Enterprise Resilience Management Blog

Dealing with Failed States

Regular readers of this blog are familiar with Enterra Solutions' Development-in-a-Box™ approach for helping emerging market countries achieve sustainable development. It will come as no surprise, then, that a book review in The Economist entitled "Nation-building for dummies" caught my eye [28 June 2008 print edition]. The book being reviewed was written by Ashraf Ghani and Clare Lockhart [Fixing Failed States: A Framework for Rebuilding a Fractured World (Oxford University Press, 2008)]. The review begins by naming a few countries that could be classified as "failed or failing states," namely, Afghanistan, Iraq and Somalia.

"Although there are many differences between them, these nations also have certain characteristics in common. At any one time, these can include political and economic instability, poverty, civil disorder, terrorism, human trafficking, ethnic conflict, disease and genocide."

The review also provides a quick overview of the authors' expertise about the subject at hand.

"Ashraf Ghani and Clare Lockhart have worked in many of these countries. In 2005 they founded the Institute for State Effectiveness in Washington, DC, to help advise countries that are trying to make the leap from failed to functioning state. Before that, Mr Ghani was finance minister in the first post-Taliban government in Afghanistan."

What intrigued me most about the book and The Economist's review of it was the idea that it presents a "framework" for dealing with failed or failing states. Since Development-in-a-Box also provides a framework for dealing with those states, I was curious if the review would reveal anything new.

"Past efforts at state-building have been dogged, Mr Ghani and Ms Lockhart argue, by a failure to understand what developing countries need in order to be effective in the modern world, particularly with regard to engaging their citizens and connecting to the global network of economic and political power. The outside world has also failed to help struggling governments become effective. Instead, it veers between two unsatisfactory extremes: imposed solutions tinged with a colonial or imperial flavour, and the hands-off neglect of 'interested observers'."

Although I agree completely with that assessment, even if it contains little new about past approaches or the challenges faced by failed states [see Explaining Development-in-a-Box]. The review does explicitly stress a point that my discussions about Development-in-a-Box have only implied.

"It is often said that globalisation makes the traditional nation-state less relevant than it was before. Mr Ghani and Ms Lockhart disagree. Building an effective sovereign state is more crucial than ever, they say. In order to achieve this, developing countries must focus on establishing legitimacy at home and in the wider world at the same time."

That observation is both accurate and important. The nation-state may have less influence in some areas than it did in the past, but it is far from becoming irrelevant. There are activities in which nation-states engage that cannot easily (or ever) be assumed by other organizations. To be successful, states need to assume their place at the table of nations and connect with other countries in a myriad of ways that ensure diplomatic, security, and economic activities work together for the good of the globe. Other organizations may try to influence nations to act in a particular way, but only nation states can work together to bring about global change in a legitimately recognized way.

Ghani and Lockhart recommend a two-pronged framework for development, with one prong focusing on domestic challenges and the other prong focusing on international challenges. First, they address the home front:

"At home, even before democratic processes are put in place, the authors favour extensive consultation, decisions taken from the bottom up and the introduction of autonomous spending powers. A new foreign-backed leader, taking decisions from the top down and often in secret, is far less likely to be seen as legitimate by citizens, or to inspire their loyalty. New programmes should be transparent and accountable. One success the authors cite, in a moment of justified self-congratulation, is the transformation of Afghanistan’s public-finance system under Mr Ghani, who defied gloomy IMF predictions by introducing a new currency within four months, thanks in part to the use of the existing hawala informal banking network."

Even though the authors talk about the importance of "transparent and accountable" programs for domestic development, those characteristics are just as important for programs aimed at attracting foreign direct investment and connecting to the global economy. Although some things, like regulations and legal protections, require a top down approach, I agree that governments gain true legitimacy only when they are perceived as representing the interests of those being governed. The perception of how well those interests are being met is much more important than the type of government in place.

The authors then turn to the framework for addressing international challenges.

"To improve legitimacy abroad, the authors argue for co-operation with international bodies and, above all, for a focus on integrating the domestic economy—and the majority of workers, not just a few elite companies—with the global economy. They point to the success of countries such as Singapore and Ireland in creating effective states and escaping from poverty through pro-market openness. Yet citing such rare examples of effective economic transformation can make the reader gloomier about the chances of doing the same in today’s basket-case countries. The authors could have done more to explain why these countries are plausible models for civil-war-torn states such as Afghanistan and Iraq, especially as they seem sceptical about advocating the greater use of force, which lately seems to be working in Iraq and is necessary in Afghanistan."

I'm not surprised that individuals who have worked closely with humanitarian and development groups would eschew the use of force. Conflict always affects most those least prepared to deal with its consequences -- the very victims of poverty who are the focus of humanitarian and development groups activities. As I have constantly stressed, however, security and development must go hand-in-hand. Regular readers know that I certainly agree with any approach that favors "co-operation with international bodies and ... focus[es] on integrating the domestic economy—and the majority of workers, not just a few elite companies—with the global economy." International bodies help establish the standards that can be used by failed states to earn trust for programs where there is no previous history or tradition of trust. Those standards, regulations, and best practices are essential if the second part of the framework -- connecting to the global economy -- is to be achieved.

The authors then go on to tackle another of my favorite subjects -- leadership (or the lack thereof).

"Lack of leadership is one of the main reasons why attempts at fixing failed states so often fail. Mr Ghani and Ms Lockhart advise those in charge to immerse themselves in the proliferating business-management literature in order to understand the importance of putting in place a strategy, communicating it widely, prioritising what needs to be done and doing these in the most efficient sequence. The books they cite are Alfred Chandler's 'The Visible Hand' and 'Execution' by Larry Bossidy, the no-nonsense former boss of Honeywell, a computer company, and Ram Charan, a management guru; not the usual set-texts of nation-building."

One of the things that differentiates Development-in-a-Box from other approaches is its business-like approach to transforming economies. It begins with taking a holistic and realistic look at a global economy and then developing a long-range plan against which decisions can be made. "No nonsense" is a good way to think about helping failed states. They have neither the resources nor the time to be pampered or coddled. That doesn't mean that those trying to help should be either patronizing or dictatorial -- they just need to be honest and forthright. Dramatically reducing corruption at all levels of government and business is essential to ensuring that the right kind of leadership is in place for sustainable development.

The review goes on to note that the authors also have a problem with "the international aid system, which they say is 'now deeply out of synch with the challenges of the contemporary world'. All too often, they point out, it is an obstacle to change rather than a catalyst." Aid, although important in many areas, is not as important as foreign direct investment for getting an economy up and moving. The bottom line, however, is that all parties interested in seeing a failed or failing state progress must work together in an accepted framework. The review concludes:

"Mr Ghani and Ms Lockhart have produced a useful book. Their chapter on the ten functions of the modern state should be helpful for policymakers everywhere. Yet their dense, academic style represents a missed opportunity, particularly for two authors with so much inside knowledge. Readers would have benefited from more straight storytelling about what happened in Afghanistan and Iraq, and what an America seriously committed to nation-building might have done better."

I find it encouraging to see others supporting a holistic and realistic approach to sustainable development. There are so many seemingly insurmountable challenges associated with such efforts that getting people and programs moving in a common direction is an essential first step.

Oil Fuels Kurdistan Economic Boom

With oil prices adversely affecting almost every economic sector, many people are calling for more exploration, more drilling, and more production. All of the so-called "easy oil," has been found -- with the possible exception of Kurdistan region of Iraq ["Wildcatters Plunge Into North Iraq," by Neil King, Jr., Wall Street Journal, 9 July 2008]. King writes:

"The Canadians are squeezing oil from sand. The Brazilians want to nurse it up through miles of seawater, sandstone and salt. But here in the far north of Iraq, oil is literally bubbling to the surface. Oil executives lament that the age of 'easy oil' is over. It isn't over here. For companies that have stumbled into this corner of Iraq known as Kurdistan, it's an era that has just begun."

While the high price of oil may have downside for most of the global economy, it has a huge upside for a developing region like Kurdistan. The Kurdistan Regional Government (KRG) has big plans for the region and big ideas normally require big bucks to implement. Oil should provide that money. King continues:

"Iraq is well known as one of the planet's last great oil repositories, with more than 115 billion barrels of reserves, by most estimates. The surprise is how much oil -- and easily accessible oil -- there appears to be in Iraq's Kurdish region, a rugged, Switzerland-size area that has seen centuries of conflict but essentially no oil exploration, until now. One of the world's most prolific oil fields, the Kirkuk field, sprawls for more than 70 miles just to the southwest of the Kurdish region's border. After 74 years in production, it still churns out over 400,000 barrels a day. Dozens of similar geological structures extend far to the north in Kurdistan, undrilled and almost entirely unexamined."

The Kurdistan oil "frontier" has generated a frenzy among oil companies of all sizes. King sums up the activity this way:

"Kurdistan is now among the world's last playgrounds for the old-fashioned oil explorers known as wildcatters. More than 20 companies from around the world are prospecting here, making this one of the liveliest exploration zones in the oil-rich Middle East, particularly for risk-taking small fry like DNO. The hubbub is in sharp contrast to the rest of Iraq, where an exploratory well hasn't been drilled in 15 years, thanks to neglect throughout the Iran-Iraq war, the period of international sanctions and then the war that began in 2003. Major oil companies have entered talks with Baghdad over ways to boost output in the huge fields in Iraq's south. But the Iraqi government remains loath to grant outsiders the right to explore for new oil or to share in the profits. The freewheeling Kurdish area has no such compunctions. The Kurds have enjoyed near-complete autonomy within Iraq since the early 1990s, and now have their own regional government, complete with a Parliament and a prime minister. The 2005 Iraqi Constitution recognized that autonomy, and gave the Kurds a degree of control over their own resources that they were quick to exploit."

The Wall Street Journal asserts that although the KRG has agreed to be part of a general oil revenue sharing agreement with the central Iraqi government, it feels that Baghdad has moved too slowly in passing acceptable legislation. It, therefore, has moved out on its own to negotiate oil deals with foreign companies. Not everyone is happy about that.

"By early 2007, the Kurds had awarded contracts to three exploration ventures. When negotiations over a national Iraqi oil law broke down in acrimony last summer, the Kurds decided to move ahead with their own oil legislation. Some two dozen other exploration deals were signed under the Kurdish law -- causing Iraqi officials in Baghdad to regard them as invalid. Companies signing deals under the Kurds' law have since been barred by Baghdad from doing business in the rest of Iraq, where the biggest of the country's oil fields lie. That threat is keeping the major oil companies out of Kurdistan, despite their ardor for new terrain to drill. Meanwhile, until Iraqis can agree on a national oil law, the companies drilling in Kurdistan have no way to export oil they unearth."

With the world hungry for more oil, most analysts believe that moving the oil out of Kurdistan and into the market won't be an insurmountable problem. The most likely route for such oil will be through a Turkish pipeline. Such an arrangement would benefit both the KRG and the Turkish government. There are already strong economic ties between Turkey and the Kurdistan Autonomous Region, despite tensions over Kurdish rebels hiding in hills of northern Iraq. Despite the uncertainties about the future of the Kurdistan oil industry, KRG officials see mostly an upside.

"Kurdish officials look at the flurry of oil contracts they're signing as a two-pronged insurance policy. By cutting deals with companies from countries as diverse as Australia, Britain, France, India, Russia, South Korea, Turkey and the U.S., the Kurds say they hope to win international political support in case things go awry with Baghdad. And in case Iraq were to break up, the Kurds would have their own abundant revenue stream. 'Has this been deliberate? It certainly has,' says a beaming Mr. Hawrami, the Kurdish natural-resources minister, who has crafted the bulk of the contracts awarded so far. 'We want a balance. We want friends on all sides.' Some good-sized companies have planted their flags here, including Austria's OMV AG, Hungary's MOL Group and India's Reliance Industries Ltd. But they are far outnumbered by lesser-known ones that see Kurdistan as a once-in-a-generation opportunity. WesternZagros Resources Ltd., for example, is a Canadian company that has never drilled for oil. It now has the rights to a 2,000-acre patch about 60 miles southeast of the famed Kirkuk field. Then there's Genel Enerji AS and Addax Petroleum Inc. Together, the Turkish and Swiss-Canadian concerns have sunk six wells in their Taqtaq field and are ready to pump more than 50,000 barrels a day. Estimated extractable oil in their field, the companies say: at least 550 million barrels."

As I have noted in numerous past posts, the future of Kurdistan region of Iraq looks bright and the prospect of billions of dollars in oil revenue only highlights exactly how bright. King discusses the building activity in Erbil, where my company, Enterra Solutions, maintains an office.

"Rumblings of a coming oil boom have triggered pell-mell construction in Erbil, the capital of the Kurdish region, a city that local officials tout as the next Dubai. It has a new airport. Cranes hover over the frame of a high-rise hotel being built for Kempinski, the German luxury hotelier. A United Arab Emirates company, Damac Properties, is planning a $4.5 billion retail and golf community on the outskirts."

KRG officials have a plan. They want the economy to develop deliberately and broadly. They want to balance their economic portfolio so that they are not solely dependent on oil revenue in the long run. In other words, they want to build a diversified economy with their people operating Ministries and commercial ventures in an internationally competitive way. That is why the government contracted with Enterra Solutions to operate the Kurdistan Business Center and other strategic engagements that assist in developing the Kurdistan region’s economy and capacity. The Kurdistan Business center offers a full range of services to businesses wanting to invest in the Kurdish region's future. The Center provides a single point of contact for investors and businesses desiring to operate in the autonomous Kurdistan region. Through a number of connected activities, the Business Center promotes economic development and foreign direct investment in the Kurdistan region. The establishment of the Kurdistan Business Center is an integral part of Enterra Solutions’ Development-in-a-Box™ offering to assist economic and social development in post-conflict and developing regions.

The Kurdistan Business Center marks a new era for business and economic development in Kurdistan. It identifies international companies, facilitates and expedites investment and joint-venture transactions in the Kurdistan Region, especially agreements in support of a number of strategic critical infrastructure projects identified by the KRG. In addition, the Center’s Erbil-based staff provides marketing, technical expertise and ombudsman services aimed at attracting investment activities in the region.

Some of the wildcatters in the Kurdistan region have already struck oil and the KRG expects that it will have arrangements in place to start exporting oil by the end of next year (perhaps as much as a quarter of a million barrels a day). Blessed with natural resources, a governmental leadership structure that is evolutionary and visionary, a stable security environment, and developing rule of law, I'm confident that region's economy will become successful and diverse.

Reviving U.S. Manufacturing

In a recent post entitled "Development-in-a-Box™ at Home in America," I focused on an op-ed piece by Thomas Friedman. In that piece, he chided U.S. politicians for not embracing policies that fostered the "next great global industry — renewable energy and clean power." Their lack of vision and action, he lamented, meant that America was not taking advantage of an opportunity clearly ready to be exploited. In another New York Times' op-ed piece, former Democratic senator and presidential candidate Gary Hart called on his party's candidate, Barack Obama, to use the campaign to outline a new chapter for American politics ["America’s Next Chapter," 25 June 2008]. Hart argues that new political chapters are, historically, written about every three decades and that the time is ripe for a new one.

"Henry Adams believed that 'a period of about 12 years measured the beat of the pendulum' during the era of the founders. Schlesinger, borrowing from his historian father, estimated that the swings between eras of public action and those of private interest were nearer to 30 years. What matters more than the length of the cycles is that these swings, between what [Arthur] Schlesinger called periods of reform and periods of consolidation, clearly occur. If we somewhat arbitrarily fix the age of Franklin D. Roosevelt as 1932 to 1968 and the era of Ronald Reagan as 1968 to 2008, a new cycle of American political history — a cycle of reform — is due."

Hart, of course, hopes that his party's nominee wins the White House and implements a new era of reform. Never one to shy away from expressing his opinions Hart goes on to tell Obama what he believes are the themes that must form the basis of this new era.

"No individual can entirely determine the architecture of a historical cycle. But much of the next one will be defined by how we grapple with a host of new realities, ones that reach beyond jihadist terrorism. They include globalized markets; the expansion of the information revolution into places like China; the emergence of new world powers including India and China; climate deterioration; failing states; the changing nature of war; mass migrations; the proliferation of weapons of mass destruction; viral pandemics; and many more. Senator Obama's attempt to introduce the next American cycle should include, at minimum, three elements. National security requires a new, expanded, post-cold-war definition. America must transition from a consumer economy to a producing one. And the moral obligations of our stewardship of the planet must become paramount."

I was struck when I read that "America must transition from a consumer economy to a producing one." Hart doesn't make what he means entirely clear, but it sounds like he wants the U.S. to start manufacturing more things and stop buying them from overseas. One could argue, of course, that in the information age a service economy (as opposed to a manufacturing economy) does "produce" value. Nevertheless, I suspect Hart was referring to generating new manufacturing jobs -- some of which, I assume, would be in the renewable energy and clean power sector supported by Friedman. Hart's vision raises another question, however: Can the U.S. recapture its manufacturing base? Pete Engardio, writing in BusinessWeek, asks just such a question ["Can the U.S. Bring Jobs Back from China?" 30 June 2008 print edition]. His answer is "maybe." But he warns, "American industry may not be ready to seize the opportunity" even when it presents itself. He begins his article with the story of a New England battery developer who couldn't find a U.S. company to produce her batteries.

"Christina Lampe-Onnerud has a long-lasting, fast-charging battery for notebook computers that she believes will revolutionize the industry. Her company, Boston-Power, would like to make the batteries in the U.S., which she says is feasible despite high American wages. But Lampe-Onnerud has had trouble finding anyone in the U.S. even to make a prototype, let alone manufacture the battery in bulk. China, by contrast, is home to more than 200 battery manufacturers. On visits to the mainland, Lampe-Onnerud toured dozens of factories with ample staff and laboratories, and none wanted the millions of dollars up front that one contract manufacturer in the U.S. had demanded. She recalls a negotiating session last year that started at 9 a.m. and ended with a midnight dinner. Despite parting with 30 unresolved questions, 'at 9:00 the next morning, the entire management team was there with pressed white shirts and a PowerPoint presentation addressing every issue,' she says. 'That's how badly they wanted the business.' In six months, Boston-Power was ramping up production in a 400-worker factory in Shenzhen."

In the post I mentioned at the beginning of this blog, I indicated that I had observed the same thing about U.S. businesses and workers. They seem to have lost their competitive edge, especially when dealing with emerging economies. I argued that America needs to reinvigorate the culture of hard work and ambition that made it great in the first place. As Lampe-Onnerud found, there are plenty of people elsewhere in the world who still have those qualities and use them to their advantage. Engardio explains why this is a good time to consider increasing U.S. manufacturing.

"The economics of global trade are starting to tilt back in favor of the U.S. to a degree unseen in a generation. Since 2002 the dollar has plunged by 30% against major world currencies and is falling against the yuan. Wages in China are rising 10% to 15% a year. And spiking oil prices are driving up shipping rates. The cost of sending a 40-foot container from Shanghai to San Diego has soared by 150%, to $5,500, since 2000. If oil hits $200 a barrel, that could reach $10,000, projects Toronto financial-services firm CIBC World Markets. But as the experience of Boston-Power and countless companies like it shows, the map of global commerce can't be redrawn overnight. American factories and supplier networks in many industries have withered in the era of globalization, so it will take lots of time and capital before the U.S. can become a big player again. In electronics, for instance, there has been a mass migration of component makers to China in the past decade. Ditto for suppliers to Midwest heavy-equipment makers and North Carolina's furniture industry."

Engardio isn't naive enough to believe that the U.S. can recapture all of the manufacturing jobs that have gone elsewhere. He writes:

"The bulk of goods made in China—clothing, toys, small appliances, and the like—probably won't be coming back, because they require abundant cheap labor. If anything, their manufacture will go to other low-wage nations in Asia or Latin America. And in industries from machinery to motorbikes, China's productivity gains nearly offset rising wages and fuel prices."

So where does Engardio see opportunities?

"In areas where the U.S. is at the forefront of innovation—renewable energy, nano materials, solid-state lighting—the U.S. must compete with Asian and European nations willing to lavish entrepreneurs with start-up capital, cash grants, and cheap loans. Similar help may be needed to persuade U.S. companies to build capacity. The global industrial landscape certainly appears to be in the early stages of a realignment. The euro's breathtaking rise against the dollar has spurred European makers of cars, steel, aircraft, and more to shift production to the U.S. Now the soaring cost of fuel is making it pricier to send goods across the Pacific. Consider Japan's steel industry, which depends on imported iron ore and coal to create high-end metal for Japanese automakers in the U.S. In 2003 it cost $15 to ship a ton of iron ore costing $30 from Brazil to Japan. By last fall, while the ore had jumped to $80 per ton, shipping costs had risen to $90. Shipping of raw materials now accounts for 13% of the price of rolled steel used in car bodies, estimates CLSA Asia-Pacific Markets. The finished steel must then be sent to factories in the U.S., pumping up the price even further. Rising costs are starting to eat into what American managers fearfully call the China Price, the once-formidable 40% to 50% cost advantage enjoyed by Chinese manufacturers—and demanded by customers."

In another post [Looking for Jobs that Last], I wrote: "Countries that want to benefit from globalization must reconcile themselves to the reality that it fragments supply chains and sends jobs in all directions. As my colleague Tom Barnett puts it, 'Globalization integrates trade by disintegrating production chains and dispersing them across economies.' ... The fact is that the vast majority of global trade involves multinational corporations. If you want to get in front of that money you had better embrace them. Why? Not only are multinationals involved in the bulk of global trade, but half of that trade is intra-network trade -- meaning trade within industry sectors or within the multinational companies themselves. ... Understanding the supply chain is critical for understanding what types of job will last." Engardio is basically making the same point. As transportation costs rise, supply chain routes are likely to change and that provides companies with new opportunities.

"Examples of production shifts abound. Chinese steel exports to America are down 20% in the past year, notes CIBC, while U.S. steel output has jumped 10% despite the slowdown in construction. Big electronics manufacturers are expanding assembly of high-end telecommunications, computer, and medical equipment in Mexico and some parts of the U.S. for greater proximity to corporate buyers."

Engardio reports, however, that many U.S. industrial sectors have downsized so dramatically that they cannot easily gear back up for increased production.

"Look behind these examples, though, and obstacles to a broad manufacturing migration become clear. Iron castings maker Donsco, on the banks of the Susquehanna River in eastern Pennsylvania, illustrates the dilemma. In recent years, Donsco has laid off hundreds of workers as customers shifted production of gear boxes, oil rig parts, and much more to Chinese competitors. Now, Donsco says it's flooded with order inquiries from U.S.-based clients. 'All of a sudden our customers are saying, Whoops, it's cheaper to buy in our backyard,' says Donsco Chairman Art Mann Sr. While Donsco managed to keep its doors open, many of its U.S. rivals shut down, so there's now a shortage of capacity."

Engardio goes on to report that industries like Donsco are not rushing to increase capacity because the costs are high and so are the risks. The story, he writes, is same in industry after industry -- furniture, lighting fixtures, heavy equipment, and so on. The risks are high because increased capacity doesn't guarantee clients. Companies that have spent millions to move production to China and elsewhere aren't eager to spend millions more relocating back to the U.S. For its part, the Chinese are working hard to keep manufacturing jobs they have attracted.

"How has China been able to keep its edge in the face of soaring costs? One factor that's widely overlooked is rising productivity. For the past decade, U.S. manufacturing productivity growth has averaged 4.8%. That's impressive for an industrialized nation, and bodes well for U.S. industry when the economy recovers. But productivity at medium and large Chinese manufacturers—the backbone of country's export boom—has averaged nearly 19% over the same period, says Bart van Ark, chief economist at the Conference Board, a business research group. While American manufacturers have been tightening their belts, producers in China have been plowing money into bigger and more advanced facilities that are ahead of their U.S. counterparts. Douglas Bartlett, chairman of Bartlett Manufacturing, a Cary (Ill.) maker of high-end circuit boards used in defense and medical systems, doesn't see a big reversal in store. A decade ago the U.S. accounted for one-third of global circuit-board output. Today that's down to 10%, with China making 80%. Chinese boards are still 40% to 50% cheaper than the ones Bartlett makes in the U.S., in part because producers there have superior technology."

That is why any increase in U.S. manufacturing jobs is likely to come in emerging economic sectors rather than in more traditional sectors. Engardio concludes:

"The new cost equation likely will influence many decisions about where to locate production in the future. America remains the world's biggest manufacturer, after all, because it's still the largest market for everything from drugs and packaged foods to high-end medical equipment. The U.S. may have as good a chance as anyone of being a strong player in nascent industries, whether next-generation wind turbines, medical devices with nano-scale sensors, or electric cars. The challenge will be to persuade reluctant venture capitalists and corporations to invest again in modern U.S. production facilities."

He believes that government agencies can also play a role by providing seed capital to promising startups and by building industrial parks with low-cost facilities and services that rival those found in China. Friedman called that "nation-building at home" and I referred to it as Development-in-a-Box™ at home. Whatever you call it, America needs to build world-class facilities to support emerging economic sectors as well as reinvigorate the pioneer spirit that made American workers the most productive in the world.

The Future of Desalination

In a recent post, I discussed efforts to harness the power of the ocean's waves to generate electricity [Harnessing the Power of Waves]. Scientists and engineers are also looking to the oceans for an even more important resource -- potable water ["Tapping the oceans," The Economist, 7 June 2008 print edition]. Many pundits have raised the possibility of future resource wars and high on most lists of resources over which nations could fight is water. The Economist puts it this way:

"There are vast amounts of water on earth. Unfortunately, over 97% of it is too salty for human consumption and only a fraction of the remainder is easily accessible in rivers, lakes or groundwater. Climate change, droughts, growing population and increasing industrial demand are straining the available supplies of fresh water. More than 1 billion people live in areas where water is scarce, according to the United Nations, and that number could increase to 1.8 billion by 2025."

One cannot help but be reminded of Samuel Taylor Coleridges' famous poem, "The Rime of the Ancient Mariner."

Water, water, every where,
And all the boards did shrink;
Water, water, every where,
Nor any drop to drink.

The Economist article asks the question, "As concern over water's scarcity grows, can desalination offer a quick technological fix?" The challenge is not just technology (because it's been around for awhile):

"References to removing salt from seawater can be found in stories and legends dating back to ancient times. But the first concerted efforts to produce drinking water from seawater were not until the 16th century, when European explorers on long sea voyages began installing simple desalting equipment on their ships for emergency use. These devices tended to be crude and inefficient, and boiled seawater above a stove or furnace. An important advance in desalination came from the sugar industry. To produce crystalline sugar, large amounts of fuel were needed to heat the sugar sap and evaporate the water it contained. Around 1850 an American engineer named Norbert Rillieux won several patents for a way to refine sugar more efficiently. His idea became what is known today as multiple-effect distillation, and consists of a cascading system of chambers, each at a lower pressure than the one before. This means the water boils at a lower temperature in each successive chamber. Heat from water vapour in the first chamber can thus be recycled to evaporate water in the next chamber, and so on. This reduced the energy consumption of sugar refining by up to 80%, says James Birkett of West Neck Strategies, a desalination consultancy based in Nobleboro, Maine. But it took about 50 years for the idea to make its way from one industry to another. Only in the late 19th century did multi-effect evaporators for desalination begin to appear on steamships and in arid countries such as Yemen and Sudan."

Anyone familiar with sea-going vessels knows that they have been using evaporators to generate potable water for some time. In fact, the aircraft carrier USS Abraham Lincoln used its evaporators to desalinate water that was used to save survivors of the Indonesia tsunami in 2004. The challenge for desalination remains cost, especially with rising energy prices. As the article notes:

"One time-tested but expensive way to produce drinking water is desalination: removing dissolved salts from sea and brackish water. Its appeal is obvious. The world's oceans, in particular, present a virtually limitless and drought-proof supply of water. 'If we could ever competitively—at a cheap rate—get fresh water from salt water,' observed President John Kennedy nearly 50 years ago, 'that would be in the long-range interest of humanity, and would really dwarf any other scientific accomplishment.' According to the latest figures from the International Desalination Association, there are now 13,080 desalination plants in operation around the world. Together they have the capacity to produce up to 55.6m cubic metres of drinkable water a day—a mere 0.5% of global water use. About half of the capacity is in the Middle East. Because desalination requires large amounts of energy and can cost several times as much as treating river or groundwater, its use in the past was largely confined to wealthy oil-rich nations, where energy is cheap and water is scarce."

As climate change spreads water shortages to areas unfamiliar with droughts, more and more people are thinking about desalination.

"In California alone some 20 seawater-desalination plants have been proposed, including a $300m facility near San Diego. Several Australian cities are planning or constructing huge desalination plants, with the biggest, near Melbourne, expected to cost about $2.9 billion. Even London is building one. According to projections from Global Water Intelligence, a market-research firm, worldwide desalination capacity will nearly double between now and 2015."

Big projects, however, always raise big concerns -- especially if they increase energy consumption. Desalinating seawater to make potable water is no exception.

"Some environmental groups are concerned about the energy the plants will use, and the greenhouse gases they will spew out. A large desalination plant can suck up enough electricity in one year to power more than 30,000 homes. The good news is that advances in technology and manufacturing have reduced the cost and energy requirements of desalination. And many new plants are being held to strict environmental standards. One recently built plant in Perth, Australia, runs on renewable energy from a nearby wind farm. In addition, its modern seawater-intake and waste-discharge systems minimise the impact on local marine life. Jason Antenucci, deputy director of the Centre for Water Research at the University of Western Australia in Perth, says the facility has 'set a benchmark for other plants in Australia.'"

Although cost remains a daunting challenge for desalination plants, there are also some technical challenges.

"[In early systems,] mineral deposits tended to build up on heat-exchange surfaces, and this inhibited the transfer of energy. In the 1950s a new type of thermal-desalination process, called multi-stage flash, reduced this problem. In this, seawater is heated under high pressure and then passed through a series of chambers, each at a lower pressure than the one before, causing some of the water to evaporate or 'flash' at each step. Concentrated seawater is left at the bottom of the chambers, and freshwater vapour condenses above. Because evaporation does not happen on the heat-exchange surfaces, fewer minerals are deposited. Countries in the Middle East with a lot of oil and a little water soon adopted multi-stage flash. Because it needs hot steam, many desalination facilities were put next to power stations, which generate excess heat. For a time, the cogeneration of electricity and water dominated the desalination industry."

Scientists are constantly looking for better ways to desalinate seawater and, like in many other areas of research, they have looked to nature to find breakthroughs.

"Research into new ways to remove salt from water picked up in the 1950s. The American government set up the Office of Saline Water to support the search for desalination technology. And scientists at the University of Florida and the University of California, Los Angeles (UCLA) began to investigate membranes that are permeable to water, but restrict the passage of dissolved salts. Such membranes are common in nature. When there is a salty solution on one side of a semi-permeable membrane (such as a cell wall), and a less salty solution on the other, water diffuses through the membrane from the less concentrated side to the more concentrated side. This process, which tends to equalise the saltiness of the two solutions, is called osmosis. Researchers wondered whether osmosis could be reversed by applying pressure to the more concentrated solution, causing water molecules to diffuse through the membrane and leave behind even more highly concentrated brine. Initial efforts showed only limited success, producing tiny amounts of fresh water. That changed in 1960, when Sidney Loeb and Srinivasa Sourirajan of UCLA hand-cast their own membranes from cellulose acetate, a polymer used in photographic film. Their new membranes boasted a dramatically improved flux (the rate at which water molecules diffuse through a membrane of a given size) leading, in 1965, to a small 'reverse osmosis' plant for desalting brackish water in Coalinga, California."

Although reverse osmosis solved some problems, it exacerbated the energy challenge.

"The energy requirements for thermal desalination do not much depend on the saltiness of the source water, but the energy needed for reverse osmosis is directly related to the concentration of dissolved salts. The saltier the water, the higher the pressure it takes (and hence the more energy you need) to push water through a membrane in order to leave behind the salt. Seawater generally contains 33-37 grams of dissolved solids per litre. To turn it into drinking water, nearly 99% of these salts must be removed. Because brackish water contains less salt than seawater, it is less energy-intensive, and thus less expensive, to process. As a result, reverse osmosis first became established as a way to treat brackish water. Another important distinction is that reverse osmosis, unlike thermal desalination, calls for extensive pre-treatment of the feed water. Reverse-osmosis plants use filters and chemicals to remove particles that could clog up the membranes, and the membranes must also be washed periodically to reduce scaling and fouling."

All of that, of course, adds to the cost of desalinating water. Continued research has addressed some of these problems.

"In the late 1970s John Cadotte of America’s Midwest Research Institute and the FilmTec Corporation created a much-improved membrane by using a special cross-linking reaction between two chemicals atop a porous backing material. His composite membrane consisted of a very thin layer of polyamide, to perform the separation, and a sturdy support beneath it. Thanks to the membrane's improved water flux, and its ability to tolerate pH and temperature variations, it went on to dominate the industry. At around the same time, the first reverse-osmosis plants for seawater began to appear. These early plants needed a lot of energy. The first big municipal seawater plant, which began operating in Jeddah, Saudi Arabia, in 1980, required more than 8 kilowatt hours (kWh) to produce one cubic metre of drinking water."

When energy is cheap and environmental concerns have a lower priority than access to potable water, building and operating such plants made a certain amount of sense. As energy prices rose, however, so did research in how to bring down energy usage and generating costs.

"The energy consumption of such plants has since fallen dramatically, thanks in large part to energy-recovery devices. High-pressure pumps force seawater against a membrane, which is typically arranged in a spiral inside a tube, to increase the surface area exposed to the incoming water and optimise the flux through the membrane. About half of the water emerges as freshwater on the other side. The remaining liquid, which contains the leftover salts, shoots out of the system at high pressure. If that high-pressure waste stream is run through a turbine or rotor, energy can be recovered and used to pressurise the incoming seawater. The energy-recovery devices in the 1980s were only about 75% efficient, but newer ones can recover about 96% of the energy from the waste stream. As a result, the energy use for reverse-osmosis seawater desalination has fallen. The Perth plant, which uses technology from Energy Recovery, a firm based in California, consumes only 3.7kWh to produce one cubic metre of drinking water, according to Gary Crisp, who helped to oversee the plant's design for the Water Corporation, a local utility."

That is less than half of the energy required by early plants. That means you can desalinate 1000 litres of water for about the same amount it costs to run a central air conditioner for an hour in a typical U.S. home (about a dime). It also makes reverse osmosis plants a little more economical than thermal plants.

"Thermal plants suck up nearly as much electricity, but also need large amounts of steam. 'A thermal plant only is practical if you can build it in such a way that it can take advantage of very low-cost or waste heat,' says Tom Pankratz, a water consultant based in Texas, who is also a board member of the International Desalination Association. Economies of scale, better membranes and improved energy-recovery have helped to bring down the cost of reverse-osmosis seawater-desalination. Although the cost of desalination plants and their water depends on where they are, as well as the local costs of capital and operations, prices decreased from roughly $1.50 a cubic metre in the early 1990s to around 50 cents in 2003, says Mr Pankratz. As a result, reverse osmosis is preferred for most modern seawater-desalination (though rising energy and commodity prices mean the cost per cubic metre has now risen to around 75 cents). Experts reckon that further gains in energy efficiency, and hence cost reductions, will be increasingly difficult, however. According to a recent report on desalination from America’s National Research Council, energy use is unlikely to be reduced by much more than 15% below today’s levels—though that would still be worthwhile, it concludes."

In addition to looking for further energy reductions (which could be a case of diminishing returns), scientists and engineers are looking at new materials (like making membranes out of nanotubes) to increase plant efficiency as well as tackling other challenges.

"As desalination becomes more widespread, its environmental impacts, including the design of intake and discharge structures, are coming under increased scrutiny. Some of the damage can be mitigated fairly easily. Reducing the intake velocity enables most fish species and other mobile marine life to swim away from the intake system, though small animals, such as plankton or fish larvae, may still get caught in the intake screens or sucked into the plant. A bigger problem may be the leftover brine, which typically contains twice as much salt as seawater and is discharged back into the ocean. So far little scientific information exists about its long-term effects. In the past, most big seawater-desalination plants were built in places that did not conduct adequate environmental assessments, says Peter Gleick, president of the Pacific Institute, a think-tank based in California that published a report on desalination in 2006. But as plants are built in areas with tighter environmental restrictions, more information is becoming available. Some recent measurements from Perth are encouraging. Initially scientists from the Centre for Water Research feared that the brine discharge from the plant would increase the saltiness of the coastal environment. But a monitoring study found that salinity returns to normal levels within about 500 metres of the plants’ discharge units. ... A separate problem may be that some metals or chemicals leach into the brine. Thermal-desalination plants are prone to corrosion, and may shed traces of heavy metals, such as copper, into the waste stream. Reverse-osmosis plants, for their part, use chemicals during the pre-treatment and cleaning of the membranes, some of which may end up in the brine. Modern plants, however, remove most of the chemicals from the water before it is discharged. And new approaches to pre-treatment may reduce or eliminate the need for some chemicals. Based on the limited evidence available to date, it appears that desalination may actually be less environmentally harmful than some other water-supply options, such as diverting large amounts of fresh water from rivers, for example, which can lead to severe reductions in local fish populations. But uncertainties over the environmental impacts of desalination make it hard to draw definite conclusions, the National Research Council concluded. Its report suggested that further research on the environmental impacts of desalination, and how to mitigate them, should be a high priority."

The article concludes by noting that most countries are going to have to take a "portfolio" approach to secure ample water supplies. This means utilizing traditional water sources as well as new ones, including seawater and waste water. In the latter case, what people don't know doesn't hurt them. As I recall, President Richard Nixon, visited a water treatment facility and famously refused to take a sip of recovered waste water when it was offered to him. The fact is, however, that making waste water potable is more energy efficient and produces better quality water than treating seawater. Within a few years, we will see water shortages grab as many headlines as the current global food crisis. We don't want to wait until there is a crisis to address seriously the water shortages that everyone knows is on the way.

Development-in-a-Box™ at Home in America

In a recent op-ed piece, New York Times' columnist Thomas Friedman insisted that the next U.S. president needs to focus on "nation-building at home" ["Anxious in America," 29 June 2008]. Friedman laments the fact that America's economic situation is so bad that it will undoubtedly become U.S. voters' most important concern during the rest of the campaign season. He predicted:

"[Both John McCain and Barack Obama] will be looking for a financial wizard as their running mates to help them steer America out of what could become a serious economic tailspin. I do not believe nation-building in Iraq is going to be the issue come November — whether things get better there or worse. If they get better, we'll ignore Iraq more; if they get worse, the next president will be under pressure to get out quicker. I think nation-building in America is going to be the issue."

So what exactly does Friedman mean when he talks about "nation-building in America"? I think he means that America needs to rediscover it entrepreneurial spirit and recapture some of the values that helped make it the world's greatest economy. I firmly agree with that. In fact, at Enterra Solutions we are daily wrestling with those issues as we attempt to greatly scale our organization and look for employees who are competitive with the best the world has to offer in significant volume (more on this later). Freidman continues:

"Up to now, the economic crisis we've been in has been largely a credit crisis in the capital markets, while consumer spending has kept reasonably steady, as have manufacturing and exports. But with banks still reluctant to lend even to healthy businesses, fuel and food prices soaring and home prices declining, this is starting to affect consumers, shrinking their wallets and crimping spending. Unemployment is already creeping up and manufacturing creeping down. ... My fellow Americans: We are a country in debt and in decline — not terminal, not irreversible, but in decline. Our political system seems incapable of producing long-range answers to big problems or big opportunities. We are the ones who need a better-functioning democracy — more than the Iraqis and Afghans. We are the ones in need of nation-building. It is our political system that is not working."

Friedman decries the current divisiveness in U.S. politics that has both sides more inclined to fight than compromise.

"I continue to be appalled at the gap between what is clearly going to be the next great global industry — renewable energy and clean power — and the inability of Congress and the administration to put in place the bold policies we need to ensure that America leads that industry. 'America and its political leaders, after two decades of failing to come together to solve big problems, seem to have lost faith in their ability to do so,' Wall Street Journal columnist Gerald Seib noted last week. 'A political system that expects failure doesn't try very hard to produce anything else.' We used to try harder and do better. After Sputnik, we came together as a nation and responded with a technology, infrastructure and education surge, notes Robert Hormats, vice chairman of Goldman Sachs International. After the 1973 oil crisis, we came together and made dramatic improvements in energy efficiency. After Social Security became imperiled in the early 1980s, we came together and fixed it for that moment. 'But today,' added Hormats, 'the political system seems incapable of producing a critical mass to support any kind of serious long-term reform.'"

Obviously, Friedman isn't so naive as to believe that the U.S. is going to recapture manufacturing jobs that have moved to low cost countries. What he is calling for are policies that will help the U.S. become a center of excellence in emerging economic sectors. The manufacturing jobs in those areas, however, will require a renewal of America's culture of hard work as well as rediscovery of the grand art of political compromise. I have argued several times in the past for new and bold leadership -- the kind of leadership capable of inspiring the nation (and the rest of the world) with a vision worthy of garnering support. Great visions are based on hope not fear. Friedman and others believe that the current crop of politicians have learned how to fight and forgotten how to hope.

The hope, determinism and confidence of post-World War II America was able to put a man on the moon less than a decade after President John F. Kennedy laid out that challenge. Those characteristics now appear dormant within America -– paved over by layers of complacency, materialism and credit card debt. We have to awaken the vital, competitive and innovative spirit that past immigrant and middle classes once instilled in the United States. The concept that one generation stands on the shoulders of the previous generation needs a 21^st century re-launch. This is the only way to make the current generation better off than the last. The question is whether the current political class can lead the nation through this kind of renaissance.

America is not the only country that needs this jolt. Many countries in the developed world could use it. In my travels throughout the Middle East, I routinely come across business leaders who still embrace those qualities of hard work, thrift, and ambition -- unfortunately, many of them lead businesses headquartered in other emerging market countries. In a recent post [Doing Business in Iraq], I referenced a USA Today article that noted most of the foreign businesses taking advantage of opportunities in Iraq were not American. In blogging about that same article, my partner Tom Barnett wrote:

"Paul Brinkley, head of the Pentagon office who talked Enterra into entering Iraq, is quoted as saying 'It's ironic' that the firms rushing into Iraq to take advantage are not American. Actually, it's not ironic whatsoever. Check out the countries described in the piece: Romania, Lebanon, China, Russia, Turkey, France, Germany. None sent troops, but all showed up for the peace. 'Come as you are' meets 'come when you want.' Iraqi foreign minister says: 'They take risks. No pain, no gain.' And before you freak on the war-peace divide, realize that 95 percent of our troops die after 'mission accomplished' and 85-plus percent since the end of the 'lost year.' These countries were our unacknowledged partners all along. You can either be shocked by that or realize that making it our war to run doesn't translate into making it our peace to exploit."

I titled this post "Development-in-a-Box™ at Home in America" to connect with Friedman's idea that we need to conduct nation-building at home as well as highlight the fact that America, too, needs to ensure that it builds the future on best practices and global standards. That is the only way that U.S. companies will once again demonstrate the kind of competitive edge that they will need to compete in emerging markets -- the markets that hold the greatest promise of growth in the future. By focusing on competing in new market sectors, America can remain a world leader, but it must invest wisely in new infrastructure, improved education and training, and technologies that will make it more responsive to the global economy. That is why I believe that Development-in-a-Box™ needs to be rolled out both in the U.S. and overseas in emerging countries. It is imperative to have both because, if we are effective in providing an effective On-Ramp to the Global Economic Grid for the 2-3 billion new consumers, quasi-capitalist, quasi-democratic peoples in the emerging world, we can give peace and stability a chance of flourishing overseas and then the U.S. can spend more of its treasure on development at home rather than on warfare abroad.

I'm a bit more sanguine than Friedman that America can respond to this challenge. A Philadelphia Inquirer story that spotlighted my company [Enterra Solutions Provides Technology to Iraq], discussed the fact that it is entrepreneurs who are taking advantage of emerging market opportunities.

"Hundreds of foreign companies are now doing business in Iraq. Enterra has two Pentagon contracts. One is to establish a call center that will handle incoming and outgoing calls for products from Iraqi manufacturers. The other is to set up a business-to-business trading portal, or Web site, for Iraqi manufacturers, similar to Amazon.com Inc. or eBay Inc. The call center and Iraqi business portal are expected to be operational in about six weeks. Enterra partnered with Iraq and Western firms to do the work, including Korek Telecom in Kurdistan. A Kuwait-based firm, Agility Logistics, will handle supply-chain logistics to get goods shipped out of Iraq. 'We created a business model that will address the nation-state-building portion of war in the 21st century,' said DeAngelis, Enterra's founder and chief executive officer."

Unfortunately, as noted above, most of those foreign companies are not American. I'm working with the U.S. Chamber of Commerce to change that. I recently joined the Chamber's activities in Iraq as Co-chair of its Iraq Initiative and Co-chair of its Kurdistan Region of Iraq Investment Taskforce. Those roles have exposed me to some of the companies that "get it." As they succeed in emerging markets, they should provide a role model for other U.S. companies who will either change with the times or die like the dinosaurs. Friedman concludes his op-ed piece this way:

"Digging out of this hole is what the next election has to be about and is going to be about — even if it is interrupted by a terrorist attack or an outbreak of war or peace in Iraq. We need nation-building at home, and we cannot wait another year to get started. Vote for the candidate who you think will do that best. Nothing else matters."

Friedman understands that politicians and governments have less influence over global economics than they did in the past. But he also knows that politicians still have tremendous influence on establishing the tone and direction for the future. A leader with vision and charisma can instill hope to replace fear. In an op-ed piece that I wrote for the Philadelphia Inquirer ["A New Global Framework," 6 December 2006], I wrote:

"What we need is a new framework for an entirely different era, a vision like that provided by the Wise Men - Dean Acheson, George Kennan and others - in the late 1940s. These leaders promulgated a governing framework for dealing with the postwar "third wave" of globalization, one that led to the development of institutions (the United Nations, the World Bank, etc.) and concepts (such as mutually assured destruction) that helped establish and maintain global stability for more than 50 years. That framework and those institutions, however, no longer address today's global environment. Today, few organizations - and this includes everything from companies to nation-states - understand how to align themselves with the times. No governing framework exists to help organizations array their resources properly. As the fourth wave of globalization unfolds, new Wise People have not yet stepped forward to create a next-generation grand ordering set of principles. Instead, today's leaders are trying to adapt old concepts and institutions to emerging challenges -- which is why Western liberal democratic principles seem to be in retreat on so many fronts. ... The future will bring new challenges, both natural and man-made. We'll know an appropriate framework is in place when both corporations and governments can respond successfully to these and other stressors created by globalization, rapid technological change, terrorism, natural disasters, and other 21st-century challenges."

Hope is the clarion call needed to re-instill the kind of values that made America great in the first place. People immigrated to America with nothing but hope in their pockets and they managed to build a great nation. We've gotten lazy as we've wallowed in our success. We have assumed that the good times would always roll and that we could continue to live large without working hard and remaining innovative. We need leaders who can make the clarion call and motivate a new generation to greatness. On that point, Friedman is right, "nothing else matters."

Revolution or Ruse in Rice Production?

Science involves the search for understanding and truth. It's about generating hypotheses and then testing them to either prove or disprove them. Although we are used to seeing competing theories debated, we normally associate such debates with high level physics rather than agriculture. With the world locked in the grips of a food shortage (which will be exacerbated by the flooding taking place in America's breadbasket states), a controversy has arisen about the best way to grow rice -- one of the world's most important food crops ["Food Revolution That Starts With Rice," by William J. Broad, New York Times, 17 June 2008]. The controversy surrounds the theories of Norman T. Uphoff, an emeritus professor at Cornell University.

"Many a professor dreams of revolution. But Norman T. Uphoff, working in a leafy corner of the Cornell University campus, is leading an inconspicuous one centered on solving the global food crisis. The secret, he says, is a new way of growing rice. Rejecting old customs as well as the modern reliance on genetic engineering, Dr. Uphoff, 67, an emeritus professor of government and international agriculture with a trim white beard and a tidy office, advocates a management revolt."

It is not just Uphoff's methods that have spawned the controversy it is his claims concerning them.

"Harvests typically double, he says, if farmers plant early, give seedlings more room to grow and stop flooding fields. That cuts water and seed costs while promoting root and leaf growth. The method, called the System of Rice Intensification, or S.R.I., emphasizes the quality of individual plants over the quantity. It applies a less-is-more ethic to rice cultivation. In a decade, it has gone from obscure theory to global trend — and encountered fierce resistance from established rice scientists. Yet a million rice farmers have adopted the system, Dr. Uphoff says. The rural army, he predicts, will swell to 10 million farmers in the next few years, increasing rice harvests, filling empty bellies and saving untold lives."

Critics argue that his claims about harvest yields and the number of farmers using Uphoff's methods are both exaggerated. But Uphoff continues to argue his case.

"'The world has lots and lots of problems,' Dr. Uphoff said recently while talking of rice intensification and his 38 years at Cornell. 'But if we can't solve the problems of peoples' food needs, we can't do anything. This, at least, is within our reach.' That may sound audacious given the depths of the food crisis and the troubles facing rice. Roughly half the world eats the grain as a staple food even as yields have stagnated and prices have soared, nearly tripling in the past year. The price jolt has provoked riots, panicked hoarding and violent protests in poor countries. But Dr. Uphoff has a striking record of accomplishment, as well as a gritty kind of farm-boy tenacity."

His critics, however, are powerful, also enjoy a global reputation, and have a proven record of accomplishment.

"[Uphoff] and his method have flourished despite the skepticism of his Cornell peers and the global rice establishment — especially the International Rice Research Institute, which helped start the green revolution of rising grain production and specializes in improving rice genetics."

The reason that the controversy continues is that critics argue that Uphoff uses anecdotes rather than controlled experimentation to make his case.

"Critics dismiss S.R.I. as an illusion. 'The claims are grossly exaggerated,' said Achim Dobermann, the head of research at the international rice institute, which is based in the Philippines. Dr. Dobermann said fewer farmers use S.R.I. than advertised because old practices often are counted as part of the trend and the method itself is often watered down. 'We don't doubt that good yields can be achieved,' he said, but he called the methods too onerous for the real world. ... In 2006, three of Dr. Uphoff's colleagues at Cornell wrote a scathing analysis based on global data. 'We find no evidence,' they wrote, 'that S.R.I. fundamentally changes the physiological yield potential of rice.' While less categorical, Dr. Dobermann of the rice research institute called the methods a step backward socially because they increased drudgery in rice farming, especially among poor women."

Nevertheless, Uphoff has a broad base of support and it seems to be growing.

"His telephone rings. It is the World Bank Institute, the educational and training arm of the development bank. The institute is making a DVD to spread the word. ... He lists top S.R.I. users as India, China, Indonesia, Cambodia and Vietnam among 28 countries on three continents. In Tamil Nadu, a state in southern India, Veerapandi S. Arumugam, the agriculture minister, recently hailed the system as 'revolutionizing' paddy farming while spreading to 'a staggering' million acres. Chan Sarun, Cambodia's agriculture minister, told hundreds of farmers at an agriculture fair in April that S.R.I.'s speedy growth promises a harvest of 'white gold.'"

Uphoff has even managed to win over some former critics.

"A former skeptic sees great potential. Vernon W. Ruttan, an agricultural economist at the University of Minnesota and a longtime member of the National Academy of Sciences, once worked for the rice institute and doubted the system’s prospects. Dr. Ruttan now calls himself an enthusiastic fan, saying the method is already reshaping the world of rice cultivation. 'I doubt it will be as great as the green revolution,' he said. 'But in some areas it’s already having a substantial impact.' Robert Chambers, a leading analyst on rural development, who works at the University of Sussex, England, called it a breakthrough. 'The extraordinary thing,' he said, 'is that both farmers and scientists have missed this — farmers for thousands of years, and scientists until very recently and then some of them in a state of denial.' The method, he added, 'has a big contribution to make to world food supplies. Its time has come.'"

Uphoff's story is an interesting one. Broad reports:

"Dr. Uphoff's improbable journey involves a Wisconsin dairy farm, a billionaire philanthropist, the jungles of Madagascar, a Jesuit priest, ranks of eager volunteers and, increasingly, the developing world. ... On Cornell's agricultural campus, Dr. Uphoff runs a one-man show from an office rich in travel mementos. From Sri Lanka, woven rice stalks adorn a wall, the heads thick with rice grains. His computers link him to a global network of S.R.I. activists and backers, like Oxfam, the British charity. Dr. Uphoff is S.R.I.’s global advocate, and his Web site (ciifad.cornell.edu/sri/) serves as the main showcase for its principles and successes. 'It couldn't have happened without the Internet,' he says. Outside his door is a sign, 'Alfalfa Room,' with a large arrow pointing down the hall, seemingly to a pre-electronic age. ... Dr. Uphoff grew up on a Wisconsin farm milking cows and doing chores. In 1966, he graduated from Princeton with a master's degree in public affairs and in 1970 from the University of California, Berkeley, with a doctorate in political science. At Cornell, he threw himself into rural development, irrigation management and credit programs for small farmers in the developing world. In 1990, a secret philanthropist (eventually revealed to be Charles F. Feeney, a Cornell alumnus who made billions in duty-free shops) gave the university $15 million to start a program on world hunger. Dr. Uphoff was the institute’s director for 15 years. The directorship took him in late 1993 to Madagascar. Slash-and-burn rice farming was destroying the rain forest, and Dr. Uphoff sought alternatives. He heard that a French Jesuit priest, Father Henri de Laulanié, had developed a high-yield rice cultivation method on Madagascar that he called the System of Rice Intensification. Dr. Uphoff was skeptical. Rice farmers there typically harvested two tons per hectare (an area 100 by 100 meters, or 2.47 acres). The group claimed 5 to 15 tons. 'I remember thinking, "Do they think they can scam me?"' Dr. Uphoff recalled. 'I told them, "Don't talk 10 or 15 tons. No one at Cornell will believe it. Let's shoot for three or four."' Dr. Uphoff oversaw field trials for three years, and the farmers averaged eight tons per hectare. Impressed, he featured S.R.I. on the cover of his institute's annual reports for 1996 and 1997. Dr. Uphoff never met the priest, who died in 1995. But the success prompted him to scrutinize the method and its origins."

So what is System of Rice Intensification? Broad continues:

"The priest [who developed SRI], during a drought, had noticed that rice plants and especially roots seemed much stronger. That led to the goal of keeping fields damp but not flooded, which improved soil aeration and root growth. Moreover, wide spacing let individual plants soak up more sunlight and send out more tillers — the shoots that branch to the side. Plants would send out upwards of 100 tillers. And each tiller, instead of bearing the usual 100 or so grains, would puff up with 200 to 500 grains. One drawback was weeds. The halt to flooding let invaders take root, and that called for more weeding. A simple solution was a rotating, hand-pushed hoe, which also aided soil aeration and crop production. But that meant more labor, at least at first. It seemed that as farmers gained skill, and yields rose, the overall system became labor saving compared with usual methods."

Until a controlled field trial is conducted and the results confirmed, the controversy will undoubtedly continue. Fortunately, such a trial is coming.

"Opponents have agreed to conduct a global field trial that may end the dispute, he said. The participants include the rice institute, Cornell and Wageningen University, a Dutch institution with a stellar reputation in agriculture. The field trials may start in 2009 and run through 2011, Dr. Uphoff said. 'This should satisfy any scientific questions,' he added. 'But my sense is that S.R.I. is moving so well and so fast that this will be irrelevant.' Practically, he said, the method is destined to grow."

Obviously, the field trial and its subsequent impact won't impact the current food crisis unless it lasts several more years. Although current climatic conditions aren't helping this crisis pass, hopefully the food shortage will be short-lived. Regardless of the current situation, the field test should help drive the direction of rice production in the future. If SRI proves as effective as Uphoff claims, I suspect that technologies will be developed to help reduce the manpower requirements to make the method even more effective and efficient.

GE Chairman Urges Pursuit of Cheap, Green Energy

For years people have been looking for technological breakthroughs that would make clean alternative energy sources competitive with electricity produced by coal and natural gas powered power plants. Jeff Immelt, chairman and CEO of General Electric, has declared that "much of the technology to make energy generation cleaner and more efficient is available now." ["GE calls for cheaper, cleaner energy," by Steve Hargreaves, CNNMoney.com, 21 April 2008] The rub, according to Immelt, is that those technologies remain costly. He has encouraged energy sector executives to invest more heavily in research and development so that the costs of implementing existing technologies can be decreased.

"A lot of the technology is already there," Immelt told a crowd of electric utility executives at an industry meeting sponsored by the Edison Electric Institute, a utility trade group. "This is a business model issue, not a technical issue. Our job is to make them cheaper."

Immelt, of course, has a vested interest in having others spend money on R&D in the energy industry. General Electric "makes a variety of energy products - from light bulbs and appliances to coal and nuclear power plants - many of them marketed to utilities." I'm sure GE will be happy to assist any innovator to get an improved technology to market, especially if they can get a piece of the action. In addition to calling for more R&D, Immelt has also been part of the group urging the U.S. government to regulate greenhouse gas emissions. Hargreaves reports:

"[GE] is part of a consortium of manufacturers and utilities urging lawmakers to pass nationwide restrictions on greenhouse gasses. The Bush administration has so far resisted immediate mandatory restrictions, largely on the grounds that waiting for better, cheaper technology would yield better results. [Both] presidential candidates support mandatory restrictions."

If you're living in the U.S., you would have to have been living in a cave not to have seen, heard, or read about General Electric's "ecomagination" advertising campaign. Immelt sees a big future in engaging in "green business" because the sense of urgency and emergence of technologies seems to be coming together at just the right time. Hargreaves notes:

"The climate debate comes as the world is facing a surge in energy demand and a simultaneous desire to cut greenhouse gas emissions. Energy consumption globally is estimated to grow by 50% over the next few decades, while scientists say the world needs to at least halve its greenhouse gas emissions over the same time period if it is to avoid the worst effects of global warming."

Immelt is concerned that inertia could win out over the daunting but necessary task of upgrading infrastructure in the near term.

"In facing this challenge, Immelt urged utility executives to keep all technologies on the table - from solar and wind to nuclear and cleaner coal - and to not let new technologies languish at the expense of maintaining the status-quo. He said low oil and gas prices historically led to massive underinvestment in the sector, with energy companies spending only about 2% of their revenue on research and development. By way of comparison, healthcare companies have invested about 8% of their sales on R&D, Immelt said. (GE also is a big player in the medical devices industry.) But with high energy prices now soaring, Immelt believes investments in energy will follow suit. 'There's plenty of incentive now to drive technology into the industry,' he said."

In concluding his remarks, Immelt observed that many of the green technologies that will emerge will likely be invented and proved elsewhere. In a globalized world, there is nothing wrong with that. He also predicted a bright and growing future for the green sector and urged utility companies to get on board.

"Immelt said GE is investing in a wide range of energy technologies. He specifically mentioned solar as one that has great potential. The cost of solar power should fall from 30 cents a kilowatt hour today to under 15 cents 'in a relatively short time,' he said. 'That should open up a sweet spot for solar.' By comparison, American consumers currently pay about 10 cents an hour on average for electricity, according to the Energy Information Administration. The U.S. utility industry will likely be a recipient of clean technologies developed outside the U.S., Immelt added, whether it be cleaner coal processes fine-tuned in China or renewable technology pioneered in Europe. But he encouraged the industry and U.S. government to take the lead in capping greenhouse gas emissions and developing clean sources of energy. 'The time to act is now,' he said. 'When you lead in clean energy, you create jobs. This is a place the U.S. could lead.'"

In a year when the economy, energy prices, and job creation are dominating the presidential election agenda, Immelt's message should be well-received by policymakers, workers, businesses, and environmentalists alike. Whether he's listened to or not, he's right about one thing -- now is the time to act. In a New York Times op-ed piece, Verlyn Klinkenborg is worried that words are being used as a substitute for action ["Some Doubts Upon Entering a New Carboniferous Era," 24 June 2008]. She writes:

"Has any phrase in the English language ever spread more quickly than 'carbon footprint'? There are contenders — 'hanging chad,' for instance — but they don't reflect the potential revolution in consciousness that carbon footprint suggests. After all, carbon footprint captures something we've never really had a simple phrase for before: the measurable totality of your environmental impact, or, to put it more simply, what your way of life actually costs the planet. ... the phrase sounds conscientious. You feel as though you're reducing global warming by saying it. Which is why advertisers are saying it everywhere. ... Companies of every description have taken up the phrase. Wal-Mart announced last fall that it would ask its suppliers to assess and lower their carbon footprints, one way that Wal-Mart is trying to green itself. BP, the much-fined petroleum giant, has a carbon footprint calculator on its Web site, as well as a link to its conservative thinking on climate change. Consumers who wish to buy voluntary carbon offsets to compensate for the size of their personal carbon footprints are beginning to be able to do so close to home. Why not buy local carbon offsets at the farmers’ market along with your locally grown produce? The swiftness of this change in consciousness — and the linguistic change that goes with it — is staggering. And a little worrying. For one, it is vastly easier to find new words than it is to overturn old habits, and all too easy to mistake the ubiquity of the new carbon-speak for substantive change."

Klinkenborg is calling for a little action to accompany all the talk. She has a point. In this political season in the U.S., politicians are supporting increased production of oil rather than encouraging voters to adopt conservation strategies. She concludes:

"What makes me uneasy is simply knowing how quickly humans adopt new phrases and how readily we confuse them with the reality — or the unreality — of our actions. The two things we seem to do most instinctively are manipulate language and create markets, and those two instincts converge when it comes to carbon footprints. Creating a market in moral carbon — offsets that counter our energy-rich lifestyle — feels a little like Rotisserie baseball, more illusion than reality. Don’t get me wrong. I’m not a climate-change skeptic. In fact, I believe that the idea of a carbon footprint is a little too glib, a little too soothing, a little too likely to persuade us that we can get out of this mess by an easy incrementalism. The same with carbon offsets, only more so. There is nothing trivial about grasping the idea that lies behind carbon footprints, trying to understand the scale of our consumption and its widespread environmental costs. Think about it properly, and it leads you to a profound critique of who we are and how we behave. Act on it, and you immediately see how carbonaceous our lives have become."

We all learn from the time that we are toddlers that deeds follow thoughts. If that proves to be the case with "carbon footprinting," then perhaps Klinkenborg is a bit premature in worrying that the world is becoming all talk and no action. If, however, politicians continue to stress increased oil production over conservation measures and that message gets them elected, Klinkenborg may just be right.

Doing Business in Iraq

The news yesterday that over 50 innocent people were killed in a suicide attack in Baghdad reminds us all how dangerous a place Iraq remains. Yet there is also good news. The Economist reports that Iraqis "are still suffering monstrously, but Iraq is doing far than it was only a few months ago." ["Iraq starts to fix itself," 14 June 2008 print edition]. To back its claim, the magazine reports:

"Only a few months ago, Iraq was in the grip not only of a fierce anti-American insurgency but also of a dense tangle of sectarian wars, which America seemed powerless to stop. Those who thought it was just making matters worse by staying on could point to the bloody facts on the ground as evidence. But now it is time to look again. Each of those overlapping conflicts has lately begun to peter out. ... The conflict between Shias and Shias has died down too." 

Considering yesterday's attacks, the magazine also prophetically noted, "Needless to say, these conflicts could resume." In a companion article in the same issue, The Economist reports, "By all the main measures—military, political and economic—Iraq is now improving, from a dire base. But that does not yet mean it is headed for peace and prosperity." ["Is it turning the corner"] It reports:

"The violence, albeit still ferocious in parts of the country, has subsided dramatically. ... Politics is also beginning to stutter towards something approaching normality, with signs of an accommodation between the three main communities—Shia Arabs, Sunni Arabs and Kurds—and the prospect of a series of vital laws, on such matters as sharing the revenue from oil, being passed, though they are still subject to endless last-minute hiccups. ... The economy has begun to grow fast too, though its ripples have yet to be felt across the country. The soaring price of oil, along with a mild improvement in production to just above its pre-war peak, mean that the government has more cash to spend than it is has had since the first Gulf war of 1991."

Although Shia cleric Muqtada al-Sadr remains a wild card on the political front and the Iraqi central government is balking at some of the terms the Bush administration would like included in a security agreement, things appear generally to be moving in the right direction. This improved climate has encouraged some foreign companies to make some tentative investments in Iraq's emerging economy. Surprisingly, U.S. companies are lagging other international companies in these investments ["Foreign Firms Investing in Iraq," by Jim Michaels, USA Today, 17 June 2008]. Michaels reports:

"European and Asian companies are beating their American rivals into Iraq now that security has improved the investment climate, Iraq and U.S. officials say. 'It's starting to turn … and the people who are getting in on the ground floor are not American,' said Paul Brinkley, the Pentagon official who is leading U.S. efforts to help Iraq rebuild its economy. 'It's ironic.' Foreign companies, including U.S. investors, have committed to deals worth about $500 million so far this year and Brinkley expects at least $1 billion in foreign investment by the end of the year. So far, Romanian consortium and a Lebanese company have signed revenue-sharing deals with Iraqi state-owned cement factories. Each group will invest about $150 million. China has also aggressively pursued the Iraqi market, selling machinery to the government and electronic products to consumers."

As frequent readers of this blog know, my company Enterra Solutions is one of the U.S. companies that is trying to help rebuild the Iraqi economy. Some of the most active companies in Iraq are Turkish. Of course they enjoy the advantage of being Iraqi neighbors, but they are also risk takers with a belief that Iraq's future remains hopeful. Michaels report agrees:

"Iraqi Foreign Minister Hoshiyar Zebari, in Washington on an official visit, said ... that larger U.S. firms were waiting for more security before entering the market. Zebari noted that Turkish and Russian companies were already active in Iraq. 'They take risks,' he told USA TODAY in an interview. 'No pain, no gain.'"

I'm working with the U.S. Chamber of Commerce to help attract other U.S. businesses to Iraq, but the going has been slow so far.

"Many of the companies active in Iraq now are from countries, including France, Russia and Turkey, that did not send combat troops to back the U.S.-led invasion. Some U.S. and Iraqi officials say American companies risk losing an early opportunity to establish long-term strategic ties with Iraq."

Although it is natural for Iraq to establish economic relationships with countries nearer to its borders than the U.S., in the information age distance isn't the challenge that it used to be. There are lots of "first mover" opportunities in Iraq at the moment, but they won't last long.

"American companies may also be reluctant to invest in Iraq because the war has generated so much controversy at home, Brinkley said. The private investments that come from the USA are generally individual or institutional investors — not American corporations, Brinkley said. U.S. investors, for example, are part of a $120 million deal to build a hotel in the heavily fortified Green Zone, where U.S. and Iraqi government offices are located. Americans lead other nations in the number of exports to Iraq, but other nations have ramped up trade. China doubled the number of exports to Iraq this year. China is now Iraq's third-largest trade partner behind the USA and Turkey, according to Global Trade Information Services, a firm that tracks trade statistics."

Most of the work in which I have been involved has been in northern Iraq, where security and economics conditions are much better than in the south. But as The Economist reports, sky-high oil prices could help Iraq's economy turn the corner.

"If, with the government's growing political and military authority, Mr Maliki could get the economy moving, then the much-uttered phrase 'turning the corner' may be apt. Iraq's windfall from higher oil prices is grand. America's State Department reckons that, if prices stay put, Iraq this year should earn more than $70 billion, though this year's budget projected $35.5 billion based on $57 a barrel at a production rate of 1.7m barrels a day. The latest production figure is 2.53m, a shade higher than its pre-war peak. So far the cash has yet to be turned into decent public services. People in Baghdad say that they have only a few hours of state-provided electricity a day; the Americans admit that the Baghdad average is seven hours. A vaunted advance is in telephony: there are now 12m cellular phones, against a handful before the war, and 261,000 Iraqis subscribe to the internet, against almost none before the war. Yet the biggest obstacle to economic progress is the lack of qualified people and civil servants to make use of the cash pouring in. The ministries spent barely half of their capital budgets last year, while provincial governments used up less than a third, according to an American government watchdog. Thanks partly to the 'de-Baathification' decree of the early American administration which chased out the senior ranks of Saddam's old bureaucracy, the state virtually ceased to function. But what is left of the old civil service may be starting to operate better again. Professor Toby Dodge, a British expert who has been sceptical of many of the American administration's past policies in Iraq, says that 'the state is beginning to re-cohere'."

One of the underlying drivers of Enterra Solutions’ Development-in-a-Box™ approach is building the indigenous capacity of local institutions and people. Most post-conflict or failed states have little or no capacity for governance, international commerce, communications, transportation, healthcare, sanitation, power generation, and so on and so on. Therefore, hearing that "the state is beginning to re-cohere" is good news. As The Economist notes, however, good news doesn't mean that all is well.

"There is a long way to go. Much of the middle class has fled; many of its members have been killed. According to the UN's High Commissioner for Refugees, some 2.8m Iraqis are still displaced within the country; another 2.2m-plus have gone abroad, out of an original population of 27m or so. The official unemployment rate is 25-40%; in reality, it may be a lot higher. Businessmen and investors have yet to come back. ... Meanwhile, the Kurds in the north are quietly consolidating their autonomy and peacefully making progress on all fronts, hoping that Iraq's Arabs will fully accept that federalism is the way to go. But they are angry that a promised referendum to determine whether the oil-rich province of Kirkuk should become part of their region is again sure to be delayed. In their hearts, most Kurds still hanker after full independence, even if many know in their heads that it is not practicable. Iraq's future is still full of pitfalls. The sectarian chasms remain deep, the wounds of strife raw. But for the first time since the insurgency against the Americans took off, the tide, which may quickly ebb, is flowing in the direction of the new order."

There is no doubt that Iraq remains a frontier economy country. Frontiers, however, hold opportunities as well as risks. Clearly, I believe the opportunities in Iraq outweigh the risks.

Farmers and Forests

With grain prices rising as steeply as oil prices, farmers around the world are hoping to cash in while commodities are selling high. One of the world's breadbasket countries, Brazil, is also home to the world's greatest atmosphere scrubber and oxygen producer -- its rain forests. The temptation to clear more land for farming directly conflicts with the desire to save the rain forests. It's a conundrum that has farmers and environmentalists squaring off and the farmers appear to be winning ["Brazil's Answer to Global Hunger," by Joshua Schneyer, BusinessWeek, 2 June 2008 print edition]. Schneyer reports:

"Food and forest have long been at odds in Brazil's Amazon. While environmentalists have pushed for preservation of the lush rain forest, soy farmers have sought to fell trees and grow ever more beans. Now, with global grain prices skyrocketing, the farmers may be gaining the upper hand. On May 13, Environment Minister Marina Silva resigned, saying her efforts to protect the forest were losing traction. 'For some time I've had difficulties advancing environmental policies,' she said in a resignation letter."

In a recent post [Turning the World Upside Down], I focused on a column by Roger Cohen that pointed out how resource-rich Brazil is becoming a global economic powerhouse in a number of areas (oil, mining, and agriculture among them). Schneyer's article looks primarily at Brazil's agricultural sector.

"In recent years, Brazil h