." ["The New Untouchables," 21 October 2009] The assertion was made to Friedman by Todd Martin, a former global executive with PepsiCo and Kraft Europe and now an international investor. Of that encounter, Friedman reports:

"Now that we are picking up the pieces, we need to understand that it is not only our financial system that needs a reboot and an upgrade, but also our public school system. Otherwise, the jobless recovery won’t be just a passing phase, but our future. 'Our education failure is the largest contributing factor to the decline of the American worker’s global competitiveness, particularly at the middle and bottom ranges,' argued Martin. ... 'This loss of competitiveness has weakened the American worker’s production of wealth, precisely when technology brought global competition much closer to home. So over a decade, American workers have maintained their standard of living by borrowing and overconsuming vis-à-vis their real income. When the Great Recession wiped out all the credit and asset bubbles that made that overconsumption possible, it left too many American workers not only deeper in debt than ever, but out of a job and lacking the skills to compete globally.' This problem will be reversed only when the decline in worker competitiveness reverses — when we create enough new jobs and educated workers that are worth, say, $40-an-hour compared with the global alternatives. If we don’t, there’s no telling how 'jobless' this recovery will be."

It takes nearly 20 years to create an educated individual with the skills necessary to compete in the information age. It might be pandering to patience to argue that good jobs are not right around the corner, but it's also painting a more realistic picture. Friedman concludes:

"Those who are waiting for this recession to end so someone can again hand them work could have a long wait. Those with the imagination to make themselves untouchables — to invent smarter ways to do old jobs, energy-saving ways to provide new services, new ways to attract old customers or new ways to combine existing technologies — will thrive. Therefore, we not only need a higher percentage of our kids graduating from high school and college — more education — but we need more of them with the right education. As the Harvard University labor expert Lawrence Katz explains it: 'If you think about the labor market today, the top half of the college market, those with the high-end analytical and problem-solving skills who can compete on the world market or game the financial system or deal with new government regulations, have done great. But the bottom half of the top, those engineers and programmers working on more routine tasks and not actively engaged in developing new ideas or recombining existing technologies or thinking about what new customers want, have done poorly. They’ve been much more exposed to global competitors that make them easily substitutable.' Those at the high end of the bottom half — high school grads in construction or manufacturing — have been clobbered by global competition and immigration, added Katz. ... Just being an average accountant, lawyer, contractor or assembly-line worker is not the ticket it used to be. As Daniel Pink, the author of 'A Whole New Mind,' puts it: In a world in which more and more average work can be done by a computer, robot or talented foreigner faster, cheaper 'and just as well,' vanilla doesn’t cut it anymore. It’s all about what chocolate sauce, whipped cream and cherry you can put on top. So our schools have a doubly hard task now — not just improving reading, writing and arithmetic but entrepreneurship, innovation and creativity. Bottom line: We’re not going back to the good old days without fixing our schools as well as our banks."

I couldn't agree more. If you want a resilient society, you need to stress entrepreneurship, innovation, and creativity. That is why the pages of this blog are filled with articles on those subjects. Education plays an enormous role in preparing individuals to think clearly and critically. Education exposes tomorrow's entrepreneurs to possibilities. Entrepreneurs, in turn, create jobs and creative people keep theirs. In a country struggling to create jobs, those in power need to understand that the education system needs to be fixed in order to ensure a better long-term future for America.

November 17, 2009

Profiting From Following the Rules

When I first started Enterra Solutions, I thought the business would primarily focus on helping companies comply with a growing number of regulations by automating business processes associated with compliance. By helping make them more effective and efficient, I knew that I could provide them with a competitive edge in a highly competitive world. Enterra remains engaged in that business sector even as it expands into the nation-state development sector and more recently the renewable and alternative energy sector. Although that may sound like a diffuse set of business areas, there is an underlying synergy that keeps them connected. Development requires businesses that are both effective and efficient (i.e., compliant with national and international regulations) and reliable electrical power supplies. Enterra is better placed to help nation-states with their development strategies than some other companies because it can help them establish world-class businesses and build state-of-the-art energy grids based on environmentally-friendly technologies.

In the past, I've written a lot about development and renewable & alternative energy. In this post, I'd like to address the subject of compliance. According to Stephen Pritchard, "businesses are starting to see the opportunities that come along with following the rules" ["Compliance tools can also deliver financial benefits," Financial Times, 2 November 2009]. He writes:

"Given the turmoil that has engulfed the financial and business world since the collapse of Lehman Brothers, it is hardly surprising that dealing with risk has moved swiftly up the enterprise agenda. This new emphasis on managing risk, as well as regulatory compliance, is shaping the IT agenda, and not just in financial services. Last December, Forrester Research, the IT analyst firm, predicted that governance, risk and compliance (GRC) would be one of the priorities for business leaders in 2009. But tighter regulations in the financial arena are only part of the story. As Forrester’s Chris McClean points out, there is a wider issue of how businesses, and their employees, behave. Risk management goes beyond meeting the demands of financial regulations, and extends into areas such as environmental compliance, supply chain integrity, the traceability and authenticity of goods and even whether staff are keeping to their employers’ ethical codes."

In the past, the best that companies could do in the compliance arena was to throw more money and people into the division that dealt with compliance or outsource the challenge to an accounting firm. All of this added to overhead, reduced profits, and increased the complexity of doing business. But the collapse of companies such as Enron and Lehman Brothers (helped along, in some cases, by people in the companies that performed their audits) made investors wary and the general public suspicious of large corporations and the promises they make in their prospectuses and advertising. The compliance challenge Pritchard is writing about was the same challenge that motivated me to start Enterra Solutions. Pritchard too believes that IT processes can help meet that challenge. He continues:

"The challenge for IT departments is to support the business’s broader compliance needs, rather than simply designing or deploying point solutions. Businesses have tended to view each regulation and compliance requirement as an isolated project, rather than developing an overall approach to GRC. This was, at least in part, a reaction to the previous round of financial scandals at the end of the dotcom boom, and the legislation, such as the Sarbanes-Oxley Act, that followed."

The problem with treating each compliance requirement as a separate challenge is that it compounds the complexity of doing business and leads to gross inefficiencies. As compliance requirements grow, so do the inefficiencies. Eventually, those inefficiencies create an overhead burden that is simply too large to bear.

"'The first wave [of regulation and compliance technology] was a sticking plaster,' says Seamus Reilly, a specialist in enterprise risk in the technology and security risk services practice at Ernst & Young. 'It was very ineffective but it was a reaction to timescales. But we are now seeing organisations look for programmes that deliver efficient and effective compliance, but also deliver benefits such as providing more insights into their customers.' One way organisations can do this is by combining data sources or by creating data marts that provide a 'single version of the truth' for regulation and compliance purposes. This provides more accurate data, quicker decision making and, ideally, better customer service. Someone buying a service from a bank, for example, should not have to provide the same paperwork several times over."

In a sidebar, Pritchard talks about how Barclays "wanted to move to a best-in-class sanctions screening system, based on the latest algorithms" and it also wanted "to create a centralised system." Barclay's changes make sense. IT systems should make it simple for bank employees to access necessary data bases when opening new accounts and the process should be fast enough so that customers don't even realize that other activities are underway while they are providing essential information. Barclay's system has one other critical feature -- flexibility. According to Pritchard, the system allows the bank "to integrate new rules, or sanctions lists." That's critical since, as one bank executive put it, "Regulations are coming in at a frequent pace. You have to have technology that is not just flexible, but copes with changes in the regulatory framework." Systems designed by Enterra are inherently flexible. Customers, management and employees are all better served when a system operates quickly, efficiently, and automatically. Investors are also happier because such systems can save money, especially if it centralized so that costs can be shared among a number of firms but privileged information can nevertheless be protected. Pritchard continues:

"Businesses are also operating in an environment where public scrutiny is the norm, suggests Douglas Stewart, a senior manager in risk services at Deloitte, the professional services firm. Increasingly, public companies are being asked to publish information such as statutory filings in near real time. Regulators are encouraging more openness, Mr Stewart suggests, and businesses will have to respond with more efficient systems for releasing information on compliance. But organisations are also looking to technology to improve the effectiveness of internal controls and, in particular, audit and regulatory compliance functions. 'Risk and compliance teams are using data analytics tools to predict trends and spot outliers,' he says. 'That allows regulation work to be more focused. You can’t replace people with technology, but you can use the technology to target your resources.' The use of business analytics in compliance is a move away from the conventional, sampling-based approach to audits."

The challenges that Pritchard is discussing all beg for automation. When processes are automated, they are less prone to human errors (or manipulation). It is much easier for regulators to certify that a particular automated process will generate accurate and honest audits than it is for them to certify that a certain firm can do so. As business leaders know all too well, it only takes one bad employee to ruin a reputation.

"At present, though, only a small number of organisations have moved beyond localised compliance systems – which are largely process-based – to ones that can identify trends and patterns in masses of data. One reason, according to Donie Lochan, a partner in the Sydney office of Bain & Co, the management consultants, is that IT maturity and complexity is holding them back. 'Technology is enormously useful,' he says. 'Without it, it’s nearly impossible to do the kind of regulation and compliance you need in financial services.' But complexity has become a bottleneck to better compliance, he suggests. Too great a proportion of IT resources – as much as 80 per cent of budgets – is being taken up by managing and maintaining existing IT infrastructure. If the business needs extensive IT support to improve compliance, the resources might not be available. 'This is something most companies know about, but something always trumps it. It is viewed as something we need to tackle, but not right now,' says Mr Lochan."

All of Pritchard's points are correct. If there had been anything like the automated business rules for compliance that I envisioned already in place, I wouldn't have started Enterra Solutions. I didn't see anything then and technologies are only being invented that permit automated compliance algorithms to be written now. It's an interesting and difficult challenge, but one that Enterra is tackling with forward thinking companies like Conair. Pritchard continues his article by noting some of the ways that compliance software can actually become a competitive advantage and not just more overhead.

"One answer could be to use compliance systems as a vehicle for a wider-reaching update of IT systems, and to find ways to bring a direct return on investment to the business. In financial services, initiatives such as 'Know Your Customer' force banks and other deposit takers to have a much more joined-up picture of their account holders, and if nothing else this provides a strong marketing opportunity. 'If you look at it more strategically, organisations [undertaking compliance work] will have a rich set of data that is valuable to the business. So the question is how to get more business value out of it,' says Mr Lochan. Compliance tools can also play a wider role in corporate governance, with technology playing a greater role in spotting unusual behaviour. The sheer volume of transactional data in most businesses is now too great to be sifted by people, whether identifying a client applying for a mortgage they cannot afford, or a member of staff making unusual payments or filing suspicious expenses claims. The third wave of compliance is to apply data analytics to these problems, suggests Ernst & Young’s Mr Reilly. 'We can’t yet find the smoking gun,' he says, 'but we can bring some insight.'"

A truly comprehensive automated system might be able to provide the smoking gun, automatically alert management before threats turn into disasters, and allow CEOs, COOs, and CFOs sleep more easily at night. The work we are doing with Conair is helping the bottom line in another way. All manufacturers are faced with a growing array of requirements established by retailers such as Walmart. If they fail to meet those requirements they are subject to significant penalties that can erode profits. The process we are working on with Conair will automatically focus people on problems that could trigger compliance penalties in time for them to do something about it. The savings for large manufacturers could amount to millions of dollars annually. As technology improves, the range of conditions under which automated business processes will prove useful, especially those that are centrally managed and can provide cost savings, will only grow. Companies that implement later rather than sooner will ultimately find themselves behind the power curve and chasing their more enlightened competition.